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, 2002.
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
--- ---
17,106,158 SHARES OF THE REGISTRANT'S COMMON STOCK, $0.01 PAR VALUE, WERE
OUTSTANDING AS OF AUGUST 7, 2002.
THIS DOCUMENT CONTAINS 41 PAGES.
THE EXHIBIT INDEX IS ON PAGE 32.
CONCORD COMMUNICATIONS, INC.
FORM 10-Q, JUNE 30, 2002
CONTENTS
PAGE
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets:
June 30, 2002 and December 31, 2001 3
Condensed Consolidated Statements of Operations:
Three and six months ended June 30, 2002 and June 30, 2001 4
Condensed Consolidated Statements of Cash Flows:
Six months ended June 30, 2002 and June 30, 2001 5
Notes to Condensed Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-25
Item 3. Quantitative and Qualitative Disclosures about Market Risk 26
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes in Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURE 29
CERTIFICATIONS 30-31
EXHIBIT INDEX 32
2
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONCORD COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2002 2001
------------- -------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 12,840,071 $ 9,010,811
Marketable securities 59,627,403 59,333,068
Restricted cash 1,013,576 --
Accounts receivable, net of allowance of $1,438,740 and $1,409,835
at June 30, 2002 and December 31, 2001, respectively 16,067,969 16,537,131
Prepaid expenses and other current assets 3,015,474 3,057,797
------------- -------------
Total current assets 92,564,493 87,938,807
------------- -------------
Equipment and improvements, at cost:
Equipment 21,402,432 19,636,704
Leasehold improvements 6,017,789 5,956,710
------------- -------------
27,420,221 25,593,414
Less-- accumulated depreciation and amortization 17,800,046 14,798,688
------------- -------------
9,620,175 10,794,726
------------- -------------
Deferred tax asset 3,500,000 3,500,000
Other long-term assets 288,858 246,655
------------- -------------
3,788,858 3,746,655
------------- -------------
Total assets $ 105,973,526 $ 102,480,188
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 3,170,897 $ 3,553,417
Accrued expenses 13,012,297 13,278,825
Deferred revenue 24,418,301 22,141,078
------------- -------------
Total current liabilities 40,601,495 38,973,320
------------- -------------
Stockholders' Equity:
Common stock, $0.01 par value:
Authorized-- 50,000,000 shares
Issued and outstanding-- 17,092,304 and 16,901,193 shares
at June 30, 2002 and December 31, 2001, respectively 170,923 169,012
Additional paid-in capital 97,980,898 96,365,287
Deferred compensation (116,630) (241,547)
Accumulated other comprehensive income 1,130,642 1,892,264
Accumulated deficit (33,793,802) (34,678,148)
------------- -------------
Total stockholders' equity 65,372,031 63,506,868
------------- -------------
Total liabilities and stockholders' equity $ 105,973,526 $ 102,480,188
============= =============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
CONCORD COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- -------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues:
License revenues $ 12,258,006 $ 13,481,341 $ 26,318,613 $ 26,552,175
Service revenues 10,693,176 8,132,413 20,869,781 15,492,911
------------ ------------ ------------ ------------
Total revenues 22,951,182 21,613,754 47,188,394 42,045,086
Cost of Revenues
Cost of license revenues 394,318 583,182 960,749 1,279,569
Cost of service revenues 3,721,300 3,812,255 7,539,958 8,077,295
------------ ------------ ------------ ------------
Total cost of revenues 4,115,618 4,395,437 8,500,707 9,356,864
------------ ------------ ------------ ------------
Gross profit 18,835,564 17,218,317 38,687,687 32,688,222
------------ ------------ ------------ ------------
Operating Expenses:
Research and development 5,445,192 6,280,825 11,186,659 12,685,696
Sales and marketing 11,890,066 12,886,783 24,024,619 25,306,029
General and administrative 1,772,095 2,244,952 3,826,795 4,791,711
Stock-based compensation 27,043 48,607 59,708 240,430
------------ ------------ ------------ ------------
Total operating expenses 19,134,396 21,461,167 39,097,781 43,023,866
------------ ------------ ------------ ------------
Operating loss (298,832) (4,242,850) (410,094) (10,335,644)
Other Income (Expense)
Interest income 802,864 861,174 1,578,906 1,660,765
Other expense (16,374) (43,913) (44,823) (49,916)
------------ ------------ ------------ ------------
Total other income, net 786,490 817,261 1,534,083 1,610,849
------------ ------------ ------------ ------------
Income (loss) before income taxes 487,658 (3,425,589) 1,123,989 (8,724,795)
Provision for income taxes 92,586 20,000 239,643 86,298
------------ ------------ ------------ ------------
Net income (loss) $ 395,072 $ (3,445,589) $ 884,346 $ (8,811,093)
============ ============ ============ ============
Net income (loss) per common and potential
common share:
Basic $ 0.02 $ (0.21) $ 0.05 $ (0.53)
============ ============ ============ ============
Diluted $ 0.02 $ (0.21) $ 0.05 $ (0.53)
============ ============ ============ ============
Weighted average common and potential
common shares outstanding:
Basic 17,017,410 16,672,323 16,974,305 16,616,432
============ ============ ============ ============
Diluted 17,861,027 16,672,323 17,969,848 16,616,432
============ ============ ============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
CONCORD COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
-------------------------------
JUNE 30, JUNE 30,
2002 2001
------------ ------------
Cash Flows from Operating Activities:
Net income (loss) $ 884,346 $ (8,811,093)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 3,001,358 3,026,726
Stock-based compensation 59,708 240,430
Changes in current assets and liabilities:
Accounts receivable 469,162 3,774,474
Prepaid expenses and other current assets 42,323 (419,966)
Accounts payable (382,520) (922,507)
Accrued expenses (1,020,288) 2,006,085
Deferred revenue 2,277,223 3,441,053
------------ ------------
Net cash provided by operating activities 5,331,312 2,335,202
------------ ------------
Cash Flows from Investing Activities:
Purchases of equipment and improvements (1,826,807) (2,601,672)
Change in other assets (42,203) (10,870)
Investments in marketable securities (2,592,258) (10,867,377)
Deposit of restricted cash (1,013,576) --
Proceeds from sales of marketable securities 2,290,061 7,770,679
------------ ------------
Net cash used in investing activities (3,184,783) (5,709,240)
------------ ------------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock 1,682,731 755,589
------------ ------------
Net cash provided by financing activities 1,682,731 755,589
------------ ------------
Net increase (decrease) in cash and cash equivalents 3,829,260 (2,618,449)
Cash and cash equivalents, beginning of period 9,010,811 10,725,265
------------ ------------
Cash and cash equivalents, end of period $ 12,840,071 $ 8,106,816
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid for taxes $ 129,557 $ 49,000
============ ============
Supplemental Disclosure of Noncash Transactions:
Reversal of deferred compensation related to forfeitures of
of stock options $ (65,209) $ (1,129,486)
============ ============
Retirement of fully depreciated assets $ -- $ 343,467
============ ============
Unrealized (loss) gain on available-for-sale securities $ (7,862) $ 654,673
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
CONCORD COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FORM 10-Q, JUNE 30, 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The accompanying condensed consolidated financial statements have been
presented by Concord Communications, Inc. (the "Company" or "Concord") unaudited
(except the balance sheet information as of December 31, 2001 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 of a normal recurring
nature, which management considers necessary for a fair presentation of the
Company's financial position as of June 30, 2002 and December 31, 2001, and the
Company's results of operations for the three and six months ended June 30, 2002
and 2001. 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 2001 Annual Report on Form 10-K
filed with the Securities and Exchange Commission in March 2002.
(b) Principles of Consolidation
The accompanying condensed consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All material
intercompany accounts and transactions have been eliminated in consolidation.
(c) 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 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 until
realized. The Company considers highly liquid investments, purchased with an
original maturity of 90 days or less, to be cash equivalents. Cash and cash
equivalents were $12,840,071 and $9,010,811 at June 30, 2002 and December 31,
2001, respectively, and consisted primarily of money market funds.
(d) Restricted Cash
Restricted cash totaling $1,013,576 at June 30, 2002 consists of money
market funds held in our name and custodied with a major financial institution.
Such funds are being used as collateral under a letter of credit arrangement
with a Company supplier.
(e) 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 or 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
6
software products, services and maintenance sold together, are allocated to each
element using the residual method in accordance with SOP 98-9. Under the
residual method, the fair value of the undelivered elements is deferred and
subsequently recognized when these elements are delivered. The Company has
established sufficient vendor specific objective evidence for professional
services, training, and maintenance and customer support services based on the
price charged when these elements are sold separately. Accordingly, software
license revenues are recognized under the residual method in arrangements in
which software is licensed with professional services, training, and maintenance
and customer support services.
Service revenues include professional services, training and maintenance
and customer support fees. Professional services are not essential to the
functionality of the other elements in an arrangement and are accounted for
separately. Service revenues are recognized as the services are performed.
Maintenance revenues, a component of service revenues, are derived from
customer support agreements generally entered into in connection with initial
software license sales and subsequent renewals. Maintenance and customer support
fees include the right to unspecified upgrades on a when-and-if-available basis
and ongoing technical support. Maintenance revenues are recognized ratably over
the term of the maintenance period. Payments for maintenance fees are generally
made in advance and are included in deferred revenue. As of June 30, 2002 and
December 31, 2001, deferred revenue includes approximately $19.4 million and
$17.1 million, respectively, of deferred maintenance revenues.
(f) 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, 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.
(g) Financial Instruments, Concentration of Credit Risk and Significant
Customers
The Company has estimated the fair value of financial instruments using
available market information and appropriate valuation methodologies. The
carrying values of cash, cash equivalents, restricted cash, marketable
securities, accounts receivable, and accounts payable approximate fair market
value due to the short-term nature of these financial instruments. Financial
instruments that potentially subject the Company to concentrations of credit
risk are principally cash, cash equivalents, restricted cash, marketable
securities and accounts receivable. The Company has no significant
off-balance-sheet or concentration of credit risk exposure such as foreign
exchange contracts, option contracts or other foreign hedging arrangements. The
Company maintains its cash, cash equivalents, restricted cash and marketable
securities with established financial institutions. Concentration of credit risk
with respect to accounts receivable is limited to certain customers to whom the
Company makes substantial sales. To reduce its credit risk, the Company
routinely assesses the financial strength of its customers. The Company
maintains an allowance for potential credit losses but historically has not
experienced any significant losses related to individual customers or groups of
customers in any particular industry or geographic area. No individual customer
or reseller accounted for more than 10% of revenues for the three and six months
ended June 30, 2002 or June 30, 2001. No one customer accounted for more than
10% of accounts receivable as of June 30, 2002. One customer accounted for 13.4%
of accounts receivable at December 31, 2001; a total of 7.2% of the receivables
from this customer was included in the Company's deferred revenue at December
31, 2001. As of June 30, 2002, this customer represented 4.2% of accounts
receivable.
(h) Reclassifications
Certain amounts in the prior period's financial statements have been
reclassified to conform to the current period's presentation.
2. BASIC AND DILUTED INCOME/LOSS PER COMMON SHARE
7
The Company computes earnings per share following the provisions of SFAS
No. 128, Earnings per Share. SFAS No. 128 establishes standards for computing
and presenting earnings per share and applies to entities with publicly held
common stock or potential common stock. Basic net income (loss) per share is
computed using the weighted-average number of common shares outstanding for a
period. Diluted net income (loss) per share is computed using the
weighted-average number of common and dilutive common-equivalent shares
outstanding for the period. Diluted net loss per share is the same as basic net
loss per share for the three and six months ended June 30, 2001, as the effects
of potential common stock are antidilutive. Dilutive common-equivalent shares
primarily consist of employee stock options. The dilutive effect of outstanding
stock options is computed using the treasury stock method. For the three and six
months ended June 30, 2002, employee stock options to purchase 2,131,725 and
2,017,582 shares, respectively, were outstanding but not included in the diluted
weighted-average share calculation as their effects would have been
antidilutive. For the three and six months ended 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 as a result of the Company's reported
loss for the periods.
Calculation 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,
2002 2001 2002 2001
----------- ------------ ----------- ------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ 395,072 $ (3,445,589) $ 884,346 $ (8,811,093)
=========== ============ =========== ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 17,017,410 16,672,323 16,974,346 16,616,432
POTENTIAL COMMON SHARES PURSUANT TO STOCK OPTIONS 843,617 -- 995,543 --
----------- ------------ ----------- ------------
DILUTED WEIGHTED AVERAGE SHARES 17,861,027 16,672,323 17,969,848 16,616,432
=========== ============ =========== ============
BASIC NET INCOME (LOSS) PER COMMON SHARE 0.02 (0.21) 0.05 (0.53)
=========== ============ =========== ============
DILUTED NET INCOME (LOSS) PER COMMON AND POTENTIAL COMMON SHARE 0.02 (0.21) 0.05 (0.53)
=========== ============ =========== ============
3. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the three and six months ended June 30,
2002 and 2001 is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2002 2001 2002 2001
-------- ----------- --------- -----------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $395,072 $(3,445,589) $ 884,346 $(8,811,093)
UNREALIZED GAIN (LOSS) ON MARKETABLE SECURITIES 590,046 (287,315) (7,862) 654,673
-------- ----------- --------- -----------
COMPREHENSIVE INCOME (LOSS) $985,118 $(3,732,904) $ 876,484 $(8,156,420)
======== =========== ========= ===========
4. 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 No. 131, is the
executive management committee which is comprised of the executive officers of
the Company.
8
The following table presents the approximate revenues by major geographical
regions:
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- ----------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2002 2001 2002 2001
----------- ------------ ------------ ------------
United States $14,660,000 $ 13,534,000 $ 29,356,000 $ 26,578,000
Europe 5,504,000 4,904,000 10,899,000 9,053,000
Rest of the World 2,787,000 3,176,000 6,933,000 6,414,000
----------- ------------ ------------ ------------
Total $22,787,000 $ 21,614,000 $ 47,188,000 $ 42,045,000
=========== ============ ============ ============
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: managed
service providers/ telecommunications carriers (MSP/TC) 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
revenues. 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 revenues by reportable segment:
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2002 2001 2002 2001
----------- ------------ ------------ ------------
MSP/TC $ 7,870,000 $ 10,480,000 $ 17,791,000 $ 18,931,000
Enterprise 15,081,000 11,134,000 29,397,000 23,114,000
----------- ------------ ------------ ------------
Total $22,951,000 $ 21,614,000 $ 47,188,000 $ 42,045,000
=========== ============ ============ ============
5. RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which supersedes SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
SFAS No. 144 further refines the requirements of SFAS No. 121, which required
that companies (1) recognize an impairment loss only if the carrying amount of a
long-lived asset is not recoverable based on its undiscounted future cash flows
and (2) measure an impairment loss as the difference between the carrying amount
and fair value of the asset. In addition, SFAS No. 144 provides guidance on
accounting and disclosure issues surrounding long-lived assets to be disposed of
by sale. The Company adopted SFAS No. 144 beginning on January 1, 2002. The
adoption did not have any impact on the Company's consolidated financial
position, results of operations or cash flows.
In November 2001, the Emerging Issues Task Force issued EITF 01-14 relating
to the accounting for reimbursements received for out-of-pocket expenses. In
accordance with EITF 01-14, reimbursements received for out-of-pocket expenses
incurred should be characterized as revenues in the statement of operations. The
Company has historically accounted for reimbursements received for out-of-pocket
expenses incurred as a reduction to cost of service revenues in the statement of
operations to offset the costs incurred. The Company adopted EITF 01-14 on
January 1, 2002, and comparative financial statements for prior periods are
reclassified to comply with the guidance in EITF 01-14. During the three and six
months ended June 30, 2002, reimbursed out-of-pocket expenses totaled $11,851
and $18,051, respectively. During the three and six months ended June 30, 2001,
reimbursed out-of-pocket expenses totaled $23,114 and $27,114. There was no
impact on the gross profit as a percentage of total revenues or gross margin for
the three and six month periods ended June 30, 2002 or 2001.
9
CONCORD COMMUNICATIONS, INC.
FORM 10-Q, JUNE 30, 2002
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Concord develops, markets and supports the eHealthTM Suite of scalable
information technology ("IT") infrastructure fault and performance management
software solutions. Concord's eHealthTM Suite integrates fault and performance
management of the systems, applications and networks that comprise today's IT
infrastructure. Concord's solutions optimize the performance and availability of
IT infrastructures on which enterprises, managed service providers and
telecommunication carriers depend for their day-to-day business and operational
success. Concord's software solutions monitor fault conditions throughout the
infrastructure in real time; test availability and responsiveness of critical
services; collect, consolidate, normalize and analyze a high volume of data from
the IT infrastructure; alert IT personnel to faults and potential outages,
maximize uptime of the IT infrastructure and automatically execute corrective
action to restore availability, if desired.
Concord does not provide forecasts of its future financial performance.
From time to time, however, the information provided by Concord or statements
made by our employees may contain forward-looking statements. In particular,
some statements contained in Concord's Form 10-Q for the quarterly period ended
June 30, 2002 are not historical statements including, but not limited to,
statements concerning the plan and objectives of management, increases in
revenues (domestically and internationally), increases in absolute dollars or
decreases as a percentage of revenues in sales and marketing, research and
development and general and administrative expenses (domestically and
internationally), Concord's ability to use deferred tax assets, Concord's
success in competing in international markets, Concord's expected future
profitability and Concord's expected liquidity and capital resources. This
document contains forward-looking statements. Any statements contained herein
that do not describe historical facts are forward-looking statements. 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. The facts
that could cause actual results to differ materially from current expectations
include the following: risks of intellectual property rights and litigation,
risks in technology development and commercialization, risks in product
development and market acceptance of and demand for the Company's products,
risks of downturns in economic conditions generally, and in the software,
networking and telecommunications industries specifically, risks associated with
competition and competitive pricing pressures, risks associated with
international sales, risks associated with the Company's recent acquisitions and
other risks detailed in this Form 10-Q under the heading "Factors that Could
Affect Future Results" and elsewhere in the Company's filings with the
Securities and Exchange Commission.
10
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data as percentages of the Company's total revenues:
UNAUDITED THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- ----------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2002 2001 2002 2001
-------- -------- --------- --------
Revenues:
License revenues 53.4% 62.4% 55.8% 63.2%
Service revenues 46.6% 37.6% 44.2% 36.8%
----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost of Revenues
Cost of license revenues 1.7% 2.7% 2.0% 3.0%
Cost of service revenues 16.2% 17.6% 16.0% 19.2%
----- ----- ----- -----
Total cost of revenues 17.9% 20.3% 18.0% 22.2%
----- ----- ----- -----
Gross profit 82.1% 79.7% 82.0% 77.8%
----- ----- ----- -----
Operating Expenses:
Research and development 23.7% 29.1% 23.7% 30.2%
Sales and marketing 51.8% 59.6% 50.9% 60.2%
General and administrative 7.7% 10.4% 8.1% 11.4%
Stock-based compensation 0.1% 0.2% 0.1% 0.6%
----- ----- ----- -----
Total operating expenses 83.4% 99.3% 82.9% 102.4%
----- ----- ----- -----
Loss from operations -1.3% -19.6% -0.9% -24.6%
Other income, net 3.4% 3.8% 3.3% 3.8%
----- ----- ----- -----
Income (loss) before taxes 2.1% -15.8% 2.4% -20.8%
Provision for income taxes 0.4% 0.1% 0.5% 0.2%
----- ----- ----- -----
Net income (loss) 1.7% -15.9% 1.9% -21.0%
----- ----- ----- -----
REVENUES. Concord'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 or 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, a component
of service 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.
TOTAL REVENUES. The Company's total revenues increased 6.2% to $23.0
million in the three months ended June 30, 2002 from $21.6 million in the three
months ended June 30, 2001. Total revenues increased 12.2% to $47.2 million in
the six months ended June 30, 2002 from $42.0 million in the six months ended
June 30, 2001.
LICENSE REVENUES. Concord's license revenues are derived from the licensing
of software products. License revenues decreased 9.1% to $12.3 million, or 53.4%
of total revenues, in the three months ended June 30, 2002 from $13.5 million,
or 62.4% of total revenues, in the three months ended June 30, 2001. License
revenues decreased .9% to $26.3 million, or 55.8% of total revenues, in the six
months ended June 30, 2002, from $26.6 million, or 63.2% of total revenues in
the six months ended June 30, 2001. The decrease in license revenues for the
three months and six months ended June 30, 2002 was due to the general slowdown
of the economy in the United States and abroad. The slowdown in the economy,
combined with the announcement by a large American
11
telecommunications firm that it had improperly accounted for some expenses, has
created uncertainties for some of our customers that has resulted in a decrease
in, postponement of, or cancellation of their IT infrastructure purchases. The
decrease in license revenues as a percent of total revenues was the result of a
significant increase in service revenues, consisting mainly of maintenance
revenues.
SERVICE REVENUES. Concord's service revenues consist of fees for
maintenance, training and professional services. Service revenues increased
31.5% to $10.7 million, or 46.6% of total revenues, in the three months ended
June 30, 2002 from $8.1 million, or 37.6% of total revenues, in the three months
ended June 30, 2001. Service revenues increased 34.7% to $20.9 million, or 44.2%
of total revenues, in the six months ended June 30, 2002 from $15.5 million, or
36.8% of total revenues, in the six months ended June 30, 2001. The increase in
service revenues for the three months and six months ended June 30, 2002 was
attributed to an increase of our customer base and the resulting demand for
services by these customers.
INTERNATIONAL REVENUES. Concord's international revenues increased 2.6% to
$8.3 million or 36.1% of total revenues for the three months ended June 30, 2002
from $8.1 million, or 37.4% of total revenues, for the three months ended June
30, 2001. International revenues increased 15.3% to $17.8 million or 37.8% of
total revenues for the six months ended June 30, 2002 from $15.5 million, or
36.8% of total revenues, for the six months ended June 30, 2001. International
revenues are primarily driven by customers based in Europe, as well as the
continued expansion of operations outside the United States.
SEGMENT REVENUES. Concord's reportable segments are determined by customer
type: managed service providers/telecommunications carriers ("MSP/TC") and
enterprise. Concord's MSP/TC revenues decreased 24.9% to $7.9 million, or 34.3%
of total revenues, for the three months ended June 30, 2002 from $10.5 million,
or 48.5% of total revenues, for the three months ended June 30, 2001. MSP/TC
revenues decreased 6.0% to $17.8 million, or 37.7% of total revenues, for the
six months ended June 30, 2002 from $18.9 million, or 45.0% of total revenues,
for the six months ended June 30, 2001. The decrease in MSP/TC revenues for the
three months and six months ended June 30, 2002 was due to the general slowdown
of the economy in the United States and abroad, particularly within the
telecommunications sector. The decrease in MSP/TC revenues as a percent of total
revenues was the result of a significant increase in enterprise revenues,
including both new and existing customers.
Concord's enterprise revenues increased 35.4% to $15.1 million, or 65.7% of
total revenues, for the three months ended June 30, 2002 from $11.1 million, or
51.5% of total revenues, for the three months ended June 30, 2001. Enterprise
revenues increased 27.2% to $29.4 million, or 62.3% of total revenues, for the
six months ended June 30, 2002 from $23.1 million, or 55.0% of total revenues,
for the six months ended June 30, 2001. The increase in enterprise revenues for
the three and six months ended June 30, 2002 was due to a significant increase
in new orders from both new and existing customers.
COST OF REVENUES. Cost of revenues includes expenses associated with
royalty costs, production, fulfillment and product documentation, along with
personnel costs associated with providing customer support in connection with
maintenance, training and professional service contracts. Royalty costs are
composed of third party software costs. Cost of revenues decreased 6.4% to $4.1
million, or 17.9% of total revenues, in the three months ended June 30, 2002
from $4.4 million, or 20.3% of total revenues, in the three months ended June
30, 2001, resulting in gross margins of 82.1% and 79.7% respectively. Cost of
revenues decreased 9.1% to $8.5 million, or 18.0% of total revenues, in the six
months ended June 30, 2002, from $9.4 million, or 22.3% of total revenues, in
the six months ended June 30, 2001. The decrease in cost of revenues as a
percent of total revenues was driven by increased efficiencies and better
management of expenses in the operations and customer support organizations. We
expect to maintain our cost of revenues as a percentage of total revenues;
however, this will depend upon our royalty costs and our revenue growth, among
other factors. Accordingly, there can be no assurance that we will be successful
in maintaining our cost of revenues as a percentage of total revenues.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consist primarily of personnel costs associated with software development.
Research and development expenses decreased 13.3% to $5.4 million, or 23.7% of
total revenues, in the three months ended June 30, 2002 from $6.3 million, or
29.1% of total revenues, in the three months ended June 30, 2001. Research and
development expenses decreased 11.8% to $11.2 million, or 23.7% of total
revenues, in the six months ended June 30, 2002 from $12.7 million, or 30.2% of
total revenues, in the six months ended June 30, 2001. The decrease in research
and development expenses was primarily due to a
12
decrease in headcount in research and development from 149 to 126 people for the
period from June 30, 2001 to June 30, 2002 as well as a reduction of
discretionary expenses for the three and six month periods ended June 30, 2002
compared to June 30, 2001. We intend to decrease our research and development
expenses as a percentage of total revenues. Our ability to decrease these
expenses as a percentage of revenue will depend upon our revenue growth, among
other factors. Accordingly, there can be no assurance that we will be successful
in decreasing our research and development expenses as a percentage of total
revenues.
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 decreased 7.7% to $11.9 million, or 51.8%
of total revenues, in the three months ended June 30, 2002 from $12.9 million,
or 59.6% of total revenues, in the three months ended June 30, 2001. Sales and
marketing expenses decreased 5.1% to $24.0 million, or 50.9% of total revenues,
in the six months ended June 30, 2002 from $25.3 million, or 60.2% of total
revenues, in the six months ended June 30, 2002. The decrease in sales and
marketing expenses was primarily the result of a reduction in sales bonuses and
commissions due to the reduction in license revenues in 2002 as well as a
reduction in headcount in sales and marketing from 194 to 183 people from June
30, 2001 to June 30, 2002. We intend to decrease our sales and marketing
expenses as a percentage of total revenues. Our ability to decrease these
expenses as a percentage of revenue will depend upon our revenue growth, among
other factors. Accordingly, there can be no assurance that we will be successful
in decreasing our expenses as a percentage of total revenues.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of salaries for financial, accounting, legal, administrative
and management personnel. General and administrative expenses decreased 21.1% to
$1.8 million, or 7.7% of total revenues, in the three months ended June 30, 2002
from $2.2 million, or 10.4% of total revenues, in the three months ended June
30, 2001. General and administrative expenses decreased 20.1% to $3.8 million,
or 8.1% of total revenues, in the six months ended June 30, 2002 from $4.8
million, or 11.4% of total revenues, in the six months ended June 30, 2001. The
decrease in general and administrative expenses is due to a decrease in
headcount from 42 to 31 people from June 30, 2001 to June 30, 2002 as well as a
reduction in discretionary expenses. We expect to decrease these expenses as a
percentage of total revenues, however, this will ultimately depend upon our
revenue growth, among other factors. Accordingly, there can be no assurance that
we will be successful in decreasing our expenses as a percentage of total
revenues.
STOCK-BASED COMPENSATION. Stock-based compensation relates to the issuance
of stock options with exercise prices below the deemed fair value of the
Company's common stock at the date of grant. Deferred stock-based compensation
resulted solely from the issuance of stock options to employees of FirstSense
Software, Inc. (FirstSense) in connection with the Company's acquisition of
FirstSense on February 4, 2000 and is amortized through charges to operations
over the vesting period of the options, which is generally four years.
Stock-based compensation was approximately $27,000 and $49,000 for the three
months ended June 30, 2002 and 2001, respectively, and was approximately $60,000
and $240,000 for the six months ended June 30, 2002 and 2001, respectively. The
Company recorded forfeitures of deferred stock based compensation of
approximately $30,000 and $57,000 for the three months ended June 30, 2002 and
2001, respectively, and approximately $65,000 and $1.1 million for the six
months ended June 30, 2002 and 2001, respectively, related to forfeitures of
stock options by terminated employees.
OTHER INCOME. Other income consists of interest earned on funds available
for investment, net of foreign currency exchange gains and losses and
miscellaneous foreign taxes. The Company had net other income of $786,000 and
$817,000 for the three months ended June 30, 2002 and 2001, respectively. The
Company had net other income of $1.5 million and $1.6 million for the six month
periods ended June 30, 2002 and 2001.
PROVISION FOR INCOME TAXES. The Company recorded an income tax provision of
approximately $93,000 in the three months ended June 30, 2002 and approximately
$240,000 in the six months ended June 30, 2002. The income tax provisions for
the three and six months ended June 30, 2002 are mainly related to foreign taxes
resulting from the profitability of certain of the Company's foreign operations.
No income tax provisions were recorded during the three and six months ended
June 30, 2001.
13
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2002, the Company had cash, cash equivalents, restricted
cash and marketable securities of $73.5 million, an increase of $5.2 million
from $68.3 million as of December 31, 2001. Concord had working capital of $52.0
million and $49.0 million as of June 30, 2002 and December 31, 2001,
respectively. The increase in working capital was primarily attributable to an
increase in cash, cash equivalents and marketable securities due to income from
continuing operations during 2002.
Net cash provided by operating activities was $5.3 million for the six
months ended June 30, 2002 and $2.3 million for the six months ended June 30,
2001. Accounts receivable decreased $469,000 primarily due to a reduction in
license revenues during the quarter ended June 30, 2002. Deferred revenue
increased $2.3 million mainly due to an increase in new and renewed maintenance
contracts.
Investing activities have consisted of the acquisition of property and
equipment, most notably computer and networking equipment to support the
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
from the exercise of stock options during the six months ended June 30, 2002 and
2001.
As of June 30, 2002, the Company has future payments under facility and
certain equipment lease agreements expiring through June 2007 of $3.5 million,
$6.7 million and $4.1 million in one year, one to three years, and thereafter,
respectively.
The Company has deferred tax assets of approximately $21.9 million, the
largest component of which represents net operating loss ("NOL") carryforwards
and research and development credits. The Company has significantly reserved for
these deferred tax assets by recording a valuation allowance of $18.4 million.
The resulting net deferred tax asset is based on the Company's estimate of NOL
carryforwards it expects to use in the future; all other tax assets have been
fully reserved. Pursuant to paragraphs 20 to 25 of SFAS No. 109, the Company
considered both positive and negative evidence in assessing the need for a
valuation allowance at June 30, 2002 and December 31, 2001. 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
and credit carryforwards and (ii) the uncertainty of future profitability. In
addition, the Company is 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 year ended December 31, 2001 and in the "Factors
that Could Affect Future Results" section of this Form 10-Q. 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.
Pursuant to the Tax Reform Act of 1986, the utilization of NOL
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.
At December 31, 2001, the utilization of approximately $2,309,000 of the
Company's NOL carryforwards are restricted to $330,000 per year as a result of
an ownership change that occurred in 1995. In addition, the utilization of
approximately $15,663,000 of NOL carryforwards that were acquired as a result of
the FirstSense acquisition is also restricted as a result of a prior ownership
change of FirstSense. Utilization of the FirstSense NOL carryforwards is limited
to $4.3 million per year.
As of December 31, 2001, the Company's NOL deferred tax asset includes
approximately $2.3 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.
14
As of June 30, 2002, Concord's principal sources of liquidity included
cash, cash equivalents, restricted cash and marketable securities. The Company
believes that its current cash, cash equivalents, restricted cash and marketable
securities and cash provided by future operations will be sufficient to meet the
working capital and anticipated capital expenditure requirements for at least
the next 12 months. Although operating activities may provide cash in certain
periods, to the extent Concord experiences growth in the future, its operating
and investing activities may require additional cash. Consequently, any such
future growth may require Concord to obtain additional equity or debt financing.
CRITICAL ACCOUNTING POLICIES
In December 2001, the SEC requested that all registrants list their three
to five most "critical accounting policies" in the Management Discussion and
Analysis section of their Annual Report on Form 10-K. The SEC indicated that a
"critical accounting policy" is one which is both important to the portrayal of
the company's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. We
believe that the following three accounting policies fit this definition:
Revenue Recognition, Accounts Receivable and Accounting for Income Taxes.
(a) Revenue Recognition Policy
We recognize revenue from the sale of software licenses when persuasive
evidence of an arrangement exists, the product has been delivered, the fee is
fixed or determinable and collection of the resulting receivable is reasonably
assured. Delivery generally occurs when product is delivered to a common carrier
and the delivery terms are FOB Concord. All revenues generated from our
worldwide operations are approved at our corporate headquarters, located in the
United States.
At the time of the transaction, we assess whether the fee associated with
our revenue transaction is fixed or determinable and whether or not collection
is reasonably assured. We assess whether the fee is fixed or determinable based
on the payment terms associated with the transaction. If a significant portion
of a fee is due after our normal payment terms, which are usually 30 to 60 days
from invoice date, we account for the fee as not being fixed or determinable. In
these cases, we usually recognize revenue when the fee is due.
We assess collection based on a number of factors, including past
transaction history with the customer and the credit-worthiness of the customer.
We do not request collateral from our customers. If we determine that collection
of a fee is not reasonably assured, we defer the fee and usually recognize
revenue upon receipt of cash.
For all sales, in the absence of a signed license agreement, we use either
a purchase order or purchase order equivalent as evidence of an arrangement. If
a signed license agreement is obtained, we use either the license agreement or
the license agreement and a purchase order as evidence of an arrangement. Sales
through our resellers are usually evidenced by a master agreement governing the
relationship together with purchase orders on a transaction-by-transaction
basis.
For arrangements with multiple obligations (for example, undelivered
maintenance and support), we allocate revenue to each component of the
arrangement using the residual value method based on the fair value of the
undelivered elements. This means that we defer revenue from the fee arrangement
equivalent to the fair values of the undelivered elements. We determine fair
values for ongoing maintenance and support obligations using our internal
pricing policies for maintenance and by referencing the prices at which we have
sold separate maintenance contract renewals to our customers. We determine fair
values of services, such as training or consulting, by referencing the prices at
which we have separately sold comparable services to our customers.
Our arrangements do not generally include clauses involving acceptance of
our products by our customers. However, if an arrangement includes an acceptance
provision, revenue recognition occurs upon the earlier of receipt of a written
customer acceptance or expiration of the acceptance period.
(b) Accounts Receivable Policy
15
We perform ongoing credit evaluations of our customers and adjust credit
limits based upon payment history and the customer's current credit worthiness,
as determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and maintain a provision for
estimated credit losses based on a percentage of our accounts receivable, our
historical experience and any specific customer collection issues that we have
identified. While management believes such credit losses have historically been
within our expectations and appropriate reserves have been established, we
cannot guarantee that we will continue to experience the same credit loss rates
that we have experienced in the past.
(c) Accounting for Income Taxes Policy
As part of the process of preparing our consolidated financial statements
we are required to estimate our income taxes in each of the jurisdictions in
which we operate. To do this, we estimate our actual current tax liabilities,
while also assessing temporary differences resulting from differing treatment of
items, such as deferred revenue, for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included
within our consolidated balance sheet. We must then assess the likelihood that
our deferred tax assets will be recovered from future taxable income. To the
extent we believe that recovery is not likely, we must establish a valuation
allowance. To the extent we establish a valuation allowance or increase this
allowance in a period, we must include an expense within the tax provision in
the statement of operations.
Significant management judgment is required in determining our provision
for income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. We have recorded a
valuation allowance of $18.4 million as of June 30, 2002, due to uncertainties
related to our ability to utilize some of our deferred tax assets, primarily
consisting of the utilization of certain net operating loss carryforwards from
prior years. We are unsure whether we will have sufficient future taxable income
to allow us to use these net operating losses before they expire. The valuation
allowance is based on our estimates of taxable income by jurisdiction in which
we operate and the period over which our deferred tax assets will be
recoverable. In the event that actual results differ from these estimates or we
adjust these estimates in future periods we may need to establish an additional
valuation allowance. Establishing new or additional valuation allowances could
materially adversely impact our financial position and results of operations.
Our net deferred tax assets as of June 30, 2002 were $3.5 million, net of a
valuation allowance of $18.4 million.
The above listing is not intended to be a comprehensive list of all of our
accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by accounting principles generally accepted
in the United States, with no need for management's judgment in their
application. There are also areas in which the exercise of management's judgment
in selecting an available alternative would not produce a materially different
result. See our audited consolidated financial statements and notes thereto
which begin on page F-1 of the Annual Report on Form 10-K for the year ended
December, 31, 2001 and which contain accounting policies and other disclosures
required by generally accepted accounting principles.
16
FACTORS THAT COULD AFFECT FUTURE RESULTS
References in these risk factors to "we," "our," the "Company," "Concord,"
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
in this document 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. 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 absolute dollars or decreases
as a percentage of revenues in sales and marketing, research and development,
customer support and service, and general and administrative expenses;
expectations regarding increased competition and Concord's ability to compete
successfully; sustenance of revenue growth both domestically and
internationally; the size, scope and description of Concord's target customer
market; future product development, including but not limited to anticipated
expense levels to fund product development, acquisitions and the integration of
acquired companies; and our expected liquidity and capital resources) constitute
forward-looking statements. 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.
Prior to 2001, we marketed and sold our products primarily in the
performance management market. In 2001, our product functionality was expanded
to include both fault and performance management features to penetrate the fault
management market. Accordingly, we have a limited operating history in this
expanded market upon which we can evaluate our business. As currently developed,
our product is an integrated fault and performance management tool that manages
applications, systems and networks. The integrated fault and performance market
is highly competitive and rapidly evolving. Additionally, many of our
competitors in this new market have a longer operating history and greater
resources. Our limited operating history and the uncertain economic climate
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 operating in the highly competitive
software industry.
WE CANNOT ENSURE THAT OUR REVENUES WILL GROW OR THAT WE WILL BE
PROFITABLE.
As a company, we have expended considerable resources to develop innovative
products that have enabled us to penetrate new markets both in the United States
and internationally. As a result of these efforts, we achieved revenue growth
and profitability for the fiscal years ended 2000, 1999, and 1998. However, as
the worldwide economy weakened in 2001, our revenues did not grow at expected
levels. We operated at a net loss and 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 the future. Our annual revenues in 2002 may be lower than
our annual revenues in 2001.
In an effort to return to profitability, we reduced our operating expenses
for 2001 and plan to continue to limit operating expenses in 2002. However,
competition in the marketplace may require us to increase our operating expenses
in the future 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.
17
To the extent that increases in our expenses precede or are not followed by
increased revenues, our profitability will continue to suffer. In addition, in
view of the rapidly evolving nature of our business and markets 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.
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 final
two weeks of each fiscal quarter;
- our customers' spending patterns and budgetary resources for fault and
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 our products are
sold;
- our success in anticipating and effectively adapting to developing
markets and rapidly changing technologies;
- our success in attracting, retaining, and motivating qualified
personnel;
- the publication of opinions about us and our products, or our
competitors and their products, by industry analysts or others;
- changes in general economic conditions; and
- geopolitical conditions in the world.
Though our services revenues have been increasing as a percentage of total
revenues, we do not have a significant ongoing revenue stream that may mitigate
quarterly fluctuations in operating results, as do 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 attempt 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.
A significant portion of our product sales occur in the final two weeks of
each fiscal quarter. Any delay in the shipment of products prior to the end of
the quarter may result in decreased revenues for the quarter. Additionally,
18
intense competition and budgetary constraints placed upon our customers
typically increase during the final two weeks of a fiscal quarter and may
adversely affect the revenues for that 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 is related to personnel, facilities and
equipment, 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 will likely suffer.
THE MARKET FOR INTEGRATED FAULT AND PERFORMANCE MANAGEMENT SOFTWARE IS
EMERGING.
The market for our integrated fault and performance solution is in an early
stage of development. Although the rapid expansion and increasing complexity of
computer applications, systems, and networks in recent years has increased the
demand for fault and performance management software products, the awareness of,
and the need for, an integrated fault and performance solution is a recent
development. Because the market for this solution is only beginning to develop,
it is difficult to assess:
- the size of this market;
- the appropriate features and prices for products to address this
market;
- the optimal distribution strategy; and
- the competitive environment that will develop.
The development of this market and our growth will depend significantly
upon the desire and success of telecommunication carriers, managed services
providers, and enterprises to integrate fault and performance management for
their applications, systems, and networks. Moreover, it will depend on the
willingness of telecommunication carriers, managed service providers, systems
integrators, and outsourcers to integrate fault and performance management
software into their product and service offerings. The market for integrated
fault and performance management software may not grow or we may fail to assess
and address the needs of this market.
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:
- report toolset vendors;
- fault management software vendors;
- application performance software vendors;
- enterprise management software, framework and platform providers;
- large, well established management framework companies that have
developed network management platforms;
- developers of network element management solutions;
- probe vendors.
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
19
will support a large number of competitors and their products. 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.
THE MARKET FOR PERFORMANCE AND FAULT MANAGEMENT OF SOFTWARE APPLICATIONS,
SYSTEMS AND NETWORKS IS BECOMING INCREASINGLY TARGETED BY LARGER COMPANIES WITH
SUBSTANTIALLY GREATER RESOURCES.
A considerable portion of our revenues is generated from sales of products
that manage both the fault and performance aspects of software applications and
systems. This market is very competitive and we are in direct competition with
larger companies with substantially greater resources. These larger companies
are able to devote considerable resources to the development of competitive
products and the creation and maintenance of direct and indirect sales channels.
The continued presence of these larger companies in this market may impact our
ability to retain or increase our market share.
MARKET ACCEPTANCE OF OUR EHEALTH(TM) PRODUCT FAMILY IS CRITICAL TO OUR SUCCESS.
We currently derive substantial product revenues from our eHealth(TM)
product family, and we expect that revenues from these products will continue to
account for almost all of our product revenues in 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) Suite of products will increase
or even remain at current levels. Factors that may affect the market acceptance
of our integrated solution include:
- the availability and price of competing solutions, products and
technologies; and
- the success of our sales efforts and those of our marketing partners.
Moreover, if demand for integrated fault and 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 resulting in decreased market acceptance of our
products.
WE MAY NEED FUTURE CAPITAL FUNDING.
We plan to continue to expend substantial funds on the continued
development, marketing, and sale of the eHealth(TM) product family. We cannot
ensure that our existing capital resources including the proceeds from our
initial public offering during October 1997, and any funds that may be generated
from future operations together will be sufficient to finance our future
operations or that other sources of funding will be available on terms
acceptable to us, if at all. In addition, future sales of substantial amounts of
our securities in the public market could adversely affect prevailing market
prices and could impair our future ability to raise capital through the sale of
our securities.
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 IT infrastructure, fault and performance management
software market, and changes in 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;
- we will not experience difficulties that could delay or prevent the
successful development, introduction and sale of such enhancements or
new products; or
- such enhancements or new products will adequately address the
requirements of the marketplace and achieve market acceptance.
THE NEED FOR OUR PRODUCTS MAY DECREASE IF MANUFACTURERS INCORPORATE OUR
PRODUCT FEATURES INTO THEIR PRODUCT OFFERINGS.
20
Our products manage the performance of computer applications, systems, and
networks. Presently, manufacturers of both hardware and software have not
implemented these management functions into their products in any significant
manner. These products typically include, but are not limited to, operating
systems, workstations, network devices, and software. If manufacturers begin to
incorporate these management functions into their products it may decrease the
value of our products and have a substantial impact on our business.
ANY ANNOUNCEMENTS BY COMPANIES CITING ACCOUNTING IMPROPRIETIES MAY ADVERSELY
IMPACT OUR REVENUES.
The announcement by a large American telecommunications firm near the end
of the fiscal quarter that it had improperly accounted for some expenses created
uncertainties for some of our customers. Specifically, banks holding debt for
this telecommunications company reduced expenditures to mitigate the exposure
created by the telecommunications company's actions. The Company's sales
suffered in the final weeks of the quarter as many of our customers considerably
decreased, postponed or potentially canceled IT infrastructure purchases due to
this uncertainty. It is likely that similar announcements by other companies
would impact the Company's future sales.
THE IMPACT OF THE RECENT TERRORIST ATTACKS AND THE RISK OF FUTURE TERRORIST
ATTACKS MAY ADVERSELY IMPACT OUR REVENUES.
The tragic events of September 11, 2001 impacted our sales to companies in
the New York City area and our sales to the United States government. These
markets have not yet recovered from the events of September 11, 2001 and it is
impossible to determine when, and if, they will recover. Sales in the New York
City area and sales to the United States government are a significant source of
revenues for us and our business may be adversely affected as these areas
recover. Additionally, recent terrorist warnings, both in the United States and
internationally, suggest the possibility of future terrorist attacks. As we sell
products both in the United States and internationally, the occurrence of future
terrorist attacks may adversely affect our business.
OUR SUCCESS IS DEPENDENT UPON SALES TO TELECOMMUNICATION CARRIERS, SERVICE
PROVIDERS, AND ENTERPRISE CUSTOMERS.
We derive and likely will continue to derive a significant portion of our
revenues from the sales of our products to telecommunication carriers, service
providers, and enterprise customers. These markets worldwide have suffered from
a turbulent economy during 2000, 2001 and 2002, turbulence that has been
exacerbated by the tragic events of September 11, 2001 and their aftermath. We
have been negatively affected by the downturn in capital spending within these
markets. The volume of sales of our products and services to telecommunication
carriers, service providers, and enterprise customers may increase slower than
we expect or may decrease.
OUR COMMON STOCK PRICE COULD EXPERIENCE SIGNIFICANT VOLATILITY.
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 leading to an increased risk of securities
class action litigation. Such litigation could result in substantial costs and a
diversion of our attention and resources.
21
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 and integrated solutions
obsolete and unmarketable. Our eHealth(TM) - Network product's 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 eHealth(TM) - Network products with these devices, which in
turn could affect its analysis and generation of comprehensive reports or the
quality of the reports. Similarly, our Live Health(TM) - Fault Manager product
receives only SNMP traps from failing devices, systems, and applications. Any
change in these industry standards could hinder the effectiveness of this
product. Furthermore, although our eHealth(TM) Suite of products currently runs
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 and solutions and those of our competitors.
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;
- value added resellers;
- system integrators;
- telecommunication carriers;
- original equipment manufacturers; 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
telecommunication carriers and other network service providers. We sell our
products in the United States through both direct sales to customers and
indirect sales to customers through our channel partners. Internationally, we
sell our products almost exclusively through indirect sales via our channel
partners. Our international channel partners are located in Europe, the Middle
East, Africa, Asia, and North and South America and are subject to local laws,
regulations, and customs that may make it difficult to accurately assess the
potential revenues that can be generated from a certain market. Our success
depends upon our ability to attract and retain valuable channel partners and to
accurately assess the size and vitality of the markets in which our products are
sold. While we have implemented policies and procedures to achieve this, we
cannot predict the extent to which we are able to attract and retain valuable
channel partners. Additionally, our channel partners may not be successful in
marketing and selling our products. We may:
- fail to attract important and effective channel partners;
- fail to penetrate our targeted market segments through the use of
channel partners; or
22
- lose any of our channel partners, as a result of competitive products
offered by other companies, or products developed internally by these
channel partners or otherwise.
WE MAY FAIL TO MANAGE SUCCESSFULLY OUR GROWTH.
We have experienced reductions in our sales and operations personnel; our
products have become increasingly complex; and our product distribution channels
are being developed and expanded. The rapid evolution of our markets and the
increasing complexity of our products 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
that may impact our ability to grow our business.
OUR SUCCESS DEPENDS ON OUR RETENTION OF KEY PERSONNEL.
Our performance depends substantially on the performance of our key
technical and senior management personnel. 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. We experience intense competition for such personnel
and are constantly exploring new avenues for attracting and retaining key
personnel. However, 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 channel partner 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;
- 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;
- political and economic instability; and
- exposure to foreign currency fluctuations.
Our successful expansion into certain countries will require additional
modification of our products, particularly national language support. Presently,
virtually all of our current export sales are denominated in United States
23
dollars. 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. In certain
European Union countries, however, we have introduced pricing in Euros in 2002.
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. Additionally, as we increase our international sales,
seasonal fluctuations in revenue generation 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 FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS MAY HARM OUR
COMPETITIVE POSITION.
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 and seven pending U.S. patents, 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 by those
patents 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 sought also to protect our intellectual property through the use of
copyright, trademark, and trade secret laws. 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 end user license agreements (also known
as "shrinkwrap" licenses) that are not signed by licensees. The law governing
the enforceability of shrinkwrap license agreements 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 adequately maintain or update their
products, could result in delay in our shipment of certain of our products while
we seek to implement technology offered by alternative sources, and any required
replacement licenses could prove costly. While it may be necessary or desirable
in the future to obtain other licenses relating to one or more of our products
or relating to current or future technologies, we cannot 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 upon the intellectual
property rights of others, claims of infringement are becoming increasingly
common as the software industry develops legal protections for 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.
24
PRODUCT DEFECTS COULD RESULT IN THE LOSS OF 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 ship 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.
Because our products are used by our customers to identify and predict
current and future application, system, and network problems and to 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, may arise from the
use of our products and could result in financial or other damages to our
customers. While we do not maintain product liability insurance, 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. As a matter of practice, our license agreements limit our liability in
regards to product liability claims, and in many agreements, our maximum
liability for product liability claims is limited to the equivalent of the cost
of the products licensed under that agreement. However, any litigation or
similar procedure related to a product liability claim may require considerable
resources to be expended that could adversely affect our business and financial
condition and decrease future revenues.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVE FINANCIAL INSTRUMENTS, OTHER FINANCIAL INSTRUMENTS AND
DERIVATIVE COMMODITY INSTRUMENTS. The Company does not have any derivative
financial instruments, other financial instruments or derivative commodity
instruments for which fair value disclosure would be required. 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.
26
CONCORD COMMUNICATIONS, INC.
FORM 10-Q, JUNE 30, 2002
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 and has issued 1,799,000 of
such shares. 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 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 over allotment 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
27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits listed in the accompanying Exhibit Index on page 32 and 33 are
filed or incorporated by reference as part of this Report.
(b) Reports on Form 8-K
A report on Form 8-K was filed with the Commission on June 14, 2002 to
report that the Company dismissed Arthur Andersen LLP as the Company's
independent certifying accountants. The Company also reported that it engaged
PricewaterhouseCoopers LLP as its independent certifying accountants for the
year ending December 31, 2002.
28
CONCORD COMMUNICATIONS, INC.
FORM 10-Q, JUNE 30, 2002
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
-----------------------------------------
August 9, 2002 Name: Melissa H. Cruz
Title: Executive Vice President,
Business Services and Chief
Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
29
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Concord Communications, Inc. (the
"Company") on Form 10-Q for the period ending June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, John A.
Blaeser, President and Chief Executive Officer of the Company, certify, pursuant
to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act
of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ John A. Blaeser
John A. Blaeser
President and Chief Executive Officer
August 9, 2002
30
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Concord Communications, Inc. (the
"Company") on Form 10-Q for the period ending June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Melissa
H. Cruz, Executive Vice President, Business Services and Chief Financial Officer
of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to
ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Melissa H. Cruz
Melissa H. Cruz
Executive Vice President, Business Services and
Chief Financial Officer
August 9, 2002
31
CONCORD COMMUNICATIONS, INC.
FORM 10-Q, JUNE 30, 2002
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 Exhibit No. 10.01 to Registration
Silicon Valley Bank dated April 3, 1997 Statement on Form S-1 (No.
333-33227)
10.02 Revolving Promissory Note made by the Company in favor of Exhibit No. 10.02 to Registration
Silicon Valley Bank Statement on Form S-1 (No.
333-33227)
10.03 Equipment Line of Credit Letter Agreement between the Exhibit No. 10.03 to Registration
Company and Fleet Bank dated as of June 9, 1997 Statement on Form S-1 (No.
333-33227)
10.04 1995 Stock Plan of the Company Exhibit No. 10.04 to Registration
Statement on Form S-1 (No.
333-33227)
10.05 1997 Stock Plan of the Company Exhibit No. 10.01 on Form 10-Q, for
the period ended June 30, 1998
10.06 1997 Stock Plan of the Company, as amended on March 12, Exhibit No. 10.06 on Form 10-K, for
1998, March 1, 1999, May 15, 1999 and March 8, 2000 the period ended December 31, 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 as amended Exhibit No. 10.08 to Current Report
on March 12, 1998, March 8, 2000, April 25, 2001 and on Form 10-Q
February 6, 2002
10.09 The Profit Sharing/401(K) Plan of the Company Exhibit No. 10.08 to Registration
Statement on Form S-1 (No.
333-33227)
10.10 Lease Agreement between the Company and John Hancock Mutual Exhibit No. 10.09 to Registration
Life Insurance Company dated March 17, 1994, as amended on Statement on Form S-1 (No.
March 25, 1997 333-33227)
10.11 First Amendment to Lease Agreement between the Company and Exhibit No. 10.10 to Registration
John Hancock Mutual Life Insurance Company dated March 25, Statement on Form S-1 (No.
1997 333-33227)
10.12 Form of Indemnification Agreement for directors and Exhibit No. 10.11 to Registration
officers of the Company Statement on Form S-1 (No.
333-33227)
10.13 Restated Common Stock Registration Rights Agreement between Exhibit No. 10.12 to Registration
the Company and certain investors dated August 7, 1986 Statement on Form S-1 (No.
333-33227)
10.14 Amended and Restated Registration Rights Agreement between Exhibit No. 10.13 to Registration
the Company and certain investors dated December 28, 1995 Statement on Form S-1 (No.
333-33227)
10.15 Management Change in Control Agreement between the Company Exhibit No. 10.14 to Registration
and John A. Blaeser dated as of August 7, 1997 Statement on Form S-1 (No.
333-33227)
10.16 Management Change in Control Agreement between the Company Exhibit No. 10.15 to Registration
and Kevin J. Conklin dated as of July 23, 1997 Statement on Form S-1 (No.
333-33227)
10.17 Management Change in Control Agreement between the Company Exhibit No. 10.16 to Registration
and Ferdinand Engel dated as of July 23, 1997 Statement on Form S-1 (No.
333-33227)
10.18 Management Change in Control Agreement between the Company Exhibit No. 10.17 to Registration
and Gary E. Haroian dated as of July 23, 1997 Statement on Form S-1 (No.
333-33227)
10.19 Management Change in Control Agreement between the Company Exhibit No. 10.18 on Form 10-Q
and Melissa H. Cruz dated as of June 12, 2000 filed on August 14, 2000
10.20 Management Change in Control Agreement between the Company Exhibit No. 10.18 to Registration
and Daniel D. Phillips, Jr. dated as of July 23, 1997 Statement on Form S-1 (No.
333-33227)
10.21 Stock Option Agreement dated January 1, 1996 between the Exhibit No. 10.19 to Registration
Company and John A. Blaeser Statement on Form S-1 (No.
333-33227)
10.22 Stock Option Agreement dated January 1, 1996 between the Exhibit No. 10.20 to Registration
Company and John A. Blaeser Statement on Form S-1 (No.
333-33227)
10.23 Letter Agreement between the Company and Silicon Valley Exhibit No. 10.21 to Registration
Bank dated March 25, 1996 together with the Loan Statement on Form S-1 (No.
Modification Agreement dated November 14, 1996 333-33227)
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 October Exhibit No. 2.1 on Form 8-K filed
19, 1999 by and among Concord Communications, Inc., E on November 12, 1999
Acquisition Corp., Empire Technologies, Inc. and the
stockholders of Empire Technologies, Inc.
10.26 Agreement and Plan of Reorganization dated as of January Exhibit No. 2.1 on Form 8-K filed
20, 2000 by and among Concord Communications, Inc., F on February 10, 2000
Acquisition Corp., and FirstSense Software, Inc.
10.27 Registration Rights Agreement dated as of February 4, 2000 Exhibit No. 99.1 on Form 8-K filed
by and among Concord Communications, Inc. and Timothy on February 10, 2000
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
32
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION SEC DOCUMENT REFERENCE
----------- ----------- ----------------------
10.29 Management Change in Control Agreement between the Company Exhibit No. 10.29 on Form 10-Q
and Ellen Kokos dated as of February 2, 2001 filed on May 9, 2001
10.30 Management Change in Control Agreement between the Company Exhibit No. 10.30 on Form 10-Q
and John F. Hamilton dated as of April 16, 2001 filed July 31, 2001
10.31 2001 Non-Executive Employee Stock Purchase Plan Exhibit No. 10.31 on Form 10-Q
filed on November 5, 2001
*10.32 Management Agreement between the Company and John Hamilton Exhibit No. 10.32 to Current Report
dated May 6, 2002 on Form 10-Q
21.01 Subsidiaries of the Company
23.01 Consent of Arthur Andersen LLP
23.02 Consent of KPMG LLP
* filed herewith
33