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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 YEAR ENDED DECEMBER 31, 1998
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)
33 Boston Post Road, West
Marlboro, Massachusetts 01752
(508) 460-4646
(Address and telephone 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
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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, 1999, as reported on the Nasdaq National Market was approximately
$847,999,192.
The number of shares outstanding of Common Stock as of March 8, 1999 was
13,198,431.
DOCUMENTS INCORPORATED BY REFERENCE
Document Form 10-K Reference
Portions of the Annual Report to Stockholders
for the fiscal year ended December 31, 1998. Part II, Item 7
Portions of the Registrant's Proxy Statement Part III
for its Annual Meeting of Stockholders to be
held on April 27, 1999.
THIS DOCUMENT CONTAINS 40 PAGES.
THE EXHIBIT INDEX IS ON PAGE 37 .
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Concord develops, markets and supports a family of turnkey, automated,
scalable, Web-based performance analysis and reporting solutions for the
management of computer networks. By providing a global view of network
performance, the Company's products enable the effective and efficient
management of large and medium-size multi-vendor networks, both by end users and
network service providers, including telecommunications carriers, Internet
Service Providers (ISPs), systems integrators and outsourcers. The Company's
Network Health product family retrieves and compiles vital network statistics,
performs extensive analyses of those statistics and provides intuitive,
informative, user-friendly graphical reports. The Company's software-only
solutions provide Information Technology (IT) executives, managers and
technicians with the information necessary to assess and correct costly network
inefficiencies, make cost-effective network purchasing decisions, predict
network failures and set and monitor service levels.
The Company's initial target market has been organizations with large and
medium-size networks of 150 or more network elements. 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, 1998, the Company had over 950 customers operating in
and serving a variety of industries. Representative customers include America
Online, Inc., Ameritech Corporation, AT&T Corporation, The Bear Stearns
Companies, Inc., British Telecommunications plc, Compaq Computer Corporation,
Cornell University, Dell Computer Corporation, Delta AirLines, Ernst & Young
LLP, MCI Communications Corporation, Motorola Inc., Nike International Ltd.,
Novartis Pharmaceuticals Corporation, Peoplesoft USA, Pepsi-Cola Company, The
Procter & Gamble Company, Sprint Corporation, Toys "R" Us, Twentieth Century
Fox, U S WEST, Inc. and Volkswagen.
INDUSTRY BACKGROUND
The pervasiveness and sophistication of business process applications, such
as email, electronic commerce and enterprise resource planning systems, have
significantly increased the amount of data traffic across networks. As these
applications have become an integral part of managing information within an
enterprise, businesses have developed and expanded their computer networks to
connect remote operations, branch offices, telecommuters, customers and
suppliers, among others. These increases in data traffic, coupled with the
emergence of widely distributed computing across heterogeneous platforms, have
increased the demands placed on both LANs and WANs. The sophisticated and
complex technologies that have been developed to meet these demands, such as LAN
switching, frame relay and ATM, must not only enhance bandwidth and
connectivity, but must also interface with existing legacy environments in order
to build an effective integrated business infrastructure.
Increased network complexities, combined with inadequate centralized
network analysis and planning functions, have led to network congestion and the
inefficient use of both LAN and WAN resources and unnecessary purchases of
additional networking hardware, leased lines and digital carrier WAN bandwidth.
Because the consequences of network congestion and failure can range from a
temporary reduction in productivity to significant financial loss, the
reliability and performance of networks has assumed critical importance. To
ensure the reliability and performance of these networks, organizations are
increasingly relying on network management software.
The technical complexity of providing for high levels of automation,
aggregation and scalability over thousands of network elements has made
comprehensive network management applications difficult to develop. Solutions
originally developed for network management were centralized, mainframe-based
systems that offered a platform from which the network manager could monitor the
network. These
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systems were expensive, provided limited functionality and were generally closed
and proprietary. With the emergence of distributed computing environments,
independent tool vendors began developing solutions that solved specific
technical network problems. The emergence of MIBs along with a standardized
protocol (SNMP) provided not only a mechanism to measure all networking elements
but also the required enabling technology for technical network management. SNMP
facilitated the development of technical tools, such as network element
management solutions and RMON and RMON2 probe-based solutions. Network element
management solutions allow technical personnel to diagnose problems, but are
usually limited to a particular vendor's equipment. Probe-based solutions
provide technical information on a specific network segment only and may provide
monitoring and reporting capabilities that are usually dependent on data
accumulated from the particular probes.
Although these tools have enhanced the technical management of networks and
are particularly useful in isolating and correcting problems in networks after
such problems have already occurred, the dependency of organizations on their
networks has necessitated new, broad-based network management solutions. These
solutions enable organizations to optimize the performance and minimize the
costs of their existing network infrastructure, identify developing network
problems and support decisions relating to future network infrastructure growth.
IT executives and managers of both large and small networks are coming to
recognize that in order to optimize network resources and effectively plan for
future demand, performance analysis and reporting solutions must reside at the
core of the network as a means of aggregating relevant network data into a
comprehensive picture of network health.
THE CONCORD SOLUTION
Concord develops, markets and supports a family of turnkey, automated,
scaleable, Web-based performance analysis and reporting solutions for the
management of computer networks. The Company's Network Health product family
retrieves and compiles vital network statistics, performs extensive analyses of
those statistics and provides intuitive, informative, user-friendly graphical
reports. The Company's products are capable of simultaneously polling, analyzing
and reporting on between 10,000 and 20,000 elements per workstation.
The Company's Network Health product family provides organizations with the
following benefits: (i) capacity planning -- providing information to support
business decisions relating to network utilization and future capacity
requirements; (ii) reduction in data communications expenses --identifying
excess capacity on each WAN, leased line or frame relay circuit; (iii) effective
allocation of resources -- allowing management to effectively deploy networking
resources and personnel; and (iv) service level monitoring -- assisting managers
in making network resource allocation decisions within an organization and
assisting both network service providers and end users in monitoring the
availability of negotiated service level agreements.
In providing these benefits, the Company's Network Health product family
incorporates the following features:
FULLY AUTOMATED, TURNKEY IMPLEMENTATION. The Company's products provide
turnkey solutions for fully automated network performance analysis and
reporting. Installation can be accomplished in a few hours without the use of
additional network hardware. Once installed, the Company's software immediately
generates standardized reports on a variety of topics, such as: (i) situations
to watch for potential trouble spots; (ii) exceptions analysis for identifying
deviations from specified performance levels; and (iii) bandwidth utilization
for managing and allocating limited network resources. These standardized
reports can be accessed via the Web, directly at the network monitoring console,
or through printed reports.
SCALEABLE, SOFTWARE-ONLY SOLUTION. The Network Health product family is
designed to collect data from heterogeneous networking environments without the
use of additional probes and network monitoring tools. The Company's products
are easily scaled to meet the demands for network performance analysis
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and reporting as an organization's network infrastructure expands. Network
Health provides managers with the ability to purchase add-on software licenses
as needed.
MULTI-LEVEL REPORTING. The Company's Network Health 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
network performance for chief information officers to a port-by-port analysis of
specific network hardware for managers or technicians.
TECHNOLOGY AND VENDOR INDEPENDENCE. The Company's Network Health product
family provides performance analysis and reporting of elements within an
organization's heterogeneous LAN and WAN infrastructure, independent of network
technology and hardware vendor. The Company's products are easily extendible to
new technologies and network architectures.
PRODUCTS AND TECHNOLOGY
The Company's Network Health product family automatically provides
enterprise-wide performance analysis and reporting for the large number of
elements typically found within networks. The technical complexity of providing
for high levels of automation, aggregation and scalability over thousands of
network elements has made comprehensive network management applications
difficult to develop. 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 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. Pricing for
Network Health applications includes a fixed license fee per application and a
variable fee based on the number of network elements managed by that
application. During 1996, 1997 and 1998, initial orders with new customers for
the Company's Network Health products ranged from approximately $10,000 to
$525,000.
The following are the Company's products:
Network Health 4.1, which was released in August 1998, provides enterprise
and service provider customers with the first multi-vendor ATM reporting and
analysis solution, along with the first device-independent reporting tool for
Remote Access equipment.
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NETWORK HEALTH -- LAN/WAN pioneered scaleable performance analysis and
reporting for LANs as well as WANs by providing reports that allow users to
solve business problems. This application provides information on capacity,
errors, trends, over-utilization, under-utilization, and service levels through
intuitive charts and graphs. These charts and graphs minimize technology
differences to allow a single report format to cover a broad set of
technologies, including Ethernet, Token Ring, and fiber distributed data
interface (FDDI) to 56Kbps, T1, T3 and switched multimegabit data service
(SMDS).
NETWORK HEALTH -- FRAME RELAY is used to manage the unique aspects of frame
relay Permanent Virtual Circuits (PVCs). This application indicates poor carrier
service by: (i) identifying carrier network congestion; (ii) end user over-usage
of the Committed Information Rate (CIR); and (iii) timing for upgrades to higher
capacities or downgrades to less expensive lower capacities. Network Health --
Frame Relay is often used by network service providers for quality of service
discussion.
NETWORK HEALTH -- ROUTER/SWITCH expands Network Health reports to cover the
increased complexity of managing the behavior of the network's routers and
switches. This application gathers information on and analyzes CPUs, memory
usage, buffer utilization, buffer misses and other such detail to provide the
first level of insight into the operation and capacities of the routers and
switches themselves. For example, with the Situations to Watch panel in the
Network Health -- Router/Switch report, needed memory upgrades can be forecasted
to allow for an orderly upgrade of the router's memory. When a router has been
identified as needing attention, the At-A-Glance Reports provide an historical
snapshot of a router's recent performance, enabling network managers to
determine a course of action.
NETWORK HEALTH -- TRAFFIC ACCOUNTANT is a software application that
provides information on nodes, access patterns and applications used. This
application scales to enterprise networks, providing an array of reports
covering cost allocation, security audit trails, security exception reports,
reconfiguration reports, application usage, Internet usage and department
utilization. The percentage of the entire network used by particular departments
or divisions in an organization can be reported in a single chart.
NETWORK HEALTH -- SERVER analyzes and reports on servers in a scaleable
manner allowing a network manager to understand the trends, capacities and
service levels of the server's CPUs, memory, disks, partitions, virtual memory,
swapping, paging and performance and operational characteristics. The diversity
of server vendors coupled with the increased complexity of servers necessitates
a unique application. The product's analysis and prediction capability, for
example, can be used to identify the disks in need of upgrade before they become
capacity constrained.
NETWORK HEALTH -- SERVICE LEVEL REPORTING provides a one to two page report
on an entire corporate enterprise's network that summarizes network and server
availability, response time and capacity. These reports give IT executives
including the CIO a picture of the critical parameters being used by end users
of the IT infrastructure. Service Level Reporting is useful in providing a
report against pre-determined goals for levels of capacity, availability and
response time that can be used by Service Providers with their end user
customers.
NETWORK HEALTH -- REMOTE ACCESS, the first device-independent reporting tool for
remote access equipment, provides three types of reports in one: for individual
modems/ISDN interfaces, modem pools, and remote access servers. Remote Access
gives ISP's and large organizations the information required to optimize remote
access service usage and configuration, while planning for future capacity
requirements. This product was introduced during August of 1998.
NETWORK HEALTH -- ATM, helps network managers optimize the performance of
complex ATM networks by providing executive-level information and easy-to-read
utilization details. This software-only solution combines out-of-the-box
automation with the ability to create custom reports from a Web interface to
meet diverse reporting requirements. This product was introduced during August
of 1998.
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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 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. Concord will deploy any one of its 25 field pre-sales technical
support representatives in the event that an on-site visit is necessary. At
December 31, 1998, the Company employed 17 technical post-sales support
personnel as well as two product trainers and one registrar.
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 exclusively through
distributors. Additionally, the Company has entered into joint marketing and
joint development arrangements with a number of companies.
At December 31, 1998, the Company had 23 domestic sales teams each
comprised of one direct sales person and one or two technical support people
targeting the following 11 different geographic regions: Atlanta and the
Southeast; Dallas; Detroit; Denver; New England and East Canada; New York; the
Carolinas; Northern California and West Canada; Philadelphia; Southern
California; and Virginia and Washington, D.C. In addition, the Company employs
five sales personnel to support the 23 domestic sales teams. Internationally,
the Company has sales offices in England, Germany, Singapore and France. At
December 31, 1998 the Company utilized 17 international distributors in nine
geographic regions, including: the United Kingdom, Germany, France, Sweden,
Korea, the Benelux region, Australia, South America and South Africa. 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, network service providers and outsourcers, as well as selling directly to
customers. The Company generates sales through seminars, trade shows, Internet
postings, press articles, referrals, mass mailings and cold calling as well as
through relationships with sales agents, VARs, network service providers and
outsourcers.
The Company distributes its products through a network of more than 22
VARs, and at December 31, 1998, the Company had relationships with over 20
network service providers. The network service providers offer the Company's
products as part of their service offerings. At December 31, 1998, the Company
also had several joint marketing and development partners, including Ascend
Communications, Inc., Cabletron Systems, Inc., Cisco Systems, Inc., NetScout
Systems, Inc., Newbridge Networks Corporation and Visual Networks, Inc. that
work with the Company's direct sales force. The Company recently introduced 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, 1998, the Company employed 12 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, 1998, the Company employed 63 sales personnel, consisting of five management
personnel, 24 sales persons, 25 technical support persons and nine inside sales
persons.
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
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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.
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. The Company is currently developing an enhanced version
of Network Health aimed at performance analysis and reporting for other
networking and computing environments.
The Company's total expenses for research and development for the years
1998, 1997 and 1996 were $7.2 million, $4.6 million and $3.9 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, 1998, the Company's product
development organization consisted of 55 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)
companies offering network performance reporting services such as International
Network Services (INS); and (v) to a lesser degree, probe vendors such as
NetScout Systems, Inc. and Visual Networks, Inc. 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 Network Health.
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.
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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
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 four issued U.S. patents, three 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. See "Risk Factors -- Uncertain Protection of Intellectual
Property Rights." 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, 1998, the Company had a total of 173 employees, all but
seven of whom were based in the United States. Of the total, 55 were in research
and development, 22 were in customer service, 63 were in sales, 12 were in
marketing, and 21 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,
1998 are as follows:
NAME AGE POSITION
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John A. Blaeser............................................... 57 Chief Executive Officer, President and Director
Kevin J. Conklin.............................................. 45 Vice President, Marketing
Ferdinand Engel............................................... 50 Vice President, Engineering
Gary E. Haroian............................................... 47 Vice President, Finance and Administration,
Chief Financial Officer, Clerk and Treasurer
Daniel D. Phillips, Jr........................................ 44 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 Vice President, 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 the Vice President, Engineering of the Company
since 1989. Prior to joining Concord, Mr. Engel was Vice President, Engineering
for Technology Concepts at Bell Atlantic.
Gary E. Haroian has been the Vice President, Finance and Administration and
Chief Financial Officer of the Company since February 1997, and 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, 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 Vice President, Worldwide Sales of the
Company since May 1994. Prior to joining Concord, Mr. Phillips was Vice
President, Worldwide Sales of Epoch Systems. While at Epoch Systems from
September 1989 until May 1994, Mr. Phillips also held the positions of Vice
President, International and OEM Operations, and Director of International
Operations.
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RISK FACTORS
The Company does not provide forecasts of the future financial performance
of the Company. From time to time, however, the information provided by the
Company or statements made by its employees may contain forward looking
statements. This document contains forward looking statements. Any statements
contained herein that do not describe historical facts are forward looking
statements. The Company makes such forward looking statements under the
provisions of the "safe harbor" section of the Private Securities Litigation
Reform Act of 1995. The forward looking statements contained herein are based on
current expectations, but are subject to a number of risks and uncertainties. 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 and the
Company's expected liquidity and capital resources) constitute forward-looking
statements. 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 below.
LIMITED OPERATING HISTORY; UNCERTAINTY OF FUTURE OPERATING RESULTS
The Company changed its focus to network management software in 1991 and
commercially introduced its first Network Health product in 1995. Accordingly,
the Company has only a limited operating history in the network performance
analysis and reporting market upon which an evaluation of its business and
prospects can be based. The Company has incurred significant net losses in each
of the five fiscal years prior to earning a small profit in 1997. As of December
31, 1998, the Company had accumulated net losses of $22.0 million. The limited
operating history of the Company and its dependence on a single product family
in an emerging market makes the prediction of future results of operations
difficult or impossible, and the Company and its prospects must be considered in
light of the risks, costs and difficulties frequently encountered by emerging
companies, particularly companies in the competitive software industry. Although
the Company has achieved recent revenue growth, and profitability for the fiscal
years ended 1998 and 1997, there can be no assurance that the Company can
generate substantial additional revenue growth on a quarterly or annual basis,
or that any revenue growth that is achieved can be sustained. Revenue growth
that the Company has achieved or may achieve may not be indicative of future
operating results. In addition, the Company has increased, and plans to increase
further, its operating expenses in order to fund higher levels of research and
development, increase its sales and marketing efforts, develop new distribution
channels, broaden its customer support capabilities and expand its
administrative resources in anticipation of future growth. To the extent that
increases in such expenses precede or are not subsequently followed by increased
revenues, the Company's business, results of operations and financial condition
would be materially adversely affected. There can be no assurance that the
Company will sustain profitability on a quarterly or annual basis. The Company
must achieve substantial revenue growth in order to sustain profitability. In
addition, in view of recent revenue growth, the rapidly evolving nature of its
business and markets and its limited operating history in its current market,
the Company believes that period-to-period comparisons of financial results are
not necessarily meaningful and should not be relied upon as an indication of
future performance. In light of the Company's strong performance in 1998, the
Company expects to use all its remaining unrestricted NOL and credit
carryforwards in 1998. Accordingly, the Company recorded a tax provision of
$532,600 during 1998. However, the continuing restrictions on the future use of
its NOL carryforwards will severely limit the benefit, if any, the Company will
attribute to this asset.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company is likely to experience significant fluctuations in quarterly
operating results caused by many factors, including, but not limited to: (i)
changes in the demand for the Company's products; (ii) the
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timing, composition and size of orders from the Company's customers, including
the tendency for significant bookings to occur in the last month of each fiscal
quarter; (iii) spending patterns and budgetary resources of its customers on
network management software solutions; (iv) the success of the Company's new
customer generation activities; (v) introductions or enhancements of products,
or delays in the introductions or enhancements of products, by the Company or
its competitors; (vi) changes in the Company's pricing policies or those of its
competitors; (vii) changes in the distribution channels through which products
are sold; (viii) the Company's ability to anticipate and effectively adapt to
developing markets and rapidly changing technologies; (ix) changes in networking
or communications technologies; (x) the Company's ability to attract, retain and
motivate qualified personnel; (xi) changes in the mix of products sold; (xii)
the publication of opinions about the Company and its products, or its
competitors and their products, by industry analysts or others; and (xiii)
changes in general economic conditions. Unlike other software companies with a
longer history of operations, the Company does not derive a significant portion
of its revenues from maintenance contracts, and therefore does not have a
significant ongoing revenue stream that may tend to mitigate quarterly
fluctuations in operating results. Furthermore, the Company is attempting to
expand its channels of distribution, and increases in the Company's revenues
will be dependent on its ability to implement successfully its distribution
strategy. Due to the buying patterns of certain of the Company's customers and
also to the Company's own sales incentive programs focused on annual sales
goals, revenues in the Company's fourth quarter could be higher than revenues in
the first quarter of the succeeding year. There also may be other factors that
significantly affect the Company's quarterly results which are difficult to
predict given the Company's limited operating history, such as seasonality and
the timing of receipt and delivery of orders within a fiscal quarter.
Consistent with software industry practice, the Company expects to operate
with a limited amount of backlog. As a result, 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 the ability of the
Company to fill orders received within the quarter, all of which are difficult
to forecast and manage. The Company's expense levels are based in part on its
expectations of future orders and sales, which, given the Company's limited
operating history, are extremely difficult to predict. A substantial portion of
the Company's operating expenses are related to personnel, facilities, and sales
and marketing programs. This level of spending for such expenses cannot be
adjusted quickly and is, therefore, relatively fixed in the short term.
Accordingly, any significant shortfall in demand for the Company's products in
relation to the Company's expectations would have an immediate and material
adverse effect on the Company's business, results of operations and financial
condition.
Due to all of the foregoing factors, the Company believes that its
quarterly operating results are likely to vary significantly in the future.
Therefore, in some future quarter the Company's results of operations may fall
below the expectations of securities analysts and investors. In such event, the
trading price of the Company's Common Stock would likely be materially adversely
affected.
EMERGING NETWORK MANAGEMENT SOFTWARE MARKET
The market for the Company's products is in an early stage of development.
Although the rapid expansion and increasing complexity of computer networks in
recent years has increased the demand for network 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 the Company's
growth will be significantly dependent on the willingness of network service
providers, including telecommunications carriers, ISPs, systems integrators and
outsourcers, to integrate network performance analysis and reporting software
into their product and service offerings. Failure of the network performance
analysis and reporting market to grow or failure of the Company to properly
assess and address such market would have a material adverse effect on the
Company's business, results of operations and financial condition.
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DEPENDENCE ON TELECOMMUNICATIONS CARRIERS
A significant portion of the Company's revenues are, and are expected to
continue to be, attributable to sales of products to telecommunications
carriers. The Company's future performance is significantly dependent upon
telecommunications carriers' increased incorporation of the Company's solutions
as part of their package of product and service offerings to end users. The
failure of the Company's products to perform favorably in and become an accepted
component of the telecommunications carriers' product and service offerings, or
a slower than expected increase or a decrease in the volume of sales of the
Company's products and services to telecommunications carriers, could have a
material adverse effect on the Company's business, results of operations and
financial condition.
CONCENTRATED PRODUCT FAMILY
The Company currently derives substantially all of its revenues from its
Network Health product family, and the Company expects that revenues from these
products will continue to account for substantially all of the Company's
revenues for the foreseeable future. Broad market acceptance of these products
is, therefore, critical to the Company's future success, and any factor
adversely affecting sales or pricing levels of these products could have a
material adverse effect on the Company's business, results of operations and
financial condition. There can be no assurance that market acceptance of Network
Health will increase or even remain at current levels. Factors that may affect
the market acceptance of the Company's products include the availability and
price of competing products and technologies and the success of the sales
efforts of the Company and its marketing partners. Moreover, the Company
anticipates that its competitors will introduce additional competitive products,
particularly if demand for network management software products increases, which
may reduce future market acceptance of the Company's products. In addition, new
competitors could enter the Company's market and offer alternative products
which may impact the market acceptance of the Company's products. The Company's
future performance will also depend in part on the successful development,
introduction and market acceptance of new and enhanced products. There can be no
assurance that any such new or enhanced products will be successfully developed,
introduced and marketed, and failure to do so would have a material adverse
effect on the Company's business, results of operations and financial condition.
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON 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 ability to analyze and generate reports, as
well as the quality of the reports, is dependent on Network Health's utilization
of the industry-standard SNMP protocol and the data resident in conventional
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 ability to analyze and generate comprehensive
reports or the quality of the reports. Furthermore, although the Company's
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, the Company's products. Any of the foregoing
developments could have a material adverse effect on the Company's business,
results of operations and financial condition.
PRODUCT ENHANCEMENTS AND NEW PRODUCTS
Because of rapid technological change in the software industry and
potential changes in the network management software market and industry
standards, the life cycle of versions of Network Health is difficult to
estimate. The Company's future success will depend upon its ability to address
the increasingly sophisticated needs of its customers by developing and
introducing enhancements to Network Health on a timely basis that keep pace with
technological developments, emerging industry standards and customer
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requirements. There can be no assurance that the Company will be successful in
developing and marketing enhancements to Network Health or in developing new
products that respond to technological changes, evolving industry standards or
customer requirements, that the Company 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.
COMPETITION; NEW ENTRANTS
The market for the Company's products is new, intensely competitive,
rapidly evolving and subject to technological change. Competitive and
alternative offerings are available from the major product categories of remote
monitoring (RMON) probe vendors, element management software, and other
performance analysis and reporting offerings. Another area of competition comes
from a number of companies offering network performance reporting services;
including International Network Services (INS). In addition, the Company expects
the large network management platform vendors to begin to offer products
directly competitive with the Company's products. These companies may bundle
their products with other hardware and software in a manner that may discourage
users from purchasing products offered by the Company. This strategy may be
particularly effective for companies with leading market shares in the network
hardware and software market, including Hewlett-Packard Company, Lucent
Technologies, International Business Machines Corporation and Cabletron Systems,
Inc. Developers of network element management solutions such as Cisco Systems,
Inc., 3Com Corporation and Nortel Networks, Inc. may also compete with the
Company in the future. The Company expects competition to persist, increase and
intensify in the future with possible price competition developing in the
Company's markets. Many of the Company's current and potential competitors have
longer operating histories and significantly greater financial, technical and
marketing resources and name recognition than the Company. The Company does not
believe its 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 the Company's market. If the Company does not provide
products that achieve success in its market in the short term, the Company could
suffer an insurmountable loss in market share and brand name acceptance, which
would result in a material adverse effect on the Company's business, results of
operations and financial condition. There can be no assurance that the Company
will be able to compete effectively with current and future competitors.
UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY RIGHTS
The Company's success depends significantly upon its proprietary
technology. 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, all of
which afford only limited protection. The Company has four issued U.S. patents,
three pending U.S. patent applications, and various foreign counterparts. There
can be no assurance that patents will issue from these pending applications or
from any future applications or that, if issued, any claims allowed will be
sufficiently broad to protect the Company's technology. In addition, there can
be no assurance that any patents that have been or may be issued will not be
challenged, invalidated or circumvented, or that any rights granted thereunder
would provide protection of the Company's proprietary rights. Failure of any
patents to protect the Company's technology may make it easier for the Company's
competitors to offer equivalent or superior technology. The Company has
registered or applied for registration for certain trademarks, and will continue
to evaluate the registration of additional trademarks as appropriate. Despite
the Company's efforts to protect its proprietary rights, unauthorized parties
may attempt to copy aspects of the Company's products or services or to obtain
and use information that the Company regards as proprietary. Third parties may
also independently develop similar technology without breach of the Company's
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, the Company's 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.
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Certain technologies used by the Company's 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 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.
Although the Company does not believe that it is 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 the Company's proprietary
technology, and third parties may assert infringement claims against the Company
with respect to their proprietary rights. Any claims or litigation can be
time-consuming and expensive regardless of their merit. Infringement claims
against the Company can cause product release delays, require the Company to
redesign its products or require the Company to enter into royalty or license
agreements, which agreements may not be available on terms acceptable to the
Company or at all.
RISK OF PRODUCT DEFECTS; PRODUCT LIABILITY
As a result of their complexity, software products may contain undetected
errors or failures when first introduced or as new versions are released. There
can be no assurance that, despite testing by the Company 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 the Company will be
able to successfully correct such errors in a timely manner or at all. The
occurrence of errors and failures in the Company's products could result in loss
of or delay in market acceptance of the Company's products, and alleviating such
errors and failures could require significant expenditure of capital and other
resources by the Company. The consequences of such errors and failures could
have a material adverse effect on the Company's business, results of operations
and financial condition.
Since the Company's products are used by its customers to predict future
network problems and avoid failures of the network to support critical business
functions, design defects, software errors, misuse of the Company's products,
incorrect data from network elements or other potential problems within or out
of the Company's control that may arise from the use of the Company's products
could result in financial or other damages to the Company's customers. The
Company does not maintain product liability insurance. Although the Company's
license agreements with its customers typically contain provisions designed to
limit the Company's exposure to potential claims as well as any liabilities
arising from such claims, such provisions may not effectively protect the
Company against such claims and the liability and costs associated therewith.
Accordingly, any such claim could have a material adverse effect upon the
Company's business, results of operations and financial condition. The Company
provides warranties for its products for a period of time (currently three
months) after the software is purchased. The Company's license agreements
generally do not permit product returns by the customer, and product returns for
fiscal 1998, 1997 and 1996 represented less than 1.0% of total revenues during
each of such periods. However, no assurance can be given that product returns
will not increase as a percentage of total revenues in future periods.
RELIANCE ON STRATEGIC PARTNERS AND OTHER EVOLVING DISTRIBUTION CHANNELS
The Company's distribution strategy is to develop multiple distribution
channels, including sales through strategic marketing partners and value added
resellers, such as Newbridge Networks Corporation; telecommunications carriers,
such as MCI Communications Corporation; OEMs, such as Cabletron
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Systems, Inc.; and independent software vendors, as well as international
distributors (collectively "channel partners"). The Company has developed a
number of these relationships and intends to continue to develop new channel
partner relationships. Accordingly, the success of the Company will be dependent
in large part on its ability to develop these additional distribution
relationships and on the performance and success of these third parties,
particularly telecommunications carriers and other network service providers.
The Company's channel partner relationships have been established recently, and
the Company cannot predict the extent to which its channel partners will be
successful in marketing the Company's products. The Company generally expects
that its agreements with its channel partners will be terminable by either party
without cause. None of the Company's channel partners are required to purchase
minimum quantities of the Company's products and none of these agreements
contain exclusive distribution arrangements. The Company's inability to attract
important and effective channel partners, or their inability to penetrate their
respective market segments, or the loss of any of the Company's channel
partners, as a result of competitive products offered by other companies or
products developed internally by these channel partners or otherwise, could
materially adversely affect the Company's business, results of operations and
financial condition.
MANAGEMENT OF POTENTIAL GROWTH
The Company recently has experienced significant growth in its sales and
operations and in the complexity of its products and product distribution
channels. The Company has recently increased and is continuing to increase the
size of its sales force and coverage territories. Furthermore, the Company has
recently established and is continuing to establish additional distribution
channels through third party relationships. The Company's growth, coupled with
the rapid evolution of the Company's markets, has placed, and is likely to
continue to place, significant strains on its administrative, operational and
financial resources and increase demands on its internal systems, procedures and
controls. If the Company is unable to manage future growth effectively, the
Company's business, results of operations and financial condition could be
materially adversely affected.
DEPENDENCE ON KEY PERSONNEL
The Company's performance is substantially dependent on the performance of
its key technical and senior management personnel, none of whom is bound by an
employment agreement. The loss of the services of any of such personnel could
have a material adverse effect on the business, results of operations and
financial condition of the Company. The Company does not maintain key person
life insurance policies on any of its employees. The Company's success is highly
dependent on its 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. Competition
for such personnel is intense, and there can be no assurance that the Company
will be able to attract, assimilate or retain highly qualified technical and
managerial personnel in the future. The inability to attract and retain the
necessary management, technical, and sales and marketing personnel could have a
material adverse effect on the Company's business, results of operations and
financial condition.
EXPANSION INTO INTERNATIONAL MARKETS
The Company intends to expand its operations outside of the United States
and enter additional international markets, primarily through the establishment
of additional reseller arrangements. The Company expects to commit additional
time and development resources to customizing its products and services for
selected international markets and to developing international sales and support
channels. There can be no assurance that such efforts will be successful.
In addition to the uncertainty as to the Company's ability to establish an
international presence, there are certain difficulties and risks inherent in
doing business internationally, including, but not limited to: (i) costs of
customizing products and services for international markets; (ii) dependence on
independent resellers; (iii) multiple and conflicting regulations; (iv) exchange
controls; (v) longer payment cycles; (vi)
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unexpected changes in regulatory requirements; (vii) import and export
restrictions and tariffs; (viii) difficulties in staffing and managing
international operations; (ix) greater difficulty or delay in accounts
receivable collection; (x) potentially adverse tax consequences; (xi) the burden
of complying with a variety of laws outside the United States; (xii) the impact
of possible recessionary environments in economies outside the United States;
and (xiii) political and economic instability. In addition, the Company's
ability to expand its business in certain countries will require modification of
its products, particularly national language support. The Company's current
export sales are denominated in United States dollars and the Company currently
expects to continue this practice as it expands its international operations. 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 the Company's 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, the
Company's operating results will be subject to risks associated with foreign
currency fluctuation and the Company 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, the Company has not entered into
any such contracts or engaged in any such activities. As the Company increases
its international sales, its total revenue may also be affected to a greater
extent by seasonal fluctuations resulting from lower sales that typically occur
during the summer months in Europe and other parts of the world.
YEAR 2000 COMPLIANCE / YEAR 2000 READINESS DISCLOSURE STATEMENT
The company is aware of the issues associated with the programming code in
existing computer systems and software products as the millennium (Year 2000)
approaches. The Company has set up a task force which consists of the Director
of IT and Operations, the Manager of System Applications and representative
personnel from each functional area. This task force is addressing the Year 2000
issue in the following categories: the Network Health product; internal business
computer systems and software applications; internal systems other than computer
hardware and software; and systems of the Company's external suppliers and
service providers. The Company is also assessing its Year 2000 associated costs,
risks and potential contingency plans. Despite the Company's efforts with
respect to the Year 2000 issue, there can be no assurance that the Company's
business, results of operations or financial condition would not be materially
adversely affected by the failure of the Company's products, its internal
systems and applications or the systems of its third party suppliers and service
providers to properly operate or manage data beyond 1999.
NETWORK HEALTH PRODUCT. In 1997, the Company initiated the necessary development
to ensure Year 2000 compliance in the Network Health family of applications and
believes it has achieved Year 2000 compliance in Network Health 4.1 which was
released in August 1998. The Company's existing customers can receive this
release, at no charge, through their annual software maintenance contract. The
Company requires its customers to purchase software maintenance in order to
receive product support. Specifically, the Company defines Year 2000 Compliance
as the following: no value for current date will cause any interruption in
operation; date-based functionality must behave consistently for dates prior to,
during, and after Year 2000; in all interfaces and data storage, the century in
any date must be specified either explicitly or by unambiguous algorithms or
inferencing rules; Year 2000 must be recognized as a leap year. The Company's
definition of Year 2000 Compliance is adopted from the British Standard
Institute's Definition of Year 2000 Conformity Requirements (PD2000-1). A copy
of the standard is available for review on the Company's website. The Company
makes no guarantee of, claims no responsibility for, and disclaims any liability
to its customers, with respect to Year 2000 compliance of operating platforms,
hardware, software, or other products not developed by the Company, including
equipment monitored by the Network Health product.
INTERNAL BUSINESS COMPUTER SYSTEMS AND SOFTWARE APPLICATIONS. In 1998, the
Company commenced a Year 2000 date conversion project to address all internal
existing computer
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systems, software applications, and related computer equipment (e.g. printers)
used in conjunction with its internal operations. The Company plans to identify,
modify, upgrade, and/or replace any systems that have been identified as
non-Year 2000 compliant to minimize the possibility of a material disruption to
it business. The Company has finished assessing all existing internal systems
and expects to complete the compliance process on these systems before the end
of 1999.
INTERNAL SYSTEMS OTHER THAN COMPUTER HARDWARE AND SOFTWARE. The operation of
office and facilities equipment such as fax machines, photocopiers, telephone
switches, security systems, elevators, and other common devices may also be
affected by the Year 2000 issue. The Company has identified, and is currently
assessing its options to remediate, the Year 2000 issue on its office and
facilities equipment.
SYSTEMS OF EXTERNAL SUPPLIERS AND SERVICE PROVIDERS. The Company has initiated
communications with third party suppliers of the computers, software, and other
equipment used, operated, or maintained by the Company to identify and, to the
extent possible, to resolve any issues regarding the Year 2000 issue. The
Company has also initiated communications with facilities service providers upon
which the Company relies for daily operations. All external suppliers and
service providers have been asked to provide a written assurance that they are
also preparing to be Year 2000 compliant in a timely manner, and that their
products/services will be available to the Company up to and beyond the Year
2000, without interruption. A response has been received from approximately 50%
of these suppliers and service providers. However, there can be no assurance
that the systems operated by other companies upon which the Company relies will
be Year 2000 compliant on a timely basis.
ASSOCIATED COSTS. To date, the Company has not incurred any material costs
related to the assessment of, and preliminary efforts to upgrade or replace
existing systems identified as non-Year 2000 compliant. Management is continuing
to assess the total Year 2000 compliance expense, but based on a preliminary
review to date, does not expect the amounts required to be expensed over the
balance of 1999 to have an adverse material effect on its business, results of
operations or financial condition. There can be no assurance, however, that
further assessment of the Company's internal systems and applications will not
indicate that additional Company efforts to assure Year 2000 compliance are
necessary, and that such efforts may be costly.
ASSOCIATED RISKS. The Company expects to identify and resolve all Year 2000
issues that could materially adversely affect its business, financial condition
or results of operations. However, management realizes it may not be possible to
determine with complete certainty that all Year 2000 problems affecting the
Company will be identified or corrected in a timely manner. As a result, the
Company could be at risk of experiencing a significant number of operational
inconveniences and inefficiencies that may divert management's time and
attention from its ordinary business activities and at risk of experiencing a
lesser number of serious system or product failures that may require significant
efforts by the Company to prevent or alleviate material business disruptions.
CONTINGENCY PLANS. The Company recognizes the importance of readiness for
potential worst case scenarios. As a result, the Company is working to identify
scenarios with significant risks, which would require contingency plans. The
Company expects to develop and complete any needed contingency plans no later
than the summer of 1999.
POSSIBLE VOLATILITY OF STOCK PRICE
The Company completed an initial public offering of its common stock during
October of 1997. The market price of the shares of 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 the Company or its 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
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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 the Company's operating results in a particular
quarter to meet market expectations may adversely affect the market price of the
shares of 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 management's attention and resources, which
would have a material adverse effect on the Company's business, results of
operations and financial condition.
FUTURE CAPITAL FUNDING
The Company plans to continue to expend substantial funds on the continued
development, sales and marketing of the Network Health product family. There can
be no assurance that the Company's existing capital resources, the proceeds from
the Company's initial public offering during October of 1997 and any funds that
may be generated from future operations together will be sufficient to finance
the Company's future operations or that other sources of funding will be
available on terms acceptable to the Company, if at all. In addition, future
sales of substantial amounts of the Company's securities in the public market
could adversely affect prevailing market prices and could impair the Company's
future ability to raise capital through the sale of its securities. The failure
to obtain such funding, if required, could have a material adverse effect on the
Company's business, results of operations and financial condition.
ITEM 2. PROPERTIES
The Company's corporate office and principal facility is located in
Marlboro, Massachusetts. Under amendments signed in March of 1997, April of 1998
and July of 1998, the Company increased space under the lease in this facility
from 20,000 to 36,000 square feet. The amended lease expires in September of
2003. 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 Tustin, California, Dallas,
Texas, London, England, Hamburg, Germany, Paris, France and Singapore. The
Company does not believe that its current corporate facilities will meet its
needs through the next 12 months and is actively pursuing other facility
options.
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, 1998.
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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
As of March 8, 1999, there were approximately 233 stockholders of record of
the Company's Common Stock.
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
18
20
$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.
ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEAR ENDED
------------------------------------------------------------
DEC. 31, DEC. 31, DEC. 28, DEC. 30, DEC. 31,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
License revenues ........................................... $ 33,030 $ 17,345 $ 7,845 $ 3,443 $ 3,416
Service revenues ........................................... 6,451 2,225 1,162 912 649
-------- -------- -------- -------- ---------
Total revenues ......................................... 39,481 19,570 9,007 4,355 4,065
Cost of revenues ............................................... 4,596 2,874 1,957 1,164 1,941
-------- -------- -------- -------- ---------
Gross profit ................................................... 34,885 16,696 7,050 3,191 2,124
-------- -------- -------- -------- ---------
Operating expenses:
Research and development ................................... 7,206 4,631 3,933 2,361 2,374
Sales and marketing ........................................ 17,523 10,173 7,040 3,694 3,391
General and administrative ................................. 2,800 2,058 1,177 1,000 751
-------- -------- -------- -------- ---------
Total operating expenses ............................... 27,529 16,862 12,150 7,055 6,516
-------- -------- -------- -------- ---------
Operating income (loss) ........................................ 7,356 (166) (5,100) (3,864) (4,392)
Other income (expense), net .................................... 2,255 297 45 80 (2)
-------- -------- -------- -------- ---------
Income (loss) from continuing operations ................... 9,611 131 (5,055) (3,784) (4,394)
Income (loss) from discontinued
operations ................................................... -- -- -- -- 117
-------- -------- -------- -------- ---------
Income (loss) before income taxes ...................... $ 9,611 $ 131 $ (5,055) $ (3,784) $ (4,277)
-------- -------- -------- -------- ---------
Provision for income taxes ..................................... 532 -- -- -- --
-------- -------- -------- -------- ---------
Net income (loss) .............................................. $ 9,079 $ 131 $ (5,055) $ (3,784) $ (4,277)
======== ======== ======== ======== =========
Net income (loss) per common and potential common share:
Basic ...................................................... $ 0.72 $ 0.04 $ (6.64) $ (5.07) $ (6.34)
Diluted .................................................... 0.64 0.01 (6.64) (5.07) (6.34)
Pro forma diluted .......................................... 0.64 0.01 (0.57) (0.84) (1.42)
Weighted average common and potential common shares outstanding:
Basic ...................................................... 12,642 3,070 761 746 675
Diluted .................................................... 14,077 11,319 761 746 675
Pro forma diluted .......................................... 14,077 11,319 8,869 4,507 3,007
FISCAL YEAR ENDED
------------------------------------------------------------
DEC. 31, DEC. 31, DEC. 28, DEC. 30, DEC. 31,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 50,402 $ 36,539 $ 1,664 $ 4,397 $ 1,619
Working capital (deficit)................... 43,024 32,431 (1,387) 3,316 1,907
Total assets................................ 55,961 41,914 5,584 6,729 3,989
Long-term debt, net of current portion...... -- -- 668 -- --
Redeemable convertible preferred stock...... -- -- 14,478 13,616 7,527
Total stockholders' equity (deficit)........ 45,745 34,483 (15,035) (9,126) (4,716)
19
21
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 1998
Annual Report to Stockholders is incorporated herein by reference.
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 27, 1999
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 27, 1999 is incorporated herein by reference.
20
22
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 27, 1999 is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
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, 1998 and December 31, 1997 F-2
Statements of Operations:
Years ended December 31, 1998, December 31, 1997 and December 28, 1996 F-3
Statements of Redeemable Convertible
Preferred Stock and Stockholders' Equity (Deficit):
Years ended December 31, 1998, December 31, 1997 and December 28, 1996 F-4
Statements of Cash Flows:
Years ended December 31, 1998, December 31, 1997 and December 28, 1996 F-5
Notes to the Financial Statements F-6
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
Included in Item 12 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:
None
21
23
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Concord Communications, Inc.:
We have audited the accompanying balance sheets of Concord Communications, Inc.
(a Massachusetts corporation) as of December 31, 1998 and December 31, 1997, and
the related statements of operations, redeemable convertible preferred stock and
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Concord Communications, Inc. as
of December 31, 1998 and December 31, 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
January 15, 1999
F-1
24
CONCORD COMMUNICATIONS, INC.
BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1998 1997
----------------------------------
ASSETS
Current Assets:
Cash, cash equivalents and marketable securities................ $ 50,402,029 $ 36,539,303
Accounts receivable, net of allowance of approximately
$450,000 and $280,000 in 1998 and 1997, respectively.......... 5,048,879 3,040,850
Prepaid expenses and other current assets....................... 509,805 282,311
------------ ------------
Total current assets........................................ 55,960,713 39,862,464
------------ ------------
Equipment and Improvements, at cost:
Equipment....................................................... 3,701,266 6,473,305
Leasehold improvements.......................................... 385,128 85,957
------------ ------------
4,086,394 6,559,262
Less-- Accumulated depreciation and amortization................ 1,365,222 4,507,737
------------ ------------
2,721,172 2,051,525
------------ ------------
$ 58,681,885 $ 41,913,989
============ ============
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable................................................ $ 3,553,673 $ 1,764,580
Accrued expenses................................................ 4,086,983 3,368,585
Deferred revenue................................................ 5,296,469 2,298,092
------------ ------------
Total current liabilities................................... 12,937,125 7,431,257
------------ ------------
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 -- 13,040,374 and 12,019,188 shares,
in 1998 and 1997 respectively................................. 130,405 120,193
Additional paid-in capital...................................... 69,938,129 67,942,708
Deferred compensation........................................... (101,189) (149,157)
Unrealized gains on marketable securities....................... 149,606 19,750
Accumulated deficit............................................. (24,372,191) $(33,450,762)
------------ ------------
Total stockholders' equity ................................. 45,744,760 34,482,732
------------ ------------
$ 58,681,885 $ 41,913,989
============ ============
The accompanying notes are an integral part of these financial statements.
F-2
25
CONCORD COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED
--------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 28,
1998 1997 1996
------------- ------------ ------------
Revenues:
License revenues................... $ 33,030,296 $ 17,344,307 $ 7,844,523
Service revenues................... 6,451,033 2,225,287 1,162,242
------------- ------------- -------------
Total revenues................ 39,481,329 19,569,594 9,006,765
Cost of Revenues........................ 4,596,314 2,873,840 1,956,889
------------- ------------- -------------
Gross profit.................. 34,885,015 16,695,754 7,049,876
------------- ------------- -------------
Operating Expenses:
Research and development........... 7,206,399 4,630,560 3,933,483
Sales and marketing................ 17,522,653 10,173,182 7,039,662
General and administrative......... 2,799,924 2,058,402 1,176,938
------------- ------------- -------------
Total operating expenses........... 27,528,976 16,862,144 12,150,083
------------- ------------- -------------
Operating income (loss)....... 7,356,039 (166,390) (5,100,207)
------------- ------------- -------------
Other Income (Expense):
Interest income.................... 2,320,897 419,733 79,832
Interest expense................... (514) (126,836) (48,564)
Other.............................. (65,251) 4,248 14,076
------------- ------------- -------------
Total other income, net....... 2,255,132 297,145 45,344
------------- ------------- -------------
Income (loss) before income taxes 9,611,171 130,755 (5,054,863)
------------- ------------- -------------
Provision for income taxes.............. 532,600 - -
------------- ------------- -------------
Net income (loss)............. $ 9,078,571 $ 130,755 $ (5,054,863)
============= ============= =============
Net income (loss) per common and potential
common share:
Basic $ 0.72 $ 0.04 $ (6.64)
============= ============= =============
Diluted $ 0.64 $ 0.01 $ (6.64)
============= ============= =============
Pro forma diluted $ 0.64 $ 0.01 $ (0.57)
============= ============= =============
Weighted average common and potential
common shares outstanding:
Basic 12,642,247 3,069,667 760,971
============= ============= =============
Diluted 14,076,990 11,319,479 760,971
============= ============= =============
Pro forma diluted 14,076,990 11,319,479 8,869,229
============= ============= =============
The accompanying notes are an integral part of these financial statements.
F-3
26
CONCORD COMMUNICATIONS, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
REDEEMABLE CONVERTIBLE PREFERRED STOCK
------------------------------------------------------------
SERIES A SERIES A-1
------------------------------------------------------------
NUMBER REDEMPTION NUMBER REDEMPTION
OF SHARES VALUE OF SHARES VALUE
--------- ---------- --------- ----------
BALANCE, DECEMBER 30, 1995.............. 1,940,863 $ 8,893,639 36,070 $ 169,399
Accretion of dividends on
preferred stock ..................... -- 533,867 -- 9,707
Exercise of stock options ............. -- -- -- --
Net loss .............................. -- -- -- --
--------------------------------------------------------------
BALANCE, DECEMBER 28, 1996 ............. 1,940,863 9,427,506 36,070 179,106
Issuance of common stock, net of
issuance costs of $ 955,359 ......... -- -- -- --
Accretion of dividends on
preferred stock ..................... -- 277,156 -- 5,151
Conversion of redeemable
convertible preferred stock to
common stock ...................... (1,940,863) (9,704,662) (36,070) (184,257)
Exercise of stock options ............. -- -- -- --
Deferred compensation related to
grants of stock options ............. -- -- -- --
Amortization of deferred
compensation related to grants
of stock options ................... -- -- -- --
Unrealized gains on available-for-
sale securities ..................... -- -- -- --
Net income ............................ -- -- -- --
--------------------------------------------------------------
Comprehensive Income .................
BALANCE, DECEMBER 31, 1997 ............. -- -- -- --
Shares issued in connection with
employee stock plans ............... -- -- -- --
Tax Benefit associated with employee
stock options ...................... -- -- -- --
Amortization of deferred
compensation related to grants
of stock options ................... -- -- -- --
Unrealized gains on available-for-
sale securities ..................... -- -- -- --
Net income ............................ -- -- -- --
--------------------------------------------------------------
Comprehensive Income
BALANCE, DECEMBER 31, 1998 ............. -- $ -- -- $ --
========== ============ ======= =========
REDEEMABLE CONVERTIBLE PREFERRED STOCK STOCKHOLDERS' EQUITY
(DEFICIT)
------------------------------------------------------------------------------
SERIES B COMMON STOCK
------------------------------------------------------------------------------
NUMBER REDEMPTION NUMBER $.01
OF SHARES VALUE TOTAL OF SHARES PAR VALUE
------------ ----------- ------------ --------- ---------
BALANCE, DECEMBER 30, 1995 ............. 4,460,789 $ 4,552,617 $ 13,615,655 760,345 $ 7,603
Accretion of dividends on
preferred stock ..................... -- 318,500 862,074 -- --
Exercise of stock options ............. -- -- -- 84,137 842
Net loss .............................. -- -- -- -- --
------------------------------------------------------------------------------
BALANCE, DECEMBER 28, 1996 ............. 4,460,789 4,871,117 14,477,729 844,482 8,445
Issuance of common stock, net of
issuance costs of $ 955,359 ......... -- -- -- 2,735,000 27,350
Accretion of dividends on
preferred stock ..................... -- 159,250 441,557 -- --
Conversion of redeemable
convertible preferred stock to
common stock ...................... (4,460,789) (5,030,367) (14,919,286) 8,108,258 81,083
Exercise of stock options ............. -- -- -- 331,448 3,315
Deferred compensation related to
grants of stock options ............ -- -- -- -- --
Amortization of deferred
compensation related to grants
of stock options .................... -- -- -- -- --
Unrealized gains on available-for-
sale securities ..................... -- -- -- -- --
Net income ............................ -- -- -- -- --
------------------------------------------------------------------------------
Comprehensive Income .................
BALANCE, DECEMBER 31, 1997 ............. 12,019,188 120,193
Shares issued in connection with
employee stock plans ............... -- -- -- 1,021,186 10,212
Tax Benefit associated with employee
stock options ...................... -- -- -- -- --
Amortization of deferred
compensation related to grants
of stock options .................... -- -- -- -- --
Unrealized gains on available-for-
sale securities ..................... -- -- -- -- --
Net income ............................ -- -- -- -- --
------------------------------------------------------------------------------
Comprehensive Income .................
BALANCE, DECEMBER 31, 1998 ............. $ $ 13,040,374 $130,405
============ ========== =========== ========== ========
STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------------------------------------------
UNREALIZED ACCUMULATED
ADDITIONAL GAIN ON OTHER
PAID-IN DEFERRED MARKETABLE ACCUMULATED COMPREHENSIVE
CAPITAL COMPENSATION SECURITIES DEFICIT INCOME
----------- ------------- ---------- ----------- -------------
BALANCE, DECEMBER 30, 1995 ............. $18,089,332 $ -- $ -- $(27,223,023) $ --
Accretion of dividends on
preferred stock ..................... -- -- -- (862,074) --
Exercise of stock options ............. 7,713 -- -- -- --
Net loss .............................. -- -- -- (5,054,863) --
---------------------------------------------------------------------------------
BALANCE, DECEMBER 28, 1996 ............. 18,097,045 -- -- (33,139,960) --
Issuance of common stock, net of
issuance costs of $ 955,359 ......... 34,626,991 -- -- -- --
Accretion of dividends on
preferred stock ..................... -- -- -- (441,557) --
Conversion of redeemable
convertible preferred stock to
common stock ...................... 14,838,203 -- -- -- --
Exercise of stock options ............. 188,594 -- -- -- --
Deferred compensation related to
grants of stock options ............. 191,875 (191,875) -- -- --
Amortization of deferred
compensation related to grants
of stock options .................... -- 42,718 -- -- --
Unrealized gains on available-for-
sale securities ..................... -- -- 19,750 -- 19,750
Net income ............................ -- -- -- 130,755 --
---------------------------------------------------------------------------------
Comprehensive Income ................. 19,750
BALANCE, DECEMBER 31, 1997 ............. 67,942,708 (149,157) 19,750 (33,450,762) --
Shares issued in connection with
employee stock plans ............... 1,495,421 -- -- -- --
Tax Benefit associated with employee
stock options ...................... 500,000 -- -- -- --
Amortization of deferred
compensation related to grants
of stock options .................... -- 47,968 -- -- --
Unrealized gains on available-for-
sale securities ..................... -- -- 129,856 -- 129,856
Net income ............................ -- -- -- 78,571 --
---------------------------------------------------------------------------------
Comprehensive Income ................. $149,606
========
BALANCE, DECEMBER 31, 1998 ............. $69,938,129 $(101,189) $149,606 $(24,372,191)
=========== ========= ======== ============
STOCKHOLDERS' EQUITY (DEFICIT)
------------------------------
COMPREHENSIVE
TOTAL INCOME
------------ -------------
BALANCE, DECEMBER 30, 1995 ............. $ (9,126,088) $ --
Accretion of dividends on
preferred stock ..................... (862,074) --
Exercise of stock options ............. 8,555 --
Net loss .............................. (5,054,863) --
---------------------------
BALANCE, DECEMBER 28, 1996 ............. (15,034,470) --
Issuance of common stock, net of
issuance costs of $ 955,359 ......... 34,654,341 --
Accretion of dividends on
preferred stock ..................... (441,557) --
Conversion of redeemable
convertible preferred stock to
common stock ...................... 14,919,286 --
Exercise of stock options ............. 191,909 --
Deferred compensation related to
grants of stock options ............. -- --
Amortization of deferred
compensation related to grants
of stock options .................... 42,718 --
Unrealized gains on available-for- 19,750
sale securities ..................... 19,750
Net income ............................ 130,755 130,755
---------------------------
Comprehensive Income ................. 150,505
BALANCE, DECEMBER 31, 1997 ............. 34,482,732 --
Shares issued in connection with
employee stock plans ............... 1,505,633 --
Tax Benefit associated with employee
stock options ...................... 500,000 --
Amortization of deferred
compensation related to grants
of stock options .................... 47,968 --
Unrealized gains on available-for-
sale securities ..................... 129,856 129,856
Net income ............................ 9,078,571 9,078,571
---------------------------
Comprehensive Income ................. $9,208,427
==========
BALANCE, DECEMBER 31, 1998 ............. $ 45,744,760
============
The accompanying notes are an integral part of these financial statements.
F-4
27
CONCORD COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED
-------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 28,
1998 1997 1996
------------ ------------- ------------
Cash Flows from Operating Activities:
Net income (loss) ................................ $ 9,078,571 $ 130,755 $(5,054,863)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities --
Depreciation and amortization .................. 873,368 592,936 409,484
Changes in current assets and liabilities--
Accounts receivable ......................... (2,008,028) (767,595) (1,254,453)
Prepaid expenses and other current assets ... (227,495) (133,377) (8,472)
Accounts payable ............................ 1,789,093 204,268 373,464
Accrued expenses ............................ 1,580,409 1,043,658 1,646,087
Deferred revenue ............................ 2,998,377 966,801 957,625
------------ ------------- -----------
Net cash provided by (used in) operating
activities ............................... 14,084,295 2,037,446 (2,931,128)
------------ ------------- -----------
Cash Flows from Investing Activities:
Purchases of equipment and improvements ............ (1,857,058) (1,103,537) (734,571)
Purchases of investments in marketable securities .. (53,139,637) (116,402,905) --
Sales of investments in marketable securities ...... 42,712,930 87,741,538 --
------------ ------------- -----------
Net cash used in investing activities ..... (12,283,765) (29,764,904) (734,571)
------------ ------------- -----------
Cash Flows from Financing Activities:
Proceeds from bank borrowings ...................... -- 583,707 924,502
Repayments of bank borrowings ...................... -- (1,508,209) --
Proceeds from issuance of common stock ............. -- 34,654,341 --
Proceeds from shares issued in connection with
employee stock plans .............................. 1,505,633 191,909 8,555
------------ ------------- -----------
Net cash provided by financing activities.. 1,505,633 33,921,748 933,057
------------ ------------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents.. 3,306,163 6,194,290 (2,732,642)
Cash and Cash Equivalents, beginning of year ......... 7,858,186 1,663,896 4,396,538
------------ ------------- -----------
Cash and Cash Equivalents, end of year ............... $ 11,164,349 $ 7,858,186 $ 1,663,896
============ ============= ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest ............................. $ -- $ 126,836 $ 48,564
============ ============= ===========
Cash paid for taxes ................................ $ 46,159 $ 1,539 $ --
============ ============= ===========
Supplemental Disclosure of Noncash Transactions:
Accretion of dividends on preferred stock .......... $ -- $ 441,557 $ 862,074
============ ============= ===========
Deferred compensation related to grants of stock
options .......................................... $ -- $ 191,875 $ --
============= ===========
Conversion of redeemable convertible preferred stock
to common stock .................................. $ -- $ 14,919,286 $ --
============ ============= ===========
Unrealized gain on available-for-sale securities ... $ 129,856 $ 19,750 $ --
============ ============= ===========
Tax benefit associated with employee stock options.. $ 500,000 $ -- $ --
============ ============= ===========
Retirement of fully depreciated fixed assets ....... $ 4,330,000 $ -- $ --
============ ============= ===========
The accompanying notes are an integral part of these financial statements.
F-5
28
CONCORD COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Concord Communications, Inc. (the Company) is primarily engaged in the
development and sale of automated network reporting software 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 its
current and future products.
(a) Fiscal Year-End
Through fiscal 1996, the Company's fiscal year was the 52- or 53-week
period ended on the Saturday closest to December 31. References to 1996 are for
the 52-week period ended December 28, 1996. Beginning in 1997, the Company has
changed to a calendar year-end.
(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 $11,164,349 and $7,858,186 at December 31, 1998 and
December 31, 1997.
(c) Revenue Recognition
The Company's revenues consist of software license revenues and service
revenues. Software license revenues for periods subsequent to December 31, 1997,
are recognized in accordance with the American Institute of Certified Public
Accountants' Statement of Position ("SOP") 97-2, Software Revenue Recognition.
Under SOP 97-2, software license revenues are recognized upon execution of a
contract and delivery of software, provided that the license fee is fixed and
determinable, no significant production, modification or customization of the
software is required and collection is considered probable by management. For
periods prior to December 31, 1997, software license revenues were recognized in
accordance with SOP 91-1, Software Revenue Recognition. Under SOP 91-1, software
license revenues were recognized upon execution of a contract and shipment of
the software, provided that no significant vendor obligations remained
outstanding, amounts were due within one year and collection was considered
probable by management. The application of SOP 97-2 did not have any impact on
the Company's consolidated financial statements for the year ended December 31,
1998. In 1999, software license revenues will be recognized in accordance with
SOP 97-2, as modified by SOP 98-9, Modification of SOP 97-2,Software Revenue
Recognition with respect to Certain Transactions. The Company believes it is
currently in compliance with SOP 97-2, as modified by SOP 98-9. 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.
F-6
29
(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
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, 1998, December 31, 1997 and
December 28, 1996, no individual customer accounted for more than 10% of
revenue.
(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, 1998 and
December 31, 1997.
(h) Net Income (Loss) per Share
In 1997, the Company adopted SFAS No. 128, Earnings Per Share, effective
December 15, 1997. SFAS No. 128 establishes standards for computing and
presenting earnings per share and applies to entities with publicly held common
stock or potential common stock. The Company has applied the provisions of SFAS
No. 128 retroactively to all periods presented. In accordance with Staff
Accounting Bulletin (SAB) No. 98, the Company has determined that there were no
nominal issuances of common stock or potential common stock in the period prior
to the Company's initial public offering (IPO). The dilutive effect of potential
common shares in 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. Diluted weighted average shares
outstanding for 1996 excludes the potential common shares from stock options and
redeemable convertible preferred stock outstanding because to do so would have
been antidilutive for the years presented. Pro forma diluted net income (loss)
per common and potential common share assumes that all series of redeemable
convertible preferred stock had been converted to common stock as of the
original issuance dates. Calculations of basic, diluted and pro forma diluted
net income (loss) per common share and potential common share are as follows:
F-7
30
1998 1997 1996
---- ---- ----
Net income (loss) ................................ $ 9,078,571 $ 130,755 $(5,054,863)
----------- ----------- -----------
Weighted average common shares
outstanding ................................... 12,642,247 3,069,667 760,971
Potential common shares pursuant
to stock options .............................. 1,434,743 1,830,774 --
Potential common shares pursuant to conversion of
redeemable convertible preferred stock ........ -- 6,419,038 --
----------- ----------- -----------
Diluted weighted average shares ................. 14,076,990 11,319,479 760,971
Pro forma conversion of redeemable
convertible preferred stock ................... -- -- 8,108,258
----------- ----------- -----------
Pro forma diluted weighted average
shares outstanding ............................ 14,076,990 11,319,479 8,869,229
----------- ----------- -----------
Basic net income (loss) per common share ......... $ 0.72 $ 0.04 $ (6.64)
=========== =========== ===========
Diluted net income (loss) per common
and potential common share .................... $ 0.64 $ 0.01 $ (6.64)
=========== =========== ===========
Pro forma diluted net income (loss) per
common and potential common share ............. $ 0.64 $ 0.01 $ (0.57)
=========== =========== ===========
(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,
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
=========== =========== ===========
The amortized cost, unrealized gains (losses) and fair value of marketable
securities available-for-sale as of December 31, 1997 with maturity dates from
January 1, 1998 through December 1, 2000, are as follows:
AMORTIZED COST UNREALIZED GAINS (LOSSES) FAIR VALUE
-------------- ------------------------ -----------
US government obligations $ 7,450,812 $ (924) $ 7,449,888
Corporate bonds and notes 22,317,923 22,455 22,340,378
Asset-backed securities 5,402,979 (1,781) 5,401,198
----------- ------------ -----------
35,171,714 19,750 35,191,464
Less: Amounts classified as
cash-equivalents 6,510,435 (88) 6,510,347
----------- ------------ -----------
Available-for-sale
marketable securities $28,661,279 $ 19,838 $28,681,117
=========== ============ ===========
(3) LINE OF CREDIT AND LONG-TERM DEBT
During 1996, the Company entered into an agreement for an equipment line of
credit in the amount of $1.0 million (the "Equipment Line") with Silicon Valley
Bank. The Equipment Line, as amended, bore interest at the bank's prime plus 2%
and was collateralized by substantially all of the Company's assets. In December
1997, the Company paid off all outstanding principal and interest due under this
agreement.
F-8
31
The Company had a revolving working capital line of credit with Silicon
Valley Bank. Borrowings outstanding under the line were limited to the lesser of
$2.5 million or 90% of eligible accounts receivable. The Company's line of
credit expired on April 2, 1998. The Company also entered into a new equipment
line of credit with Fleet National Bank during June of 1997 for up to $1.0
million. In December, 1997, the Company paid off all outstanding principal and
interest under this agreement.
(4) STOCKHOLDERS' EQUITY (DEFICIT)
In December 1995, the Company's Board of Directors approved a one-for-three
reverse stock split of its common and redeemable convertible preferred stock. On
October 9, 1997, the Company amended its certificate of incorporation to
authorize a 1-for-2 reverse stock split of the Company's common stock and
increase the number of authorized shares of common stock to 50,000,000. The
stock splits have been retroactively reflected in the accompanying financial
statements and notes for all periods presented.
In October 1997, the Company completed an initial public offering (the IPO)
of 2,735,000 shares of its common stock, inclusive of 435,000 shares exercised
to cover over-allotments. The sale of common stock resulted in net proceeds to
the Company of approximately $34,650,000, after deducting all expenses related
to the IPO.
(5) PREFERRED STOCK
In connection with the IPO, the Company's redeemable convertible preferred
stock was converted into 8,108,258 shares of common stock. Thereafter, the
Company's certificate of incorporation was amended to authorize 1,000,000 shares
of preferred stock in one or more series and to fix or alter the designations,
preferences, rights and any qualifications, limitations or restrictions of the
shares of each such series thereof, including the dividend rights and rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series or
designation of such series. At December 31, 1998, the Company has no issued or
outstanding shares of preferred stock.
(6) 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, for which the Company reserved 750,000, 375,000 and 95,000 shares of
common stock, respectively, for future issuance. In April 1998, the Shareholders
approved the amended 1997 Stock Plan to increase the aggregate number of shares
of Common Stock reserved for issuance thereunder by 750,000 shares to 1,500,000
shares and to make certain minor modifications.
Under the 1995 and 1997 Stock Plans (the Plans), the Company may issue
options to purchase up to 2,519,239 shares of common stock, of which 845,450
options are available for grant as of December 31, 1998. 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 1998, 1997
and 1996 was $31.08, $5.64 and $.17, respectively. The weighted average
assumptions are as follows:
F-9
32
1998 1997 1996
------- ---------- -------
Risk-free interest rate......................... 6.0% 5.1 - 6.0% 6.3%
Expected dividend yield......................... -- -- --
Expected lives.................................. 7 years 7 years 7 years
Expected volatility............................. 80% 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:
1998 1997 1996
---------- ---------- ------------
Net income (loss), as reported ........... $9,078,571 $ 130,755 $(5,054,863)
========== ========= ===========
Net income (loss), pro forma ............. $6,260,432 $(320,629) $(5,105,339)
========== ========= ===========
Net income (loss) per share, as reported
Basic ................................... $ 0.72 $ 0.04 $ (6.64)
========== ========= ==========
Diluted ................................. $ 0.64 $ 0.01 $ (6.64)
========== ========= ==========
Pro forma diluted ....................... $ 0.64 $ 0.01 $ (0.57)
========== ========= ==========
Net income (loss) per share, pro forma
Basic ................................... $ 0.50 $ (0.10) $ (6.71)
========== ========= ==========
Diluted ................................. $ 0.44 $ (0.03) $ (6.71)
========== ========= ==========
Pro forma diluted ....................... $ 0.44 $ (0.03) $ (0.58)
========== ========= ==========
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
may not be representative of that to be expected in future years.
The following table summarizes information about options outstanding at
December 31, 1998:
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 - 1.90 735,553 5.40 $ .62 100,831 $ .58
4.10 - 10.00 207,722 6.32 4.71 35,212 4.53
17.06 - 24.75 625,014 7.11 20.42 28,914 19.46
25.19 - 56.75 105,500 7.70 36.23 --
--------- -------
1,673,789 164,957
========= =======
The following schedule summarizes the activity under the stock option plans
for the three-year period ended December 31, 1998:
WEIGHTED AVERAGE
NUMBER OF PRICE PER PRICE
SHARES SHARE PER SHARE
---------- ------------- ----------------
Outstanding at December 30, 1995 ... 426,022 .60 .60
Granted ....................... 1,881,259 .10--1.90 .22
Exercised ..................... (84,137) .10--.60 .10
Terminated .................... (518,802) .10--.60 .51
--------- ------------- ------
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
========= ============= ======
Exercisable at December 31, 1998.... 164,957 $ .10--21.38 $ 4.73
========= ============= ======
F-10
33
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, 1998
and 1997, the Company has recorded compensation expense of $47,968 and $42,718,
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.
(7) INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. This standard requires, among other things,
recognition of future tax effects, measured by enacted tax rates, attributable
to deductible temporary differences between the financial statement and income
tax bases of assets and liabilities.
The approximate income tax effects of these temporary differences are as
follows:
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
Net operating loss and federal tax credit
carryforwards ........................................ $ 12,719,000 $ 10,689,000
Reserves not yet deductible for tax purposes .......... 1,027,000 344,000
Depreciation .......................................... 92,000 101,000
Deferred revenue ...................................... 1,373,000 174,000
Capitalized research and development expenses ......... 2,088,000 2,284,000
Valuation allowance ................................... (17,299,000) (13,592,000)
------------ ------------
$ -- $ --
============ ============
The Company has available net operating loss carryforwards of approximately
$27,000,000 and federal research and development tax credit carryforwards of
approximately $1,730,000 as of December 31, 1998 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
- -------------- ------------------ --------------------
1999 .... $ 3,358,000 $ --
2000 .... 3,659,000 --
2001 .... 2,870,000 1,252,000
2002-2006 1,369,000 150,000
2007-2013 15,744,000 328,000
----------- ----------
$27,000,000 $1,730,000
=========== ==========
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 $17.3 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 $17.3 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, 1997 and 1998. The
factors that weighed most heavily on the Company's decision to record a full
valuation allowance were (i) the Company's history of losses, (ii) the
substantial restrictions on the use of its existing net operation loss (NOL)
carryforwards and (iii) the uncertainty of future profitability.
F-11
34
As a result of the ownership change described above, the future use of
approximately $16.6 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, 1998. The Company's limited operating success in late 1997
and 1998 and its 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
$4.3 million pertaining to the benefit associated with the exercise and
subsequent disqualifying disposition of incentive stock options by the Company's
employees. When and if the Company realizes this asset, the resulting change in
the valuation allowance will be credited directly to additional paid-in capital,
pursuant to the provisions of SFAS No. 109.
The difference between the Company's 1998 effective tax rate of
approximately 5.5% and the applicable statutory rate can be attributed to the
use of the NOL and credit carryforwards described above. In addition, the
Company received a tax benefit of approximately $500,000 pursuant to the
exercise of employee stock options. The Company recorded this benefit as a
component of additional paid in capital.
(8) COMMITMENTS AND CONTINGENCIES
(a) Leases
The Company leases facilities under an operating lease that expires in
September 2003. The approximate future minimum rental payments under this lease,
as amended, are as follows:
AMOUNT
----------
1999.................................................. $ 619,000
2000.................................................. 684,000
2001.................................................. 698,000
2002.................................................. 373,000
2003.................................................. 25,000
----------
$2,399,000
==========
Rent expense was approximately $464,000, $346,000 and $244,000 for the
years ended December 31, 1998, December 31, 1997 and December 28, 1996,
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 payment due under this agreement for 1999 is
$450,000.
Royalty expense under royalty agreements was approximately $665,000,
$903,000 and $735,000 for fiscal 1998, 1997 and 1996, respectively.
F-12
35
(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.
(9) ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
Payroll and payroll-related........................................... $1,268,845 $ 681,923
Royalties............................................................. 412,656 372,853
Outside commissions................................................... 568,450 143,543
Customer deposits..................................................... 254,340 1,085,521
Other................................................................. 1,582,692 1,084,745
---------- ----------
$4,086,983 $3,368,585
========== ==========
(10) EMPLOYEE BENEFIT PLAN
The Company maintains an employee benefit plan under Section 401(k) of the
Internal Revenue Code covering all eligible employees, as defined. The Plan
allows for employees to defer a portion of their salary up to 15% of pretax
compensation. While the Company has the discretion to make contributions to the
plan, no such contributions were made in 1998, 1997 or 1996.
(11) 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
---------- ---------- ---------- ----------
1996................... $130,000 $135,000 $(54,884) $210,116
1997................... $210,116 $ 70,000 $ -- $280,116
1998................... $280,116 $169,884 $ -- $450,000
(12) SEGMENT REPORTING AND INTERNATIONAL INFORMATION
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information in the fiscal year ended December 31, 1998.
SFAS 131 establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information for
those segments to be presented in interim financial reports issued to
stockholders. SFAS 131 also establishes standards for related disclosures about
products and services and geographic areas. Operating segments are identified as
components of an enterprise about which separate discrete financial information
is available for evaluation by the chief operating decision maker, or decision
making group, in making decisions how to allocate resources and assess
performance. The Company's chief decision making group, as defined under SFAS
131, is the Executive Management Committee. To date, the Executive Management
Committee has viewed the Company's operations as principally one segment,
software sales and associated services. As a result, the financial information
disclosed herein, materially represents all of the financial information related
to the Company's principal operating segment. Revenues from international
locations were $7.1 million, $2.4 million and $1.0 million in 1998, 1997 and
1996, respectively. The Company's revenues from international locations were
primarily generated from customers located in Europe. Revenues from customers
located in Europe accounted for 13.2%, 10.3% and 10.1% of total revenues in
1998, 1997 and 1996, respectively. Substantially all of the Company's assets are
located in the United States.
F-13
36
CONCORD COMMUNICATIONS, INC.
FORM 10-K, December 31, 1998
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 22nd day of March, 1999.
Concord Communications, Inc.
/s/ Gary E. Haroian
---------------------------------
Name: Gary E. Haroian
Title: Vice President of Finance
and Chief Financial Officer
(Principal Financial Officer and
Principal 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, 03/22/99
- ------------------------------ President and Director
John A. Blaeser (Principal Executive Officer)
/s/ Gary E. Haroian Chief Financial Officer, Vice 03/22/99
- ------------------------------ President of Finance,
Gary E. Haroian Treasurer and Clerk
(Principal Financial and
Accounting Officer)
/s/ Frederick W.W. Bolander Director 03/22/99
- ------------------------------
Frederick W.W. Bolander
/s/ Richard M. Burnes, Jr. Director 03/22/99
- ------------------------------
Richard M. Burnes, Jr.
/s/ Robert C. Hawk Director 03/22/99
- ------------------------------
Robert C. Hawk
/s/ John Robert Held Director 03/22/99
- ------------------------------
John Robert Held
/s/ Deepak Kamra Director 03/22/99
- ------------------------------
Deepak Kamra
/s/ Robert M. Wadsworth Director 03/22/99
- ------------------------------
Robert M. Wadsworth
37
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
10.01 Working Capital Loan Agreement between the Company and Silicon Exhibit No. 10.01 to Registration Statement on
Valley Bank dated April 3, 1997 Form S-1 (No. 333-33227)
10.02 Revolving Promissory Note made by the Company in favor of Silicon Exhibit No. 10.02 to Registration Statement on
Valley Bank Form S-1 (No. 333-33227)
10.03 Equipment Line of Credit Letter Agreement between the Company and Exhibit No. 10.03 to Registration Statement on
Fleet Bank dated as of June 9, 1997 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 Employee Stock Purchase Plan of the Company Exhibit No. 10.06 to Registration Statement on
Form S-1 (No. 333-33227)
10.07 1997 Non-Employee Director Stock Option Plan of the Company Exhibit No. 10.02 on Form 10-Q, for the period
ended June 30, 1998
10.08 The Profit Sharing/401(K) Plan of the Company Exhibit No. 10.08 to Registration Statement on
Form S-1 (No. 333-33227)
10.09 Lease Agreement between the Company and John Hancock Mutual Life Exhibit No. 10.09 to Registration Statement on
Insurance Company dated March 17, 1994, as amended on March Form S-1 (No. 333-33227)
25,1997
10.10 First Amendment to Lease Agreement between the Company and John Exhibit No. 10.10 to Registration Statement on
Hancock Mutual Life Insurance Company dated March 25, 1997 Form S-1 (No. 333-33227)
10.11 Form of Indemnification Agreement for directors and officers of Exhibit No. 10.11 to Registration Statement on
the Company Form S-1 (No. 333-33227)
10.12 Restated Common Stock Registration Rights Agreement between the Exhibit No. 10.12 to Registration Statement on
Company and certain investors dated August 7, 1986 Form S-1 (No. 333-33227)
10.13 Amended and Restated Registration Rights Agreement between the Exhibit No. 10.13 to Registration Statement on
Company and certain investors dated December 28, 1995 Form S-1 (No. 333-33227)
10.14 Management Change in Control Agreement between the Company and Exhibit No. 10.14 to Registration Statement on
John A. Blaeser dated as of August 7, 1997 Form S-1 (No. 333-33227)
10.15 Management Change in Control Agreement between the Company and Exhibit No. 10.15 to Registration Statement on
Kevin J. Conklin dated as of July 23, 1997 Form S-1 (No. 333-33227)
10.16 Management Change in Control Agreement between the Company and Exhibit No. 10.16 to Registration Statement on
Ferdinand Engel dated as of July 23, 1997 Form S-1 (No. 333-33227)
10.17 Management Change in Control Agreement between the Company and Exhibit No. 10.17 to Registration Statement on
Gary E. Haroian dated as of July 23, 1997 Form S-1 (No. 333-33227)
10.18 Management Change in Control Agreement between the Company and Exhibit No. 10.18 to Registration Statement on
Daniel D. Phillips, Jr. dated as of July 23, 1997 Form S-1 (No. 333-33227)
10.19 Stock Option Agreement dated January 1, 1996 between the Company Exhibit No. 10.19 to Registration Statement on
and John A. Blaeser Form S-1 (No. 333-33227)
10.20 Stock Option Agreement dated January 1, 1996 between the Company Exhibit No. 10.20 to Registration Statement on
and John A. Blaeser Form S-1 (No. 333-33227)
10.21 Letter Agreement between the Company and Silicon Valley Bank Exhibit No. 10.21 to Registration Statement on
dated March 25, 1996 together with the Loan Modification Form S-1 (No. 333-33227)
Agreement dated November 14, 1996
10.22 Form of Shrink-Wrap License Exhibit No. 10.22 to Registration Statement on
Form S-1 (No. 333-33227)
* 13.01 Pages 15-20 of the Registrant's 1998 Annual Report
to Stockholders
* 21.01 Subsidiaries of the Company
* 23.01 Consent of Arthur Andersen LLP
* 27.01 Financial Data Schedule
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* filed herewith