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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the quarterly period ended June 30, 2001.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the transition period from ________ to _________ .
COMMISSION FILE NUMBER 0-23067
CONCORD COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2710876
(State of incorporation) (IRS Employer Identification Number)
600 NICKERSON ROAD
MARLBORO, MASSACHUSETTS 01752
(508) 460-4646
(ADDRESS AND TELEPHONE OF PRINCIPAL EXECUTIVE OFFICES)
----------------
INDICATE BY CHECK MARK WHETHER REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO
BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS, AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS
FOR THE PAST 90 DAYS;
YES [X] NO [ ]
16,694,473 SHARES OF THE REGISTRANT'S COMMON STOCK, $0.01 PAR VALUE, WERE
OUTSTANDING AS OF JULY 31, 2001.
THIS DOCUMENT CONTAINS 34 PAGES.
THE EXHIBIT INDEX IS ON PAGE 25.
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CONCORD COMMUNICATIONS, INC.
FORM 10-Q, JUNE 30, 2001
CONTENTS
Item Number Page
ART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets:
June 30, 2001 and December 31, 2000 3
Condensed Consolidated Statements of Operations:
Three and six months ended June 30, 2001 and June
30, 2000 4
Consolidated Statements of Cash Flows:
Six months ended June 30, 2001 and June 30, 2000 5
Notes to Condensed Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURE 24
EXHIBIT INDEX 25
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONCORD COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
2001 2000
------------- -------------
ASSETS
Current Assets:
Cash, cash equivalents and marketable securities $ 64,384,349 $ 63,251,427
Accounts receivable, net of allowance of
$1,306,941 and $1,525,965 in 2001 and 2000, respectively 16,225,719 20,000,193
Prepaid expenses and other current assets 2,829,316 2,409,350
------------- -------------
Total current assets 83,439,384 85,660,970
------------- -------------
Equipment and Improvements, at cost:
Equipment 18,501,469 16,085,465
Leasehold improvements 5,922,306 6,080,105
------------- -------------
24,423,775 22,165,570
Less-- Accumulated depreciation and amortization 11,823,429 9,140,170
------------- -------------
Equipment and Improvements, net 12,600,346 13,025,400
------------- -------------
Deferred Tax Asset 3,500,000 3,500,000
Other Long-term Assets 100,559 89,689
------------- -------------
$ 99,640,289 $ 102,276,059
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,195,120 $ 3,117,627
Accrued expenses 13,115,006 11,108,921
Deferred revenue 20,744,981 17,303,928
------------- -------------
Total current liabilities 36,055,107 31,530,476
------------- -------------
Common Stock, $0.01 par value:
Authorized -- 50,000,000 shares
Issued and outstanding -- 16,693,010 and 16,554,944
shares, in 2001 and 2000 respectively 166,930 165,549
Additional paid-in capital 95,104,062 95,479,340
Deferred compensation (139,964) (1,509,880)
Accumulated other comprehensive income 789,832 135,159
Accumulated deficit (32,335,678) (23,524,585)
------------- -------------
Total stockholders' equity 63,585,226 70,745,583
------------- -------------
$ 99,640,289 $ 102,276,059
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
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CONCORD COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenues:
License revenues $ 13,481,341 $ 17,508,011 $ 26,552,175 $ 32,360,538
Service revenues 8,132,413 5,302,463 15,492,911 9,718,209
------------ ------------ ------------ ------------
Total revenues 21,613,754 22,810,474 42,045,086 42,078,747
Cost of Revenues 4,395,437 2,645,657 9,356,864 5,072,020
------------ ------------ ------------ ------------
Gross profit 17,218,317 20,164,817 32,688,222 37,006,727
------------ ------------ ------------ ------------
Operating Expenses:
Research and development 6,280,825 4,682,927 12,685,696 9,471,007
Sales and marketing 12,886,783 10,529,866 25,306,029 19,755,921
General and administrative 2,244,952 1,704,138 4,791,711 3,119,827
Stock-based compensation 48,607 214,914 240,430 469,171
Acquisition-related charges -- -- -- 4,300,000
------------ ------------ ------------ ------------
Total operating expenses 21,461,167 17,131,845 43,023,866 37,115,926
------------ ------------ ------------ ------------
Operating (loss) income (4,242,850) 3,032,972 (10,335,644) (109,099)
Other income net 797,261 795,442 1,524,551 1,551,374
------------ ------------ ------------ ------------
(Loss) income before income taxes and
extraordinary items (3,445,589) 3,828,414 (8,811,093) 1,442,175
Provision for income taxes -- 1,378,230 -- 487,230
------------ ------------ ------------ ------------
(Loss) income before extraordinary items (3,445,589) 2,450,184 (8,811,093) 954,945
Extraordinary loss upon early retirement of
debt, net of tax benefit of $72,000 -- -- -- (216,010)
------------ ------------ ------------ ------------
Net (loss) income $ (3,445,589) $ 2,450,184 $ (8,811,093) $ 738,935
============ ============ ============ ============
Net (loss) income per common and potential
common share:
Basic $ (0.21) $ 0.15 $ (0.53) $ 0.05
============ ============ ============ ============
Diluted $ (0.21) $ 0.15 $ (0.53) $ 0.04
============ ============ ============ ============
Weighted average common and potential
commons shares outstanding:
Basic 16,672,323 16,286,467 16,616,432 15,861,661
============ ============ ============ ============
Diluted 16,672,323 16,741,150 16,616,432 16,463,660
============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
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CONCORD COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
-------------------------------
JUNE 30, JUNE 30,
2001 2000
------------- ------------
Cash Flows from Operating Activities:
Net (loss) income $ (8,811,093) $ 738,935
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 3,026,726 1,769,302
Stock-based compensation 240,430 469,171
Changes in current assets and liabilities:
Accounts receivable 3,774,474 (2,881,813)
Prepaid expenses and other current assets (430,836) 190,623
Accounts payable (922,507) (505,525)
Accrued expenses 2,006,085 (196,906)
Deferred revenue 3,441,053 2,949,408
------------ ------------
Net cash provided by operating activities 2,324,332 2,533,195
------------ ------------
Cash Flows from Investing Activities:
Purchases of equipment and improvements (2,601,672) (5,618,003)
Net (investments in) proceeds from marketable securities (3,096,698) 2,947,099
------------ ------------
Net cash used in investing activities (5,698,370) (2,670,904)
------------ ------------
Cash Flows from Financing Activities:
Repayments of bank borrowings -- (2,962,466)
Proceeds from shares issued in connection with
employee stock plans and warrants exercised 755,589 1,858,272
------------ ------------
Net cash provided by (used in) financing
activities 755,589 (1,104,194)
------------ ------------
Net Decrease in Cash and Cash Equivalents (2,618,449) (1,241,903)
Cash and Cash Equivalents, beginning of period 10,725,265 10,629,528
------------ ------------
Cash and Cash Equivalents, end of period $ 8,106,816 $ 9,387,625
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ -- $ 33,592
============ ============
Cash paid for taxes $ 49,000 $ 328,556
============ ============
Supplemental Disclosure of Noncash Transactions:
Reversal of deferred compensation related to
forfeited stock options $ (1,129,486) $ --
============ ============
Retirement of fully depreciated assets $ 343,467 $ --
============ ============
Conversion of redeemable convertible preferred stock
to common stock $ -- $ 11,723,017
============ ============
Unrealized gain on available-for-sale securities $ 654,673 $ 52,500
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
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CONCORD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FORM 10-Q, JUNE 30, 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been presented by
Concord Communications, Inc. (the "Company") unaudited (except the balance sheet
information as of December 31, 2000 which has been derived from audited
financial statements) in accordance with accounting principles generally
accepted in the United States for interim financial statements and with the
instructions to Form 10-Q and Regulation S-X pertaining to interim financial
statements. Accordingly, these interim financial statements do not include all
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. The financial statements
reflect all adjustments and accruals which management considers necessary for a
fair presentation of financial position as of June 30, 2001 and December 31,
2000, and the results of operations for the three and six months ended June 30,
2001 and 2000. The results for the interim periods presented are not necessarily
indicative of results to be expected for any future period. The financial
statements should be read in conjunction with the audited financial statements
and the notes thereto included in the Company's 2000 Annual Report on Form 10-K
filed with the Securities and Exchange Commission in March 2001.
REVENUE RECOGNITION
The Company's revenues consist of software license revenues and service
revenues. Software license revenues are recognized in accordance with the
American Institute of Certified Public Accountants' Statement of Position
("SOP") 97-2, Software Revenue Recognition, as modified by SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition with respect to Certain
Transactions. 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. Revenues under multiple element arrangements, which typically
include software products and maintenance sold together, are allocated to each
element using the residual method in accordance with 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.
RECLASSIFICATIONS
Certain amounts in the prior year's financial statements have been
reclassified to conform to the current year's presentation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
2. BASIC AND DILUTED INCOME/LOSS PER COMMON SHARE
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings Per Share. SFAS No. 128 establishes standards
for computing and presenting earnings per share and applies to entities with
publicly held common stock or potential common stock. Basic net (loss) income
per share is computed using the weighted-average number of common shares
outstanding during the period. Diluted net income per share is computed using
the weighted-average number of
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common and dilutive common-equivalent shares outstanding during the period.
Dilutive common-equivalent shares primarily consist of employee stock options.
Diluted loss per share is the same as basic loss per share for the three and six
month periods ending June 30, 2001, as the effects of potential common stock are
antidilutive. For the three and six months ending June 30, 2001, employee stock
options to purchase 2,540,323 and 2,495,353 shares respectively, were
outstanding but not included in the diluted weighted-average share calculation
as the effect would have been antidilutive.
Calculations of the basic and diluted net income/loss per share and
potential common share are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2001 2000 2001 2000
----------- ----------- ------------ -----------
Net (loss) income available to common stockholders..... $(3,445,589) $ 2,450,184 $ (8,811,093) $ 738,935
=========== =========== ============ ===========
Weighted average common shares outstanding............. 16,672,323 16,286,467 16,616,432 15,861,661
Potential common shares pursuant to stock options and
warrants............................................. -- 454,683 -- 601,999
Diluted weighted average shares....................... 16,672,323 16,741,150 16,616,432 16,463,660
----------- ----------- ----------- -----------
Basic net (loss) income per common
share................................................ $ (0.21) $ 0.15 $ (0.53) $ 0.05
=========== =========== ============ ===========
Diluted net (loss) income per common and potential
common share.......................................... $ (0.21) $ 0.15 $ (0.53) $ 0.04
=========== =========== ============ ===========
3. COMPREHENSIVE (LOSS) INCOME
Comprehensive (loss) income for the three months and six months ended June
30, 2001 and 2000 is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- ---------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2001 2000 2001 2000
------------ ---------- ------------ ----------
Net (loss) income........................ $(3,445,589) $2,450,184 $(8,811,093) $ 738,935
Unrealized (loss) gain on marketable
securities............................... (287,315) 133,620 654,673 52,500
----------- ---------- ---------- ---------
Comprehensive (loss) income.......... $(3,732,904) $2,583,804 $(8,156,420) $ 791,435
=========== ========== =========== =========
4. ACQUISITIONS
On February 4, 2000, the Company consummated a transaction pursuant to
which it acquired FirstSense Software, Inc. ("FirstSense"). Under the terms of
the agreement, the shareholders and option holders of FirstSense received an
aggregate of 1,940,000 equivalent Concord shares to effect the business
combination. The transaction has been accounted for as a pooling of interests.
Accordingly, all prior period financial statements presented have been restated
to reflect the combination of the respective companies, as required by APB
Opinion No. 16, "Accounting for Business Combinations". All inter-company
transactions have been eliminated as a result of the business combination. As a
part of the transaction, the Company incurred direct, acquisition-related
charges of approximately $4,300,000. All of such costs have been charged to
operations in fiscal 2000 upon consummation of the FirstSense acquisition in
February 2000.
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5. SEGMENT REPORTING AND INTERNATIONAL INFORMATION
The Company follows the provisions of SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 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 No. 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 on how to allocate resources and assess performance. The
Company's chief decision making group, as defined under SFAS 131, is the
Executive Management Committee.
The following table presents the approximate revenue by major geographical
regions:
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- -----------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2001 2000 2001 2000
----------- ----------- ----------- -----------
United States.................. $13,534,000 $17,270,000 $26,578,000 $29,255,000
Europe......................... 4,904,000 3,491,000 9,053,000 8,285,000
Rest of the World.............. 3,176,000 2,049,000 6,414,000 4,539,000
----------- ----------- ----------- -----------
Total......................... $21,614,000 $22,810,000 $42,045,000 $42,079,000
=========== =========== =========== ===========
No one country, except the United States, accounts for greater than 10% of
total revenues. Substantially all of the Company's assets are located in the
United States.
The Company's reportable segments are determined by customer type: service
providers/telecommunications companies (SP/T) and enterprise. The accounting
policies of the segments are the same as those described in Note 1. The
Executive Management Committee evaluates segment performance based on revenue.
Accordingly, all expenses are considered corporate level activities and are not
allocated to segments. Also, the Executive Management Committee does not assign
assets to these segments.
The table presents the approximate revenue by reportable segment:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ ------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2001 2000 2001 2000
---------- ----------- ----------- -----------
SP/T............................ $10,480,000 $ 8,640,000 $18,931,000 $17,800,000
Enterprise...................... 11,134,000 14,170,000 23,114,000 24,279,000
----------- ----------- ----------- -----------
Total............................ $21,614,000 $22,810,000 $42,045,000 $42,079,000
=========== =========== =========== ==========
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CONCORD COMMUNICATIONS, INC.
FORM 10-Q, JUNE 30, 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Concord develops, markets and supports a suite of highly scalable software
solutions, our eHealth SuiteTM family of products, which maximizes the
availability and performance of networks, systems, and applications that form
the critical underlying IT infrastructure on which businesses depend for their
operations. Concord's software solutions monitor to detect fault conditions
throughout the infrastructure in real time; test availability and responsiveness
of critical services; collect, consolidate, normalize and analyze high volumes
of data from the IT infrastructure; alert IT personnel to faults and potential
outages and automatically execute corrective action to restore availability and
maximize uptime of the internet infrastructure, if desired.
This document contains forward-looking statements. Any statements contained
herein that do not describe historical facts are forward-looking statements.
Concord makes such forward-looking statements under the provisions of the "safe
harbor" section of the Private Securities Litigation Reform Act of 1995. The
forward-looking statements contained herein are based on current expectations,
but are subject to a number of risks and uncertainties. Concord's actual future
results may differ significantly from those stated in any forward-looking
statements. Factors that may cause such differences include, but are not limited
to, the factors discussed elsewhere in this Form 10-K under the heading "Risk
Factors".
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain financial
data as percentages of the Company's total revenue:
UNAUDITED THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2001 2000 2001 2000
-------- -------- --------- --------
Revenues:
License revenues 62.4% 76.8% 63.2% 76.9%
Service revenues 37.6 23.2 36.8 23.1
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
Cost of Revenues 20.3 11.6 22.3 12.1
----- ----- ----- -----
Gross profit 79.7 88.4 77.7 87.9
Operating Expenses:
Research and development 29.1 20.5 30.2 22.5
Sales and marketing 59.6 46.2 60.2 46.9
General and administrative 10.4 7.5 11.4 7.4
Stock-based compensation 0.2 0.9 0.6 1.1
Acquisition-related charges 0.0 0.0 0.0 10.2
----- ----- ----- -----
Total operating expenses 99.3 75.1 102.4 88.1
----- ----- ----- -----
(Loss) income from Operations (19.6) 13.3 (24.6) (0.3)
Other income, net 3.7 3.5 3.6 3.7
----- ----- ----- -----
(Loss) income before taxes (15.9) 16.8 (21.0) 3.4
Provision for income taxes 0.0 6.0 0.0 1.2
----- ----- ----- -----
Net (loss) income before extraordinary items (15.9) 10.7 (21.0) 2.3
Extraordinary items 0.0 0.0 0.0 (0.5)
----- ----- ----- -----
Net (loss) income (15.9)% 10.7% (21.0)% 1.8%
----- ----- ----- -----
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TOTAL REVENUES. The Company's total revenues decreased 5% to $21.6 million
in the three months ended June 30, 2001 from $22.8 million in the three months
ended June 30, 2000. Total revenue was consistent at $42.1 million in the six
months ended June 30, 2001 with $42.1 million in the six months ended June 30,
2000.
LICENSE REVENUES. The Company's license revenues, which are derived from the
licensing of software products, decreased 23% to $13.5 million, or 62.4% of
total revenues, in the three months ended June 30, 2001, from $17.5 million, or
76.8% of total revenues in the three months ended June 30, 2000. License
revenues decreased 17.9% to $26.6 million, or 63.2% of total revenues, in the
six months ended June 30, 2001, from $32.4 million, or 76.9% of total revenues
in the six months ended June 30, 2000. The decrease of license revenues is due
to the general slowdown of the economy in the United States and abroad. The
decrease in license revenues as a percent of total revenues was, in part, due to
a significant increase in service revenues.
SERVICE REVENUES. The Company's service revenues, which consist of fees for
maintenance, training and professional services, increased 53.4% to $8.1
million, or 37.6% of total revenues, in the three months ended June 30, 2001
from $5.3 million, or 23.2% of total revenues, in the three months ended June
30, 2000. Service revenues increased 59.4% to $15.5 million, or 36.8% of total
revenues, in the six months ended June 30, 2001 from $9.7 million, or 23.1% of
total revenues, in the six months ended June 30, 2000. The increase in service
revenues was attributed to an increase of our customer base and the resulting
demand for services by these customers.
COST OF REVENUES. Cost of revenues includes expenses associated with royalty
costs, production, fulfillment and product documentation, along with personnel
costs associated with providing customer support in connection with maintenance,
training and professional service contracts. Royalty costs are composed of third
party software costs. Cost of revenues increased 66.1% to $4.4 million, or 20.3%
of total revenues, in the three months ended June 30, 2001 from $2.6 million, or
11.6% of total revenues, in the three months ended June 30, 2000, resulting in
gross margins of 79.7% and 88.4% in each respective period. Cost of revenues
increased 84.5% to $9.4 million, or 22.3% of total revenues, in the six months
ended June 30, 2001 from $5.1 million, or 12.1% of total revenues, in the six
months ended June 30, 2000, resulting in gross margins of 77.7% and 87.9% in
each respective period. The increase in cost of revenues as a percent of sales
was primarily driven by the increased spending in customer support to be more
responsive to growing customer needs. We expect to decrease our cost of
revenues as a percentage of total revenues; however, this will depend on our
royalty costs and our growth, among other factors.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses consist
primarily of personnel costs associated with software development. Research and
development expenses increased 34.1% to $6.3 million, or 29.1% of total
revenues, in the three months ended June 30, 2001 from $4.7 million, or 20.5% of
total revenues, in the three months ended June 30, 2000. Research and
development expenses increased 33.9% to $12.7 million, or 30.2% of total
revenues, in the six months ended June 30, 2001 from $9.5 million, or 22.5% of
total revenues, in the six months ended June 30, 2000. The increase in absolute
dollars in research and development expenses was primarily due to increased
headcount in research and development from 118 to 149 people for the period from
June 30, 2000 to June 30, 2001. We intend to decrease our research and
development expenses as a percentage of total revenues; however, this depends on
our growth, among other factors.
SALES AND MARKETING EXPENSES. Sales and marketing expenses consist primarily
of salaries, commissions to sales personnel and agents, travel, tradeshow
participation, public relations, advertising and other promotional expenses.
Sales and marketing expenses increased 22.4% to $12.9 million, or 59.6% of total
revenues, in the three months ended June 30, 2001 from $10.5 million, or 46.2%
of total revenues, in the three months ended June 30, 2000. Sales and marketing
expenses increased 28.1% to $25.3 million, or 60.2% of total revenues, in the
six months ended June 30, 2001 from $19.8 million, or 46.9% of total revenues,
in the six months ended June 30, 2000. The increase in absolute dollars was
primarily the result of increased headcount to continue to build the direct
sales force along with additional marketing and promotional activities to
penetrate the market. Headcount in sales and marketing increased from 152 to 194
people from June 30, 2000 to June 30, 2001. We intend to decrease our sales and
marketing expenses as a percentage of total revenues; however, this depends on
our growth, among other factors.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of salaries for financial, administrative and management
personnel and related travel expenses, as well as legal, bad debt and other
accounting expenses. General and administrative expenses increased 31.7% to $2.2
million, or 10.4% of total revenues, in the three months ended June 30, 2001
from $1.7 million, or 7.5% of total revenues, in the three months ended June 30,
2000. General and administrative expenses increased 53.6% to $4.8 million, or
11.4% of total revenues, in the six months ended June 30, 2001 from $3.1
million, or 7.4% of total revenues, in the six months ended June 30, 2000. The
increase in absolute dollars year over year is associated with an increase of
costs in general support areas, such as human resources, finance and legal
services, which will enable the Company to scale its infrastructure in
anticipation of future growth. Headcount in general and administrative functions
increased from 24 to 42
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people from June 30, 2000 to June 30, 2001. We intend to decrease our general
and administrative expenses as a percentage of total revenues; however, this
depends on our growth, among other factors.
ACQUISITION-RELATED EXPENSES. Acquisition-related expenses of approximately
$4.3 million were incurred in the six months ending June 30, 2000 related to
accounting, legal and investment banking fees associated with the acquisition of
FirstSense Software, Inc. in February 2000.
OTHER INCOME. Other income consists of interest earned on funds available
for investment net of interest expense in connection with the financing of
capital equipment and interest expense paid by FirstSense on an outstanding term
loan obtained by FirstSense prior to the acquisition by Concord. The Company had
net other income of $797,000 for the three months ended June 30, 2001 and net
other income of $795,000 for the three months ended June 30, 2000. The Company
had net other income of $1.5 million for the six months ended June 30, 2001 and
net other income of $1.6 million for the six months ended June 30, 2000.
EXTRAORDINARY ITEMS. The Company recognized an extraordinary loss of
$216,000 (net of the tax benefit of $72,000) related to the early extinguishment
of certain debt that the Company assumed as part of the FirstSense acquisition.
BENEFIT FROM INCOME TAXES. The Company did not record any income tax benefit
in the six months ended June 30, 2001 versus an income tax expense of $487,000
in the six months ended June 30, 2000. The Company did not record such a benefit
in 2001 based on its estimate of its year-end tax position.
LIQUIDITY AND CAPITAL RESOURCES
The Company financed its operations, prior to its initial public offering,
primarily through the private sales of equity securities and a credit line for
equipment purchases. On October 24, 1997, the Company completed its initial
public offering yielding the Company net proceeds of approximately $34.7
million. The Company had working capital of $47.4 million at June 30, 2001.
Net cash provided by operating activities was $2.0 million and $2.5 million
for the six months ended June 30, 2001 and 2000, respectively. Cash, cash
equivalents and marketable securities were $64.4 million and $59.4 million at
June 30, 2001 and 2000, respectively. Accounts receivable decreased $3.8 million
due to lower license revenue for the period ending June 30, 2001.
Investing activities have consisted of the acquisition of property and
equipment, most notably computer and networking equipment to support the growing
employee base and corporate infrastructure and also investments in marketable
securities. The Company manages its market risk on its investment securities by
selecting investment grade securities with the highest credit ratings of
relatively short duration that trade in highly liquid markets.
Financing activities consisted primarily of the issuance of common stock and
exercise of options during the six months ended June 30, 2001 and 2000 and from
the repayments of borrowings on a subordinated debt financing by FirstSense.
Pursuant to the Tax Reform Act of 1986, the utilization of net operating
loss carryforwards for tax purposes may be subject to an annual limitation if a
cumulative change of ownership of more than 50% occurs over a three-year period.
As a result of the Company's 1995 preferred stock financings, such a change in
ownership has occurred. As a result of this ownership change, the use of the net
operating loss (NOL) carryforwards is limited. The Company has determined that
its initial public offering did not cause another ownership change. In addition,
NOL carryforwards acquired as a result of the FirstSense acquisition are also
restricted as a result of a prior ownership change. The Company has deferred tax
assets of approximately $14.9 million composed primarily of net operating loss
carryforwards and research and development credits. The Company has partially
reserved for these deferred tax assets by recording a valuation allowance of
$11.4 million. The net tax asset is based on the Company's estimate of NOL
carryforwards it expects to use in the next two years; all other tax assets have
been fully reserved.
Pursuant to paragraphs 20 to 25 of SFAS No. 109, the Company considered both
positive and negative evidence in assessing the need for a valuation allowance.
The factors that weighed most heavily on the Company's decision to record a
valuation allowance were (i) the substantial restrictions on the use of certain
of its existing NOL carryforwards and (ii) the uncertainty of future
profitability.
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As a result of the Company's ownership change described above, the future
use of approximately $6.6 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. The FirstSense NOL carryforwards are
limited to $4.2 million per year. Pursuant to the provisions of SFAS No. 109,
the Company used all of its remaining unrestricted NOL and credit carryforwards
in computing the 1998 tax provision. As a part of restating its financial
statements to reflect the FirstSense acquisition, the Company determined that
approximately $3.0 million of valuation allowance previously recorded by
FirstSense prior to the acquisition was not necessary, given the Company's
estimates of future taxable income. Accordingly, pursuant to SFAS No. 109, the
Company recorded an asset and reduced its provision for income taxes in the
period in which such NOL carryforwards were generated by FirstSense. The Company
is also subject to rapid technological change, competition from substantially
larger competitors, a limited family of products and other related risks, as
more thoroughly described in the "Risk Factors" section beginning on page 13 and
in the "Risk factors" section of the Company's Form 10-K, for the fiscal year
ended December 31, 2000. The Company's dependence on a single product family in
an emerging market makes the prediction of future results difficult, if not
impossible, especially in the highly competitive software industry. As a result,
the Company found the evidence described above to be the most reliable objective
evidence available in determining that a valuation allowance against its tax
assets would be necessary.
The Company's net operating loss deferred tax asset includes approximately
$3.75 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.
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RISK FACTORS
References in these risk factors to "we," "our" the "Company" and "us"
refer to Concord Communications, Inc., a Massachusetts corporation. Any
investment in our common stock involves a high degree of risk. If any of the
following risks actually occur, our business, results of operations and
financial condition would likely suffer.
This document contains forward-looking statements. Any statements
contained herein that do not describe historical facts are forward-looking
statements. Concord makes such forward-looking statements under the provisions
of the "safe harbor" section of the Private Securities Litigation Reform Act of
1995. The forward-looking statements contained herein are based on current
expectations, but are subject to a number of risks and uncertainties. Concord'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.
OUR FUTURE OPERATING RESULTS ARE UNCERTAIN.
We changed our focus to network management software in 1991 and
commercially introduced our first Network Health(R) product in 1995. We acquired
Empire Technologies in October 1999 and FirstSense Software in February 2000,
bringing us into the broader performance, availability and fault management
market. Accordingly, we have a relatively limited operating history in this
broader market upon which you can evaluate our business and prospects can be
based. We incurred significant net losses in each of the five fiscal years prior
to earning a small profit in 1997, and remaining profitable in 1998, 1999 and
2000. As of June 30, 2001, we had accumulated net losses of approximately $32.3
million. Our limited operating history makes the prediction of future results of
operations difficult or impossible. Our prospects must be considered in light of
the risks, costs and difficulties frequently encountered by emerging companies,
particularly companies in the competitive software industry.
WE CANNOT ENSURE THAT OUR REVENUES WILL GROW OR THAT WE WILL BE PROFITABLE.
Although we have achieved revenue growth and profitability for the
fiscal years ended 2000, 1999, 1998 and 1997, we cannot ensure that we can
generate revenue growth on a quarterly or annual basis, or that we can achieve
or sustain any revenue growth. In addition, we have increased, and may increase
in the future, our operating expenses in order to:
- fund higher levels of research and development;
- increase our sales and marketing efforts;
- develop new distribution channels;
- broaden our customer support capabilities; and
- expand our administrative resources in anticipation of future growth.
To the extent that increases in our expenses precede or are not
followed by increased revenue, our profitability will continue to suffer. Our
revenue must grow substantially in order for us to become profitable on a
quarterly or annual basis. In addition, in view of the rapidly evolving nature
of our business and markets, our recent acquisitions and our limited operating
history in our current market, we believe that one should not rely on
period-to-period comparisons of our financial results as an indication of our
future performance. In light of our strong performance in 1998, we used all of
our remaining unrestricted tax net operating loss and credit carryforwards in
1998. Accordingly, we recorded a tax benefit of $986,000 during 1998, and a tax
provision of $4.3 million during 1999 and $375,000 for 2000. The continuing
restrictions on our future use of our net operating loss carryforwards will
severely limit the benefit, if any, we will attribute to this asset.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE.
We are likely to experience significant fluctuations in our quarterly
operating results caused by many factors, including, but not limited to:
- changes in the demand for our products by customers or group of
customers;
- the timing, composition and size of orders from our customers,
including the tendency for significant bookings to occur in the last
month of each fiscal quarter;
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- our success in integrating products from acquisitions to our current
product line;
- our customers' spending patterns and budgetary resources for
performance management software solutions;
- the success of our new customer generation activities;
- introductions or enhancements of products, or delays in the
introductions or enhancements of products, by us or our competitors;
- changes in our pricing policies or those of our competitors;
- changes in the distribution channels through which products are sold;
- our success in anticipating and effectively adapting to developing
markets and rapidly changing technologies;
- changes in networking or communications technologies;
- our success in attracting, retaining and motivating qualified
personnel;
- changes in the mix of products sold by us and our competitors;
- the publication of opinions about us and our products, or our
competitors and their products, by industry analysts or others; and
- changes in general economic conditions.
Though our services revenue has been increasing as a percentage of revenue,
we do not have a significant ongoing revenue stream that may mitigate quarterly
fluctuations in operating results as other software companies with a longer
history of operations. Increases in our revenues will also depend on our
successful implementation of our distribution strategy as we are trying to
expand our channels of distribution. Due to the buying patterns of certain of
our customers and also to our own sales incentive programs focused on annual
sales goals, revenues in our fourth quarter could be higher than revenues in our
first quarter of the following year. There also may be other factors, such as
seasonality and the timing of receipt and delivery of orders within a fiscal
quarter, that significantly affect our quarterly results, which are difficult to
predict given our limited operating history.
Our quarterly sales and operating results depend generally on:
- the volume and timing of orders within the quarter;
- the tendency of sales to occur late in fiscal quarters; and
- our fulfillment of orders received within the quarter.
In addition, our expense levels are based in part on our expectations of
future orders and sales, which are extremely difficult to predict. A substantial
portion of our operating expenses are related to personnel, facilities and sales
and marketing programs. Accordingly, we may not be able to adjust our fixed
expenses quickly enough to address any significant shortfall in demand for our
products in relation to our expectations.
Due to all of the foregoing factors, we believe that our quarterly operating
results are likely to vary significantly in the future. Therefore, in some
future quarter our results of operations may fall below the expectations of
securities analysts and investors. In such event, the trading price of our
common stock would likely suffer.
THE MARKET FOR PERFORMANCE MANAGEMENT SOFTWARE IS EMERGING.
The market for our products is in an early stage of development. Although
the rapid expansion and increasing complexity of computer networks, systems and
applications in recent years has increased the demand for performance management
software products, the awareness of and the need for such products is a recent
development. Because the market for these products is only beginning to develop,
it is difficult to assess:
- 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.
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The development of this market and our growth will depend significantly upon
the willingness of telecommunications carriers, ISPs, systems integrators and
outsourcers to integrate performance management software into their product and
service offerings. The market for performance management software may not grow
or we may fail to assess properly and address the needs of this market.
OUR SUCCESS IS DEPENDENT UPON SALES TO TELECOMMUNICATIONS CARRIERS.
We derive a significant portion of our revenues, and likely will continue
to, from the sales of our products to telecommunications carriers. The domestic
telecommunications market has suffered from a turbulent economy during 2000 and
early 2001, and Concord has been negatively affected by the downturn in capital
spending within this market. Our future performance depends upon
telecommunications carriers' increased incorporation of our products and
services as part of their package of product and service offerings to end users.
Our products may fail to perform favorably in and become an accepted component
of the telecommunications carriers' product and service offerings. The volume of
sales of our products and services to telecommunications carriers may increase
slower than we expect or may decrease.
MARKET ACCEPTANCE OF OUR EHEALTH(TM) PRODUCT FAMILY IS CRITICAL TO OUR SUCCESS.
We currently derive substantially all of our product revenues from our
eHealth(TM) product family, and we expect that revenues from these products will
continue to account for substantially all of our product revenues for the
foreseeable future. Broad market acceptance of these products is critical to our
future success. We cannot ensure that market acceptance of our eHealth(TM)
product will increase or even remain at current levels. Factors that may affect
the market acceptance of our products include:
- the availability and price of competing products and technologies; and
- the success of our sales efforts and those of our marketing partners.
Moreover, if demand for performance management software products increases,
we anticipate that our competitors will introduce additional competitive
products and new competitors could enter our market and offer alternative
products. Product introductions by our competitors may also reduce future market
acceptance of our products.
OUR INDUSTRY IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE. OUR SUCCESS DEPENDS UPON
MAINTENANCE OF STANDARD PROTOCOLS.
The software industry is characterized by:
- rapid technological change;
- frequent introductions of new products;
- changes in customer demands; and
- evolving industry standards.
The introduction of products embodying new technologies and the emergence of
new industry standards can render existing products obsolete and unmarketable.
Our Network Health(R) products' analysis and reporting, as well as the quality
of its reports, depends upon its utilization of the industry-standard Simple
Network Management Protocol (SNMP) and the data resident in conventional
Management Information Bases (MIBs). Any change in these industry standards, the
development of vendor-specific proprietary MIB technology, or the emergence of
new network technologies could affect the compatibility of our Network Health(R)
products with these devices which, in turn, could affect its analysis and
generation of comprehensive reports or the quality of the reports. Furthermore,
although our products currently run on industry-standard UNIX operating systems
and Windows NT, any significant change in industry-standard operating systems
could affect the demand for, or the pricing of, our products.
WE MUST INTRODUCE PRODUCT ENHANCEMENTS AND NEW PRODUCTS ON A TIMELY BASIS.
Because of rapid technological change in the software industry and potential
changes in the performance management software market and industry standards,
the life cycle of versions of our eHealth(TM) products is difficult to estimate.
We cannot ensure that:
- we will successfully develop and market enhancements to our eHealth(TM)
products or successfully develop new products that respond to technological
changes, evolving industry standards or customer requirements;
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- we will not experience difficulties that could delay or prevent the
successful development, introduction and sale of such enhancements or new
products; or
- that such enhancements or new products will adequately address the
requirements of the marketplace and achieve any significant degree of
market acceptance.
OUR ACQUISITIONS MAY NEGATIVELY IMPACT OUR RESULTS OF OPERATIONS.
In October 1999, we acquired Empire Technologies, Inc. Empire is a provider
of solutions for proactive self-management of UNIX, Linux and Windows NT
systems, as well as mission-critical applications. In February 2000, we acquired
FirstSense Software, Inc. FirstSense is a provider of application response
management solutions. Because these acquisitions will be recorded as
"poolings-of-interests" for accounting and financial reporting purposes, we
recorded the expenses of these acquisitions, which are substantial, in the
period in which each acquisition occurred.
INTEGRATING OUR ACQUIRED PRODUCTS AND SERVICES MAY BE DIFFICULT.
The anticipated benefits of our acquisitions may not be achieved unless,
among other things, our operations, products, services and personnel are
successfully combined with those of our acquired companies in a timely and
efficient manner. The diversion of our attention, and any difficulties
encountered in our transition processes, could harm the combined enterprise. We
cannot ensure that we will successfully integrate our acquired companies,
because, among other things:
- the products and services offered by us and our acquired companies are
highly complex and have been developed independently; and
- integration of our product lines with those of our acquired companies will
require coordination of separate development and engineering teams from
each company.
If the anticipated benefits of our acquisitions are not achieved or are not
achieved in a timely fashion, then our acquisitions could harm our operating
results for a significant period of time that cannot now be determined.
THE MARKET FOR OUR PRODUCTS IS INTENSELY COMPETITIVE.
The market for our products is new, intensely competitive, rapidly evolving
and subject to technological change. Our current and future competitors include:
- remote monitoring (RMON) probe vendors;
- element management software vendors;
- systems management software vendors;
- other performance analysis and reporting vendors;
- companies offering network performance reporting services;
- large network management platform vendors which may bundle their products
with other hardware and software in a manner that may discourage users from
purchasing our products; and
- developers of network element management solutions.
We expect competition to persist, increase and intensify in the future with
possible price competition developing in our markets. Many of our current and
potential competitors have longer operating histories and significantly greater
financial, technical and marketing resources and name recognition than us. We do
not believe our market will support a large number of competitors and their
products. In the past, a number of software markets have become dominated by one
or a small number of suppliers, and a small number of suppliers or even a single
supplier may dominate our market. If we do not provide products that achieve
success in our market in the short term, we could suffer an insurmountable loss
in market share and brand name acceptance. We cannot ensure that we will compete
effectively with current and future competitors.
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OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS MAY HARM OUR COMPETITIVE
POSITION IN THE NETWORK MANAGEMENT SOFTWARE MARKET.
Our success depends significantly upon our proprietary technology. We rely
on a combination of patent, copyright, trademark and trade secret laws,
non-disclosure agreements and other contractual provisions to establish,
maintain and protect our proprietary rights. These means afford only limited
protection. We have ten issued U.S. patents, seven pending U.S. patent
applications, and various foreign counterparts. We cannot ensure that patents
will issue from our pending applications or from any future applications or
that, if issued, any claims allowed will be sufficiently broad to protect our
technology. In addition, we cannot ensure that any patents that have been or may
be issued will not be challenged, invalidated or circumvented, or that any
rights granted thereunder would protect our proprietary rights. Failure of any
patents to protect our technology may make it easier for our competitors to
offer equivalent or superior technology. We have registered or applied for
registration for certain trademarks, and will continue to evaluate the
registration of additional trademarks as appropriate. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy aspects
of our products or services or to obtain and use information that we regard as
proprietary. Third parties may also independently develop similar technology
without breach of our proprietary rights. In addition, the laws of some foreign
countries do not protect proprietary rights to as great an extent as do the laws
of the United States. In addition, many of our products are licensed under
shrinkwrap license agreements that are not signed by licensees. The law
governing the enforceability of shrinkwrap license agreement is not settled in
most jurisdictions. There can be no guarantee that we would achieve success in
enforcing one or more shrinkwrap license agreements if we sought to do so in a
court of law.
WE LICENSE CERTAIN TECHNOLOGIES FROM THIRD PARTIES.
We license from third parties, generally on a non-exclusive basis, certain
technologies used in our products. The termination of any such licenses, or the
failure of the third-party licensors to maintain adequately or update their
products, could result in delay in our shipment of certain of our products while
we seek to implement technology offered by alternative sources, and any required
replacement licenses could prove costly. While it may be necessary or desirable
in the future to obtain other licenses relating to one or more of our products
or relating to current or future technologies, we cannot ensure that we will be
successful in doing so on commercially reasonable terms or at all.
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS WOULD HARM OUR BUSINESS.
Although we do not believe that we are infringing the intellectual property
rights of others, claims of infringement are becoming increasingly common as the
software industry develops and legal protections, including patents, are applied
to software products. Litigation may be necessary to protect our proprietary
technology, and third parties may assert infringement claims against us with
respect to their proprietary rights. Any claims or litigation can be
time-consuming and expensive regardless of their merit. Infringement claims
against us can cause product release delays, require us to redesign our products
or require us to enter into royalty or license agreements, which agreements may
not be available on terms acceptable to us or at all.
PRODUCT DEFECTS COULD RESULT IN LOSS OR DELAY IN MARKET ACCEPTANCE OF OUR
PRODUCTS.
As a result of their complexity, software products may contain undetected
errors or failures when first introduced or as new versions are released. We
cannot ensure that, despite testing by us and testing and use by current and
potential customers, errors will not be found in new products we begin of
commercial shipments or, if discovered, that we will successfully correct such
errors in a timely manner or at all. The occurrence of errors and failures in
our products could result in loss of or delay in market acceptance of our
products, and alleviating such errors and failures could require significant
expenditure of capital and other resources by us.
WE MAY NOT HAVE SUFFICIENT PROTECTION AGAINST PRODUCT LIABILITY CLAIMS.
Since our products are used by our customers to predict future network,
system and application problems and avoid failures of the network to support
critical business functions, design defects, software errors, misuse of our
products, incorrect data from network elements or other potential problems
within or out of our control that may arise from the use of our products could
result in financial or other damages to our customers. We do not maintain
product liability insurance. Although our license agreements with our customers
typically contain provisions designed to limit our exposure to potential claims
as well as any liabilities arising from such claims, such provisions may not
effectively protect us against such claims and the liability and costs
associated therewith. We provide warranties for our products for a period of
time (currently three months) after purchase. Our license agreements do not
permit product returns by the customer, and product returns for fiscal 2000,
1999 and 1998 represented less than 1.0% of total revenues during each of such
periods. We cannot ensure that product returns will not increase as a percentage
of total revenues in future periods.
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WE RELY ON STRATEGIC PARTNERS AND OTHER EVOLVING DISTRIBUTION CHANNELS.
Our distribution strategy is to develop multiple distribution channels,
including sales through:
- strategic marketing partners, such as Cisco Systems;
- value added resellers, such as Empowered Networks;
- telecommunications carriers, such as MCI WorldCom;
- OEMs, such as Network Associates Inc.; and
- independent software vendors and international distributors.
We have developed a number of these relationships and intend to continue to
develop new "channel partner" relationships. Our success will depend in large
part on our development of these additional distribution relationships and on
the performance and success of these third parties, particularly
telecommunications carriers and other network service providers. We have
recently established many of our channel partner relationships. Accordingly, we
cannot predict the extent to which our channel partners will be successful in
marketing our products. We generally expect that our agreements with our channel
partners may be terminated by either party without cause. None of our channel
partners are required to purchase minimum quantities of our products and none of
these agreements contain exclusive distribution arrangements. We may:
- fail to attract important and effective channel partners;
- fail to penetrate the market segments of our channel partners; or
- lose any of our channel partners, as a result of competitive products
offered by other companies, products developed internally by these
channel partners or otherwise.
WE MAY FAIL TO MANAGE SUCCESSFULLY OUR GROWTH.
We have experienced significant growth in our sales and operations and in
the complexity of our products and product distribution channels. We have
increased and are continuing to increase the size of our sales force and
coverage territories. Furthermore, we have established and are continuing to
establish additional distribution channels through third party relationships.
Our growth, coupled with the rapid evolution of our markets, has placed, and is
likely to continue to place, significant strains on our administrative,
operational and financial resources and increase demands on our internal
systems, procedures and controls.
OUR SUCCESS DEPENDS ON OUR RETENTION OF KEY PERSONNEL.
Our performance depends substantially on the performance of our key
technical and senior management personnel, none of whom is bound by an
employment agreement. We may lose the services of any of such persons. We do not
maintain key person life insurance policies on any of our employees. Our success
depends on our continuing ability to identify, hire, train, motivate and retain
highly qualified management, technical, and sales and marketing personnel,
including recently hired officers and other employees. We experience intense
competition for such personnel. We cannot ensure that we will successfully
attract, assimilate or retain highly qualified technical, managerial or sales
and marketing personnel in the future.
OUR FAILURE TO EXPAND INTO INTERNATIONAL MARKETS COULD HARM OUR BUSINESS.
We intend to continue to expand our operations outside of the United States
and enter additional international markets, primarily through the establishment
of additional reseller arrangements. We expect to commit additional time and
development resources to customizing our products and services for selected
international markets and to developing international sales and support
channels. We cannot ensure that such efforts will be successful.
We face certain difficulties and risks inherent in doing business
internationally, including, but not limited to:
- costs of customizing products and services for international markets;
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- dependence on independent resellers;
- multiple and conflicting regulations;
- exchange controls;
- longer payment cycles;
- unexpected changes in regulatory requirements;
- import and export restrictions and tariffs;
- difficulties in staffing and managing international operations;
- greater difficulty or delay in accounts receivable collection;
- potentially adverse tax consequences;
- the burden of complying with a variety of laws outside the United
States;
- the impact of possible recessionary environments in economies outside
the United States; and
- political and economic instability.
Our successful expansion into certain countries will require additional
modification of our products, particularly national language support. Our
current export sales are denominated in United States dollars and we currently
expect to largely continue this practice as we expand internationally. To the
extent that international sales continue to be denominated in U.S. dollars, an
increase in the value of the United States dollar relative to other currencies
could make our products and services more expensive and, therefore, potentially
less competitive in international markets. To the extent that future
international sales are denominated in foreign currency, our operating results
will be subject to risks associated with foreign currency fluctuation. We would
consider entering into forward exchange contracts or otherwise engaging in
hedging activities. To date, as all export sales are denominated in U.S.
dollars, we have not entered into any such contracts or engaged in any such
activities. As we increase our international sales, seasonal fluctuations
resulting from lower sales that typically occur during the summer months in
Europe and other parts of the world may affect our total revenues.
OUR COMMON STOCK PRICE COULD EXPERIENCE SIGNIFICANT VOLATILITY.
We completed an initial public offering of our common stock during October
1997. The market price of our common stock may be highly volatile and could be
subject to wide fluctuations in response to:
- variations in results of operations;
- announcements of technological innovations or new products by us or our
competitors;
- changes in financial estimates by securities analysts; or
- other events or factors.
In addition, the financial markets have experienced significant price and
volume fluctuations that have particularly affected the market prices of equity
securities of many high technology companies and that often have been unrelated
to the operating performance of such companies or have resulted from the failure
of the operating results of such companies to meet market expectations in a
particular quarter. Broad market fluctuations or any failure of our operating
results in a particular quarter to meet market expectations may adversely affect
the market price of our common stock. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been instituted against such a company. Such
litigation could result in substantial costs and a diversion of our attention
and resources.
WE MAY NEED FUTURE CAPITAL FUNDING.
We plan to continue to expend substantial funds on the continued
development, sales and marketing of the eHealth(TM) product family. We cannot
ensure that our existing capital resources, the proceeds from our initial public
offering during October 1997 and any funds that may be generated from future
operations together will be sufficient to finance our future operations or that
other
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sources of funding will be available on terms acceptable to us, if at all. In
addition, future sales of substantial amounts of our securities in the public
market could adversely affect prevailing market prices and could impair our
future ability to raise capital through the sale of our securities.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVE FINANCIAL INSTRUMENTS, OTHER FINANCIAL INSTRUMENTS AND DERIVATIVE
COMMODITY INSTRUMENTS. The Company does not invest in derivative financial
instruments, other financial instruments or derivative commodity instruments for
which fair value disclosure would be required under SFAS No. 107. All of the
Company's investments are in investment grade securities with high credit
ratings of relatively short duration that trade in highly liquid markets and are
carried at fair value on the Company's books. Accordingly, the Company has no
quantitative information concerning the market risk of participating in such
investments.
PRIMARY MARKET RISK EXPOSURES. The Company's primary market risk exposure is
in the area of interest rate risk. The Company's investment portfolio of cash
equivalents and marketable securities 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.
The Company's current export sales are denominated in United States dollars.
To the extent that international sales continue to be denominated in United
States dollars, an increase in the value of the United States dollar relative to
other currencies could make the Company's products and services more expensive
and, therefore, potentially less competitive in international markets.
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CONCORD COMMUNICATIONS, INC.
FORM 10-Q, JUNE 30, 2001
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any litigation that it believes could have a
material adverse effect on the business, results of operations and financial
condition of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Issuance of Securities
On February 4, 2000, the Company completed a merger with FirstSense
Software, Inc. The Company has reserved for issuance in connection with the
merger, 1,940,000 shares of Concord Common Stock. The Company issued the shares
in a private placement transaction pursuant to Section 4(2) under the Securities
Act of 1933. The merger was accounted for as a pooling of interests. The Company
has filed a Form S-3 Registration Statement to cover the resale of the
securities issued in the merger.
(b) 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 shareholders 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
shares of Common stock in the IPO to the public was $40,600,000 (exclusive of
the Underwriters' Option), with proceeds to the Company and selling
shareholders, after deduction of the underwriting discount, of $29,946,000
(before deducting offering expenses payable by the Company) and $7,812,000
respectively. The aggregate offering price of the Underwriters' Option exercised
was $6,090,000, with proceeds to the Company, after deduction of the
underwriting discount, of $5,663,700 (before deducting offering expenses payable
by the Company). The aggregate amount of expenses incurred by the Company in
connection with the issuance and distribution of the shares of Common Stock
offered and sold in the IPO were approximately $3.6 million, including $2.7
million in underwriting discounts and commissions and $950,000 in other offering
expenses. The net proceeds to the Company from the IPO, after deducting
underwriting discounts and commissions and other offering expenses were
approximately $34.7 million. To date, the Company has not utilized any of the
net proceeds from the IPO. The Company has invested all such net proceeds
primarily in US treasury obligations and other interest bearing investment grade
securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
22
23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits listed in the accompanying Exhibit Index on page 25 and page 26
are filed or incorporated by reference as part of this Report.
23
24
CONCORD COMMUNICATIONS, INC.
FORM 10-Q, JUNE 30, 2001
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Concord Communications, Inc.
/s/ Melissa H. Cruz
---------------------------------------
Date: August 6, 2001 Name: Melissa H. Cruz
Title: Executive Vice President of
Business Services and Chief
Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
24
25
CONCORD COMMUNICATIONS, INC.
FORM 10-Q, JUNE 30, 2001
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION SEC DOCUMENT REFERENCE
------- ----------- ----------------------
3.01 Restated Articles of Organization of the Company Exhibit No. 3.01 on Form 10-K, for the period ended
December 31, 1997
3.02 Restated By-laws of the Company Exhibit No. 3.02 on Form 10-K, for the period ended
December 31, 1998
10.01 Working Capital Loan Agreement between the Company
and Silicon Valley Bank dated April 3, 1997 Exhibit No. 10.01 to Registration Statement on Form S-1
(No. 333-33227)
10.02 Revolving Promissory Note made by the Company in
favor of Silicon Valley Bank Exhibit No. 10.02 to Registration Statement on Form S-1
(No. 333-33227)
10.03 Equipment Line of Credit Letter Agreement between the Exhibit No. 10.03 to Registration Statement on Form S-1
Company and Fleet Bank dated as of June 9, 1997 (No. 333-33227)
10.04 1995 Stock Plan of the Company Exhibit No. 10.04 to Registration Statement on Form S-1
(No. 333-33227)
10.05 1997 Stock Plan of the Company Exhibit No. 10.01 on Form 10-Q, for the period ended June
30, 1998
10.06 1997 Stock Plan of the Company, as amended on March Exhibit No. 10.06 on Form 10-K, for the period ended
12, 1998, March 1, 1999, May 15, 1999 and March 8, December 31, 2000
2000
10.07 1997 Employee Stock Purchase Plan of the Company Exhibit No. 10.06 to Registration Statement on Form S-1
(No. 333-33227)
10.08 1997 Non-Employee Director Stock Option Plan of the Exhibit No. 10.08 on Form 10-K, for the period ended
Company as amended on March 8, 2000 December 31, 2000
10.09 The Profit Sharing/401(K) Plan of the Company Exhibit No. 10.08 to Registration Statement on Form S-1
(No. 333-33227)
10.10 Lease Agreement between the Company and John Hancock Exhibit No. 10.09 to Registration Statement on Form S-1
Mutual Life Insurance Company dated March 17, 1994, (No. 333-33227)
as amended on March 25,1997
10.11 First Amendment to Lease Agreement between the
Company and John Hancock Mutual Life Insurance Exhibit No. 10.10 to Registration Statement on Form S-1
Company dated March 25, 1997 (No. 333-33227)
10.12 Form of Indemnification Agreement for directors and
officers of the Company Exhibit No. 10.11 to Registration Statement on Form S-1
(No. 333-33227)
10.13 Restated Common Stock Registration Rights Agreement
between the Company and certain investors dated Exhibit No. 10.12 to Registration Statement on Form S-1
August 7, 1986 (No. 333-33227)
10.14 Amended and Restated Registration Rights Agreement
between the Company and certain investors dated Exhibit No. 10.13 to Registration Statement on Form S-1
December 28, 1995 (No. 333-33227)
10.15 Management Change in Control Agreement between the
Company and John A. Blaeser dated as of August 7, 1997 Exhibit No. 10.14 to Registration Statement on Form S-1
(No. 333-33227)
10.16 Management Change in Control Agreement between the
Company and Kevin J. Conklin dated as of July 23, 1997 Exhibit No. 10.15 to Registration Statement on Form S-1
(No. 333-33227)
10.17 Management Change in Control Agreement between the
Company and Ferdinand Engel dated as of July 23, 1997 Exhibit No. 10.16 to Registration Statement on Form S-1
(No. 333-33227)
10.18 Management Change in Control Agreement between the Exhibit No. 10.17 to Registration Statement on Form S-1
Company and Gary E. Haroian dated as of July 23, 1997 (No. 333-33227)
10.19 Management Change in Control Agreement between the Exhibit No. 10.18 on Form 10-Q filed on August 14, 2000
Company and Melissa H. Cruz dated as of June 12, 2000
10.20 Management Change in Control Agreement between the Exhibit No. 10.18 to Registration Statement on Form S-1
Company and Daniel D. Phillips, Jr. dated as of July (No. 333-33227)
23, 1997
10.21 Stock Option Agreement dated January 1, 1996 between Exhibit No. 10.19 to Registration Statement on Form S-1
the Company and John A. Blaeser (No. 333-33227)
10.22 Stock Option Agreement dated January 1, 1996 between Exhibit No. 10.20 to Registration Statement on Form S-1
the Company and John A. Blaeser (No. 333-33227)
10.23 Letter Agreement between the Company and Silicon Exhibit No. 10.21 to Registration Statement on Form S-1
Valley Bank dated March 25, 1996 together with the (No. 333-33227)
Loan Modification Agreement dated November 14, 1996
10.24 Form of Shrink-Wrap License Exhibit No. 10.22 to Registration Statement on Form S-1
(No. 333-33227)
10.25 Agreement and Plan of Reorganization dated as of Exhibit No. 2.1 on Form 8-K filed on November 12, 1999
October 19, 1999 by and among Concord Communications,
Inc., E Acquisition Corp., Empire Technologies, Inc.
and the stockholders of Empire Technologies, Inc.
10.26 Agreement and Plan of Reorganization dated as of Exhibit No. 2.1 on Form 8-K filed on February 10, 2000
January 20, 2000 by and among Concord Communications,
Inc., F Acquisition Corp., and FirstSense Software,
Inc.
10.27 Registration Rights Agreement dated as of February 4, Exhibit No. 99.1 on Form 8-K filed on February 10, 2000
2000 by and among Concord Communications, Inc. and
Timothy Barrows, as Securityholder Agent
10.28 2000 Non-Executive Employee Equity Incentive Plan Exhibit 10.28 on Form 10-K, for the period ended December
31, 2000
25
26
CONCORD COMMUNICATIONS, INC.
FORM 10-Q, MARCH 31, 2001
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION SEC DOCUMENT REFERENCE
------- ----------- ----------------------
Management Change in Control Agreement between the Exhibit No. 10.29 on Form 10-Q filed on May 9, 2001
10.29 Company and Ellen Kokos dated as of February 2, 2001
*10.30 Management Change in Control Agreement between the Exhibit No. 10.30 to Current Report on Form 10-Q
Company and John F. Hamilton dated as of April 16,
2001
* filed herewith
26