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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ to ________
Commission file number 0-23067
CONCORD COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2710876
(State of incorporation) (IRS Employer Identification Number)
600 Nickerson Road
Marlboro, Massachusetts 01752
(508) 460-4646
(Address and telephone number of principal executive offices)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing sale price of the Company's common stock on
March 8, 2000, as reported on the Nasdaq National Market was approximately
$645,302,040.
The number of shares outstanding of Common Stock as of March 8, 2000 was
16,132,551.
DOCUMENTS INCORPORATED BY REFERENCE
Document Form 10-K Reference
Portions of the Annual Report to Stockholders Part II,Item 7
for the fiscal year ended December 31, 1999.
Portions of the Registrant's Proxy Statement Part III
for its Annual Meeting of Stockholders to be
held on April 25, 2000.
THIS DOCUMENT CONTAINS 40 PAGES.
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THE EXHIBIT INDEX IS ON PAGE 37 .
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PART I
This document contains forward looking statements. Any statements contained
herein that do not describe historical facts are forward looking statements.
Concord makes such forward looking statements under the provisions of the "safe
harbor" section of the Private Securities Litigation Reform Act of 1995. The
forward looking statements contained herein are based on current expectations,
but are subject to a number of risks and uncertainties. The Company's actual
future results may differ significantly from those stated in any forward-looking
statements. Factors that may cause such differences include, but are not limited
to, the factors discussed elsewhere in this Form 10-K under the heading "Risk
Factors."
ITEM 1. BUSINESS
INTRODUCTION
Concord develops, markets and supports next-generation performance
management solutions. With the recent acquisitions of Empire Technologies and
FirstSense Software, Concord offers the only integrated performance management
solution spanning systems, applications, services and networks. By successfully
managing performance across all of these key areas, Concord's products ensure
effective e-business. This end-to-end performance view provides the critical
insights needed to power day-to-day business and e-commerce operations for some
of today's most successful corporations and service providers worldwide.
By providing a global view of application, system and network performance,
the Company's products enable traditional corporate enterprises and companies
engaged in e-commerce to effectively manage the service levels they are required
to supply to their community of users, including internal end users and external
customers and suppliers. In addition, service providers engaged in providing
network and bandwidth services, internet access (ISP's), web hosting,
application services (ASP's) and outsourcing services use the Company's products
to manage the provision of those services to their end user customers. The
Company's eHealth product family consists of a set of solutions that identify
application and business process response time and availability problems and
provide information about the underlying causes of those problems within
particular applications, servers, networks or services being provided by an ISP,
Carrier or ASP. The Company's software-only solutions provide instrumentation to
gather critical application and system information but also retrieve vital
network statistics from a wide range of network devices and operating systems.
Extensive analysis is performed on the data and statistics are gathered and
outputted in the form of intuitive, informative, user friendly graphical reports
that can be viewed on a historical basis or in real time. This information is
critically important to IT and Service Provider executives, managers and
technicians who in turn use it to proactively effect the availability, response
time, performance and capacity of the services they are required to provide.
The Company's target market has and will continue to be large and
medium-size corporate users, e-commerce companies and service providers
responsible for the management of several thousand to millions of client, server
and network devices running multiple critical business applications
simultaneously. The Company markets to these potential customers through its own
sales force, sales agents, value added resellers, network service providers,
including telecommunication carriers, and OEMs. As of December 31, 1999, the
Company had over 1,600 customers operating in and serving a variety of
industries. Representative customers include Aetna, America Online, American
Express, Ameritech, Amoco, AT&T Corporation, Bell Atlantic, Blue Cross/Blue
Shield, British Telecommunications plc, Delta Air Lines, Deutsche Telekom, Fleet
Financial, Frontier Communications, Fuji Film, Global One, Goodyear, GTE,
Harvard Business School, Lloyds of London, Maxnet, McDonald's, MCI Worldcom,
Mercedes-Benz, Mindspring, NATO, New York Times, Pacific Bell, Pepsi, Qwest,
Siemens, Siris, Sprint, Telecom Italia, Toys 'R' Us, Tufts, U S West, Inc., U.S.
Customs, US Internetworking, Visa International, Wang Global and Wiltel.
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INDUSTRY BACKGROUND
The rapid emergence of e-business applications, such as business to business
and business to consumer electronic commerce and enterprise resource planning
systems that extend outside of the traditional corporate environment to
suppliers and partners has significantly increased the amount of business
transaction data flowing across corporate and service provider networks and the
internet. As these applications have become integral in transacting business
between enterprises and their customers, the requirement for fast response
times, high performance and application availability has become a critical
business priority. In order to deliver the high level of services required in
this new environment, businesses continue to expand their internal computer
networks but also contract with an ever increasing number of service provider
companies providing a host of different solutions and services from bandwidth to
outsourcing. These changes in the market have increased the complexity,
difficulty and importance of managing the performance of the services and
underlying applications and infrastructure required to deliver those services.
Since customers are now interacting directly with these systems, there is much
less tolerance for poor service. In addition, the problem of management has
become more difficult given the multitude of entities, applications, systems and
physical networks involved in any one transaction.
The technical complexity of providing for high levels of automation,
aggregation, instrumentation and scalability over many critical applications and
many thousands of clients, systems and network elements has made comprehensive
performance management solutions difficult to develop and deliver. Any
comprehensive solution must be able to provide an integrated performance
management system across a set of business processes and both off-the-shelf and
customized applications across all major computer and operating systems such as
UNIX, Windows NT and Linux, and across all major networking technologies and
devices from vendors like Cisco, Lucent and Nortel. Other performance management
solutions that are currently available are either point solutions that attempt
to compete in a particular area as a "best of breed" solution or platforms and
frameworks that attempt to provide a comprehensive solution that must be
developed in a custom manner. While the point solutions may be reasonably priced
and provide adequate functionality in one particular area, they do not provide
the comprehensive solution required for the management of e-business
environments. Platform and framework solutions can be expensive and time
consuming to implement and very difficult to support given the extent to which
they must be customized for each different environment.
Although tools that are considered point solutions enhance the technical
management of a discreet area like a network, a set of computers or a particular
application and are useful in isolating and correcting problems after such
problems have been identified, these solutions are not able to determine the
effect problems have on real users and assess which component of the overall
e-business environment, the application, the systems, the network or the
services being offered by the service providers is contributing to the problem.
Customized solutions that are developed on top of a framework or platform are
expensive and time consuming to develop and by their proprietary nature are
inflexible and must be implemented in total.
THE CONCORD SOLUTION
Concord has combined its core capabilities in network performance management
with the new systems and application performance management products from Empire
Technologies and FirstSense Software to deliver a set of best of breed products
that can be integrated to provide a comprehensive performance management
solution. Concord's product line, eHealth is a family of turnkey, automated,
scaleable, Web-based performance management solutions for critical applications,
systems, services and networks that combine sophisticated data collection or
agent technologies with Concord's industry leading data retrieval and analysis
engine to provide real-time and historical data in an intuitive, informative and
user-friendly graphical format. The Company's products are currently capable of
simultaneously retrieving data, performing analysis and reporting on that data
for up to 80,000 elements per console or workstation. During 2000, Concord plans
to introduce a new version of eHealth that will dramatically improve on its
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current scalability. This new version is being designed for very large end-user
and large service provider customers.
The Company's eHealth product family provides organizations with the
following benefits: (i) automated management across the IT infrastructure -
provides information automatically in real-time and in historical reports to all
levels of IT technical and management staffs about the performance of
applications, as seen by the end-user, the underlying systems running those
applications and the network infrastructure; (ii) predictive and real-time
problem solving - provides actionable information about the availability and
response time of critical applications and services so that IT management can
adjust capacities in a proactive manner to meet the contracted service level
agreements; (iii) alignment of IT or Service Provider operations with Customer
business goals - provides a total view into the end-to-end performance and
availability of the end-user or customer environment so that the IT or Service
Provider organization can deliver services based on the business needs of that
end-user or customer; (iv) effective resource management - allows IT management
to cost-effectively deploy personnel and equipment resources across the
organization; and (v) service provider management - provides the e-business or
IT entity with a tool to effectively manage the performance of their service
providers.
In providing these benefits, the Company's eHealth product family
incorporates the following features:
FULLY AUTOMATED, TURNKEY IMPLEMENTATION. The Company's products provide
turnkey solutions for fully automated performance management. Installation can
be accomplished in a few hours for most products and for certain products
installation can occur over the Web. Once installed the Company's products can
provide real time information or historical reports on critical areas such as
(i) important trends and changes for application response times, system and
network availability and capacity; (ii) situations to watch for potential delays
or failures in important services and processes; and (iii) exceptions analysis
for identifying deviations from specified performance and service levels.
SCALEABLE, SOFTWARE-ONLY SOLUTION. The eHealth product family is designed to
collect data from heterogeneous sources. The Company's products are easily
scaled to meet the demands for performance management as an organization's
e-business infrastructure expands. eHealth provides managers with the ability to
purchase add-on software licenses or additional agent software as needed.
MULTI-LEVEL REPORTING. The Company's eHealth product family generates a
comprehensive package of graphical reports that provide information and analyses
on a wide variety of pre-programmed parameters. Information is provided for use
at multiple levels of management, from a general overview of capacity,
availability and response time for chief information officers to a detailed
analysis of specific transactions, server components, network equipment
components, network bandwidth components and network services.
BROAD TECHNOLOGY COVERAGE. The Company's eHealth product family provides
performance management across a broad spectrum of industry standard applications
like Microsoft Exchange, Lotus Notes, ERP systems from SAP, Baan and Peoplesoft,
industry standard operating systems like Unix, Windows, Windows NT and Linux and
industry standard networking technologies like ATM, Frame Relay and IP.
PRODUCTS AND TECHNOLOGY
Each of the applications in the eHealth product line, Network Health,
Application Health, and System Health includes a fixed license fee and a
variable fee based on network elements, servers or clients. The following are
the Company's products:
NETWORK HEALTH - NETWORK HEALTH IS THE FOUNDATION OF THE EHEALTH FAMILY. The
Network Health platform automatically locates devices on the network, identifies
MIB variables, polls devices, and stores data in a relational database. After
the data has been analyzed, Network Health automatically generates
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multiple reports, which can be retrieved from the network console or via the
Web. Network Health software operates continuously to provide full-time data
gathering and on demand reporting. Network Health reports show the effects of
usage and serve as a basis for agreeing to and understanding service levels,
proactively addressing potential network failures, managing bandwidth and
capacity, identifying security violations and understanding the usage patterns
of the network and the network's various elements.
The critical technology components in the Network Health architecture are
the polling engine, the MIB translation file, the database and group filter, and
the reporting engine. Each of these components is device independent, and thus
can function on any type of network device or segment irrespective of the
network equipment vendor or technology. These components automate the functions
of locating the appropriate devices for polling, gathering only the appropriate
variables and data from those devices, and converting the data into canonical
format which facilitates analysis. The distributed nature of the product allows
for the product components and the user to be located at any location within the
organization. Through the use of sophisticated algorithms and heuristics, the
gathered data can be analyzed to make predictions of upcoming problems
throughout the network. The report viewing components within the reporting
engine allow the rendering and display of multiple views and reports in a
graphical fashion for Web output, print output or integration level output to
other products. By focusing on the issues of capacity, errors, service levels
and utilization, Network Health's manner of reporting provides a common model,
which covers a broad spectrum of network elements and technologies.
The following modules are available within the Network Health product line:
Network Health -- Frame Relay
Network Health -- Router/Switch
Network Health -- Traffic Accountant
Network Health -- Server
Network Health -- Service Level Reporting
Network Health -- Remote Access
Network Health -- ATM
APPLICATION HEALTH - Application Health provides a comprehensive solution
for the management of service and application response management. With
Application Health, large enterprises or service providers can effectively
measure and manage the availability of critical e-business applications and
services from several perspectives including the network infrastructure, the
systems or servers, or the client. Through the use of industry leading agent
technologies like those from Empire Technologies, FirstSense Software or Cisco,
Application Health offers visibility into business transactions and services. It
can both measure and report on performance trends and also provide a snapshot
into the overall performance of business critical applications. Application
Health can currently provide this capability for most industry standard ERP
applications (e.g., SAP, Baan, Peoplesoft) and industry standard communications
software products like Exchange and Notes. In addition, Application Health
provides a unique capability that allows an e-business to measure response time
and availability performance for non-standard "home-grown" applications.
SYSTEM HEALTH - System Health provides a set of solutions that allow an
e-business to manage large groups of servers and systems, including Web servers,
across all major operating system and server vendor environments. System Health
provides real time alarm notification of problems and automatic restart of
failed processes critical to the day-to-day functioning of an e-business, an IT
organization, a Web-hosting company or an Application Service Provider. System
Health provides critical information on which applications are consuming the
greatest CPU or memory resources.
CUSTOMER SERVICE
The post-sales support organization is responsible for providing ongoing
technical support and training for the Company's customers. For an annual fee, a
customer will receive telephone and email support, as well as new releases of
the Company's products. The Company has also begun offering 24 x 7 support
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coverage to customers for an additional fee. The Company offers a toll-free
customer support line to customers. Support personnel answer the technical
support calls and generally provide same-day responses to questions that cannot
be resolved during the initial call. All calls are logged, opened, tracked, and
closed with daily updates to the customer, Concord's sales teams and Concord's
executive management team. At December 31, 1999, the Company employed 17
technical post-sales support personnel. In addition, Concord also had 17
professional service and training personnel which provide services to its
customers on a per fee basis.
SALES AND MARKETING
The Company markets its products in the United States to organizations with
large and medium-size networks, as well as network service providers which
include telecommunications carriers, ISPs, systems integrators and outsourcers
primarily through a direct sales force, sales agents and through value added
resellers (VARs). Internationally, the Company markets primarily through
distributors. Additionally, the Company has entered into joint marketing and
joint development arrangements with a number of companies.
At December 31, 1999, the Company had 23 North America sales teams each
comprised of one direct sales person and one or two technical support people
targeting the following four geographic regions: East, Central, West and
Federal. The Company had 7 International sales teams also comprised of one
direct sales person and one or two technical support people targeting the
following three geographic regions: EMEA, Asia/Pacific and South America. In
addition, the Company employs 21 sales and technical management personnel to the
sales teams. At December 31, 1999 the Company utilized 26 North America VARs and
27 international distributors. It is the responsibility of each sales team to
manage all sales within its geographic territory by signing up, training, and
managing a small number of sales agents, VARs, distributors, network service
providers and outsourcers, as well as selling directly to customers. The Company
generates sales leads through seminars, trade shows, Internet postings, press
articles, referrals, mass mailings and cold calling as well as through
relationships with sales agents, distributors, VARs, network service providers
and outsourcers.
At December 31, 1999, the Company had relationships with over 100 network
service providers. The network service providers offer the Company's products as
part of their service offerings. At December 31, 1999, the Company also had
several joint marketing and development partners, including ADC
Telecommunications, Ascend Communications, Inc., Cabletron Systems, Inc., Cisco
Systems, Inc., Fore Systems, Inc., Ganymede, Lucent Technologies, Inc., NetScout
Systems, Inc., Newbridge Networks Corporation, Nortel Networks, Paradyne,
Response Networks, Shomiti and Visual Networks, Inc. that work with the
Company's direct sales force. The Company also has a professional services
referral program aimed at its key network consulting partners. Under this
program, the Company will provide professional services through these partners
directly to its customers.
At December 31, 1999, the Company employed 21 marketing personnel who
position, promote and market the Company's products. These individuals are
engaged in a variety of activities, including direct marketing, public
relations, tradeshows, advertising, Internet postings, and seminars. At December
31, 1999, the Company employed 98 sales personnel, consisting of 11 management
personnel, 30 sales persons, 37 technical support persons, 19 inside sales
persons and one administrative person.
PRODUCT DEVELOPMENT
Management believes that the Company's future success depends in large part
on its ability to continue to enhance existing products and develop new products
that maintain technological competitiveness and deliver value to existing and
new customers. The Company has made and intends to continue to make substantial
investments in product development. Extensive product development input is
obtained through customers and the Company's monitoring of end user needs and
changes in the marketplace.
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The Company introduced the initial version of Network Health focused at the
LAN and WAN environments in the first quarter of 1995. During 1996, the Company
introduced three additional versions of Network Health -- Frame Relay,
Router/Switch and Traffic Accountant. During 1997, the Company introduced two
additional versions of Network Health -- Server and Service Level Reporting.
During 1998, the Company introduced two additional versions of Network Health --
ATM and Remote Access. During 1999, the Company introduced one additional
version of Network Health -- Response, which is now incorporated into the
Application Health product. The Company is now developing new releases of
Network Health, System Health and Application Health.
The Company's total expenses for research and development for the years
1999, 1998 and 1997 were $11.4 million, $7.6 million and $4.9 million,
respectively. The Company anticipates that it will continue to commit
substantial resources to research and development in the future and that product
development expenses may increase in absolute dollars in future periods. To
date, the Company's development efforts have not resulted in any capitalized
software development costs. As of December 31, 1999, the Company's product
development organization consisted of 81 people.
COMPETITION
The market for the Company's products is highly competitive and subject to
rapid technological change. Although the Company has experienced limited
competition to date from products with comparable capabilities, the Company
expects competition to increase in the future. The Company currently competes
principally on the basis of: (i) the breadth of its products' features; (ii) the
automated, scaleable, and cost effective nature of its products; and (iii) the
Company's knowledge, expertise and service ability gained from years of close
interaction with customers. While the Company believes that it currently
competes favorably overall with respect to these factors, there can be no
assurance that the Company will be able to continue to do so.
The Company competes or may compete directly or indirectly with the
following categories of companies: (i) report toolset vendors, such as Desktalk
Systems, Inc.; (ii) large, well established networking OEMs such as
International Business Machines Corporation, Lucent Technologies,
Hewlett-Packard Company, and Cabletron Systems, Inc. that have developed network
management platforms; (iii) developers of network element management solutions
such as Cisco Systems, Inc., 3Com Corporation and Nortel Networks, Inc.; (iv) to
a lesser degree, probe vendors such as NetScout Systems, Inc. and Visual
Networks, Inc; and (v) enterprise management software, framework and platform
providers such as BMC Software and Computer Associates. Additional competitors,
including large networking or telecommunications equipment manufacturers,
telecommunications service providers, and computer hardware and software
companies, may enter this market, thereby further intensifying competition.
Additionally, there can be no assurance that one or more of the Company's
customers may not attempt to develop competing products internally or that one
or more of the companies Concord has developed relationships with, such as the
network management platform developers and probe vendors, will not try to
develop a product that competes more directly with eHealth.
Many of the Company's current and prospective competitors have significantly
greater financial, selling and marketing, technical and other resources than the
Company. As a result, these competitors may be able to devote greater resources
to the development, promotion, sale and support of their products than the
Company. Moreover, these companies may introduce additional products that are
competitive with or better than those of the Company or may enter into strategic
relationships to offer better products than those currently offered by the
Company. There can be no assurance that the Company's products would effectively
compete with such new products.
To remain competitive, the Company must continue to invest in research and
development, selling and marketing, and customer service and support. In
addition, as the Company enters new markets and utilizes different distribution
channels, the technical requirements and levels and bases of competition may be
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different than those experienced in the Company's current market. There can be
no assurance that the Company will be able to successfully compete against
either current or potential competitors in the future.
PROPRIETARY RIGHTS
The Company relies on a combination of patent, copyright, trademark and
trade secret laws, non-disclosure agreements and other contractual provisions to
establish, maintain and protect its proprietary rights in its products. The
Company has five issued U.S. patents, five pending U.S. patent applications and
various foreign counterparts. There can be no assurance that patents which have
been or may be issued will not be challenged, invalidated or circumvented, or
any rights thereunder will provide protection of the Company's intellectual
property rights. The Company believes that, because of the rapid pace of
technological change in the software and data communications industries, the
legal intellectual property protection for its products is a less significant
factor in the Company's success than the knowledge, abilities and experience of
the Company's employees, the frequency of its product enhancements, the
effectiveness of its marketing activities and the timeliness and quality of its
support services. Certain technologies used in the Company's products are
licensed from third parties, including the database technology employed in the
Company's Network Health product family. Such third-party licenses are generally
non-exclusive, royalty based licenses. With respect to the database technology,
the Company is obligated to make minimum fixed price payments to the extent that
the royalty under such license does not exceed a certain minimum threshold. The
termination of any such licenses, or the failure of the third-party licensors to
adequately maintain or update their products, could result in delay in the
Company's ability to ship certain of its products while it seeks to implement
technology offered by alternative sources, and any required replacement licenses
could prove costly. While it may be necessary or desirable in the future to
obtain other licenses relating to one or more of the Company's products or
relating to current or future technologies, there can be no assurance that the
Company will be able to do so on commercially reasonable terms or at all.
EMPLOYEES
As of December 31, 1999, the Company had a total of 281 employees, all but
17 of whom were based in the United States. Of the total, 81 were in research
and development, 43 were in customer service, 98 were in sales, 21 were in
marketing, and 38 were in finance, administration and operations. The Company's
future performance depends in significant part upon the continued service of its
key engineering, technical support and sales personnel. Competition for such
personnel is intense and there can be no assurance that the Company will be
successful in attracting or retaining such personnel in the future. None of the
Company's employees are represented by a labor union or are subject to a
collective bargaining agreement. The Company has not experienced any work
stoppages and considers its relations with its employees to be good.
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ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages as of December 31, 1999
are as follows:
Name Age Position
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John A. Blaeser...................................... 58 Chief Executive Officer, President and Director
Kevin J. Conklin..................................... 46 Sr. Vice President, Marketing
Ferdinand Engel...................................... 51 Sr. Vice President, Engineering
Gary E. Haroian...................................... 48 Sr. Vice President, Finance and Administration,
Chief Financial Officer, Clerk and Treasurer
Daniel D. Phillips, Jr............................... 45 Sr. Vice President, Worldwide Sales
Set forth below is certain information relating to each executive officer's
business experience:
John A. Blaeser has been Chief Executive Officer and President of the
Company since January 1, 1996 and a Director of the Company since 1985. Prior to
joining the Company, from 1991 until 1996, Mr. Blaeser was Managing General
Partner of EG&G Venture Management, a venture capital firm.
Kevin J. Conklin has been Senior Vice President of Marketing of the Company
since September 1999 and Vice President of Marketing of the Company since March
1994. Prior to joining Concord, Mr. Conklin was Vice President of Product
Marketing and Development at Artel Communications from June 1993 until joining
Concord in March 1994, and from July 1991 to June 1993 Mr. Conklin served as
Director of Marketing at Artel Communications.
Ferdinand Engel has been Senior Vice President of Engineering of the Company
since September 1999 and Vice President of Engineering of the Company since
1989. Prior to joining Concord, Mr. Engel was Vice President of Engineering for
Technology Concepts at Bell Atlantic.
Gary E. Haroian has been Senior Vice President of Finance and Administration
and Chief Financial Officer of the Company since September 1999 and Vice
President of Finance and Administration and Chief Financial Officer of the
Company since February 1997. Mr. Haroian also serves as Clerk and Treasurer of
the Company. Prior to joining the Company, Mr. Haroian was President and Chief
Executive Officer of Stratus Computer. At Stratus, Mr. Haroian held the
positions of Controller from 1983 until 1985, Vice President and Chief Financial
Officer from 1985 until 1991, Vice President of Corporate Operations, from 1991
until 1993, Executive Vice President from 1993 until 1994, and President and
Chief Operating Officer from 1994 until 1996.
Daniel D. Phillips, Jr. has been Senior Vice President of Worldwide Sales of
the Company since September 1999 and Vice President of Worldwide Sales of the
Company since May 1994. Prior to joining Concord, Mr. Phillips was Vice
President of Worldwide Sales of Epoch Systems. While at Epoch Systems from
September 1989 until May 1994, Mr. Phillips also held the positions of Vice
President of International and OEM Operations, and Director of International
Operations.
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RISK FACTORS
References in these risk factors to "we," "our" and "us" refer to Concord
Communications, Inc., a Massachusetts corporation. Any investment in our common
stock involves a high degree of risk. If any of the following risks actually
occur, our business, results of operations and financial condition would likely
suffer.
We do not provide forecasts of our future financial performance. From time
to time, however, the information we provide or statements made by our employees
may contain forward looking statements. This document contains forward looking
statements. Any statements contained in this document that do not describe
historical facts are forward looking statements. We make such forward looking
statements under the provisions of the "safe harbor" section of the Private
Securities Litigation Reform Act of 1995. The forward looking statements
contained in this document are based on current expectations, but are subject to
a number of risks and uncertainties. In particular, statements contained in
Management's Discussion and Analysis of Financial Condition and Results of
Operations which are not historical facts (including, but not limited to,
statements concerning the plans and objectives of management; increases in sales
and marketing, research and development and general and administrative expenses;
expenses associated with Year 2000; statements related to acquisitions and the
integration of acquired companies; and our expected liquidity and capital
resources) constitute forward-looking statements. Our actual future results and
actions may differ significantly from those stated in any forward-looking
statements. Factors that may cause such differences include, but are not limited
to, the factors discussed below.
WE HAVE A LIMITED OPERATING HISTORY. OUR FUTURE OPERATING RESULTS ARE UNCERTAIN.
We changed our focus to network management software in 1991 and commercially
introduced our first Network Health product in 1995. Accordingly, we have only a
limited operating history in the network performance management market upon
which an evaluation of our business and prospects can be based. We incurred
significant net losses in each of the five fiscal years prior to earning a small
profit in 1997. As of December 31, 1999, we had accumulated net losses of $11.0
million. Our limited operating history and our dependence on a single product
family in an emerging market make the prediction of future results of operations
difficult or impossible, and our prospects must be considered in light of the
risks, costs and difficulties frequently encountered by emerging companies,
particularly companies in the competitive software industry.
WE CANNOT ASSURE THAT OUR REVENUES WILL GROW OR THAT WE WILL REMAIN PROFITABLE.
Although we have achieved recent revenue growth and profitability for the
fiscal years ended 1999, 1998 and 1997, we cannot assure that we can generate
substantial additional revenue growth on a quarterly or annual basis, or that we
can sustain any revenue growth that we achieve. In addition, we have increased,
and plan to increase further, our operating expenses in order to:
- - fund higher levels of research and development;
- - increase our sales and marketing efforts;
- - develop new distribution channels;
- - broaden our customer support capabilities; and
- - expand our administrative resources in anticipation of future growth.
To the extent that increases in our expenses precede or are not followed by
increased revenue, our profitability will suffer. Our revenue must grow
substantially in order for us to remain profitable on a quarterly or annual
basis. In addition, in view of recent revenue growth, the rapidly evolving
nature of our
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business and markets, our recent acquisitions and our limited operating history
in our current market, we believe that one should not rely on period-to-period
comparisons of our financial results as an indication of our future performance.
In light of our strong performance in 1998, we used all of our remaining
unrestricted net operating loss and credit carryforwards in 1998. Accordingly,
we recorded a tax provision of $532,600 during 1998 and $5.6 million during
1999. The continuing restrictions on our future use of our net operating loss
carryforwards will severely limit the benefit, if any, we will attribute to this
asset.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE.
We are likely to experience significant fluctuations in our quarterly
operating results caused by many factors, including, but not limited to:
- - changes in the demand for our products;
- - the timing, composition and size of orders from our customers, including the
tendency for significant bookings to occur in the last month of each fiscal
quarter;
- - our customers' spending patterns and budgetary resources for performance
management software solutions;
- - the success of our new customer generation activities;
- - introductions or enhancements of products, or delays in the introductions or
enhancements of products, by us or our competitors;
- - changes in our pricing policies or those of our competitors;
- - changes in the distribution channels through which products are sold;
- - our ability to anticipate and effectively adapt to developing markets and
rapidly changing technologies;
- - changes in networking or communications technologies;
- - our ability to attract, retain and motivate qualified personnel;
- - changes in the mix of products sold by us and our competitors;
- - the publication of opinions about us and our products, or our competitors
and their products, by industry analysts or others; and
- - changes in general economic conditions.
Unlike other software companies with a longer history of operations, we do
not derive a significant portion of our revenues from maintenance contracts, and
therefore we do not have a significant ongoing revenue stream that may mitigate
quarterly fluctuations in operating results. Furthermore, we are trying to
expand our channels of distribution, and increases in our revenues will depend
on our successful implementation of our distribution strategy. Due to the buying
patterns of certain of our customers and also to our own sales incentive
programs focused on annual sales goals, revenues in our fourth quarter could be
higher than revenues in our first quarter of the following year. There also may
be other factors, such as seasonality and the timing of receipt and delivery of
orders within a fiscal quarter, that significantly affect our quarterly results,
which are difficult to predict given our limited operating history.
Our quarterly sales and operating results depend generally on:
- - the volume and timing of orders within the quarter;
- - the tendency of sales to occur late in fiscal quarters; and
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- - our fulfillment of orders received within the quarter.
In addition, our expense levels are based in part on our expectations of
future orders and sales, which are extremely difficult to predict. A substantial
portion of our operating expenses are related to personnel, facilities, and
sales and marketing programs. Accordingly, we may not be able to adjust our
fixed expenses quickly enough to address any significant shortfall in demand for
our products in relation to our expectations.
Due to all of the foregoing factors, we believe that our quarterly operating
results are likely to vary significantly in the future. Therefore, in some
future quarter our results of operations may fall below the expectations of
securities analysts and investors. In such event, the trading price of our
common stock would likely suffer.
THE MARKET FOR PERFORMANCE MANAGEMENT SOFTWARE IS EMERGING.
The market for our products is in an early stage of development. Although
the rapid expansion and increasing complexity of computer networks, systems and
applications in recent years has increased the demand for performance management
software products, the awareness of and the need for such products is a recent
development. Because the market for these products is only beginning to develop,
it is difficult to assess:
- - the size of this market;
- - the appropriate features and prices for products to address this market;
- - the optimal distribution strategy; and
- - the competitive environment that will develop.
The development of this market and our growth will depend significantly upon
the willingness of telecommunications carriers, ISPs, systems integrators and
outsourcers to integrate performance management software into their product and
service offerings. The market for performance management software may not grow
or we may fail to properly assess and address the needs of this market.
OUR SUCCESS IS DEPENDENT UPON SALES TO TELECOMMUNICATIONS CARRIERS.
A significant portion of our revenues are, and likely will continue to be,
attributable to sales of products to telecommunications carriers. Our future
performance depends upon telecommunications carriers' increased incorporation of
our products and services as part of their package of product and service
offerings to end users. Our products may fail to perform favorably in and become
an accepted component of the telecommunications carriers' product and service
offerings. The volume of sales of our products and services to
telecommunications carriers may increase slower than we expect or may decrease.
MARKET ACCEPTANCE OF OUR EHEALTH PRODUCT FAMILY IS CRITICAL TO OUR SUCCESS.
We currently derive substantially all of our revenues from our eHealth
product family, and we expect that revenues from these products will continue to
account for substantially all of our revenues for the foreseeable future. Broad
market acceptance of these products is critical to our future success. We cannot
assure that market acceptance of eHealth will increase or even remain at current
levels. Factors that may affect the market acceptance of our products include:
- - the availability and price of competing products and technologies; and
- - the success of our sales efforts and those of our marketing partners.
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Moreover, if demand for performance management software products increases,
we anticipate that our competitors will introduce additional competitive
products and new competitors could enter our market and offer alternative
products. Product introductions by our competitors may also reduce future market
acceptance of our products.
OUR INDUSTRY IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE. OUR SUCCESS DEPENDS UPON
MAINTENANCE OF STANDARD PROTOCOLS.
The software industry is characterized by:
- - rapid technological change,
- - frequent introductions of new products,
- - changes in customer demands; and
- - evolving industry standards.
The introduction of products embodying new technologies and the emergence of
new industry standards can render existing products obsolete and unmarketable.
Network Health's analysis and reporting, as well as the quality of its reports,
depends upon Network Health's utilization of the industry-standard Simple
Network Management Protocol (SNMP) and the data resident in conventional
Management Information Bases (MIBs). Any change in these industry standards, the
development of vendor-specific proprietary MIB technology, or the emergence of
new network technologies could affect the compatibility of Network Health with
these devices which, in turn, could affect Network Health's analysis and
generation of comprehensive reports or the quality of the reports. Furthermore,
although our products currently run on industry-standard UNIX operating systems
and Windows NT, any significant change in industry-standard operating systems
could affect the demand for, or the pricing of, our products.
WE MUST INTRODUCE PRODUCT ENHANCEMENTS AND NEW PRODUCTS ON A TIMELY BASIS.
Because of rapid technological change in the software industry and potential
changes in the performance management software market and industry standards,
the life cycle of versions of eHealth is difficult to estimate. We cannot assure
that:
- - we will successfully develop and market enhancements to eHealth or
successfully develop new products that respond to technological changes,
evolving industry standards or customer requirements;
- - we will not experience difficulties that could delay or prevent the
successful development, introduction and sale of such enhancements or new
products; or
- - that such enhancements or new products will adequately address the
requirements of the marketplace and achieve any significant degree of
market acceptance.
OUR ACQUISITIONS MAY NEGATIVELY IMPACT OUR RESULTS OF OPERATIONS.
In October 1999, we acquired Empire Technologies, Inc. Empire is a provider
of solutions for proactive self-management of UNIX and Windows NT systems, as
well as mission-critical applications. In February 2000, we acquired FirstSense
Software, Inc. FirstSense is a provider of application response management
solutions. Because these acquisitions will be recorded as
"poolings-of-interests" for accounting and financial reporting purposes, we
recorded the expenses of these acquisitions, which are substantial, in the
period in which each acquisition occurred. The reporting of expenses of each
acquisition as a current charge will have a significant adverse impact on our
post-acquisition results of operations.
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INTEGRATING OUR ACQUIRED PRODUCTS AND SERVICES MAY BE DIFFICULT.
The anticipated benefits of our acquisitions may not be achieved unless,
among other things, our operations, products, services and personnel are
successfully combined with those of our acquired companies in a timely and
efficient manner. The diversion of our attention, and any difficulties
encountered in our transition processes, could harm the combined enterprise. We
cannot assure assurance that we will successfully integrate our acquired
companies, because, among other things:
- the products and services offered by us and our acquired companies
are highly complex and have been developed independently; and
- integration of our product lines with those of our acquired
companies will require coordination of separate development and
engineering teams from each company.
If the anticipated benefits of our acquisitions are not achieved or are not
achieved in a timely fashion, then our acquisitions could harm our operating
results for a significant period of time that cannot now be determined.
THE MARKET FOR OUR PRODUCTS IS INTENSELY COMPETITIVE.
The market for our products is new, intensely competitive, rapidly evolving
and subject to technological change. Our current and future competitors include:
- - remote monitoring (RMON) probe vendors;
- - element management software vendors;
- - other performance analysis and reporting vendors;
- - companies offering network performance reporting services;
- - large network management platform vendors which may bundle their products
with other hardware and software in a manner that may discourage users from
purchasing our products; and
- - developers of network element management solutions.
We expect competition to persist, increase and intensify in the future with
possible price competition developing in our markets. Many of our current and
potential competitors have longer operating histories and significantly greater
financial, technical and marketing resources and name recognition than us. We do
not believe our market will support a large number of competitors and their
products. In the past, a number of software markets have become dominated by one
or a small number of suppliers, and a small number of suppliers or even a single
supplier may dominate our market. If we do not provide products that achieve
success in our market in the short term, we could suffer an insurmountable loss
in market share and brand name acceptance. We cannot ensure that we will compete
effectively with current and future competitors.
OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS MAY HARM OUR COMPETITIVE
POSITION IN THE NETWORK MANAGEMENT SOFTWARE MARKET.
Our success depends significantly upon our proprietary technology. We rely
on a combination of patent, copyright, trademark and trade secret laws,
non-disclosure agreements and other contractual provisions to establish,
maintain and protect our proprietary rights. These means afford only limited
protection. We have six issued U.S. patents, seven pending U.S. patent
applications, and various foreign counterparts. We cannot assure that patents
will issue from our pending applications or from any future applications or
that, if issued, any claims allowed will be sufficiently broad to protect our
technology. In addition, we cannot assure that any patents that have been or may
be issued will not be challenged, invalidated or circumvented, or that any
rights granted thereunder would protect our proprietary rights. Failure of any
patents to protect our technology may make it easier for our competitors to
offer equivalent
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or superior technology. We have registered or applied for registration for
certain trademarks, and will continue to evaluate the registration of additional
trademarks as appropriate. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy aspects of our products or
services or to obtain and use information that we regard as proprietary. Third
parties may also independently develop similar technology without breach of our
proprietary rights. In addition, the laws of some foreign countries do not
protect proprietary rights to as great an extent as do the laws of the United
States. In addition, our products are licensed under shrink wrap license
agreements that are not signed by licensees and therefore may not be binding
under the laws of certain jurisdictions.
WE LICENSE CERTAIN TECHNOLOGIES FROM THIRD PARTIES.
Certain technologies used by our products are licensed from third parties,
generally on a non-exclusive basis. The termination of any such licenses, or the
failure of the third-party licensors to adequately maintain or update their
products, could result in delay in our shipment of certain of our products while
we seek to implement technology offered by alternative sources, and any required
replacement licenses could prove costly. While it may be necessary or desirable
in the future to obtain other licenses relating to one or more of our products
or relating to current or future technologies, we cannot assure that we will be
successful in doing so on commercially reasonable terms or at all.
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS WOULD HARM OUR BUSINESS.
Although we do not believe that we are infringing the intellectual property
rights of others, claims of infringement are becoming increasingly common as the
software industry develops and legal protections, including patents, are applied
to software products. Litigation may be necessary to protect our proprietary
technology, and third parties may assert infringement claims against us with
respect to their proprietary rights. Any claims or litigation can be
time-consuming and expensive regardless of their merit. Infringement claims
against us can cause product release delays, require us to redesign our products
or require us to enter into royalty or license agreements, which agreements may
not be available on terms acceptable to us or at all.
PRODUCT DEFECTS COULD RESULT IN LOSS OR DELAY IN MARKET ACCEPTANCE OF OUR
PRODUCTS.
As a result of their complexity, software products may contain undetected
errors or failures when first introduced or as new versions are released. We
cannot assure that, despite testing by us and testing and use by current and
potential customers, errors will not be found in new products after commencement
of commercial shipments or, if discovered, that we will successfully correct
such errors in a timely manner or at all. The occurrence of errors and failures
in our products could result in loss of or delay in market acceptance of our
products, and alleviating such errors and failures could require significant
expenditure of capital and other resources by us.
WE MAY NOT HAVE SUFFICIENT PROTECTION AGAINST PRODUCT LIABILITY CLAIMS.
Since our products are used by our customers to predict future network
problems and avoid failures of the network to support critical business
functions, design defects, software errors, misuse of our products, incorrect
data from network elements or other potential problems within or out of our
control that may arise from the use of our products could result in financial or
other damages to our customers. We do not maintain product liability insurance.
Although our license agreements with our customers typically contain provisions
designed to limit our exposure to potential claims as well as any liabilities
arising from such claims, such provisions may not effectively protect us against
such claims and the liability and costs associated therewith. We provide
warranties for our products for a period of time (currently three months) after
purchase. Our license agreements generally do not permit product returns by the
customer, and product returns for fiscal 1999, 1998 and 1997 represented less
than 1.0% of total revenues during each of such periods. We cannot assure that
product returns will not increase as a percentage of total revenues in future
periods.
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WE RELY ON STRATEGIC PARTNERS AND OTHER EVOLVING DISTRIBUTION CHANNELS.
Our distribution strategy is to develop multiple distribution channels,
including sales through:
- - strategic marketing partners, such as Cisco Systems;
- - value added resellers, such as Empowered Networks;
- - telecommunications carriers, such as MCI Communications Corporation;
- - OEMs, such as Lucent Technologies, Inc.; and
- - independent software vendors and international distributors.
We have developed a number of these relationships and intend to continue to
develop new "channel partner" relationships. Our success will depend in large
part on our development of these additional distribution relationships and on
the performance and success of these third parties, particularly
telecommunications carriers and other network service providers. We have
recently established many of our channel partner relationships. Accordingly, we
cannot predict the extent to which our channel partners will be successful in
marketing our products. We generally expect that our agreements with our channel
partners may be terminated by either party without cause. None of our channel
partners are required to purchase minimum quantities of our products and none of
these agreements contain exclusive distribution arrangements. We may:
- - fail to attract important and effective channel partners;
- - fail to penetrate the market segments of our channel partners; or
- - lose any of our channel partners, as a result of competitive products
offered by other companies, products developed internally by these channel
partners or otherwise.
WE MAY FAIL TO SUCCESSFULLY MANAGE OUR GROWTH.
We have experienced significant growth in our sales and operations and in
the complexity of our products and product distribution channels. We have
increased and are continuing to increase the size of our sales force and
coverage territories. Furthermore, we have established and are continuing to
establish additional distribution channels through third party relationships.
Our growth, coupled with the rapid evolution of our markets, has placed, and is
likely to continue to place, significant strains on our administrative,
operational and financial resources and increase demands on our internal
systems, procedures and controls.
OUR SUCCESS DEPENDS ON OUR RETENTION OF KEY PERSONNEL.
Our performance depends substantially on the performance of our key
technical and senior management personnel, none of whom is bound by an
employment agreement. We may lose the services of any of such persons. We do not
maintain key person life insurance policies on any of our employees. Our success
depends on our continuing ability to identify, hire, train, motivate and retain
highly qualified management, technical, and sales and marketing personnel,
including recently hired officers and other employees. We experience intense
competition for such personnel. We cannot assure that we will successfully
attract, assimilate or retain highly qualified technical, managerial or sales
and marketing personnel in the future.
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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 SYSTEMS ARE SUBJECT TO YEAR 2000 COMPLIANCE FAILURES.
We were aware of the issues associated with the programming code in
existing computer systems and software products as the millennium (Year 2000)
approached. We set up a task force consisting of the Director of IT and
Operations, the Manager of System Applications and representative personnel from
each functional area. This task force addressed the Year 2000 issue in the
following categories:
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- - the Network Health product;
- - internal business computer systems and software applications;
- - internal systems other than computer hardware and software; and
- - systems of our external suppliers and service providers.
We also assessed our Year 2000 associated costs, risks and potential
contingency plans. Despite our efforts with respect to the Year 2000 issue, we
cannot assure that we would not suffer upon the failure of our products, our
internal systems and applications or the systems of our third party suppliers
and service providers to properly operate or manage data beyond 1999.
We believe that we have identified and resolved all our Year 2000 issues. We
realize, however, that it may not be possible to determine, at this time, with
complete certainty that all Year 2000 problems affecting us were corrected. As a
result, we could experience a significant number of operational inconveniences
and inefficiencies that may divert our time and attention from our ordinary
business activities.
OUR COMMON STOCK PRICE COULD EXPERIENCE SIGNIFICANT VOLATILITY.
We completed an initial public offering of our common stock during October
of 1997. The market price of our common stock may be highly volatile and could
be subject to wide fluctuations in response to:
- - variations in results of operations,
- - announcements of technological innovations or new products by us or our
competitors,
- - changes in financial estimates by securities analysts, or
- - other events or factors.
In addition, the financial markets have experienced significant price and
volume fluctuations that have particularly affected the market prices of equity
securities of many high technology companies and that often have been unrelated
to the operating performance of such companies or have resulted from the failure
of the operating results of such companies to meet market expectations in a
particular quarter. Broad market fluctuations or any failure of our operating
results in a particular quarter to meet market expectations may adversely affect
the market price of our common stock. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been instituted against such a company. Such
litigation could result in substantial costs and a diversion of our attention
and resources.
WE MAY NEED FUTURE CAPITAL FUNDING.
We plan to continue to expend substantial funds on the continued
development, sales and marketing of the eHealth product family. We cannot assure
that our existing capital resources, the proceeds from our initial public
offering during October 1997 and any funds that may be generated from future
operations together will be sufficient to finance our future operations or that
other sources of funding will be available on terms acceptable to us, if at all.
In addition, future sales of substantial amounts of our securities in the public
market could adversely affect prevailing market prices and could impair our
future ability to raise capital through the sale of our securities.
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ITEM 2. PROPERTIES
The Company's corporate office and principal facility is located in
Marlboro, Massachusetts. In March, 1999 the Company signed a 7 year operating
lease for its principal operating facilities. Aggregate rental payments under
the lease will be $12.0 million. This facility accommodates finance,
administration and operations, research and development, customer support and
marketing. The Company also leases, on a short-term basis, sales office space in
Atlanta, GA, Tustin, CA, Dallas, TX, Stafford, TX, Plymouth, MI, Barrington, IL,
Eden Prairie, MN, Seattle, WA, Vienna, VA, Point Pleasant, NJ, Boca Raton, FL,
London, England, Hamburg, Germany, Paris, France, the Netherlands, Australia and
Singapore. Following the abandonment of the Company's existing corporate office
space, the Company recorded a third quarter charge of $700,000, representing the
remaining lease commitment, less expected sublease income.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation that it believes could have a
material adverse effect on the business, results of operations and financial
condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Company effected its initial public offering on October 24, 1997 at a
price of $14.00 per share. Since that date, the Company's Common Stock has
traded on the Nasdaq National Market under the symbol CCRD. The following table
sets forth, for the period indicated, the high and low closing sales prices for
the Common Stock, all as reported by the Nasdaq National Market.
Period High Low
------ ---- ---
October 16, 1997 - December 31, 1997 $ 23.25 $ 15.75
Fiscal 1998:
First Quarter...................................... $ 28.75 $ 15.13
Second Quarter..................................... 29.38 21.25
Third Quarter...................................... 45.13 26.00
Fourth Quarter..................................... 56.75 31.25
Fiscal Year............................................ 56.75 15.13
Fiscal 1999:
First Quarter...................................... $ 68.25 $ 43.75
Second Quarter..................................... 58.00 36.56
Third Quarter...................................... 56.75 34.75
Fourth Quarter..................................... 64.00 38.00
Fiscal Year............................................ 68.25 34.75
As of March 8, 2000, there were approximately 239 stockholders of record of
the Company's Common Stock.
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DIVIDEND POLICY
The Company currently anticipates that it will retain all future earnings
for use in its business and does not anticipate that it will pay any cash
dividends in the foreseeable future. The payment of any future dividends will be
at the discretion of the Company's Board of Directors and will depend upon,
among other things, future earnings, operations, capital requirements and the
general financial condition of the Company, general business conditions and
contractual restrictions on payment of dividends, if any.
USE OF PROCEEDS
On October 16, 1997, the Company commenced an initial public offering
("IPO") of 2,900,000 shares of common stock, par value $.01 per share (the
"Common Stock"), of the Company pursuant to the Company's final prospectus dated
October 15, 1997 (the "Prospectus"). The Prospectus was contained in the
Company's Registration Statement on Form S-1, which was declared effective by
the Securities and Exchange Commission (SEC File No. 333-33227) on October 15,
1997. Of the 2,900,000 shares of Common Stock offered, 2,300,000 shares were
offered and sold by the Company and 600,000 shares were offered and sold by
certain stockholders of the Company. As part of the IPO, the Company granted the
several underwriters an overallotment option to purchase up to an additional
435,000 shares of Common Stock (the "Underwriters' Option"). The IPO closed on
October 21, 1997 upon the sale of 2,900,000 shares of Common Stock to the
underwriters. On October 24, 1997, the Representatives, on behalf of the several
underwriters, exercised the Underwriters' Option, purchasing 435,000 additional
shares of Common Stock from the Company. The aggregate offering price of the IPO
to the public was $40,600,000 (exclusive of the Underwriters' Option), with
proceeds to the Company and selling shareholders, after deduction of the
underwriting discount, of $29,946,000 (before deducting offering expenses
payable by the Company) and $7,812,000 respectively. The aggregate offering
price of the Underwriters' Option exercised was $6,090,000, with proceeds to the
Company, after deduction of the underwriting discount, of $5,663,700 (before
deducting offering expenses payable by the Company). The aggregate amount of
expenses incurred by the Company in connection with the issuance and
distribution of the shares of Common Stock offered and sold in the IPO were
approximately $3.6 million, including $2.7 million in underwriting discounts and
commissions and $950,000 in other offering expenses.
None of the expenses paid by the Company in connection with the IPO or the
exercise of the Underwriters' Option were paid, directly or indirectly, to
directors, officers, persons owning ten percent or more of the Company's equity
securities, or affiliates of the Company.
The net proceeds to the Company from the IPO, after deducting underwriting
discounts and commissions and other offering expenses were approximately $34.7
million. To date, the Company has not utilized any of the net proceeds from the
IPO. The Company has invested all such net proceeds primarily in US treasury
obligations and other interest bearing investment grade securities. None of the
net proceeds from the IPO were used to pay, directly or indirectly, directors,
officers, persons owning ten percent or more of the Company's equity securities,
or affiliates of the Company.
ISSUANCE OF SECURITIES
On October 29, 1999, the Company completed a merger with Empire
Technologies, Inc. Concord issued an aggregate of 815,248 shares of Concord
Common Stock to the stockholders of Empire in the Merger in a private placement
transaction pursuant to Section 4(2) under the Securities Act of 1933. The
Company plans to file a Form S-3 Registration Statement to cover the resale of
the securities issued in the merger.
On February 4, 2000, the Company completed a merger with FirstSense
Software, Inc. The Company has reserved for issuance in connection with the
merger, 1,940,000 shares of Concord Common Stock. The Company will issue the
shares in a private placement transaction pursuant to Section 4(2) under the
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Securities Act of 1933. The Company is obligated to file a Form S-3 Registration
Statement to cover the resale of the securities issued in the merger.
ITEM 6. SELECTED FINANCIAL DATA
Fiscal Year Ended
-------------------------------------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 28, Dec. 30,
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
License revenues........................ $ 52,708 $ 34,597 $ 18,455 $ 8,172 $ 3,565
Service revenues........................ 14,635 6,860 2,225 1,162 912
-------- -------- -------- -------- -------
Total revenues...................... 67,343 41,457 20,680 9,334 4,477
Cost of revenues............................ 8,086 4,676 2,925 1,973 1,170
------ ------ -------- -------- -------
Gross profit................................ 59,257 36,781 17,755 7,361 3,307
-------- -------- -------- -------- -------
Operating expenses:
Research and development................ 11,409 7,387 5,069 4,009 2,413
Sales and marketing..................... 25,687 17,522 10,173 7,040 3,694
General and administrative.............. 3,679 2,802 2,058 1,177 1,000
Stock-based compensation (Note 3)....... 2,549 1,001 -- -- --
General and administrative.............. 551 -- -- -- --
-------- -------- -------- -------- -------
Total operating expenses............ 43,875 28,712 17,300 12,226 7,107
-------- -------- -------- -------- -------
Operating income (loss)..................... 15,382 8,069 455 (4,865) (3,800)
Other income (expense), net................. 3,117 2,290 305 43 80
--------- --------- --------- --------- --------
Income (loss) before income taxes... $ 18,499 $ 10,359 $ 760 $ (4,822) $(3,720)
Provision for income taxes........ 5,593 533 -- -- --
--------- --------- --------- --------- --------
Net income (loss)........................... $ 12,906 $ 9,826 $ 760 $ (4,822) $(3,720)
========= ========= ========= ========= ========
Pro forma provision for income taxes on
Subchapter S-Corporation income (unaudited) 146 41 -- -- --
--------- --------- --------- --------- --------
Pro forma net income (unaudited) ........... $ 12,760 $ 9,785 $ 760 $ (4,822) $(3,720)
========= ========= ========= ========= ========
Net income (loss) per common and potential common share:
Basic................................... $ 0.91 $ 0.73 $ 0.20 $ (3.06) $ (2.38)
Diluted................................. 0.85 0.66 0.06 (3.06) (2.38)
Pro forma diluted....................... 0.85 0.66 0.06 (0.50) (0.70)
Weighted average common and potential common shares
outstanding:
Basic................................... 14,161 13,457 3,885 1,576 1,561
Diluted................................. 15,139 14,892 12,134 1,576 1,561
Pro forma diluted....................... 15,139 14,892 12,134 9,684 5,322
Fiscal Year Ended
-----------------------------------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 28, Dec. 30,
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents............. $ 62,044 $ 51,249 $ 36,898 $ 1,664 $ 4,397
Working capital (deficit)............. 55,442 43,978 33,356 (1,387) 3,316
Total assets.......................... 84,405 59,923 43,014 5,584 6,729
Long-term debt, net of current portion -- 1,001 189 668 --
Redeemable convertible preferred stock -- -- -- 14,478 13,616
Total stockholders' equity (deficit).. 63,051 45,751 35,249 (15,035) (9,126)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information appearing under the caption, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Company's 1999
Annual Report to Stockholders is incorporated herein by reference.
20
22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative Financial Instruments, Other Financial Instruments and Derivative
Commodity Instruments. The Company does not invest in derivative financial
instruments, other financial instruments or derivative commodity instruments for
which fair value disclosure would be required under SFAS No. 107. All of the
Company's investments are in investment grade securities with high credit
ratings of relatively short duration that trade in highly liquid markets and are
carried at fair value on the Company's books. Accordingly, the Company has no
quantitative information concerning the market risk of participating in such
investments.
Primary Market Risk Exposures. The Company's primary market risk exposure is
in the area of interest rate risk. The Company's investment portfolio of cash
equivalents is subject to interest rate fluctuations, but the Company believes
this risk is immaterial due to the short-term nature of these investments.
Substantially all of the Company's business outside the United States is
conducted in U.S. dollar-denominated transactions, whereas the Company's
operating expenses in its international branches are denominated in local
currency. The Company has no foreign exchange contracts, option contracts or
other foreign hedging arrangements. The Company believes that the operating
expenses of its foreign operations are immaterial, and therefore any associated
market risk is unlikely to have a material adverse effect on the Company's
business, results of operations or financial condition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements together with the related notes and the
report of Arthur Andersen LLP, independent accountants, are set forth beginning
on page F-1 of Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The information under the captions "Election of Directors" and "Section
16(a) Beneficial Ownership Reporting Compliance" as set forth in the Company's
proxy statement for its annual stockholders' meeting to be held April 25, 2000
is incorporated herein by reference.
The information concerning officers is included in Part I, Item 1A under the
caption "Executive Officers".
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation" as set forth in
the Company's proxy statement for its annual stockholders' meeting to be held
April 25, 2000 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Securities Ownership of Certain
Beneficial Owners and Management" as set forth in the Company's proxy statement
for its annual stockholders' meeting to be held April 25, 2000 is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
21
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form:
1. Financial Statements: Page Number
Report of Independent Public Accountants F-1
Balance Sheets:
December 31, 1999 and December 31, 1998 F-2
Statements of Income:
Years ended December 31, 1999, December 31, 1998 and December 31, 1997 F-3
Statements of Stockholders' Equity:
Years ended December 31, 1999, December 31, 1998 and December 31, 1997 F-4
Statements of Cash Flows:
Years ended December 31, 1999, December 31, 1998 and December 31, 1997 F-5
Notes to the Financial Statements F-6
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
Included in Item 9 of Notes to the Financial Statements
3. Exhibits:
See Index to Exhibits. The Exhibits listed in the accompanying Index to
Exhibits are filed or incorporated by reference as part of this report.
(b) Reports on Form 8-K:
Form 8-K was filed on November 12, 1999 for disclosure of the merger
with Empire Technologies, Inc.
Form 8-K was filed on January 26, 2000 for disclosure of the
execution of the merger with FirstSense Software, Inc.
Form 8-K was filed on February 10, 2000 for the disclosure of the
consummation of the merger with FirstSense Software, Inc.
Form 8-K was filed on February 29, 2000 for the disclosure of the
1999 audited consolidated financial statements and management's
discussion and analysis of financial condition and results of
operations related thereto.
22
24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Concord Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Concord
Communications, Inc. (a Massachusetts corporation) as of December 31, 1999 and
December 31, 1998, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Concord Communications, Inc. as
of December 31, 1999 and December 31, 1998, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in United
States.
Arthur Andersen LLP
Boston, Massachusetts
January 17, 2000
F-1
25
CONCORD COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1999 1998
------------ ------------
ASSETS
Current Assets:
Cash, cash equivalents and marketable securities...... $ 62,044,141 $ 51,248,773
Accounts receivable, net of allowance of approximately
$930,000 and $450,000 in 1999 and 1998,
respectively........................................ 13,465,999 5,391,723
Prepaid expenses and other current assets............. 1,286,070 509,805
---------- ----------
Total current assets.............................. 76,796,210 57,150,301
Equipment and Improvements, at cost:
Equipment............................................. 7,897,533 3,792,080
Leasehold improvements................................ 3,005,915 388,894
---------- ----------
10,903,448 4,180,974
Less-- Accumulated depreciation and amortization...... 3,294,551 1,407,430
---------- ----------
7,608,897 2,773,544
---------- ----------
$ 84,405,107 $ 59,923,845
========== ==========
LIABILITIES
AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable...................................... $ 4,542,644 $ 3,599,636
Accrued expenses...................................... 6,885,827 5,087,984
Deferred revenue...................................... 9,925,297 5,485,585
---------- ----------
Total current liabilities......................... 21,353,768 14,173,205
---------- ----------
Commitments and Contingencies (Note 8)
Stockholders' Equity
Preferred Stock, $.01 par value --
Authorized -- 1,000,000 shares
Issued and outstanding-- None...................... -- --
Common stock, $.01 par value--
Authorized -- 50,000,000 shares
Issued and outstanding -- 14,406,192 and 13,040,374
shares, in 1999 and 1998 respectively.............. 144,062 130,405
Additional paid-in capital............................ 77,799,827 69,998,035
Deferred compensation................................. (53,221) (101,189)
Accumulated other comprehensive income................ (1,386,125) 149,606
Accumulated deficit................................... (13,453,204) (24,426,217)
---------- ----------
Total stockholders' equity ....................... 63,051,339 45,750,640
---------- ----------
$ 84,405,107 $ 59,923,845
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
F-2
26
CONCORD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended
----------------------------------------------
December 31, December 31, December 31,
1999 1998 1997
------------ ------------ ------------
Revenues:
License revenues............. $52,707,905 $34,597,958 $18,454,613
Service revenues............. 14,635,150 6,859,394 2,225,287
---------- ---------- ----------
Total revenues.......... 67,343,055 41,457,352 20,679,900
Cost of Revenues.................. 8,085,987 4,676,335 2,925,169
---------- ---------- ----------
Gross profit............ 59,257,068 36,781,017 17,754,731
---------- ---------- ----------
Operating Expenses:
Research and development..... 11,409,464 7,386,706 5,068,489
Sales and marketing.......... 25,687,262 17,522,653 10,173,182
General and administrative... 3,678,544 2,802,023 2,058,402
Stock-based compensation
(Note 3).................... 2,549,000 1,001,000 --
Acquisition-related charges
(Note 3).................... 550,601 -- --
---------- ---------- ----------
Total operating expenses..... 43,874,871 28,712,382 17,300,073
---------- ---------- ----------
Operating income........ 15,382,197 8,068,635 454,658
---------- ---------- ----------
Other Income (Expense):
Interest income.............. 3,136,026 2,355,816 428,253
Interest expense............. -- (514) (126,836)
Other........................ (19,268) (65,251) 4,248
---------- ---------- ----------
Total other income, net. 3,116,758 2,290,051 305,665
---------- ---------- ----------
Income before income taxes 18,498,955 10,358,686 760,323
Provision for income taxes........ 5,592,703 532,600 --
---------- ---------- ----------
Net income........................ $12,906,252 $ 9,826,086 $ 760,323 $
========== ========== ==========
Pro forma provision for income taxes
on Subchapter S-Corporation income
(unaudited) .................... 146,325 41,400 --
---------- ---------- ----------
Pro forma net income (unaudited).. $12,759,927 $ 9,784,686 $ 760,323
========== =========== ==========
Net income per common and potential
common share:
Basic $ 0.91 $ 0.73 $ 0.20
========== =========== ==========
Diluted $ 0.85 $ 0.66 $ 0.06
========== =========== ==========
Pro forma diluted (unaudited) $ 0.85 $ 0.66 $ 0.06
========== =========== ==========
Weighted average common and
potential common shares outstanding:
Basic 14,160,755 13,457,495 3,884,915
========== =========== ==========
Diluted 15,139,325 14,892,238 12,134,727
========== =========== ==========
Pro forma diluted (unaudited) 15,139,325 14,892,238 12,134,727
========== =========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
27
CONCORD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock
-------------------- Unrealized Accumulated
Additional Deferred Gain On Other
Number $.01 Paid-In Compen- Marketable Accumulated Comprehensive Comprehensive
of Shares Par Value Capital sation Securities Deficit Income Total Income
--------- --------- ---------- -------- ---------- ----------- ------------- ----- -------------
BALANCE, DECEMBER
28, 1996... 844,482 $8,445 $18,156,951 -- -- $(32,943,433) -- $(14,778,037) --
Issuance of common
stock, net of
issuance costs of
$ 955,359 2,735,000 27,350 34,626,991 -- -- -- -- 34,654,341 --
Accretion of divi-
dends on
preferred stock.... -- -- -- -- -- (441,557) -- (441,557) --
Conversion of
redeemable
convertible pre-
ferred stock to
common stock....... 8,108,258 81,083 14,838,203 -- -- -- -- 14,919,286 --
Exercise of stock
options............ 331,448 3,315 188,594 -- -- -- -- 191,909 --
Deferred compen-
sation related
to grants of
stock options..... -- -- 191,875 (191,875) -- -- -- -- --
Amortization of
deferred compen-
sation related
to grants of
stock options..... -- -- -- 42,718 -- -- -- 42,718 --
Unrealized gains
on available-for-
sale securities... -- -- -- -- 19,750 -- 19,750 19,750 19,750
Distribution to
shareholders...... -- -- -- -- -- (119,698) -- (119,698) --
Net income........ -- -- -- -- -- 760,323 -- 760,323 760,323
--------- --------- --------- -------- --------- --------- -------- --------- ---------
Comprehensive
Income 19,750 780,073
BALANCE, DECEMBER
31, 1997.......... 12,019,188 120,193 68,002,614 (149,157) 19,750 (32,744,365) -- 35,249,035 --
Shares issued in
connection with
employee stock
plans............. 1,021,186 10,212 1,495,421 -- -- -- -- 1,505,633 --
Tax benefit
associated with
employee stock
options........... -- -- 500,000 -- -- -- -- 500,000 --
Amortization of de-
ferred compen-
sation related to
grants of stock
options........... -- -- -- 47,968 -- -- -- 47,968 --
Unrealized gains
on available-for-
sale securities... -- -- -- -- 129,856 -- 129,856 129,856 129,856
Distribution to
shareholders....... -- -- -- -- (1,507,938) -- (1,507,938) --
Net income........ -- -- -- -- -- 9,826,086 -- 9,826,086 9,826,086
--------- --------- --------- -------- --------- --------- -------- --------- ---------
Comprehensive
Income 149,606 9,955,942
BALANCE, DECEMBER
31, 1998.......... 13,040,374 130,405 69,998,035 (101,189) 149,606 (24,426,217) -- 45,750,640 --
Shares issued in
connection with
employee stock
plans............. 1,365,818 13,657 2,901,792 -- -- -- -- 2,915,449 --
Tax benefit
associated with
employee stock
options........... -- -- 4,900,000 -- -- -- -- 4,900,000 --
Amortization of
deferred comp-
ensation related
to grants of
stock options..... -- -- -- 47,968 -- -- -- 47,968 --
Unrealized gains
on available-for-
sale securities... -- -- -- -- (1,535,731) -- (1,535,731) (1,535,731) (1,535,731)
Distribution to
shareholders....... -- -- -- -- -- (1,933,239) -- (1,933,239) --
Net income........ -- -- -- -- -- 12,906,252 -- 12,906,252 12,906,252
--------- --------- ----------- -------- ----------- ------------ -------- ----------- -----------
Comprehensive
Income $(1,386,125) $11,372,521
=========== ===========
BALANCE, DECEMBER
31, 1999.......... 14,406,192 $ 144,062 $77,799,827 $(53,221) $(1,386,125) $(13,453,204) $63,051,339
========== ========= =========== ======== =========== ============ ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-4
28
CONCORD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------- ------------ ------------
Cash Flows from Operating Activities:
Net income................................... $12,906,252 $ 9,826,026 $ 760,323
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.............. 1,935,089 756,669 591,798
Unrealized (loss) gain on available-for-sale
securities.............................. (1,535,731) 129,856 19,750
Changes in current assets and liabilities:
Accounts receivable..................... (8,074,276) (1,640,779) (1,423,916)
Prepaid expenses and other current assets (776,265) (227,495) (132,769)
Accounts payable........................ 943,008 1,787,061 207,536
Accrued expenses........................ 6,697,843 2,351,472 1,306,493
Deferred revenue........................ 4,439,712 3,132,156 1,001,678
---------- ---------- ----------
Net cash provided by operating activities 16,535,632 16,114,966 2,330,893
---------- ---------- ----------
Cash Flows from Investing Activities:
Purchases of equipment and improvements........ (6,722,474) (1,891,606) (1,119,863)
Purchases of investments in marketable
securities................................. (252,350,710) (53,139,637) (116,402,905)
Sales of investments in marketable securities.. 238,648,717 42,712,930 87,741,538
----------- ----------- -----------
Net cash used in investing activities. (20,424,467) (12,318,313) (29,781,230)
----------- ----------- -----------
Cash Flows from Financing Activities:
Proceeds from bank borrowings.................. -- -- 583,707
Repayments of bank borrowings.................. -- -- (1,508,209)
Distribution to shareholders................... (1,933,239) (1,507,938) (119,698)
Proceeds from issuance of common stock......... -- -- 34,654,341
Proceeds from shares issued in connection
with employee stock plans.................... 2,915,449 1,505,633 191,909
----------- ----------- -----------
Net cash provided by (used in) financing
activities.................. 982,210 (2,305) 33,802,050
----------- ----------- -----------
Net (Decrease) Increase in Cash and Cash Equivalents (2,906,625) 3,794,348 6,351,713
Cash and Cash Equivalents, beginning of year..... 12,011,093 8,216,745 1,865,032
----------- ----------- -----------
Cash and Cash Equivalents, end of year........... $ 9,104,468 $12,011,093 $ 8,216,745
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest......................... $ -- $ -- $ 126,836
=========== =========== ===========
Cash paid for taxes............................ $ 341,837 $ 46,159 $ 1,539
=========== =========== ===========
Supplemental Disclosure of Noncash Transactions:
Accretion of dividends on preferred stock...... $ -- $ -- $ 441,557
=========== =========== ===========
Deferred compensation related to
grants of stock options...................... $ -- $ -- $ 191,875
=========== =========== ===========
Conversion of redeemable convertible
preferred stock to common stock.............. $ -- $ -- $14,919,286
=========== =========== ===========
Unrealized (loss) gain on available-for-sale
securities................................... $(1,535,731) $ 129,856 $ 19,750
=========== =========== ===========
Tax benefit associated with employee
stock options................................ $ 4,900,000 $ 500,000 $ --
=========== =========== ===========
Retirement of fully depreciated fixed assets... $ -- $ 4,330,000 $ --
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-5
29
CONCORD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Concord Communications, Inc. (the Company or Concord) is primarily engaged
in the development and sale of next-generation performance management solutions
to companies principally in the United States and Europe.
The Company is subject to the risks associated with emerging,
technology-oriented companies. Primary among these risks are competition from
substitute products and the ability to successfully develop and market the
Company's current and future products.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and all its wholly owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
(b) Cash, Cash Equivalents and Marketable Securities
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities. The Company has classified its cash equivalents and marketable
securities as available-for-sale and recorded them at fair value, with the
unrealized gains and losses reported as a separate component of stockholders'
equity. The Company considers cash and highly liquid investments, purchased with
an original maturity of 90 days or less, to be cash and cash equivalents. Cash
and cash equivalents are $9,104,468 and $12,011,093 at December 31, 1999 and
December 31, 1998, respectively.
(c) Revenue Recognition
The Company's revenues consist of software license revenues and service
revenues. Software license revenues are recognized in accordance with the
American Institute of Certified Public Accountants' Statement of Position
("SOP") No. 97-2, Software Revenue Recognition, as modified by SOP 98-9,
Modification of SOP 97-2,Software Revenue Recognition with respect to Certain
Transactions. Software license revenues are recognized upon execution of a
contract and delivery of software, provided that the license fee is fixed and
determinable, no significant production, modification or customization of the
software is required and collection is considered probable by management.
Service revenues are recognized as the services are performed. Maintenance
revenues are derived from customer support agreements generally entered into in
connection with initial license sales and subsequent renewals. Maintenance
revenues are recognized ratably over the term of the maintenance period.
Payments for maintenance fees are generally made in advance.
(d) Equipment and Improvements
Equipment and improvements are recorded at cost. Depreciation is provided
for on a straight-line basis over the useful lives of the assets, which are
estimated to be three to five years for all assets except leasehold
improvements, which are amortized over the life of the lease.
(e) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(f) Concentration of Credit Risk and Significant Customers
F-6
30
SFAS No. 105, Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. The Company has no significant off-balance-sheet concentration
of credit risk such as foreign exchange contracts, option contracts or other
foreign hedging arrangements. The Company maintains its cash, cash equivalent
and marketable securities with established financial institutions. The Company
does not believe it has accounts receivable collection risk in excess of
existing reserves. For the years ended December 31, 1999, December 31, 1998 and
December 31, 1997, no individual customer accounted for more than 10% of revenue
or accounts receivable.
(g) Software Development Costs
SFAS No. 86, Accounting for the Costs of Computer Software to be sold,
Leased or Otherwise Marketed, requires the capitalization of certain computer
software development costs incurred after technological feasibility is
established. The Company believes that once technological feasibility of a
software product has been established, the additional development costs incurred
to bring the product to a commercially acceptable level are not significant.
There were no capitalized software development costs at December 31, 1999 or
December 31, 1998.
(h) Net Income per Share
The Company computes earnings per share following the provisions of SFAS No.
128, Earnings per Share. SFAS No. 128 establishes standards for computing and
presenting earnings per share and applies to entities with publicly held common
stock or potential common stock. The dilutive effect of potential common shares
in 1999 and 1998 consisting of outstanding stock options and in 1997 consisting
of outstanding stock options and redeemable convertible preferred stock, is
determined using the treasury method and the if-converted method, respectively,
in accordance with SFAS No. 128. Pro forma diluted net income per common and
potential common share assumes earnings from Empire Technologies, Inc., an
acquired Subchapter S-Corporation accounted for as a pooling-of-interests (Note
3), were taxed at the Company's effective tax rate. Calculations of basic,
diluted and pro forma diluted net income per common share and potential common
share are as follows:
1999 1998 1997
---- ---- ----
Net income............................ $ 12,906,252 $ 9,826,086 $ 760,323
-------------- -------------- --------------
Pro forma provision for income taxes on
Subchapter S-Corporation income (unaudited) 146,325 41,400 --
-------------- -------------- --------------
Pro forma net income (unaudited)...... $ 12,759,927 $ 9,784,686 $ 760,323
============== ============== ==============
Weighted average common shares
outstanding........................ 14,160,755 13,457,495 3,884,915
Potential common shares pursuant
to stock options................... 978,570 1,434,743 1,830,774
Potential common shares pursuant
to conversion of redeemable
convertible preferred stock........ -- -- 6,419,038
-------------- -------------- --------------
Diluted weighted average shares...... 15,139,325 14,892,238 12,134,727
============== ============== ==============
Basic net income per common share..... $ 0.91 $ 0.73 $ 0.20
============== ============== ==============
Diluted net income per common
and potential common share......... $ 0.85 $ 0.66 $ 0.06
============== ============== ==============
Pro forma diluted net income per
common and potential common share.. $ 0.85 $ 0.66 $ 0.06
============== ============== ==============
Diluted weighted average shares outstanding do not include 722,572, 4,003
and 44,818 common equivalent shares for the years ended December 31, 1999, 1998
and 1997, respectively, as their effect would have been antidilutive.
F-7
31
(2) MARKETABLE SECURITIES
It is the Company's intent to maintain a liquid investment portfolio to
support current operations and to take advantage of investment opportunities;
therefore, all marketable securities are considered to be available-for-sale and
are classified as current assets.
The amortized cost, unrealized gains (losses) and fair value of marketable
securities available-for-sale as of December 31, 1999 with maturity dates from
January 1, 2000 through April 20, 2004, are as follows:
Amortized Cost Unrealized Gains (Losses) Fair Value
-------------- ------------------------- ----------
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
============== ============== ==============
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:
Amortized Cost Unrealized Gains (Losses) Fair Value
-------------- ------------------------- ----------
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
============== ============== ==============
(3) ACQUISITION OF EMPIRE TECHNOLOGIES, INC.
On October 29, 1999, the Company issued 815,248 shares of common stock for
all of the issued and outstanding shares of Empire Technologies, Inc. ("Empire")
in a transaction accounted for as a pooling-of-interests. Accordingly, all
prior-period financial statements presented have been restated as required by
Accounting Principles Board Opinion No. 16, Accounting for Business
Combinations. All intercompany transactions have been eliminated as a part of
the restatement.
As a part of the transaction, the Company incurred direct,
acquisition-related charges of approximately $551,000. All of such costs have
been expensed. Also, as part of the transaction, the Company assumed an
obligation related to Empire's existing stock appreciation rights plan. Pursuant
to the terms of the only grant under this plan, the Company settled this
obligation in cash within 30 days of closing. The expense relating to the grant
was recognized from the date of grant through the date of settlement.
Separate and combined results of Concord and Empire during the periods preceding
the merger were as follows:
Concord Empire Eliminations Combined
------- ------ ------------ --------
1999 (Through 10/29/1999)
Net Revenues $49,616,491 $2,713,962 (133,160) $52,197,293
Net Income 7,519,519 471,655 7,991,174
1998
Net Revenues $39,481,330 $1,976,022 $41,457,352
Net Income 9,078,471 747,615 9,826,086
1997
Net Revenues $19,569,594 $1,110,306 $20,679,900
Net Income 130,755 629,568 760,323
F-8
32
(4) STOCK OPTION PLANS
In 1995, the Company's Board of Directors (the Board) approved the 1995
Stock Plan, which provides for the granting of incentive stock options (ISOs)
and nonqualified stock options. Prior to the adoption of the 1995 Stock Plan,
the Board granted options under the 1982 Employee Incentive Stock Option Plan,
the 1986 Nonqualified Stock Option Plan and the 1986 Stock Plan. Following the
completion of the IPO, the Company adopted the 1997 Stock Plan, the 1997
Employee Stock Purchase Plan and the 1997 Nonemployee Director Stock Option
Plan. As amended, these plans allow for issuances of up to 2,500,000, 375,000
and 95,000 shares of common stock, respectively; the Company has reserved such
shares for future issuance.
Under the 1995 and 1997 Stock Plans (the Plans), the Company may issue
options to purchase up to 2,963,798 shares of common stock, of which 137,658
options are available for grant as of December 31, 1999. ISOs may be granted at
an exercise price not less than the fair market value per share of common stock
on the date of grant, as determined by the Board. The price per share relating
to each nonqualified option granted under the Plans shall not be less than the
lesser of (i) the book value per share of common stock as of the end of the
Company's fiscal year immediately preceding the date of grant or (ii) 50% of the
fair market value per share of common stock on the date of grant. Vesting of the
options is determined by the Board, and the options expire 8 years from the date
of grant. An employee may convert his or her unexercised ISOs into nonqualified
options at any time prior to the expiration of such ISOs.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation, which requires the measurement of
the fair value of stock options or warrants to be included in the statement of
operations or disclosed in the notes to the financial statements. As permitted
by SFAS No. 123, the Company will continue to account for stock-based
compensation for employees under Accounting Principles Board Opinion No. 25 and
has elected the disclosure-only alternative under SFAS No. 123 for options
granted using the Black-Scholes option pricing model prescribed by SFAS No. 123.
The weighted average fair value per share of options granted during 1999, 1998
and 1997 was $45.27, $31.08 and $5.64, respectively. The weighted average
assumptions are as follows:
1999 1998 1997
---- ---- ----
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%
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:
1999 1998 1997
------------- ------------- -------------
Net income, as reported................................. $ 12,906,252 $ 9,826,086 $ 760,323
============= ============= =============
Net (loss) income, pro forma............................ $ (302,081) $ 7,007,947 $ 308,939
============= ============= =============
Net income per share, as reported
Basic................................................. $ 0.91 $ 0.73 $ 0.20
============= ============= =============
Diluted............................................... $ 0.85 $ 0.66 $ 0.06
============= ============= =============
Pro forma diluted..................................... $ 0.85 $ 0.66 $ 0.06
============= ============= =============
Net (loss) income per share, pro forma
Basic................................................. $ (0.02) $ 0.52 $ .08
============= ============= =============
Diluted............................................... $ (0.02) $ 0.47 $ .03
============= ============= =============
Pro forma diluted..................................... $ (0.02) $ 0.47 $ .03
============= ============= =============
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma
compensation may not be representative of that to be expected in future
years.
F-9
33
The following table summarizes information about options outstanding at
December 31, 1999:
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
-------------- ----------- ---------------- ---------------- ----------- ----------------
$ .10 - 1.90 322,395 4.60 $ .93 127,168 $ .91
4.10 - 17.38 290,735 5.68 10.87 93,761 10.46
18.38 - 23.50 347,205 6.13 21.73 121,146 21.71
23.88 - 33.38 62,957 6.44 27.94 19,601 27.41
34.88 - 36.91 901,801 7.64 36.85 6,237 35.11
37.25 - 52.38 239,300 7.42 45.17 6,355 44.23
52.63 - 64.25 661,747 7.25 55.00 625 56.75
--------- -------
2,826,140 374,893
========= =======
The following schedule summarizes the activity under the stock option plans
for the three-year period ended December 31, 1999:
WEIGHTED
AVERAGE
NUMBER OF PRICE PER PRICE
SHARES SHARE PER SHARE
--------- --------- ---------
Outstanding at December 28, 1996 1,704,342 $ .10 -- 1.90 $ .23
Granted................... 784,700 1.90 -- 21.88 7.29
Exercised................. (331,448) .10 -- 1.90 .58
Terminated................ (26,494) . 10 -- 8.50 2.56
--------- -------------- --------
Outstanding at December 31, 1997 2,131,100 .10 -- 21.88 2.76
Granted................... 563,750 17.06 -- 56.75 23.71
Exercised................. (984,473) .10 -- 21.38 .98
Terminated................ (36,588) . 10 -- 41.00 6.73
--------- -------------- --------
Outstanding at December 31, 1998 1,673,789 $ .10 -- 56.75 $ 10.79
========= ============== ========
Granted................... 1,781,555 17.06 -- 64.25 43.90
Exercised................. (532,684) .10 -- 44.38 3.81
Terminated................ (96,520) .10 -- 58.25 27.94
--------- -------------- --------
Outstanding at December 31, 1999 2,826,140 $ .10 -- 64.25 $ 32.53
========= ============== ========
Exercisable at December 31, 1999 374,893 $ .10 -- 64.25 $ 12.80
========= ============== ========
Exercisable at December 31, 1998 164,957 $ .10 -- 21.38 $ 4.73
========= ============== ========
Exercisable at December 31, 1997 517,816 $ .10 -- 1.90 $ .19
========= ============== ========
In 1997, the Company granted one officer and one director options to
purchase in total 143,750 shares of common stock at an exercise price of $1.90
per share. At the date of grant, the estimated fair value per share of the
Company's common stock exceeded the exercise price of the options, and
accordingly, the Company has recorded deferred compensation of $191,875 related
to this difference at the date of grant. For the years ended December 31, 1999
and 1998, the Company has recorded compensation expense of $47,968 and $47,968,
respectively, related to these options grants.
The exercise price of all other options outstanding represents the fair
market value per share of common stock as of the date of grant.
(5) INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. This standard requires, among other things,
recognition of future tax effects, measured by enacted tax rates, attributable
to deductible temporary differences between the financial statement and income
tax bases of assets and liabilities.
F-10
34
The approximate income tax effects of these temporary differences are as
follows:
DECEMBER 31, DECEMBER 31,
1999 1998
------------- -------------
Net operating loss and federal tax credit carryforwards. $ 8,073,000 $ 12,719,000
Accruals not yet deductible for tax purposes............ 2,102,000 1,027,000
Depreciation............................................ 62,000 92,000
Deferred revenue........................................ 1,695,000 1,373,000
Capitalized research and development expenses........... 1,939,000 2,088,000
Valuation allowance..................................... (13,871,000) (17,299,000)
------------ ------------
$ - $ -
============ ============
The Company has available net operating loss carryforwards of approximately
$14,300,000 and federal research and development tax credit carryforwards of
approximately $2,225,000 as of December 31, 1999 to reduce future income tax
liabilities. These carryforwards are subject to review and possible adjustment
by the appropriate taxing authorities and expire from 1999 through 2013 as
follows:
RESEARCH AND
NET OPERATING LOSS DEVELOPMENT TAX
FISCAL YEAR CARRYFORWARDS CREDIT CARRYFORWARDS
------------ ------------------ --------------------
2000......................................................... $ 3,659,000 $ --
2001......................................................... 2,870,000 1,252,000
2002-2006.................................................... 1,369,000 150,000
2007-2013.................................................... 6,367,000 823,000
----------- ----------
$14,265,000 $2,225,000
=========== ==========
Pursuant to the Tax Reform Act of 1986, the utilization of net operating
loss carryforwards for tax purposes may be subject to an annual limitation if a
cumulative change of ownership of more than 50% occurs over a three-year period.
As a result of the Company's 1995 preferred stock financings, such a change in
ownership has occurred. As a result of this ownership change, the use of the net
operating loss carryforwards will be limited. The Company has determined that
its initial public offering did not cause another ownership change. The Company
has deferred tax assets of approximately $13.9 million comprised primarily of
net operating loss carryforwards and research and development credits. The
Company has fully reserved for these deferred tax assets by recording a
valuation allowance of $13.9 million, as the Company believes that it is more
likely than not that it will not be able to realize this asset.
Pursuant to paragraphs 20 to 25 of Statement of Financial Accounting
Standards No. 109, the Company considered both positive and negative evidence in
assessing the need for a valuation allowance at December 31, 1998 and 1999. The
factors that weighed most heavily on the Company's decision to record a full
valuation allowance were (i) the substantial restrictions on the use of its
existing net operation loss (NOL) carryforwards and (ii) the uncertainty of
future profitability.
As a result of the ownership change described above, the future use of
approximately $10.9 million of the Company's NOL carryforwards are limited to
only $330,000 per year; the substantial majority of such NOL carryforwards will
expire before they can be used. Pursuant to the provisions of SFAS No. 109, the
Company used all of its remaining unrestricted NOL and credit carryforwards in
computing the 1998 tax provision. The Company is also subject to rapid
technological change, competition from substantially larger competitors, a
limited family of products and other related risks, as more thoroughly described
in the "Risk Factors" section of the Company's Form 10-K, for the fiscal year
ended December 31, 1999. The Company's dependence on a single product family in
an emerging market makes the prediction of future results difficult, if not
impossible, especially in the highly competitive software industry. As a result,
the Company found the evidence described above to be the most reliable objective
evidence available in determining that a full valuation allowance against its
tax assets would be necessary.
The Company's net operating loss deferred tax asset includes approximately
$3.4 million pertaining to the benefit associated with the exercise and
subsequent disqualifying disposition of incentive stock options by the Company's
employees. When and if the Company realizes this asset, the resulting change in
the valuation allowance will be credited directly to additional paid-in capital,
pursuant to the provisions of SFAS No. 109.
The Company received a tax benefit of approximately $4.9 million and
$500,000 in 1999 and 1998, respectively, pursuant to the exercise of employee
stock options. The Company recorded this benefit as a component of additional
paid-in capital.
F-11
35
The difference between the expected combined federal and state tax rate and
the Company's effective tax rate in 1999 relates primarily to the use of
currently-generated tax credits and tax assets acquired as a part of the Empire
acquisition (Note 3). The difference in 1998 and 1997 relates primarily to the
use of substantially all of the Company's unrestricted NOL carryforwards.
(6) COMMITMENTS AND CONTINGENCIES
(a) Leases
In March, 1999 the Company signed a 7 year operating lease for its principal
operating facilities. Following the abandonment of the Company's former office
space, the Company recorded a third quarter charge of $700,000, representing the
remaining lease commitment, less expected sublease income. The approximate
future minimum rental payments under both leases are as follows:
AMOUNT
------
2000.......................................... $ 1,773,000
2001.......................................... 2,321,000
2002.......................................... 2,327,000
2003.......................................... 2,036,000
2004.......................................... 2,073,000
Thereafter.................................... 3,218,000
-----------
$13,749,000
===========
Rent expense was approximately $2.4 million, $464,000 and $346,000 for the
years ended December 31, 1999, December 31, 1998 and December 31, 1997,
respectively.
(b) Royalties
The Company has entered into several software license agreements that
provide the Company with exclusive worldwide licenses to distribute or utilize
certain patented computer software. The Company is required to pay royalties on
all related sales. Under one software license agreement, as amended, the Company
is obligated to make minimum quarterly royalty payments from 1995 through 1999.
The minimum payments are noncancelable and nonrefundable, but any minimum
payments in excess of amounts due for actual license sales in any quarter may be
used as a credit against future royalty fees in excess of the specified minimum
payments. The minimum royalty payments were paid in full in 1999. Royalty
expense under royalty agreements was approximately $1.0 million, $665,000 and
$903,000 for fiscal 1999, 1998 and 1997, respectively.
(c) Legal Proceedings
From time to time, the Company may be exposed to litigation relating to its
products and operations. The Company is not engaged in any legal proceedings
that are expected, individually or in the aggregate, to have a material adverse
effect on the Company's financial conditions or results of operations.
(7) ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
Payroll and payroll-related................................. $1,932,735 $2,269,845
Royalties................................................... 569,656 412,656
Outside commissions......................................... 286,854 568,450
Customer deposits........................................... 142,224 254,340
Deferred rent............................................... 456,957 --
Loss on lease abandonment................................... 700,000 --
Other....................................................... 2,797,401 1,582,693
---------- ----------
$6,885,827 $5,087,984
========== ==========
F-12
36
(8) EMPLOYEE BENEFIT PLAN
The Company maintains an employee benefit plan under Section 401(k) of the
Internal Revenue Code covering all eligible employees, as defined. The Plan
allows for employees to defer a portion of their salary up to 15% of pretax
compensation. While the Company has the discretion to make contributions to the
plan, no such contributions were made in 1999, 1998 or 1997.
(9) VALUATION AND QUALIFYING ACCOUNTS
The following table sets forth activity in the Company's accounts receivable
reserve account:
BALANCE AT BALANCE AT
BEGINNING CHARGES TO END OF
OF YEAR EXPENSES DEDUCTIONS YEAR
---------- ---------- ---------- ----------
1997.......................................... $ 210,116 $ 70,000 $ -- $ 280,116
1998.......................................... $ 280,116 $ 169,884 $ -- $ 450,000
1999.......................................... $ 450,000 $ 480,000 $ -- $ 930,000
(10) SEGMENT REPORTING AND INTERNATIONAL INFORMATION
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information in the fiscal year ended December 31, 1998.
SFAS 131 establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information for
those segments to be presented in interim financial reports issued to
stockholders. SFAS 131 also establishes standards for related disclosures about
products and services and geographic areas. Operating segments are identified as
components of an enterprise about which separate discrete financial information
is available for evaluation by the chief operating decision maker, or decision
making group, in making decisions how to allocate resources and assess
performance. The Company's chief decision making group, as defined under SFAS
131, is the Executive Management Committee. To date, the Executive Management
Committee has viewed the Company's operations as principally one segment,
software sales and associated services. As a result, the financial information
disclosed herein, materially represents all of the financial information related
to the Company's principal operating segment. Revenues from international
locations were $16.3 million, $7.3 million and $2.4 million in 1999, 1998 and
1997, respectively. The Company's revenues from international locations were
primarily generated from customers located in Europe. Revenues from customers
located in Europe accounted for 13.1%, 12.6% and 10.3% of total revenues in
1999, 1998 and 1997, respectively. No one country accounts for greater than 10%
of total revenues. Substantially all of the Company's assets are located in the
United States.
(11) SUBSEQUENT EVENT
On February 4, 2000 the Company completed a merger with privately-held
FirstSense Software. FirstSense is a provider of application and service
response management solutions. The Company has reserved for issuance in
connection with the merger, 1,940,000 shares of Concord's common stock. The
transaction is being accounted for as a pooling-of-interests.
F-13
37
CONCORD COMMUNICATIONS, INC.
FORM 10-K, December 31, 1999
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized this 28th day of March, 2000.
Concord Communications, Inc.
/s/ Gary E. Haroian
--------------------------------------
Name: Gary E. Haroian
Title: Sr. Vice President of Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ John A. Blaeser Chief Executive Officer, 03/28/00
--------------------------- President and Director
John A. Blaeser (Principal Executive Officer)
/s/ Gary E. Haroian Chief Financial Officer, Sr. Vice 03/28/00
--------------------------- President of Finance,
Gary E. Haroian Treasurer and Clerk
(Principal Financial and
Accounting Officer)
/s/ Frederick W.W. Bolander Director 03/28/00
---------------------------
Frederick W.W. Bolander
/s/ Richard M. Burnes, Jr. Director 03/28/00
---------------------------
Richard M. Burnes, Jr.
/s/ Robert C. Hawk Director 03/28/00
---------------------------
Robert C. Hawk
/s/ John Robert Held Director 03/28/00
---------------------------
John Robert Held
/s/ Deepak Kamra Director 03/28/00
---------------------------
Deepak Kamra
/s/ Robert M. Wadsworth Director 03/28/00
---------------------------
Robert M. Wadsworth
38
EXHIBIT INDEX
The following designated exhibits are either filed herewith or, where
information is provided under the SEC Document Reference heading corresponding
to such exhibit, incorporated by reference to such filing.
EXHIBIT NO. DESCRIPTION SEC DOCUMENT REFERENCE
----------- ----------- ----------------------
3.01 Restated Articles of Organization of the Company Exhibit No. 3.01 on Form 10-K, for the period ended
December 31, 1997
3.02 Restated By-laws of the Company Exhibit No. 3.02 on Form 10-K, for the period ended
December 31, 1998
10.01 Working Capital Loan Agreement between the Company
and Silicon Valley Bank dated April 3, 1997 Exhibit No. 10.01 to Registration Statement on Form S-1
(No. 333-33227)
10.02 Revolving Promissory Note made by the Company in
favor of Silicon Valley Bank Exhibit No. 10.02 to Registration Statement on Form S-1
(No. 333-33227)
10.03 Equipment Line of Credit Letter Agreement between the
Company and Fleet Bank dated as of June 9, 1997 Exhibit No. 10.03 to Registration Statement on Form S-1
(No. 333-33227)
10.04 1995 Stock Plan of the Company Exhibit No. 10.04 to Registration Statement on Form S-1
(No. 333-33227)
10.05 1997 Stock Plan of the Company Exhibit No. 10.01 on Form 10-Q, for the period ended June
30, 1998
* 10.06 1997 Stock Plan of the Company, as amended on March
12, 1998 and March 1, 1999
10.07 1997 Employee Stock Purchase Plan of the Company Exhibit No. 10.06 to Registration Statement on Form S-1
(No. 333-33227)
10.08 1997 Non-Employee Director Stock Option Plan of the Exhibit No. 10.02 on Form 10-Q, for the period ended June
Company 30, 1998
10.09 The Profit Sharing/401(K) Plan of the Company Exhibit No. 10.08 to Registration Statement on Form S-1
(No. 333-33227)
10.10 Lease Agreement between the Company and John Hancock
Mutual Life Insurance Company dated March 17, 1994,
as amended on March 25,1997 Exhibit No. 10.09 to Registration Statement on Form S-1
(No. 333-33227)
10.11 First Amendment to Lease Agreement between the
Company and John Hancock Mutual Life Insurance Exhibit No. 10.10 to Registration Statement on Form S-1
Company dated March 25, 1997 (No. 333-33227)
10.12 Form of Indemnification Agreement for directors and
officers of the Company Exhibit No. 10.11 to Registration Statement on Form S-1
(No. 333-33227)
10.13 Restated Common Stock Registration Rights Agreement
between the Company and certain investors dated Exhibit No. 10.12 to Registration Statement on Form S-1
August 7, 1986 (No. 333-33227)
10.14 Amended and Restated Registration Rights Agreement
between the Company and certain investors dated Exhibit No. 10.13 to Registration Statement on Form S-1
December 28, 1995 (No. 333-33227)
10.15 Management Change in Control Agreement between the
Company and John A. Blaeser dated as of August 7, 1997 Exhibit No. 10.14 to Registration Statement on Form S-1
(No. 333-33227)
10.16 Management Change in Control Agreement between the
Company and Kevin J. Conklin dated as of July 23, 1997 Exhibit No. 10.15 to Registration Statement on Form S-1
(No. 333-33227)
10.17 Management Change in Control Agreement between the
Company and Ferdinand Engel dated as of July 23, 1997 Exhibit No. 10.16 to Registration Statement on Form S-1
(No. 333-33227)
10.18 Management Change in Control Agreement between the
Company and Gary E. Haroian dated as of July 23, 1997 Exhibit No. 10.17 to Registration Statement on Form S-1
(No. 333-33227)
10.19 Management Change in Control Agreement between the
Company and Daniel D. Phillips, Jr. dated as of July Exhibit No. 10.18 to Registration Statement on Form S-1
23, 1997 (No. 333-33227)
10.20 Stock Option Agreement dated January 1, 1996 between
the Company and John A. Blaeser Exhibit No. 10.19 to Registration Statement on Form S-1
(No. 333-33227)
10.21 Stock Option Agreement dated January 1, 1996 between
the Company and John A. Blaeser Exhibit No. 10.20 to Registration Statement on Form S-1
(No. 333-33227)
10.22 Letter Agreement between the Company and Silicon Valley Bank
dated March 25, 1996 together with the
Loan Modification Agreement dated November 14, 1996 Exhibit No. 10.21 to Registration Statement on Form S-1
(No. 333-33227)
10.23 Form of Shrink-Wrap License Exhibit No. 10.22 to Registration Statement on Form S-1
(No. 333-33227)
10.24 Agreement and Plan of Reorganization dated as of Exhibit No. 2.1 to Current Report on Form 8-K filed on
October 19, 1999 by and among Concord Communications, November 12, 1999
Inc., E Acquisition Corp., Empire Technologies, Inc.
and the stockholders of Empire Technologies, Inc.
10.25 Agreement and Plan of Reorganization dated as of Exhibit No. 2.1 to Current Report on Form 8-K filed on
January 20, 2000 by and among Concord Communications, February 10, 2000
Inc., F Acquisition Corp., and FirstSense Software,
Inc.
10.26 Registration Rights Agreement dated as of February 4, Exhibit No. 99.1 to Current Report on Form 8-K filed on
2000 by and among Concord Communications, Inc. and February 10, 2000
Timothy Barrows, as Securityholder Agent
* 13.01 Pages 17-22 of Registrant's 1999 Annual Report to
Stockholders
21.01 Subsidiaries of the Company
23.01 Consent of Arthur Andersen LLP
27.01 Financial Data Schedule
* filed herewith