-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CD+g3UINEsgPIBmMQAj3xbkOqzDPolkjjYDi6NWCALZGxsdhVBhoh4w4/YUWaxDs BVzdvQ0AxwaCtGyZnIqd7g== 0000950135-00-001700.txt : 20000329 0000950135-00-001700.hdr.sgml : 20000329 ACCESSION NUMBER: 0000950135-00-001700 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONCORD COMMUNICATIONS INC CENTRAL INDEX KEY: 0000915290 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 042710876 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23067 FILM NUMBER: 581495 BUSINESS ADDRESS: STREET 1: 600 NICKERSON RD CITY: MARLBORO STATE: MA ZIP: 01752 BUSINESS PHONE: 5084604646 MAIL ADDRESS: STREET 1: 600 NICKERSON RD CITY: MARLBORO STATE: MA ZIP: 01752 10-K 1 CONCORD COMMUNICATIONS, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON DC 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ to ________ Commission file number 0-23067 CONCORD COMMUNICATIONS, INC. (Exact name of registrant as specified in its charter) Massachusetts 04-2710876 (State of incorporation) (IRS Employer Identification Number) 600 Nickerson Road Marlboro, Massachusetts 01752 (508) 460-4646 (Address and telephone number of principal executive offices) ----------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing sale price of the Company's common stock on March 8, 2000, as reported on the Nasdaq National Market was approximately $645,302,040. The number of shares outstanding of Common Stock as of March 8, 2000 was 16,132,551. DOCUMENTS INCORPORATED BY REFERENCE Document Form 10-K Reference Portions of the Annual Report to Stockholders Part II,Item 7 for the fiscal year ended December 31, 1999. Portions of the Registrant's Proxy Statement Part III for its Annual Meeting of Stockholders to be held on April 25, 2000. THIS DOCUMENT CONTAINS 40 PAGES. ---- THE EXHIBIT INDEX IS ON PAGE 37 . ------ 2 PART I This document contains forward looking statements. Any statements contained herein that do not describe historical facts are forward looking statements. Concord makes such forward looking statements under the provisions of the "safe harbor" section of the Private Securities Litigation Reform Act of 1995. The forward looking statements contained herein are based on current expectations, but are subject to a number of risks and uncertainties. The Company's actual future results may differ significantly from those stated in any forward-looking statements. Factors that may cause such differences include, but are not limited to, the factors discussed elsewhere in this Form 10-K under the heading "Risk Factors." ITEM 1. BUSINESS INTRODUCTION Concord develops, markets and supports next-generation performance management solutions. With the recent acquisitions of Empire Technologies and FirstSense Software, Concord offers the only integrated performance management solution spanning systems, applications, services and networks. By successfully managing performance across all of these key areas, Concord's products ensure effective e-business. This end-to-end performance view provides the critical insights needed to power day-to-day business and e-commerce operations for some of today's most successful corporations and service providers worldwide. By providing a global view of application, system and network performance, the Company's products enable traditional corporate enterprises and companies engaged in e-commerce to effectively manage the service levels they are required to supply to their community of users, including internal end users and external customers and suppliers. In addition, service providers engaged in providing network and bandwidth services, internet access (ISP's), web hosting, application services (ASP's) and outsourcing services use the Company's products to manage the provision of those services to their end user customers. The Company's eHealth product family consists of a set of solutions that identify application and business process response time and availability problems and provide information about the underlying causes of those problems within particular applications, servers, networks or services being provided by an ISP, Carrier or ASP. The Company's software-only solutions provide instrumentation to gather critical application and system information but also retrieve vital network statistics from a wide range of network devices and operating systems. Extensive analysis is performed on the data and statistics are gathered and outputted in the form of intuitive, informative, user friendly graphical reports that can be viewed on a historical basis or in real time. This information is critically important to IT and Service Provider executives, managers and technicians who in turn use it to proactively effect the availability, response time, performance and capacity of the services they are required to provide. The Company's target market has and will continue to be large and medium-size corporate users, e-commerce companies and service providers responsible for the management of several thousand to millions of client, server and network devices running multiple critical business applications simultaneously. The Company markets to these potential customers through its own sales force, sales agents, value added resellers, network service providers, including telecommunication carriers, and OEMs. As of December 31, 1999, the Company had over 1,600 customers operating in and serving a variety of industries. Representative customers include Aetna, America Online, American Express, Ameritech, Amoco, AT&T Corporation, Bell Atlantic, Blue Cross/Blue Shield, British Telecommunications plc, Delta Air Lines, Deutsche Telekom, Fleet Financial, Frontier Communications, Fuji Film, Global One, Goodyear, GTE, Harvard Business School, Lloyds of London, Maxnet, McDonald's, MCI Worldcom, Mercedes-Benz, Mindspring, NATO, New York Times, Pacific Bell, Pepsi, Qwest, Siemens, Siris, Sprint, Telecom Italia, Toys 'R' Us, Tufts, U S West, Inc., U.S. Customs, US Internetworking, Visa International, Wang Global and Wiltel. 1 3 INDUSTRY BACKGROUND The rapid emergence of e-business applications, such as business to business and business to consumer electronic commerce and enterprise resource planning systems that extend outside of the traditional corporate environment to suppliers and partners has significantly increased the amount of business transaction data flowing across corporate and service provider networks and the internet. As these applications have become integral in transacting business between enterprises and their customers, the requirement for fast response times, high performance and application availability has become a critical business priority. In order to deliver the high level of services required in this new environment, businesses continue to expand their internal computer networks but also contract with an ever increasing number of service provider companies providing a host of different solutions and services from bandwidth to outsourcing. These changes in the market have increased the complexity, difficulty and importance of managing the performance of the services and underlying applications and infrastructure required to deliver those services. Since customers are now interacting directly with these systems, there is much less tolerance for poor service. In addition, the problem of management has become more difficult given the multitude of entities, applications, systems and physical networks involved in any one transaction. The technical complexity of providing for high levels of automation, aggregation, instrumentation and scalability over many critical applications and many thousands of clients, systems and network elements has made comprehensive performance management solutions difficult to develop and deliver. Any comprehensive solution must be able to provide an integrated performance management system across a set of business processes and both off-the-shelf and customized applications across all major computer and operating systems such as UNIX, Windows NT and Linux, and across all major networking technologies and devices from vendors like Cisco, Lucent and Nortel. Other performance management solutions that are currently available are either point solutions that attempt to compete in a particular area as a "best of breed" solution or platforms and frameworks that attempt to provide a comprehensive solution that must be developed in a custom manner. While the point solutions may be reasonably priced and provide adequate functionality in one particular area, they do not provide the comprehensive solution required for the management of e-business environments. Platform and framework solutions can be expensive and time consuming to implement and very difficult to support given the extent to which they must be customized for each different environment. Although tools that are considered point solutions enhance the technical management of a discreet area like a network, a set of computers or a particular application and are useful in isolating and correcting problems after such problems have been identified, these solutions are not able to determine the effect problems have on real users and assess which component of the overall e-business environment, the application, the systems, the network or the services being offered by the service providers is contributing to the problem. Customized solutions that are developed on top of a framework or platform are expensive and time consuming to develop and by their proprietary nature are inflexible and must be implemented in total. THE CONCORD SOLUTION Concord has combined its core capabilities in network performance management with the new systems and application performance management products from Empire Technologies and FirstSense Software to deliver a set of best of breed products that can be integrated to provide a comprehensive performance management solution. Concord's product line, eHealth is a family of turnkey, automated, scaleable, Web-based performance management solutions for critical applications, systems, services and networks that combine sophisticated data collection or agent technologies with Concord's industry leading data retrieval and analysis engine to provide real-time and historical data in an intuitive, informative and user-friendly graphical format. The Company's products are currently capable of simultaneously retrieving data, performing analysis and reporting on that data for up to 80,000 elements per console or workstation. During 2000, Concord plans to introduce a new version of eHealth that will dramatically improve on its 2 4 current scalability. This new version is being designed for very large end-user and large service provider customers. The Company's eHealth product family provides organizations with the following benefits: (i) automated management across the IT infrastructure - provides information automatically in real-time and in historical reports to all levels of IT technical and management staffs about the performance of applications, as seen by the end-user, the underlying systems running those applications and the network infrastructure; (ii) predictive and real-time problem solving - provides actionable information about the availability and response time of critical applications and services so that IT management can adjust capacities in a proactive manner to meet the contracted service level agreements; (iii) alignment of IT or Service Provider operations with Customer business goals - provides a total view into the end-to-end performance and availability of the end-user or customer environment so that the IT or Service Provider organization can deliver services based on the business needs of that end-user or customer; (iv) effective resource management - allows IT management to cost-effectively deploy personnel and equipment resources across the organization; and (v) service provider management - provides the e-business or IT entity with a tool to effectively manage the performance of their service providers. In providing these benefits, the Company's eHealth product family incorporates the following features: FULLY AUTOMATED, TURNKEY IMPLEMENTATION. The Company's products provide turnkey solutions for fully automated performance management. Installation can be accomplished in a few hours for most products and for certain products installation can occur over the Web. Once installed the Company's products can provide real time information or historical reports on critical areas such as (i) important trends and changes for application response times, system and network availability and capacity; (ii) situations to watch for potential delays or failures in important services and processes; and (iii) exceptions analysis for identifying deviations from specified performance and service levels. SCALEABLE, SOFTWARE-ONLY SOLUTION. The eHealth product family is designed to collect data from heterogeneous sources. The Company's products are easily scaled to meet the demands for performance management as an organization's e-business infrastructure expands. eHealth provides managers with the ability to purchase add-on software licenses or additional agent software as needed. MULTI-LEVEL REPORTING. The Company's eHealth product family generates a comprehensive package of graphical reports that provide information and analyses on a wide variety of pre-programmed parameters. Information is provided for use at multiple levels of management, from a general overview of capacity, availability and response time for chief information officers to a detailed analysis of specific transactions, server components, network equipment components, network bandwidth components and network services. BROAD TECHNOLOGY COVERAGE. The Company's eHealth product family provides performance management across a broad spectrum of industry standard applications like Microsoft Exchange, Lotus Notes, ERP systems from SAP, Baan and Peoplesoft, industry standard operating systems like Unix, Windows, Windows NT and Linux and industry standard networking technologies like ATM, Frame Relay and IP. PRODUCTS AND TECHNOLOGY Each of the applications in the eHealth product line, Network Health, Application Health, and System Health includes a fixed license fee and a variable fee based on network elements, servers or clients. The following are the Company's products: NETWORK HEALTH - NETWORK HEALTH IS THE FOUNDATION OF THE EHEALTH FAMILY. The Network Health platform automatically locates devices on the network, identifies MIB variables, polls devices, and stores data in a relational database. After the data has been analyzed, Network Health automatically generates 3 5 multiple reports, which can be retrieved from the network console or via the Web. Network Health software operates continuously to provide full-time data gathering and on demand reporting. Network Health reports show the effects of usage and serve as a basis for agreeing to and understanding service levels, proactively addressing potential network failures, managing bandwidth and capacity, identifying security violations and understanding the usage patterns of the network and the network's various elements. The critical technology components in the Network Health architecture are the polling engine, the MIB translation file, the database and group filter, and the reporting engine. Each of these components is device independent, and thus can function on any type of network device or segment irrespective of the network equipment vendor or technology. These components automate the functions of locating the appropriate devices for polling, gathering only the appropriate variables and data from those devices, and converting the data into canonical format which facilitates analysis. The distributed nature of the product allows for the product components and the user to be located at any location within the organization. Through the use of sophisticated algorithms and heuristics, the gathered data can be analyzed to make predictions of upcoming problems throughout the network. The report viewing components within the reporting engine allow the rendering and display of multiple views and reports in a graphical fashion for Web output, print output or integration level output to other products. By focusing on the issues of capacity, errors, service levels and utilization, Network Health's manner of reporting provides a common model, which covers a broad spectrum of network elements and technologies. The following modules are available within the Network Health product line: Network Health -- Frame Relay Network Health -- Router/Switch Network Health -- Traffic Accountant Network Health -- Server Network Health -- Service Level Reporting Network Health -- Remote Access Network Health -- ATM APPLICATION HEALTH - Application Health provides a comprehensive solution for the management of service and application response management. With Application Health, large enterprises or service providers can effectively measure and manage the availability of critical e-business applications and services from several perspectives including the network infrastructure, the systems or servers, or the client. Through the use of industry leading agent technologies like those from Empire Technologies, FirstSense Software or Cisco, Application Health offers visibility into business transactions and services. It can both measure and report on performance trends and also provide a snapshot into the overall performance of business critical applications. Application Health can currently provide this capability for most industry standard ERP applications (e.g., SAP, Baan, Peoplesoft) and industry standard communications software products like Exchange and Notes. In addition, Application Health provides a unique capability that allows an e-business to measure response time and availability performance for non-standard "home-grown" applications. SYSTEM HEALTH - System Health provides a set of solutions that allow an e-business to manage large groups of servers and systems, including Web servers, across all major operating system and server vendor environments. System Health provides real time alarm notification of problems and automatic restart of failed processes critical to the day-to-day functioning of an e-business, an IT organization, a Web-hosting company or an Application Service Provider. System Health provides critical information on which applications are consuming the greatest CPU or memory resources. CUSTOMER SERVICE The post-sales support organization is responsible for providing ongoing technical support and training for the Company's customers. For an annual fee, a customer will receive telephone and email support, as well as new releases of the Company's products. The Company has also begun offering 24 x 7 support 4 6 coverage to customers for an additional fee. The Company offers a toll-free customer support line to customers. Support personnel answer the technical support calls and generally provide same-day responses to questions that cannot be resolved during the initial call. All calls are logged, opened, tracked, and closed with daily updates to the customer, Concord's sales teams and Concord's executive management team. At December 31, 1999, the Company employed 17 technical post-sales support personnel. In addition, Concord also had 17 professional service and training personnel which provide services to its customers on a per fee basis. SALES AND MARKETING The Company markets its products in the United States to organizations with large and medium-size networks, as well as network service providers which include telecommunications carriers, ISPs, systems integrators and outsourcers primarily through a direct sales force, sales agents and through value added resellers (VARs). Internationally, the Company markets primarily through distributors. Additionally, the Company has entered into joint marketing and joint development arrangements with a number of companies. At December 31, 1999, the Company had 23 North America sales teams each comprised of one direct sales person and one or two technical support people targeting the following four geographic regions: East, Central, West and Federal. The Company had 7 International sales teams also comprised of one direct sales person and one or two technical support people targeting the following three geographic regions: EMEA, Asia/Pacific and South America. In addition, the Company employs 21 sales and technical management personnel to the sales teams. At December 31, 1999 the Company utilized 26 North America VARs and 27 international distributors. It is the responsibility of each sales team to manage all sales within its geographic territory by signing up, training, and managing a small number of sales agents, VARs, distributors, network service providers and outsourcers, as well as selling directly to customers. The Company generates sales leads through seminars, trade shows, Internet postings, press articles, referrals, mass mailings and cold calling as well as through relationships with sales agents, distributors, VARs, network service providers and outsourcers. At December 31, 1999, the Company had relationships with over 100 network service providers. The network service providers offer the Company's products as part of their service offerings. At December 31, 1999, the Company also had several joint marketing and development partners, including ADC Telecommunications, Ascend Communications, Inc., Cabletron Systems, Inc., Cisco Systems, Inc., Fore Systems, Inc., Ganymede, Lucent Technologies, Inc., NetScout Systems, Inc., Newbridge Networks Corporation, Nortel Networks, Paradyne, Response Networks, Shomiti and Visual Networks, Inc. that work with the Company's direct sales force. The Company also has a professional services referral program aimed at its key network consulting partners. Under this program, the Company will provide professional services through these partners directly to its customers. At December 31, 1999, the Company employed 21 marketing personnel who position, promote and market the Company's products. These individuals are engaged in a variety of activities, including direct marketing, public relations, tradeshows, advertising, Internet postings, and seminars. At December 31, 1999, the Company employed 98 sales personnel, consisting of 11 management personnel, 30 sales persons, 37 technical support persons, 19 inside sales persons and one administrative person. PRODUCT DEVELOPMENT Management believes that the Company's future success depends in large part on its ability to continue to enhance existing products and develop new products that maintain technological competitiveness and deliver value to existing and new customers. The Company has made and intends to continue to make substantial investments in product development. Extensive product development input is obtained through customers and the Company's monitoring of end user needs and changes in the marketplace. 5 7 The Company introduced the initial version of Network Health focused at the LAN and WAN environments in the first quarter of 1995. During 1996, the Company introduced three additional versions of Network Health -- Frame Relay, Router/Switch and Traffic Accountant. During 1997, the Company introduced two additional versions of Network Health -- Server and Service Level Reporting. During 1998, the Company introduced two additional versions of Network Health -- ATM and Remote Access. During 1999, the Company introduced one additional version of Network Health -- Response, which is now incorporated into the Application Health product. The Company is now developing new releases of Network Health, System Health and Application Health. The Company's total expenses for research and development for the years 1999, 1998 and 1997 were $11.4 million, $7.6 million and $4.9 million, respectively. The Company anticipates that it will continue to commit substantial resources to research and development in the future and that product development expenses may increase in absolute dollars in future periods. To date, the Company's development efforts have not resulted in any capitalized software development costs. As of December 31, 1999, the Company's product development organization consisted of 81 people. COMPETITION The market for the Company's products is highly competitive and subject to rapid technological change. Although the Company has experienced limited competition to date from products with comparable capabilities, the Company expects competition to increase in the future. The Company currently competes principally on the basis of: (i) the breadth of its products' features; (ii) the automated, scaleable, and cost effective nature of its products; and (iii) the Company's knowledge, expertise and service ability gained from years of close interaction with customers. While the Company believes that it currently competes favorably overall with respect to these factors, there can be no assurance that the Company will be able to continue to do so. The Company competes or may compete directly or indirectly with the following categories of companies: (i) report toolset vendors, such as Desktalk Systems, Inc.; (ii) large, well established networking OEMs such as International Business Machines Corporation, Lucent Technologies, Hewlett-Packard Company, and Cabletron Systems, Inc. that have developed network management platforms; (iii) developers of network element management solutions such as Cisco Systems, Inc., 3Com Corporation and Nortel Networks, Inc.; (iv) to a lesser degree, probe vendors such as NetScout Systems, Inc. and Visual Networks, Inc; and (v) enterprise management software, framework and platform providers such as BMC Software and Computer Associates. Additional competitors, including large networking or telecommunications equipment manufacturers, telecommunications service providers, and computer hardware and software companies, may enter this market, thereby further intensifying competition. Additionally, there can be no assurance that one or more of the Company's customers may not attempt to develop competing products internally or that one or more of the companies Concord has developed relationships with, such as the network management platform developers and probe vendors, will not try to develop a product that competes more directly with eHealth. Many of the Company's current and prospective competitors have significantly greater financial, selling and marketing, technical and other resources than the Company. As a result, these competitors may be able to devote greater resources to the development, promotion, sale and support of their products than the Company. Moreover, these companies may introduce additional products that are competitive with or better than those of the Company or may enter into strategic relationships to offer better products than those currently offered by the Company. There can be no assurance that the Company's products would effectively compete with such new products. To remain competitive, the Company must continue to invest in research and development, selling and marketing, and customer service and support. In addition, as the Company enters new markets and utilizes different distribution channels, the technical requirements and levels and bases of competition may be 6 8 different than those experienced in the Company's current market. There can be no assurance that the Company will be able to successfully compete against either current or potential competitors in the future. PROPRIETARY RIGHTS The Company relies on a combination of patent, copyright, trademark and trade secret laws, non-disclosure agreements and other contractual provisions to establish, maintain and protect its proprietary rights in its products. The Company has five issued U.S. patents, five pending U.S. patent applications and various foreign counterparts. There can be no assurance that patents which have been or may be issued will not be challenged, invalidated or circumvented, or any rights thereunder will provide protection of the Company's intellectual property rights. The Company believes that, because of the rapid pace of technological change in the software and data communications industries, the legal intellectual property protection for its products is a less significant factor in the Company's success than the knowledge, abilities and experience of the Company's employees, the frequency of its product enhancements, the effectiveness of its marketing activities and the timeliness and quality of its support services. Certain technologies used in the Company's products are licensed from third parties, including the database technology employed in the Company's Network Health product family. Such third-party licenses are generally non-exclusive, royalty based licenses. With respect to the database technology, the Company is obligated to make minimum fixed price payments to the extent that the royalty under such license does not exceed a certain minimum threshold. The termination of any such licenses, or the failure of the third-party licensors to adequately maintain or update their products, could result in delay in the Company's ability to ship certain of its products while it seeks to implement technology offered by alternative sources, and any required replacement licenses could prove costly. While it may be necessary or desirable in the future to obtain other licenses relating to one or more of the Company's products or relating to current or future technologies, there can be no assurance that the Company will be able to do so on commercially reasonable terms or at all. EMPLOYEES As of December 31, 1999, the Company had a total of 281 employees, all but 17 of whom were based in the United States. Of the total, 81 were in research and development, 43 were in customer service, 98 were in sales, 21 were in marketing, and 38 were in finance, administration and operations. The Company's future performance depends in significant part upon the continued service of its key engineering, technical support and sales personnel. Competition for such personnel is intense and there can be no assurance that the Company will be successful in attracting or retaining such personnel in the future. None of the Company's employees are represented by a labor union or are subject to a collective bargaining agreement. The Company has not experienced any work stoppages and considers its relations with its employees to be good. 7 9 ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company and their ages as of December 31, 1999 are as follows:
Name Age Position ---- --- -------- John A. Blaeser...................................... 58 Chief Executive Officer, President and Director Kevin J. Conklin..................................... 46 Sr. Vice President, Marketing Ferdinand Engel...................................... 51 Sr. Vice President, Engineering Gary E. Haroian...................................... 48 Sr. Vice President, Finance and Administration, Chief Financial Officer, Clerk and Treasurer Daniel D. Phillips, Jr............................... 45 Sr. Vice President, Worldwide Sales
Set forth below is certain information relating to each executive officer's business experience: John A. Blaeser has been Chief Executive Officer and President of the Company since January 1, 1996 and a Director of the Company since 1985. Prior to joining the Company, from 1991 until 1996, Mr. Blaeser was Managing General Partner of EG&G Venture Management, a venture capital firm. Kevin J. Conklin has been Senior Vice President of Marketing of the Company since September 1999 and Vice President of Marketing of the Company since March 1994. Prior to joining Concord, Mr. Conklin was Vice President of Product Marketing and Development at Artel Communications from June 1993 until joining Concord in March 1994, and from July 1991 to June 1993 Mr. Conklin served as Director of Marketing at Artel Communications. Ferdinand Engel has been Senior Vice President of Engineering of the Company since September 1999 and Vice President of Engineering of the Company since 1989. Prior to joining Concord, Mr. Engel was Vice President of Engineering for Technology Concepts at Bell Atlantic. Gary E. Haroian has been Senior Vice President of Finance and Administration and Chief Financial Officer of the Company since September 1999 and Vice President of Finance and Administration and Chief Financial Officer of the Company since February 1997. Mr. Haroian also serves as Clerk and Treasurer of the Company. Prior to joining the Company, Mr. Haroian was President and Chief Executive Officer of Stratus Computer. At Stratus, Mr. Haroian held the positions of Controller from 1983 until 1985, Vice President and Chief Financial Officer from 1985 until 1991, Vice President of Corporate Operations, from 1991 until 1993, Executive Vice President from 1993 until 1994, and President and Chief Operating Officer from 1994 until 1996. Daniel D. Phillips, Jr. has been Senior Vice President of Worldwide Sales of the Company since September 1999 and Vice President of Worldwide Sales of the Company since May 1994. Prior to joining Concord, Mr. Phillips was Vice President of Worldwide Sales of Epoch Systems. While at Epoch Systems from September 1989 until May 1994, Mr. Phillips also held the positions of Vice President of International and OEM Operations, and Director of International Operations. 8 10 RISK FACTORS References in these risk factors to "we," "our" and "us" refer to Concord Communications, Inc., a Massachusetts corporation. Any investment in our common stock involves a high degree of risk. If any of the following risks actually occur, our business, results of operations and financial condition would likely suffer. We do not provide forecasts of our future financial performance. From time to time, however, the information we provide or statements made by our employees may contain forward looking statements. This document contains forward looking statements. Any statements contained in this document that do not describe historical facts are forward looking statements. We make such forward looking statements under the provisions of the "safe harbor" section of the Private Securities Litigation Reform Act of 1995. The forward looking statements contained in this document are based on current expectations, but are subject to a number of risks and uncertainties. In particular, statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations which are not historical facts (including, but not limited to, statements concerning the plans and objectives of management; increases in sales and marketing, research and development and general and administrative expenses; expenses associated with Year 2000; statements related to acquisitions and the integration of acquired companies; and our expected liquidity and capital resources) constitute forward-looking statements. Our actual future results and actions may differ significantly from those stated in any forward-looking statements. Factors that may cause such differences include, but are not limited to, the factors discussed below. WE HAVE A LIMITED OPERATING HISTORY. OUR FUTURE OPERATING RESULTS ARE UNCERTAIN. We changed our focus to network management software in 1991 and commercially introduced our first Network Health product in 1995. Accordingly, we have only a limited operating history in the network performance management market upon which an evaluation of our business and prospects can be based. We incurred significant net losses in each of the five fiscal years prior to earning a small profit in 1997. As of December 31, 1999, we had accumulated net losses of $11.0 million. Our limited operating history and our dependence on a single product family in an emerging market make the prediction of future results of operations difficult or impossible, and our prospects must be considered in light of the risks, costs and difficulties frequently encountered by emerging companies, particularly companies in the competitive software industry. WE CANNOT ASSURE THAT OUR REVENUES WILL GROW OR THAT WE WILL REMAIN PROFITABLE. Although we have achieved recent revenue growth and profitability for the fiscal years ended 1999, 1998 and 1997, we cannot assure that we can generate substantial additional revenue growth on a quarterly or annual basis, or that we can sustain any revenue growth that we achieve. In addition, we have increased, and plan to increase further, our operating expenses in order to: - - fund higher levels of research and development; - - increase our sales and marketing efforts; - - develop new distribution channels; - - broaden our customer support capabilities; and - - expand our administrative resources in anticipation of future growth. To the extent that increases in our expenses precede or are not followed by increased revenue, our profitability will suffer. Our revenue must grow substantially in order for us to remain profitable on a quarterly or annual basis. In addition, in view of recent revenue growth, the rapidly evolving nature of our 9 11 business and markets, our recent acquisitions and our limited operating history in our current market, we believe that one should not rely on period-to-period comparisons of our financial results as an indication of our future performance. In light of our strong performance in 1998, we used all of our remaining unrestricted net operating loss and credit carryforwards in 1998. Accordingly, we recorded a tax provision of $532,600 during 1998 and $5.6 million during 1999. The continuing restrictions on our future use of our net operating loss carryforwards will severely limit the benefit, if any, we will attribute to this asset. OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE. We are likely to experience significant fluctuations in our quarterly operating results caused by many factors, including, but not limited to: - - changes in the demand for our products; - - the timing, composition and size of orders from our customers, including the tendency for significant bookings to occur in the last month of each fiscal quarter; - - our customers' spending patterns and budgetary resources for performance management software solutions; - - the success of our new customer generation activities; - - introductions or enhancements of products, or delays in the introductions or enhancements of products, by us or our competitors; - - changes in our pricing policies or those of our competitors; - - changes in the distribution channels through which products are sold; - - our ability to anticipate and effectively adapt to developing markets and rapidly changing technologies; - - changes in networking or communications technologies; - - our ability to attract, retain and motivate qualified personnel; - - changes in the mix of products sold by us and our competitors; - - the publication of opinions about us and our products, or our competitors and their products, by industry analysts or others; and - - changes in general economic conditions. Unlike other software companies with a longer history of operations, we do not derive a significant portion of our revenues from maintenance contracts, and therefore we do not have a significant ongoing revenue stream that may mitigate quarterly fluctuations in operating results. Furthermore, we are trying to expand our channels of distribution, and increases in our revenues will depend on our successful implementation of our distribution strategy. Due to the buying patterns of certain of our customers and also to our own sales incentive programs focused on annual sales goals, revenues in our fourth quarter could be higher than revenues in our first quarter of the following year. There also may be other factors, such as seasonality and the timing of receipt and delivery of orders within a fiscal quarter, that significantly affect our quarterly results, which are difficult to predict given our limited operating history. Our quarterly sales and operating results depend generally on: - - the volume and timing of orders within the quarter; - - the tendency of sales to occur late in fiscal quarters; and 10 12 - - our fulfillment of orders received within the quarter. In addition, our expense levels are based in part on our expectations of future orders and sales, which are extremely difficult to predict. A substantial portion of our operating expenses are related to personnel, facilities, and sales and marketing programs. Accordingly, we may not be able to adjust our fixed expenses quickly enough to address any significant shortfall in demand for our products in relation to our expectations. Due to all of the foregoing factors, we believe that our quarterly operating results are likely to vary significantly in the future. Therefore, in some future quarter our results of operations may fall below the expectations of securities analysts and investors. In such event, the trading price of our common stock would likely suffer. THE MARKET FOR PERFORMANCE MANAGEMENT SOFTWARE IS EMERGING. The market for our products is in an early stage of development. Although the rapid expansion and increasing complexity of computer networks, systems and applications in recent years has increased the demand for performance management software products, the awareness of and the need for such products is a recent development. Because the market for these products is only beginning to develop, it is difficult to assess: - - the size of this market; - - the appropriate features and prices for products to address this market; - - the optimal distribution strategy; and - - the competitive environment that will develop. The development of this market and our growth will depend significantly upon the willingness of telecommunications carriers, ISPs, systems integrators and outsourcers to integrate performance management software into their product and service offerings. The market for performance management software may not grow or we may fail to properly assess and address the needs of this market. OUR SUCCESS IS DEPENDENT UPON SALES TO TELECOMMUNICATIONS CARRIERS. A significant portion of our revenues are, and likely will continue to be, attributable to sales of products to telecommunications carriers. Our future performance depends upon telecommunications carriers' increased incorporation of our products and services as part of their package of product and service offerings to end users. Our products may fail to perform favorably in and become an accepted component of the telecommunications carriers' product and service offerings. The volume of sales of our products and services to telecommunications carriers may increase slower than we expect or may decrease. MARKET ACCEPTANCE OF OUR EHEALTH PRODUCT FAMILY IS CRITICAL TO OUR SUCCESS. We currently derive substantially all of our revenues from our eHealth product family, and we expect that revenues from these products will continue to account for substantially all of our revenues for the foreseeable future. Broad market acceptance of these products is critical to our future success. We cannot assure that market acceptance of eHealth will increase or even remain at current levels. Factors that may affect the market acceptance of our products include: - - the availability and price of competing products and technologies; and - - the success of our sales efforts and those of our marketing partners. 11 13 Moreover, if demand for performance management software products increases, we anticipate that our competitors will introduce additional competitive products and new competitors could enter our market and offer alternative products. Product introductions by our competitors may also reduce future market acceptance of our products. OUR INDUSTRY IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE. OUR SUCCESS DEPENDS UPON MAINTENANCE OF STANDARD PROTOCOLS. The software industry is characterized by: - - rapid technological change, - - frequent introductions of new products, - - changes in customer demands; and - - evolving industry standards. The introduction of products embodying new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable. Network Health's analysis and reporting, as well as the quality of its reports, depends upon Network Health's utilization of the industry-standard Simple Network Management Protocol (SNMP) and the data resident in conventional Management Information Bases (MIBs). Any change in these industry standards, the development of vendor-specific proprietary MIB technology, or the emergence of new network technologies could affect the compatibility of Network Health with these devices which, in turn, could affect Network Health's analysis and generation of comprehensive reports or the quality of the reports. Furthermore, although our products currently run on industry-standard UNIX operating systems and Windows NT, any significant change in industry-standard operating systems could affect the demand for, or the pricing of, our products. WE MUST INTRODUCE PRODUCT ENHANCEMENTS AND NEW PRODUCTS ON A TIMELY BASIS. Because of rapid technological change in the software industry and potential changes in the performance management software market and industry standards, the life cycle of versions of eHealth is difficult to estimate. We cannot assure that: - - we will successfully develop and market enhancements to eHealth or successfully develop new products that respond to technological changes, evolving industry standards or customer requirements; - - we will not experience difficulties that could delay or prevent the successful development, introduction and sale of such enhancements or new products; or - - that such enhancements or new products will adequately address the requirements of the marketplace and achieve any significant degree of market acceptance. OUR ACQUISITIONS MAY NEGATIVELY IMPACT OUR RESULTS OF OPERATIONS. In October 1999, we acquired Empire Technologies, Inc. Empire is a provider of solutions for proactive self-management of UNIX and Windows NT systems, as well as mission-critical applications. In February 2000, we acquired FirstSense Software, Inc. FirstSense is a provider of application response management solutions. Because these acquisitions will be recorded as "poolings-of-interests" for accounting and financial reporting purposes, we recorded the expenses of these acquisitions, which are substantial, in the period in which each acquisition occurred. The reporting of expenses of each acquisition as a current charge will have a significant adverse impact on our post-acquisition results of operations. 12 14 INTEGRATING OUR ACQUIRED PRODUCTS AND SERVICES MAY BE DIFFICULT. The anticipated benefits of our acquisitions may not be achieved unless, among other things, our operations, products, services and personnel are successfully combined with those of our acquired companies in a timely and efficient manner. The diversion of our attention, and any difficulties encountered in our transition processes, could harm the combined enterprise. We cannot assure assurance that we will successfully integrate our acquired companies, because, among other things: - the products and services offered by us and our acquired companies are highly complex and have been developed independently; and - integration of our product lines with those of our acquired companies will require coordination of separate development and engineering teams from each company. If the anticipated benefits of our acquisitions are not achieved or are not achieved in a timely fashion, then our acquisitions could harm our operating results for a significant period of time that cannot now be determined. THE MARKET FOR OUR PRODUCTS IS INTENSELY COMPETITIVE. The market for our products is new, intensely competitive, rapidly evolving and subject to technological change. Our current and future competitors include: - - remote monitoring (RMON) probe vendors; - - element management software vendors; - - other performance analysis and reporting vendors; - - companies offering network performance reporting services; - - large network management platform vendors which may bundle their products with other hardware and software in a manner that may discourage users from purchasing our products; and - - developers of network element management solutions. We expect competition to persist, increase and intensify in the future with possible price competition developing in our markets. Many of our current and potential competitors have longer operating histories and significantly greater financial, technical and marketing resources and name recognition than us. We do not believe our market will support a large number of competitors and their products. In the past, a number of software markets have become dominated by one or a small number of suppliers, and a small number of suppliers or even a single supplier may dominate our market. If we do not provide products that achieve success in our market in the short term, we could suffer an insurmountable loss in market share and brand name acceptance. We cannot ensure that we will compete effectively with current and future competitors. OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS MAY HARM OUR COMPETITIVE POSITION IN THE NETWORK MANAGEMENT SOFTWARE MARKET. Our success depends significantly upon our proprietary technology. We rely on a combination of patent, copyright, trademark and trade secret laws, non-disclosure agreements and other contractual provisions to establish, maintain and protect our proprietary rights. These means afford only limited protection. We have six issued U.S. patents, seven pending U.S. patent applications, and various foreign counterparts. We cannot assure that patents will issue from our pending applications or from any future applications or that, if issued, any claims allowed will be sufficiently broad to protect our technology. In addition, we cannot assure that any patents that have been or may be issued will not be challenged, invalidated or circumvented, or that any rights granted thereunder would protect our proprietary rights. Failure of any patents to protect our technology may make it easier for our competitors to offer equivalent 13 15 or superior technology. We have registered or applied for registration for certain trademarks, and will continue to evaluate the registration of additional trademarks as appropriate. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or services or to obtain and use information that we regard as proprietary. Third parties may also independently develop similar technology without breach of our proprietary rights. In addition, the laws of some foreign countries do not protect proprietary rights to as great an extent as do the laws of the United States. In addition, our products are licensed under shrink wrap license agreements that are not signed by licensees and therefore may not be binding under the laws of certain jurisdictions. WE LICENSE CERTAIN TECHNOLOGIES FROM THIRD PARTIES. Certain technologies used by our products are licensed from third parties, generally on a non-exclusive basis. The termination of any such licenses, or the failure of the third-party licensors to adequately maintain or update their products, could result in delay in our shipment of certain of our products while we seek to implement technology offered by alternative sources, and any required replacement licenses could prove costly. While it may be necessary or desirable in the future to obtain other licenses relating to one or more of our products or relating to current or future technologies, we cannot assure that we will be successful in doing so on commercially reasonable terms or at all. INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS WOULD HARM OUR BUSINESS. Although we do not believe that we are infringing the intellectual property rights of others, claims of infringement are becoming increasingly common as the software industry develops and legal protections, including patents, are applied to software products. Litigation may be necessary to protect our proprietary technology, and third parties may assert infringement claims against us with respect to their proprietary rights. Any claims or litigation can be time-consuming and expensive regardless of their merit. Infringement claims against us can cause product release delays, require us to redesign our products or require us to enter into royalty or license agreements, which agreements may not be available on terms acceptable to us or at all. PRODUCT DEFECTS COULD RESULT IN LOSS OR DELAY IN MARKET ACCEPTANCE OF OUR PRODUCTS. As a result of their complexity, software products may contain undetected errors or failures when first introduced or as new versions are released. We cannot assure that, despite testing by us and testing and use by current and potential customers, errors will not be found in new products after commencement of commercial shipments or, if discovered, that we will successfully correct such errors in a timely manner or at all. The occurrence of errors and failures in our products could result in loss of or delay in market acceptance of our products, and alleviating such errors and failures could require significant expenditure of capital and other resources by us. WE MAY NOT HAVE SUFFICIENT PROTECTION AGAINST PRODUCT LIABILITY CLAIMS. Since our products are used by our customers to predict future network problems and avoid failures of the network to support critical business functions, design defects, software errors, misuse of our products, incorrect data from network elements or other potential problems within or out of our control that may arise from the use of our products could result in financial or other damages to our customers. We do not maintain product liability insurance. Although our license agreements with our customers typically contain provisions designed to limit our exposure to potential claims as well as any liabilities arising from such claims, such provisions may not effectively protect us against such claims and the liability and costs associated therewith. We provide warranties for our products for a period of time (currently three months) after purchase. Our license agreements generally do not permit product returns by the customer, and product returns for fiscal 1999, 1998 and 1997 represented less than 1.0% of total revenues during each of such periods. We cannot assure that product returns will not increase as a percentage of total revenues in future periods. 14 16 WE RELY ON STRATEGIC PARTNERS AND OTHER EVOLVING DISTRIBUTION CHANNELS. Our distribution strategy is to develop multiple distribution channels, including sales through: - - strategic marketing partners, such as Cisco Systems; - - value added resellers, such as Empowered Networks; - - telecommunications carriers, such as MCI Communications Corporation; - - OEMs, such as Lucent Technologies, Inc.; and - - independent software vendors and international distributors. We have developed a number of these relationships and intend to continue to develop new "channel partner" relationships. Our success will depend in large part on our development of these additional distribution relationships and on the performance and success of these third parties, particularly telecommunications carriers and other network service providers. We have recently established many of our channel partner relationships. Accordingly, we cannot predict the extent to which our channel partners will be successful in marketing our products. We generally expect that our agreements with our channel partners may be terminated by either party without cause. None of our channel partners are required to purchase minimum quantities of our products and none of these agreements contain exclusive distribution arrangements. We may: - - fail to attract important and effective channel partners; - - fail to penetrate the market segments of our channel partners; or - - lose any of our channel partners, as a result of competitive products offered by other companies, products developed internally by these channel partners or otherwise. WE MAY FAIL TO SUCCESSFULLY MANAGE OUR GROWTH. We have experienced significant growth in our sales and operations and in the complexity of our products and product distribution channels. We have increased and are continuing to increase the size of our sales force and coverage territories. Furthermore, we have established and are continuing to establish additional distribution channels through third party relationships. Our growth, coupled with the rapid evolution of our markets, has placed, and is likely to continue to place, significant strains on our administrative, operational and financial resources and increase demands on our internal systems, procedures and controls. OUR SUCCESS DEPENDS ON OUR RETENTION OF KEY PERSONNEL. Our performance depends substantially on the performance of our key technical and senior management personnel, none of whom is bound by an employment agreement. We may lose the services of any of such persons. We do not maintain key person life insurance policies on any of our employees. Our success depends on our continuing ability to identify, hire, train, motivate and retain highly qualified management, technical, and sales and marketing personnel, including recently hired officers and other employees. We experience intense competition for such personnel. We cannot assure that we will successfully attract, assimilate or retain highly qualified technical, managerial or sales and marketing personnel in the future. 15 17 OUR FAILURE TO EXPAND INTO INTERNATIONAL MARKETS COULD HARM OUR BUSINESS. We intend to continue to expand our operations outside of the United States and enter additional international markets, primarily through the establishment of additional reseller arrangements. We expect to commit additional time and development resources to customizing our products and services for selected international markets and to developing international sales and support channels. We cannot assure that such efforts will be successful. We face certain difficulties and risks inherent in doing business internationally, including, but not limited to: - - costs of customizing products and services for international markets; - - dependence on independent resellers; - - multiple and conflicting regulations; - - exchange controls; - - longer payment cycles; - - unexpected changes in regulatory requirements; - - import and export restrictions and tariffs; - - difficulties in staffing and managing international operations; - - greater difficulty or delay in accounts receivable collection; - - potentially adverse tax consequences; - - the burden of complying with a variety of laws outside the United States; - - the impact of possible recessionary environments in economies outside the United States; and - - political and economic instability. Our successful expansion into certain countries will require additional modification of our products, particularly national language support. Our current export sales are denominated in United States dollars and we currently expect to continue this practice as we expand internationally. To the extent that international sales continue to be denominated in U.S. dollars, an increase in the value of the United States dollar relative to other currencies could make our products and services more expensive and, therefore, potentially less competitive in international markets. To the extent that future international sales are denominated in foreign currency, our operating results will be subject to risks associated with foreign currency fluctuation. We would consider entering into forward exchange contracts or otherwise engaging in hedging activities. To date, as all export sales are denominated in U.S. dollars, we have not entered into any such contracts or engaged in any such activities. As we increase our international sales, seasonal fluctuations resulting from lower sales that typically occur during the summer months in Europe and other parts of the world may affect our total revenues. OUR SYSTEMS ARE SUBJECT TO YEAR 2000 COMPLIANCE FAILURES. We were aware of the issues associated with the programming code in existing computer systems and software products as the millennium (Year 2000) approached. We set up a task force consisting of the Director of IT and Operations, the Manager of System Applications and representative personnel from each functional area. This task force addressed the Year 2000 issue in the following categories: 16 18 - - the Network Health product; - - internal business computer systems and software applications; - - internal systems other than computer hardware and software; and - - systems of our external suppliers and service providers. We also assessed our Year 2000 associated costs, risks and potential contingency plans. Despite our efforts with respect to the Year 2000 issue, we cannot assure that we would not suffer upon the failure of our products, our internal systems and applications or the systems of our third party suppliers and service providers to properly operate or manage data beyond 1999. We believe that we have identified and resolved all our Year 2000 issues. We realize, however, that it may not be possible to determine, at this time, with complete certainty that all Year 2000 problems affecting us were corrected. As a result, we could experience a significant number of operational inconveniences and inefficiencies that may divert our time and attention from our ordinary business activities. OUR COMMON STOCK PRICE COULD EXPERIENCE SIGNIFICANT VOLATILITY. We completed an initial public offering of our common stock during October of 1997. The market price of our common stock may be highly volatile and could be subject to wide fluctuations in response to: - - variations in results of operations, - - announcements of technological innovations or new products by us or our competitors, - - changes in financial estimates by securities analysts, or - - other events or factors. In addition, the financial markets have experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of many high technology companies and that often have been unrelated to the operating performance of such companies or have resulted from the failure of the operating results of such companies to meet market expectations in a particular quarter. Broad market fluctuations or any failure of our operating results in a particular quarter to meet market expectations may adversely affect the market price of our common stock. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against such a company. Such litigation could result in substantial costs and a diversion of our attention and resources. WE MAY NEED FUTURE CAPITAL FUNDING. We plan to continue to expend substantial funds on the continued development, sales and marketing of the eHealth product family. We cannot assure that our existing capital resources, the proceeds from our initial public offering during October 1997 and any funds that may be generated from future operations together will be sufficient to finance our future operations or that other sources of funding will be available on terms acceptable to us, if at all. In addition, future sales of substantial amounts of our securities in the public market could adversely affect prevailing market prices and could impair our future ability to raise capital through the sale of our securities. 17 19 ITEM 2. PROPERTIES The Company's corporate office and principal facility is located in Marlboro, Massachusetts. In March, 1999 the Company signed a 7 year operating lease for its principal operating facilities. Aggregate rental payments under the lease will be $12.0 million. This facility accommodates finance, administration and operations, research and development, customer support and marketing. The Company also leases, on a short-term basis, sales office space in Atlanta, GA, Tustin, CA, Dallas, TX, Stafford, TX, Plymouth, MI, Barrington, IL, Eden Prairie, MN, Seattle, WA, Vienna, VA, Point Pleasant, NJ, Boca Raton, FL, London, England, Hamburg, Germany, Paris, France, the Netherlands, Australia and Singapore. Following the abandonment of the Company's existing corporate office space, the Company recorded a third quarter charge of $700,000, representing the remaining lease commitment, less expected sublease income. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any litigation that it believes could have a material adverse effect on the business, results of operations and financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 1999. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK The Company effected its initial public offering on October 24, 1997 at a price of $14.00 per share. Since that date, the Company's Common Stock has traded on the Nasdaq National Market under the symbol CCRD. The following table sets forth, for the period indicated, the high and low closing sales prices for the Common Stock, all as reported by the Nasdaq National Market.
Period High Low ------ ---- --- October 16, 1997 - December 31, 1997 $ 23.25 $ 15.75 Fiscal 1998: First Quarter...................................... $ 28.75 $ 15.13 Second Quarter..................................... 29.38 21.25 Third Quarter...................................... 45.13 26.00 Fourth Quarter..................................... 56.75 31.25 Fiscal Year............................................ 56.75 15.13 Fiscal 1999: First Quarter...................................... $ 68.25 $ 43.75 Second Quarter..................................... 58.00 36.56 Third Quarter...................................... 56.75 34.75 Fourth Quarter..................................... 64.00 38.00 Fiscal Year............................................ 68.25 34.75
As of March 8, 2000, there were approximately 239 stockholders of record of the Company's Common Stock. 18 20 DIVIDEND POLICY The Company currently anticipates that it will retain all future earnings for use in its business and does not anticipate that it will pay any cash dividends in the foreseeable future. The payment of any future dividends will be at the discretion of the Company's Board of Directors and will depend upon, among other things, future earnings, operations, capital requirements and the general financial condition of the Company, general business conditions and contractual restrictions on payment of dividends, if any. USE OF PROCEEDS On October 16, 1997, the Company commenced an initial public offering ("IPO") of 2,900,000 shares of common stock, par value $.01 per share (the "Common Stock"), of the Company pursuant to the Company's final prospectus dated October 15, 1997 (the "Prospectus"). The Prospectus was contained in the Company's Registration Statement on Form S-1, which was declared effective by the Securities and Exchange Commission (SEC File No. 333-33227) on October 15, 1997. Of the 2,900,000 shares of Common Stock offered, 2,300,000 shares were offered and sold by the Company and 600,000 shares were offered and sold by certain stockholders of the Company. As part of the IPO, the Company granted the several underwriters an overallotment option to purchase up to an additional 435,000 shares of Common Stock (the "Underwriters' Option"). The IPO closed on October 21, 1997 upon the sale of 2,900,000 shares of Common Stock to the underwriters. On October 24, 1997, the Representatives, on behalf of the several underwriters, exercised the Underwriters' Option, purchasing 435,000 additional shares of Common Stock from the Company. The aggregate offering price of the IPO to the public was $40,600,000 (exclusive of the Underwriters' Option), with proceeds to the Company and selling shareholders, after deduction of the underwriting discount, of $29,946,000 (before deducting offering expenses payable by the Company) and $7,812,000 respectively. The aggregate offering price of the Underwriters' Option exercised was $6,090,000, with proceeds to the Company, after deduction of the underwriting discount, of $5,663,700 (before deducting offering expenses payable by the Company). The aggregate amount of expenses incurred by the Company in connection with the issuance and distribution of the shares of Common Stock offered and sold in the IPO were approximately $3.6 million, including $2.7 million in underwriting discounts and commissions and $950,000 in other offering expenses. None of the expenses paid by the Company in connection with the IPO or the exercise of the Underwriters' Option were paid, directly or indirectly, to directors, officers, persons owning ten percent or more of the Company's equity securities, or affiliates of the Company. The net proceeds to the Company from the IPO, after deducting underwriting discounts and commissions and other offering expenses were approximately $34.7 million. To date, the Company has not utilized any of the net proceeds from the IPO. The Company has invested all such net proceeds primarily in US treasury obligations and other interest bearing investment grade securities. None of the net proceeds from the IPO were used to pay, directly or indirectly, directors, officers, persons owning ten percent or more of the Company's equity securities, or affiliates of the Company. ISSUANCE OF SECURITIES On October 29, 1999, the Company completed a merger with Empire Technologies, Inc. Concord issued an aggregate of 815,248 shares of Concord Common Stock to the stockholders of Empire in the Merger in a private placement transaction pursuant to Section 4(2) under the Securities Act of 1933. The Company plans to file a Form S-3 Registration Statement to cover the resale of the securities issued in the merger. On February 4, 2000, the Company completed a merger with FirstSense Software, Inc. The Company has reserved for issuance in connection with the merger, 1,940,000 shares of Concord Common Stock. The Company will issue the shares in a private placement transaction pursuant to Section 4(2) under the 19 21 Securities Act of 1933. The Company is obligated to file a Form S-3 Registration Statement to cover the resale of the securities issued in the merger. ITEM 6. SELECTED FINANCIAL DATA
Fiscal Year Ended ------------------------------------------------------- Dec. 31, Dec. 31, Dec. 31, Dec. 28, Dec. 30, 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues: License revenues........................ $ 52,708 $ 34,597 $ 18,455 $ 8,172 $ 3,565 Service revenues........................ 14,635 6,860 2,225 1,162 912 -------- -------- -------- -------- ------- Total revenues...................... 67,343 41,457 20,680 9,334 4,477 Cost of revenues............................ 8,086 4,676 2,925 1,973 1,170 ------ ------ -------- -------- ------- Gross profit................................ 59,257 36,781 17,755 7,361 3,307 -------- -------- -------- -------- ------- Operating expenses: Research and development................ 11,409 7,387 5,069 4,009 2,413 Sales and marketing..................... 25,687 17,522 10,173 7,040 3,694 General and administrative.............. 3,679 2,802 2,058 1,177 1,000 Stock-based compensation (Note 3)....... 2,549 1,001 -- -- -- General and administrative.............. 551 -- -- -- -- -------- -------- -------- -------- ------- Total operating expenses............ 43,875 28,712 17,300 12,226 7,107 -------- -------- -------- -------- ------- Operating income (loss)..................... 15,382 8,069 455 (4,865) (3,800) Other income (expense), net................. 3,117 2,290 305 43 80 --------- --------- --------- --------- -------- Income (loss) before income taxes... $ 18,499 $ 10,359 $ 760 $ (4,822) $(3,720) Provision for income taxes........ 5,593 533 -- -- -- --------- --------- --------- --------- -------- Net income (loss)........................... $ 12,906 $ 9,826 $ 760 $ (4,822) $(3,720) ========= ========= ========= ========= ======== Pro forma provision for income taxes on Subchapter S-Corporation income (unaudited) 146 41 -- -- -- --------- --------- --------- --------- -------- Pro forma net income (unaudited) ........... $ 12,760 $ 9,785 $ 760 $ (4,822) $(3,720) ========= ========= ========= ========= ======== Net income (loss) per common and potential common share: Basic................................... $ 0.91 $ 0.73 $ 0.20 $ (3.06) $ (2.38) Diluted................................. 0.85 0.66 0.06 (3.06) (2.38) Pro forma diluted....................... 0.85 0.66 0.06 (0.50) (0.70) Weighted average common and potential common shares outstanding: Basic................................... 14,161 13,457 3,885 1,576 1,561 Diluted................................. 15,139 14,892 12,134 1,576 1,561 Pro forma diluted....................... 15,139 14,892 12,134 9,684 5,322 Fiscal Year Ended ----------------------------------------------------- Dec. 31, Dec. 31, Dec. 31, Dec. 28, Dec. 30, 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents............. $ 62,044 $ 51,249 $ 36,898 $ 1,664 $ 4,397 Working capital (deficit)............. 55,442 43,978 33,356 (1,387) 3,316 Total assets.......................... 84,405 59,923 43,014 5,584 6,729 Long-term debt, net of current portion -- 1,001 189 668 -- Redeemable convertible preferred stock -- -- -- 14,478 13,616 Total stockholders' equity (deficit).. 63,051 45,751 35,249 (15,035) (9,126)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information appearing under the caption, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1999 Annual Report to Stockholders is incorporated herein by reference. 20 22 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments. The Company does not invest in derivative financial instruments, other financial instruments or derivative commodity instruments for which fair value disclosure would be required under SFAS No. 107. All of the Company's investments are in investment grade securities with high credit ratings of relatively short duration that trade in highly liquid markets and are carried at fair value on the Company's books. Accordingly, the Company has no quantitative information concerning the market risk of participating in such investments. Primary Market Risk Exposures. The Company's primary market risk exposure is in the area of interest rate risk. The Company's investment portfolio of cash equivalents is subject to interest rate fluctuations, but the Company believes this risk is immaterial due to the short-term nature of these investments. Substantially all of the Company's business outside the United States is conducted in U.S. dollar-denominated transactions, whereas the Company's operating expenses in its international branches are denominated in local currency. The Company has no foreign exchange contracts, option contracts or other foreign hedging arrangements. The Company believes that the operating expenses of its foreign operations are immaterial, and therefore any associated market risk is unlikely to have a material adverse effect on the Company's business, results of operations or financial condition. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's financial statements together with the related notes and the report of Arthur Andersen LLP, independent accountants, are set forth beginning on page F-1 of Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT The information under the captions "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" as set forth in the Company's proxy statement for its annual stockholders' meeting to be held April 25, 2000 is incorporated herein by reference. The information concerning officers is included in Part I, Item 1A under the caption "Executive Officers". ITEM 11. EXECUTIVE COMPENSATION The information under the caption "Executive Compensation" as set forth in the Company's proxy statement for its annual stockholders' meeting to be held April 25, 2000 is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the caption "Securities Ownership of Certain Beneficial Owners and Management" as set forth in the Company's proxy statement for its annual stockholders' meeting to be held April 25, 2000 is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable. 21 23 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form: 1. Financial Statements: Page Number Report of Independent Public Accountants F-1 Balance Sheets: December 31, 1999 and December 31, 1998 F-2 Statements of Income: Years ended December 31, 1999, December 31, 1998 and December 31, 1997 F-3 Statements of Stockholders' Equity: Years ended December 31, 1999, December 31, 1998 and December 31, 1997 F-4 Statements of Cash Flows: Years ended December 31, 1999, December 31, 1998 and December 31, 1997 F-5 Notes to the Financial Statements F-6 2. Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts Included in Item 9 of Notes to the Financial Statements 3. Exhibits: See Index to Exhibits. The Exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this report. (b) Reports on Form 8-K: Form 8-K was filed on November 12, 1999 for disclosure of the merger with Empire Technologies, Inc. Form 8-K was filed on January 26, 2000 for disclosure of the execution of the merger with FirstSense Software, Inc. Form 8-K was filed on February 10, 2000 for the disclosure of the consummation of the merger with FirstSense Software, Inc. Form 8-K was filed on February 29, 2000 for the disclosure of the 1999 audited consolidated financial statements and management's discussion and analysis of financial condition and results of operations related thereto.
22 24 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Concord Communications, Inc.: We have audited the accompanying consolidated balance sheets of Concord Communications, Inc. (a Massachusetts corporation) as of December 31, 1999 and December 31, 1998, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Concord Communications, Inc. as of December 31, 1999 and December 31, 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in United States. Arthur Andersen LLP Boston, Massachusetts January 17, 2000 F-1 25 CONCORD COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS
December 31, December 31, 1999 1998 ------------ ------------ ASSETS Current Assets: Cash, cash equivalents and marketable securities...... $ 62,044,141 $ 51,248,773 Accounts receivable, net of allowance of approximately $930,000 and $450,000 in 1999 and 1998, respectively........................................ 13,465,999 5,391,723 Prepaid expenses and other current assets............. 1,286,070 509,805 ---------- ---------- Total current assets.............................. 76,796,210 57,150,301 Equipment and Improvements, at cost: Equipment............................................. 7,897,533 3,792,080 Leasehold improvements................................ 3,005,915 388,894 ---------- ---------- 10,903,448 4,180,974 Less-- Accumulated depreciation and amortization...... 3,294,551 1,407,430 ---------- ---------- 7,608,897 2,773,544 ---------- ---------- $ 84,405,107 $ 59,923,845 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable...................................... $ 4,542,644 $ 3,599,636 Accrued expenses...................................... 6,885,827 5,087,984 Deferred revenue...................................... 9,925,297 5,485,585 ---------- ---------- Total current liabilities......................... 21,353,768 14,173,205 ---------- ---------- Commitments and Contingencies (Note 8) Stockholders' Equity Preferred Stock, $.01 par value -- Authorized -- 1,000,000 shares Issued and outstanding-- None...................... -- -- Common stock, $.01 par value-- Authorized -- 50,000,000 shares Issued and outstanding -- 14,406,192 and 13,040,374 shares, in 1999 and 1998 respectively.............. 144,062 130,405 Additional paid-in capital............................ 77,799,827 69,998,035 Deferred compensation................................. (53,221) (101,189) Accumulated other comprehensive income................ (1,386,125) 149,606 Accumulated deficit................................... (13,453,204) (24,426,217) ---------- ---------- Total stockholders' equity ....................... 63,051,339 45,750,640 ---------- ---------- $ 84,405,107 $ 59,923,845 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-2 26 CONCORD COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF INCOME
Years Ended ---------------------------------------------- December 31, December 31, December 31, 1999 1998 1997 ------------ ------------ ------------ Revenues: License revenues............. $52,707,905 $34,597,958 $18,454,613 Service revenues............. 14,635,150 6,859,394 2,225,287 ---------- ---------- ---------- Total revenues.......... 67,343,055 41,457,352 20,679,900 Cost of Revenues.................. 8,085,987 4,676,335 2,925,169 ---------- ---------- ---------- Gross profit............ 59,257,068 36,781,017 17,754,731 ---------- ---------- ---------- Operating Expenses: Research and development..... 11,409,464 7,386,706 5,068,489 Sales and marketing.......... 25,687,262 17,522,653 10,173,182 General and administrative... 3,678,544 2,802,023 2,058,402 Stock-based compensation (Note 3).................... 2,549,000 1,001,000 -- Acquisition-related charges (Note 3).................... 550,601 -- -- ---------- ---------- ---------- Total operating expenses..... 43,874,871 28,712,382 17,300,073 ---------- ---------- ---------- Operating income........ 15,382,197 8,068,635 454,658 ---------- ---------- ---------- Other Income (Expense): Interest income.............. 3,136,026 2,355,816 428,253 Interest expense............. -- (514) (126,836) Other........................ (19,268) (65,251) 4,248 ---------- ---------- ---------- Total other income, net. 3,116,758 2,290,051 305,665 ---------- ---------- ---------- Income before income taxes 18,498,955 10,358,686 760,323 Provision for income taxes........ 5,592,703 532,600 -- ---------- ---------- ---------- Net income........................ $12,906,252 $ 9,826,086 $ 760,323 $ ========== ========== ========== Pro forma provision for income taxes on Subchapter S-Corporation income (unaudited) .................... 146,325 41,400 -- ---------- ---------- ---------- Pro forma net income (unaudited).. $12,759,927 $ 9,784,686 $ 760,323 ========== =========== ========== Net income per common and potential common share: Basic $ 0.91 $ 0.73 $ 0.20 ========== =========== ========== Diluted $ 0.85 $ 0.66 $ 0.06 ========== =========== ========== Pro forma diluted (unaudited) $ 0.85 $ 0.66 $ 0.06 ========== =========== ========== Weighted average common and potential common shares outstanding: Basic 14,160,755 13,457,495 3,884,915 ========== =========== ========== Diluted 15,139,325 14,892,238 12,134,727 ========== =========== ========== Pro forma diluted (unaudited) 15,139,325 14,892,238 12,134,727 ========== =========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-3 27 CONCORD COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock -------------------- Unrealized Accumulated Additional Deferred Gain On Other Number $.01 Paid-In Compen- Marketable Accumulated Comprehensive Comprehensive of Shares Par Value Capital sation Securities Deficit Income Total Income --------- --------- ---------- -------- ---------- ----------- ------------- ----- ------------- BALANCE, DECEMBER 28, 1996... 844,482 $8,445 $18,156,951 -- -- $(32,943,433) -- $(14,778,037) -- Issuance of common stock, net of issuance costs of $ 955,359 2,735,000 27,350 34,626,991 -- -- -- -- 34,654,341 -- Accretion of divi- dends on preferred stock.... -- -- -- -- -- (441,557) -- (441,557) -- Conversion of redeemable convertible pre- ferred stock to common stock....... 8,108,258 81,083 14,838,203 -- -- -- -- 14,919,286 -- Exercise of stock options............ 331,448 3,315 188,594 -- -- -- -- 191,909 -- Deferred compen- sation related to grants of stock options..... -- -- 191,875 (191,875) -- -- -- -- -- Amortization of deferred compen- sation related to grants of stock options..... -- -- -- 42,718 -- -- -- 42,718 -- Unrealized gains on available-for- sale securities... -- -- -- -- 19,750 -- 19,750 19,750 19,750 Distribution to shareholders...... -- -- -- -- -- (119,698) -- (119,698) -- Net income........ -- -- -- -- -- 760,323 -- 760,323 760,323 --------- --------- --------- -------- --------- --------- -------- --------- --------- Comprehensive Income 19,750 780,073 BALANCE, DECEMBER 31, 1997.......... 12,019,188 120,193 68,002,614 (149,157) 19,750 (32,744,365) -- 35,249,035 -- Shares issued in connection with employee stock plans............. 1,021,186 10,212 1,495,421 -- -- -- -- 1,505,633 -- Tax benefit associated with employee stock options........... -- -- 500,000 -- -- -- -- 500,000 -- Amortization of de- ferred compen- sation related to grants of stock options........... -- -- -- 47,968 -- -- -- 47,968 -- Unrealized gains on available-for- sale securities... -- -- -- -- 129,856 -- 129,856 129,856 129,856 Distribution to shareholders....... -- -- -- -- (1,507,938) -- (1,507,938) -- Net income........ -- -- -- -- -- 9,826,086 -- 9,826,086 9,826,086 --------- --------- --------- -------- --------- --------- -------- --------- --------- Comprehensive Income 149,606 9,955,942 BALANCE, DECEMBER 31, 1998.......... 13,040,374 130,405 69,998,035 (101,189) 149,606 (24,426,217) -- 45,750,640 -- Shares issued in connection with employee stock plans............. 1,365,818 13,657 2,901,792 -- -- -- -- 2,915,449 -- Tax benefit associated with employee stock options........... -- -- 4,900,000 -- -- -- -- 4,900,000 -- Amortization of deferred comp- ensation related to grants of stock options..... -- -- -- 47,968 -- -- -- 47,968 -- Unrealized gains on available-for- sale securities... -- -- -- -- (1,535,731) -- (1,535,731) (1,535,731) (1,535,731) Distribution to shareholders....... -- -- -- -- -- (1,933,239) -- (1,933,239) -- Net income........ -- -- -- -- -- 12,906,252 -- 12,906,252 12,906,252 --------- --------- ----------- -------- ----------- ------------ -------- ----------- ----------- Comprehensive Income $(1,386,125) $11,372,521 =========== =========== BALANCE, DECEMBER 31, 1999.......... 14,406,192 $ 144,062 $77,799,827 $(53,221) $(1,386,125) $(13,453,204) $63,051,339 ========== ========= =========== ======== =========== ============ =========== The accompanying notes are an integral part of these consolidated financial statements.
F-4 28 CONCORD COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 1998 1997 ------------- ------------ ------------ Cash Flows from Operating Activities: Net income................................... $12,906,252 $ 9,826,026 $ 760,323 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.............. 1,935,089 756,669 591,798 Unrealized (loss) gain on available-for-sale securities.............................. (1,535,731) 129,856 19,750 Changes in current assets and liabilities: Accounts receivable..................... (8,074,276) (1,640,779) (1,423,916) Prepaid expenses and other current assets (776,265) (227,495) (132,769) Accounts payable........................ 943,008 1,787,061 207,536 Accrued expenses........................ 6,697,843 2,351,472 1,306,493 Deferred revenue........................ 4,439,712 3,132,156 1,001,678 ---------- ---------- ---------- Net cash provided by operating activities 16,535,632 16,114,966 2,330,893 ---------- ---------- ---------- Cash Flows from Investing Activities: Purchases of equipment and improvements........ (6,722,474) (1,891,606) (1,119,863) Purchases of investments in marketable securities................................. (252,350,710) (53,139,637) (116,402,905) Sales of investments in marketable securities.. 238,648,717 42,712,930 87,741,538 ----------- ----------- ----------- Net cash used in investing activities. (20,424,467) (12,318,313) (29,781,230) ----------- ----------- ----------- Cash Flows from Financing Activities: Proceeds from bank borrowings.................. -- -- 583,707 Repayments of bank borrowings.................. -- -- (1,508,209) Distribution to shareholders................... (1,933,239) (1,507,938) (119,698) Proceeds from issuance of common stock......... -- -- 34,654,341 Proceeds from shares issued in connection with employee stock plans.................... 2,915,449 1,505,633 191,909 ----------- ----------- ----------- Net cash provided by (used in) financing activities.................. 982,210 (2,305) 33,802,050 ----------- ----------- ----------- Net (Decrease) Increase in Cash and Cash Equivalents (2,906,625) 3,794,348 6,351,713 Cash and Cash Equivalents, beginning of year..... 12,011,093 8,216,745 1,865,032 ----------- ----------- ----------- Cash and Cash Equivalents, end of year........... $ 9,104,468 $12,011,093 $ 8,216,745 =========== =========== =========== Supplemental Disclosure of Cash Flow Information: Cash paid for interest......................... $ -- $ -- $ 126,836 =========== =========== =========== Cash paid for taxes............................ $ 341,837 $ 46,159 $ 1,539 =========== =========== =========== Supplemental Disclosure of Noncash Transactions: Accretion of dividends on preferred stock...... $ -- $ -- $ 441,557 =========== =========== =========== Deferred compensation related to grants of stock options...................... $ -- $ -- $ 191,875 =========== =========== =========== Conversion of redeemable convertible preferred stock to common stock.............. $ -- $ -- $14,919,286 =========== =========== =========== Unrealized (loss) gain on available-for-sale securities................................... $(1,535,731) $ 129,856 $ 19,750 =========== =========== =========== Tax benefit associated with employee stock options................................ $ 4,900,000 $ 500,000 $ -- =========== =========== =========== Retirement of fully depreciated fixed assets... $ -- $ 4,330,000 $ -- =========== =========== =========== The accompanying notes are an integral part of these consolidated financial statements.
F-5 29 CONCORD COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 (1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Concord Communications, Inc. (the Company or Concord) is primarily engaged in the development and sale of next-generation performance management solutions to companies principally in the United States and Europe. The Company is subject to the risks associated with emerging, technology-oriented companies. Primary among these risks are competition from substitute products and the ability to successfully develop and market the Company's current and future products. (a) Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and all its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. (b) Cash, Cash Equivalents and Marketable Securities The Company follows the provisions of Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Company has classified its cash equivalents and marketable securities as available-for-sale and recorded them at fair value, with the unrealized gains and losses reported as a separate component of stockholders' equity. The Company considers cash and highly liquid investments, purchased with an original maturity of 90 days or less, to be cash and cash equivalents. Cash and cash equivalents are $9,104,468 and $12,011,093 at December 31, 1999 and December 31, 1998, respectively. (c) Revenue Recognition The Company's revenues consist of software license revenues and service revenues. Software license revenues are recognized in accordance with the American Institute of Certified Public Accountants' Statement of Position ("SOP") No. 97-2, Software Revenue Recognition, as modified by SOP 98-9, Modification of SOP 97-2,Software Revenue Recognition with respect to Certain Transactions. Software license revenues are recognized upon execution of a contract and delivery of software, provided that the license fee is fixed and determinable, no significant production, modification or customization of the software is required and collection is considered probable by management. Service revenues are recognized as the services are performed. Maintenance revenues are derived from customer support agreements generally entered into in connection with initial license sales and subsequent renewals. Maintenance revenues are recognized ratably over the term of the maintenance period. Payments for maintenance fees are generally made in advance. (d) Equipment and Improvements Equipment and improvements are recorded at cost. Depreciation is provided for on a straight-line basis over the useful lives of the assets, which are estimated to be three to five years for all assets except leasehold improvements, which are amortized over the life of the lease. (e) Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (f) Concentration of Credit Risk and Significant Customers F-6 30 SFAS No. 105, Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk, requires disclosure of any significant off-balance-sheet and credit risk concentrations. The Company has no significant off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. The Company maintains its cash, cash equivalent and marketable securities with established financial institutions. The Company does not believe it has accounts receivable collection risk in excess of existing reserves. For the years ended December 31, 1999, December 31, 1998 and December 31, 1997, no individual customer accounted for more than 10% of revenue or accounts receivable. (g) Software Development Costs SFAS No. 86, Accounting for the Costs of Computer Software to be sold, Leased or Otherwise Marketed, requires the capitalization of certain computer software development costs incurred after technological feasibility is established. The Company believes that once technological feasibility of a software product has been established, the additional development costs incurred to bring the product to a commercially acceptable level are not significant. There were no capitalized software development costs at December 31, 1999 or December 31, 1998. (h) Net Income per Share The Company computes earnings per share following the provisions of SFAS No. 128, Earnings per Share. SFAS No. 128 establishes standards for computing and presenting earnings per share and applies to entities with publicly held common stock or potential common stock. The dilutive effect of potential common shares in 1999 and 1998 consisting of outstanding stock options and in 1997 consisting of outstanding stock options and redeemable convertible preferred stock, is determined using the treasury method and the if-converted method, respectively, in accordance with SFAS No. 128. Pro forma diluted net income per common and potential common share assumes earnings from Empire Technologies, Inc., an acquired Subchapter S-Corporation accounted for as a pooling-of-interests (Note 3), were taxed at the Company's effective tax rate. Calculations of basic, diluted and pro forma diluted net income per common share and potential common share are as follows:
1999 1998 1997 ---- ---- ---- Net income............................ $ 12,906,252 $ 9,826,086 $ 760,323 -------------- -------------- -------------- Pro forma provision for income taxes on Subchapter S-Corporation income (unaudited) 146,325 41,400 -- -------------- -------------- -------------- Pro forma net income (unaudited)...... $ 12,759,927 $ 9,784,686 $ 760,323 ============== ============== ============== Weighted average common shares outstanding........................ 14,160,755 13,457,495 3,884,915 Potential common shares pursuant to stock options................... 978,570 1,434,743 1,830,774 Potential common shares pursuant to conversion of redeemable convertible preferred stock........ -- -- 6,419,038 -------------- -------------- -------------- Diluted weighted average shares...... 15,139,325 14,892,238 12,134,727 ============== ============== ============== Basic net income per common share..... $ 0.91 $ 0.73 $ 0.20 ============== ============== ============== Diluted net income per common and potential common share......... $ 0.85 $ 0.66 $ 0.06 ============== ============== ============== Pro forma diluted net income per common and potential common share.. $ 0.85 $ 0.66 $ 0.06 ============== ============== ==============
Diluted weighted average shares outstanding do not include 722,572, 4,003 and 44,818 common equivalent shares for the years ended December 31, 1999, 1998 and 1997, respectively, as their effect would have been antidilutive. F-7 31 (2) MARKETABLE SECURITIES It is the Company's intent to maintain a liquid investment portfolio to support current operations and to take advantage of investment opportunities; therefore, all marketable securities are considered to be available-for-sale and are classified as current assets. The amortized cost, unrealized gains (losses) and fair value of marketable securities available-for-sale as of December 31, 1999 with maturity dates from January 1, 2000 through April 20, 2004, are as follows:
Amortized Cost Unrealized Gains (Losses) Fair Value -------------- ------------------------- ---------- US government obligations $ 18,121,819 $ (699,459) $ 17,422,360 Corporate bonds and notes 39,164,353 (686,666) 38,477,687 -------------- -------------- -------------- 57,286,172 (1,386,125) 55,900,047 Less: Amounts classified as cash equivalents 2,960,374 -- 2,960,374 -------------- -------------- -------------- Available-for-sale marketable securities $ 54,325,798 $ (1,386,125) $ 52,939,673 ============== ============== ==============
The amortized cost, unrealized gains (losses) and fair value of marketable securities available-for-sale as of December 31, 1998 with maturity dates from January 1, 1999 through September 15, 2003, are as follows:
Amortized Cost Unrealized Gains (Losses) Fair Value -------------- ------------------------- ---------- US government obligations $ 9,423,374 $ 11,559 $ 9,434,933 Corporate bonds and notes 31,949,720 138,047 32,087,767 -------------- -------------- -------------- 41,373,094 149,606 41,522,700 Less: Amounts classified as cash equivalents 2,285,020 -- 2,285,020 -------------- -------------- -------------- Available-for-sale marketable securities $ 39,088,074 $ 149,606 $ 39,237,680 ============== ============== ==============
(3) ACQUISITION OF EMPIRE TECHNOLOGIES, INC. On October 29, 1999, the Company issued 815,248 shares of common stock for all of the issued and outstanding shares of Empire Technologies, Inc. ("Empire") in a transaction accounted for as a pooling-of-interests. Accordingly, all prior-period financial statements presented have been restated as required by Accounting Principles Board Opinion No. 16, Accounting for Business Combinations. All intercompany transactions have been eliminated as a part of the restatement. As a part of the transaction, the Company incurred direct, acquisition-related charges of approximately $551,000. All of such costs have been expensed. Also, as part of the transaction, the Company assumed an obligation related to Empire's existing stock appreciation rights plan. Pursuant to the terms of the only grant under this plan, the Company settled this obligation in cash within 30 days of closing. The expense relating to the grant was recognized from the date of grant through the date of settlement. Separate and combined results of Concord and Empire during the periods preceding the merger were as follows:
Concord Empire Eliminations Combined ------- ------ ------------ -------- 1999 (Through 10/29/1999) Net Revenues $49,616,491 $2,713,962 (133,160) $52,197,293 Net Income 7,519,519 471,655 7,991,174 1998 Net Revenues $39,481,330 $1,976,022 $41,457,352 Net Income 9,078,471 747,615 9,826,086 1997 Net Revenues $19,569,594 $1,110,306 $20,679,900 Net Income 130,755 629,568 760,323
F-8 32 (4) STOCK OPTION PLANS In 1995, the Company's Board of Directors (the Board) approved the 1995 Stock Plan, which provides for the granting of incentive stock options (ISOs) and nonqualified stock options. Prior to the adoption of the 1995 Stock Plan, the Board granted options under the 1982 Employee Incentive Stock Option Plan, the 1986 Nonqualified Stock Option Plan and the 1986 Stock Plan. Following the completion of the IPO, the Company adopted the 1997 Stock Plan, the 1997 Employee Stock Purchase Plan and the 1997 Nonemployee Director Stock Option Plan. As amended, these plans allow for issuances of up to 2,500,000, 375,000 and 95,000 shares of common stock, respectively; the Company has reserved such shares for future issuance. Under the 1995 and 1997 Stock Plans (the Plans), the Company may issue options to purchase up to 2,963,798 shares of common stock, of which 137,658 options are available for grant as of December 31, 1999. ISOs may be granted at an exercise price not less than the fair market value per share of common stock on the date of grant, as determined by the Board. The price per share relating to each nonqualified option granted under the Plans shall not be less than the lesser of (i) the book value per share of common stock as of the end of the Company's fiscal year immediately preceding the date of grant or (ii) 50% of the fair market value per share of common stock on the date of grant. Vesting of the options is determined by the Board, and the options expire 8 years from the date of grant. An employee may convert his or her unexercised ISOs into nonqualified options at any time prior to the expiration of such ISOs. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, Accounting for Stock-Based Compensation, which requires the measurement of the fair value of stock options or warrants to be included in the statement of operations or disclosed in the notes to the financial statements. As permitted by SFAS No. 123, the Company will continue to account for stock-based compensation for employees under Accounting Principles Board Opinion No. 25 and has elected the disclosure-only alternative under SFAS No. 123 for options granted using the Black-Scholes option pricing model prescribed by SFAS No. 123. The weighted average fair value per share of options granted during 1999, 1998 and 1997 was $45.27, $31.08 and $5.64, respectively. The weighted average assumptions are as follows:
1999 1998 1997 ---- ---- ---- Risk-free interest rate.................. 6.0% 6.0% 5.1 - 6.0% Expected dividend yield.................. -- -- -- Expected lives........................... 7 years 7 years 7 years Expected volatility...................... 82% 80% 80%
Had compensation cost for these plans been determined consistent with SFAS No. 123, the Company's net income (loss) and basic, diluted and pro forma diluted net income (loss) per common and potential common share would have been as follows:
1999 1998 1997 ------------- ------------- ------------- Net income, as reported................................. $ 12,906,252 $ 9,826,086 $ 760,323 ============= ============= ============= Net (loss) income, pro forma............................ $ (302,081) $ 7,007,947 $ 308,939 ============= ============= ============= Net income per share, as reported Basic................................................. $ 0.91 $ 0.73 $ 0.20 ============= ============= ============= Diluted............................................... $ 0.85 $ 0.66 $ 0.06 ============= ============= ============= Pro forma diluted..................................... $ 0.85 $ 0.66 $ 0.06 ============= ============= ============= Net (loss) income per share, pro forma Basic................................................. $ (0.02) $ 0.52 $ .08 ============= ============= ============= Diluted............................................... $ (0.02) $ 0.47 $ .03 ============= ============= ============= Pro forma diluted..................................... $ (0.02) $ 0.47 $ .03 ============= ============= =============
Because the method prescribed by SFAS No. 123 has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation may not be representative of that to be expected in future years. F-9 33 The following table summarizes information about options outstanding at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------- ------------------------------- WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE RANGE OF NUMBER REMAINING EXERCISE PRICE NUMBER EXERCISE PRICE EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE PER SHARE OUTSTANDING PER SHARE -------------- ----------- ---------------- ---------------- ----------- ---------------- $ .10 - 1.90 322,395 4.60 $ .93 127,168 $ .91 4.10 - 17.38 290,735 5.68 10.87 93,761 10.46 18.38 - 23.50 347,205 6.13 21.73 121,146 21.71 23.88 - 33.38 62,957 6.44 27.94 19,601 27.41 34.88 - 36.91 901,801 7.64 36.85 6,237 35.11 37.25 - 52.38 239,300 7.42 45.17 6,355 44.23 52.63 - 64.25 661,747 7.25 55.00 625 56.75 --------- ------- 2,826,140 374,893 ========= =======
The following schedule summarizes the activity under the stock option plans for the three-year period ended December 31, 1999:
WEIGHTED AVERAGE NUMBER OF PRICE PER PRICE SHARES SHARE PER SHARE --------- --------- --------- Outstanding at December 28, 1996 1,704,342 $ .10 -- 1.90 $ .23 Granted................... 784,700 1.90 -- 21.88 7.29 Exercised................. (331,448) .10 -- 1.90 .58 Terminated................ (26,494) . 10 -- 8.50 2.56 --------- -------------- -------- Outstanding at December 31, 1997 2,131,100 .10 -- 21.88 2.76 Granted................... 563,750 17.06 -- 56.75 23.71 Exercised................. (984,473) .10 -- 21.38 .98 Terminated................ (36,588) . 10 -- 41.00 6.73 --------- -------------- -------- Outstanding at December 31, 1998 1,673,789 $ .10 -- 56.75 $ 10.79 ========= ============== ======== Granted................... 1,781,555 17.06 -- 64.25 43.90 Exercised................. (532,684) .10 -- 44.38 3.81 Terminated................ (96,520) .10 -- 58.25 27.94 --------- -------------- -------- Outstanding at December 31, 1999 2,826,140 $ .10 -- 64.25 $ 32.53 ========= ============== ======== Exercisable at December 31, 1999 374,893 $ .10 -- 64.25 $ 12.80 ========= ============== ======== Exercisable at December 31, 1998 164,957 $ .10 -- 21.38 $ 4.73 ========= ============== ======== Exercisable at December 31, 1997 517,816 $ .10 -- 1.90 $ .19 ========= ============== ========
In 1997, the Company granted one officer and one director options to purchase in total 143,750 shares of common stock at an exercise price of $1.90 per share. At the date of grant, the estimated fair value per share of the Company's common stock exceeded the exercise price of the options, and accordingly, the Company has recorded deferred compensation of $191,875 related to this difference at the date of grant. For the years ended December 31, 1999 and 1998, the Company has recorded compensation expense of $47,968 and $47,968, respectively, related to these options grants. The exercise price of all other options outstanding represents the fair market value per share of common stock as of the date of grant. (5) INCOME TAXES The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. This standard requires, among other things, recognition of future tax effects, measured by enacted tax rates, attributable to deductible temporary differences between the financial statement and income tax bases of assets and liabilities. F-10 34 The approximate income tax effects of these temporary differences are as follows:
DECEMBER 31, DECEMBER 31, 1999 1998 ------------- ------------- Net operating loss and federal tax credit carryforwards. $ 8,073,000 $ 12,719,000 Accruals not yet deductible for tax purposes............ 2,102,000 1,027,000 Depreciation............................................ 62,000 92,000 Deferred revenue........................................ 1,695,000 1,373,000 Capitalized research and development expenses........... 1,939,000 2,088,000 Valuation allowance..................................... (13,871,000) (17,299,000) ------------ ------------ $ - $ - ============ ============
The Company has available net operating loss carryforwards of approximately $14,300,000 and federal research and development tax credit carryforwards of approximately $2,225,000 as of December 31, 1999 to reduce future income tax liabilities. These carryforwards are subject to review and possible adjustment by the appropriate taxing authorities and expire from 1999 through 2013 as follows:
RESEARCH AND NET OPERATING LOSS DEVELOPMENT TAX FISCAL YEAR CARRYFORWARDS CREDIT CARRYFORWARDS ------------ ------------------ -------------------- 2000......................................................... $ 3,659,000 $ -- 2001......................................................... 2,870,000 1,252,000 2002-2006.................................................... 1,369,000 150,000 2007-2013.................................................... 6,367,000 823,000 ----------- ---------- $14,265,000 $2,225,000 =========== ==========
Pursuant to the Tax Reform Act of 1986, the utilization of net operating loss carryforwards for tax purposes may be subject to an annual limitation if a cumulative change of ownership of more than 50% occurs over a three-year period. As a result of the Company's 1995 preferred stock financings, such a change in ownership has occurred. As a result of this ownership change, the use of the net operating loss carryforwards will be limited. The Company has determined that its initial public offering did not cause another ownership change. The Company has deferred tax assets of approximately $13.9 million comprised primarily of net operating loss carryforwards and research and development credits. The Company has fully reserved for these deferred tax assets by recording a valuation allowance of $13.9 million, as the Company believes that it is more likely than not that it will not be able to realize this asset. Pursuant to paragraphs 20 to 25 of Statement of Financial Accounting Standards No. 109, the Company considered both positive and negative evidence in assessing the need for a valuation allowance at December 31, 1998 and 1999. The factors that weighed most heavily on the Company's decision to record a full valuation allowance were (i) the substantial restrictions on the use of its existing net operation loss (NOL) carryforwards and (ii) the uncertainty of future profitability. As a result of the ownership change described above, the future use of approximately $10.9 million of the Company's NOL carryforwards are limited to only $330,000 per year; the substantial majority of such NOL carryforwards will expire before they can be used. Pursuant to the provisions of SFAS No. 109, the Company used all of its remaining unrestricted NOL and credit carryforwards in computing the 1998 tax provision. The Company is also subject to rapid technological change, competition from substantially larger competitors, a limited family of products and other related risks, as more thoroughly described in the "Risk Factors" section of the Company's Form 10-K, for the fiscal year ended December 31, 1999. The Company's dependence on a single product family in an emerging market makes the prediction of future results difficult, if not impossible, especially in the highly competitive software industry. As a result, the Company found the evidence described above to be the most reliable objective evidence available in determining that a full valuation allowance against its tax assets would be necessary. The Company's net operating loss deferred tax asset includes approximately $3.4 million pertaining to the benefit associated with the exercise and subsequent disqualifying disposition of incentive stock options by the Company's employees. When and if the Company realizes this asset, the resulting change in the valuation allowance will be credited directly to additional paid-in capital, pursuant to the provisions of SFAS No. 109. The Company received a tax benefit of approximately $4.9 million and $500,000 in 1999 and 1998, respectively, pursuant to the exercise of employee stock options. The Company recorded this benefit as a component of additional paid-in capital. F-11 35 The difference between the expected combined federal and state tax rate and the Company's effective tax rate in 1999 relates primarily to the use of currently-generated tax credits and tax assets acquired as a part of the Empire acquisition (Note 3). The difference in 1998 and 1997 relates primarily to the use of substantially all of the Company's unrestricted NOL carryforwards. (6) COMMITMENTS AND CONTINGENCIES (a) Leases In March, 1999 the Company signed a 7 year operating lease for its principal operating facilities. Following the abandonment of the Company's former office space, the Company recorded a third quarter charge of $700,000, representing the remaining lease commitment, less expected sublease income. The approximate future minimum rental payments under both leases are as follows:
AMOUNT ------ 2000.......................................... $ 1,773,000 2001.......................................... 2,321,000 2002.......................................... 2,327,000 2003.......................................... 2,036,000 2004.......................................... 2,073,000 Thereafter.................................... 3,218,000 ----------- $13,749,000 ===========
Rent expense was approximately $2.4 million, $464,000 and $346,000 for the years ended December 31, 1999, December 31, 1998 and December 31, 1997, respectively. (b) Royalties The Company has entered into several software license agreements that provide the Company with exclusive worldwide licenses to distribute or utilize certain patented computer software. The Company is required to pay royalties on all related sales. Under one software license agreement, as amended, the Company is obligated to make minimum quarterly royalty payments from 1995 through 1999. The minimum payments are noncancelable and nonrefundable, but any minimum payments in excess of amounts due for actual license sales in any quarter may be used as a credit against future royalty fees in excess of the specified minimum payments. The minimum royalty payments were paid in full in 1999. Royalty expense under royalty agreements was approximately $1.0 million, $665,000 and $903,000 for fiscal 1999, 1998 and 1997, respectively. (c) Legal Proceedings From time to time, the Company may be exposed to litigation relating to its products and operations. The Company is not engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on the Company's financial conditions or results of operations. (7) ACCRUED EXPENSES Accrued expenses consist of the following:
DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------ Payroll and payroll-related................................. $1,932,735 $2,269,845 Royalties................................................... 569,656 412,656 Outside commissions......................................... 286,854 568,450 Customer deposits........................................... 142,224 254,340 Deferred rent............................................... 456,957 -- Loss on lease abandonment................................... 700,000 -- Other....................................................... 2,797,401 1,582,693 ---------- ---------- $6,885,827 $5,087,984 ========== ==========
F-12 36 (8) EMPLOYEE BENEFIT PLAN The Company maintains an employee benefit plan under Section 401(k) of the Internal Revenue Code covering all eligible employees, as defined. The Plan allows for employees to defer a portion of their salary up to 15% of pretax compensation. While the Company has the discretion to make contributions to the plan, no such contributions were made in 1999, 1998 or 1997. (9) VALUATION AND QUALIFYING ACCOUNTS The following table sets forth activity in the Company's accounts receivable reserve account:
BALANCE AT BALANCE AT BEGINNING CHARGES TO END OF OF YEAR EXPENSES DEDUCTIONS YEAR ---------- ---------- ---------- ---------- 1997.......................................... $ 210,116 $ 70,000 $ -- $ 280,116 1998.......................................... $ 280,116 $ 169,884 $ -- $ 450,000 1999.......................................... $ 450,000 $ 480,000 $ -- $ 930,000
(10) SEGMENT REPORTING AND INTERNATIONAL INFORMATION The Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information in the fiscal year ended December 31, 1998. SFAS 131 establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. SFAS 131 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, in making decisions how to allocate resources and assess performance. The Company's chief decision making group, as defined under SFAS 131, is the Executive Management Committee. To date, the Executive Management Committee has viewed the Company's operations as principally one segment, software sales and associated services. As a result, the financial information disclosed herein, materially represents all of the financial information related to the Company's principal operating segment. Revenues from international locations were $16.3 million, $7.3 million and $2.4 million in 1999, 1998 and 1997, respectively. The Company's revenues from international locations were primarily generated from customers located in Europe. Revenues from customers located in Europe accounted for 13.1%, 12.6% and 10.3% of total revenues in 1999, 1998 and 1997, respectively. No one country accounts for greater than 10% of total revenues. Substantially all of the Company's assets are located in the United States. (11) SUBSEQUENT EVENT On February 4, 2000 the Company completed a merger with privately-held FirstSense Software. FirstSense is a provider of application and service response management solutions. The Company has reserved for issuance in connection with the merger, 1,940,000 shares of Concord's common stock. The transaction is being accounted for as a pooling-of-interests. F-13 37 CONCORD COMMUNICATIONS, INC. FORM 10-K, December 31, 1999 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized this 28th day of March, 2000. Concord Communications, Inc. /s/ Gary E. Haroian -------------------------------------- Name: Gary E. Haroian Title: Sr. Vice President of Finance and Chief Financial Officer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ John A. Blaeser Chief Executive Officer, 03/28/00 --------------------------- President and Director John A. Blaeser (Principal Executive Officer) /s/ Gary E. Haroian Chief Financial Officer, Sr. Vice 03/28/00 --------------------------- President of Finance, Gary E. Haroian Treasurer and Clerk (Principal Financial and Accounting Officer) /s/ Frederick W.W. Bolander Director 03/28/00 --------------------------- Frederick W.W. Bolander /s/ Richard M. Burnes, Jr. Director 03/28/00 --------------------------- Richard M. Burnes, Jr. /s/ Robert C. Hawk Director 03/28/00 --------------------------- Robert C. Hawk /s/ John Robert Held Director 03/28/00 --------------------------- John Robert Held /s/ Deepak Kamra Director 03/28/00 --------------------------- Deepak Kamra /s/ Robert M. Wadsworth Director 03/28/00 --------------------------- Robert M. Wadsworth
38 EXHIBIT INDEX The following designated exhibits are either filed herewith or, where information is provided under the SEC Document Reference heading corresponding to such exhibit, incorporated by reference to such filing.
EXHIBIT NO. DESCRIPTION SEC DOCUMENT REFERENCE ----------- ----------- ---------------------- 3.01 Restated Articles of Organization of the Company Exhibit No. 3.01 on Form 10-K, for the period ended December 31, 1997 3.02 Restated By-laws of the Company Exhibit No. 3.02 on Form 10-K, for the period ended December 31, 1998 10.01 Working Capital Loan Agreement between the Company and Silicon Valley Bank dated April 3, 1997 Exhibit No. 10.01 to Registration Statement on Form S-1 (No. 333-33227) 10.02 Revolving Promissory Note made by the Company in favor of Silicon Valley Bank Exhibit No. 10.02 to Registration Statement on Form S-1 (No. 333-33227) 10.03 Equipment Line of Credit Letter Agreement between the Company and Fleet Bank dated as of June 9, 1997 Exhibit No. 10.03 to Registration Statement on Form S-1 (No. 333-33227) 10.04 1995 Stock Plan of the Company Exhibit No. 10.04 to Registration Statement on Form S-1 (No. 333-33227) 10.05 1997 Stock Plan of the Company Exhibit No. 10.01 on Form 10-Q, for the period ended June 30, 1998 * 10.06 1997 Stock Plan of the Company, as amended on March 12, 1998 and March 1, 1999 10.07 1997 Employee Stock Purchase Plan of the Company Exhibit No. 10.06 to Registration Statement on Form S-1 (No. 333-33227) 10.08 1997 Non-Employee Director Stock Option Plan of the Exhibit No. 10.02 on Form 10-Q, for the period ended June Company 30, 1998 10.09 The Profit Sharing/401(K) Plan of the Company Exhibit No. 10.08 to Registration Statement on Form S-1 (No. 333-33227) 10.10 Lease Agreement between the Company and John Hancock Mutual Life Insurance Company dated March 17, 1994, as amended on March 25,1997 Exhibit No. 10.09 to Registration Statement on Form S-1 (No. 333-33227) 10.11 First Amendment to Lease Agreement between the Company and John Hancock Mutual Life Insurance Exhibit No. 10.10 to Registration Statement on Form S-1 Company dated March 25, 1997 (No. 333-33227) 10.12 Form of Indemnification Agreement for directors and officers of the Company Exhibit No. 10.11 to Registration Statement on Form S-1 (No. 333-33227) 10.13 Restated Common Stock Registration Rights Agreement between the Company and certain investors dated Exhibit No. 10.12 to Registration Statement on Form S-1 August 7, 1986 (No. 333-33227) 10.14 Amended and Restated Registration Rights Agreement between the Company and certain investors dated Exhibit No. 10.13 to Registration Statement on Form S-1 December 28, 1995 (No. 333-33227) 10.15 Management Change in Control Agreement between the Company and John A. Blaeser dated as of August 7, 1997 Exhibit No. 10.14 to Registration Statement on Form S-1 (No. 333-33227) 10.16 Management Change in Control Agreement between the Company and Kevin J. Conklin dated as of July 23, 1997 Exhibit No. 10.15 to Registration Statement on Form S-1 (No. 333-33227) 10.17 Management Change in Control Agreement between the Company and Ferdinand Engel dated as of July 23, 1997 Exhibit No. 10.16 to Registration Statement on Form S-1 (No. 333-33227) 10.18 Management Change in Control Agreement between the Company and Gary E. Haroian dated as of July 23, 1997 Exhibit No. 10.17 to Registration Statement on Form S-1 (No. 333-33227) 10.19 Management Change in Control Agreement between the Company and Daniel D. Phillips, Jr. dated as of July Exhibit No. 10.18 to Registration Statement on Form S-1 23, 1997 (No. 333-33227) 10.20 Stock Option Agreement dated January 1, 1996 between the Company and John A. Blaeser Exhibit No. 10.19 to Registration Statement on Form S-1 (No. 333-33227) 10.21 Stock Option Agreement dated January 1, 1996 between the Company and John A. Blaeser Exhibit No. 10.20 to Registration Statement on Form S-1 (No. 333-33227) 10.22 Letter Agreement between the Company and Silicon Valley Bank dated March 25, 1996 together with the Loan Modification Agreement dated November 14, 1996 Exhibit No. 10.21 to Registration Statement on Form S-1 (No. 333-33227) 10.23 Form of Shrink-Wrap License Exhibit No. 10.22 to Registration Statement on Form S-1 (No. 333-33227) 10.24 Agreement and Plan of Reorganization dated as of Exhibit No. 2.1 to Current Report on Form 8-K filed on October 19, 1999 by and among Concord Communications, November 12, 1999 Inc., E Acquisition Corp., Empire Technologies, Inc. and the stockholders of Empire Technologies, Inc. 10.25 Agreement and Plan of Reorganization dated as of Exhibit No. 2.1 to Current Report on Form 8-K filed on January 20, 2000 by and among Concord Communications, February 10, 2000 Inc., F Acquisition Corp., and FirstSense Software, Inc. 10.26 Registration Rights Agreement dated as of February 4, Exhibit No. 99.1 to Current Report on Form 8-K filed on 2000 by and among Concord Communications, Inc. and February 10, 2000 Timothy Barrows, as Securityholder Agent * 13.01 Pages 17-22 of Registrant's 1999 Annual Report to Stockholders 21.01 Subsidiaries of the Company 23.01 Consent of Arthur Andersen LLP 27.01 Financial Data Schedule
* filed herewith EX-10.06 2 1997 STOCK PLAN OF THE COMPANY 1 EXHIBIT 10.06 CONCORD COMMUNICATIONS, INC. 1997 STOCK PLAN (AS AMENDED ON MARCH 12, 1998 AND MARCH 1, 1999) 1. PURPOSE; TERMINATION OF PRIOR PLAN. The purpose of the 1997 Stock Plan (the "Plan") is to encourage key employees of Concord Communications, Inc. (the "Company") and of any present or future parent or subsidiary of the Company (collectively, "Related Corporations") and other individuals who render services to the Company or a Related Corporation, by providing opportunities to participate in the ownership of the Company and its future growth through (a) the grant of options which qualify as "incentive stock options" ("ISOs") under Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"); (b) the grant of options which do not qualify as ISOs ("Non-Qualified Options"); (c) awards of stock in the Company ("Awards"); and (d) opportunities to make direct purchases of stock in the Company ("Purchases"). Both ISOs and Non-Qualified Options are referred to hereafter individually as an "Option" and collectively as "Options." Options, Awards and authorizations to make Purchases are referred to hereafter collectively as "Stock Rights." As used herein, the terms "parent" and "subsidiary" mean "parent corporation" and "subsidiary corporation," respectively, as those terms are defined in Section 424 of the Code. The Company's 1995 Stock Plan (the "1995 Stock Plan") is terminated effective as of October 16, 1997 and henceforth, the Company shall make no grants under the 1995 Stock Plan. The 1995 Stock Plan shall, however, continue to govern all options, awards and other grants granted and outstanding under the 1995 Stock Plan. 2. ADMINISTRATION OF THE PLAN. A. BOARD OR COMMITTEE ADMINISTRATION. The Plan shall be administered by the Board of Directors of the Company (the "Board") or, subject to paragraph 2(D) (relating to compliance with Section 162(m) of the Code), by a committee appointed by the Board of two or more of its members (the "Committee"). Hereinafter, all references in this Plan to the "Committee" shall mean the Board if no Committee has been appointed. Subject to ratification of the grant or authorization of each Stock Right by the Board (if so required by applicable state law), and subject to the terms of the Plan, the Committee shall have the authority to (i) determine to whom (from among the class of employees eligible under paragraph 3 to receive ISOs) ISOs shall be granted, and to whom (from among the class of individuals and entities eligible under paragraph 3 to receive Non-Qualified Options and Awards and to make Purchases) Non-Qualified Options, Awards and authorizations to make Purchases may be granted; (ii) determine the time or times at which Options or Awards shall be granted or Purchases made; (iii) determine the purchase price of shares subject to each Option or Purchase, which prices shall not be less than the minimum price specified in paragraph 6; (iv) determine whether each Option granted shall be an ISO or a Non-Qualified Option; (v) determine (subject to paragraph 7) the time or times when each Option shall become exercisable and the duration of the exercise period; (vi) determine whether restrictions such as repurchase options are to be imposed on shares subject to Options, Awards and Purchases and the nature of such restrictions, if any; and (vii) interpret the Plan and prescribe and rescind rules and regulations relating to it. If the Committee determines to issue a Non-Qualified Option, it shall take whatever actions it deems necessary, under Section 422 of the Code and the regulations promulgated thereunder, to ensure that such Option is not treated as an ISO. The interpretation and construction by the Committee of any provisions of the Plan or of any Stock Right granted under it shall be final unless otherwise determined by the Board. The Committee may from time to time adopt such rules and regulations for carrying out the Plan as it may deem best. No member of the Board or of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Stock Right granted under it. B. COMMITTEE ACTIONS. The Committee may select one of its members as its chairman, and shall hold meetings at such time and places as it may determine. A majority of the Committee shall constitute a quorum and acts of a majority of the members of the Committee at a meeting at which a quorum is present, or acts reduced to or approved in writing by all the members of the Committee (if consistent with applicable state law), shall be the valid acts of the Committee. From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members 2 in substitution therefor, fill vacancies however caused, or remove all members of the Committee and thereafter directly administer the Plan. C. GRANT OF STOCK RIGHTS TO BOARD MEMBERS. Notwithstanding the provisions of paragraph 2.A., no Stock Rights shall be granted to any person who is, at the time of the proposed grant, a member of the Board unless such grant is approved by a majority vote of the disinterested members of the Board. All grants of Stock Rights to members of the Board shall in all respects be made in accordance with the provisions of this Plan applicable to other eligible persons. Members of the Board who either (i) are eligible to receive grants of Stock Rights pursuant to the Plan or (ii) have been granted Stock Rights may vote on any matters affecting the administration of the Plan or the grant of any Stock Rights pursuant to the Plan, except that no such member shall act upon the granting to himself or herself of Stock Rights, but any such member may be counted in determining the existence of a quorum at any meeting of the Board during which action is taken with respect to the granting to such member of Stock Rights. Notwithstanding any other provision of this paragraph 2, in the event the Company registers any class of any equity security pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), any grants to members of the Board of Options made at any time from the effective date of such registration until six months after the termination of such registration shall be made only by the Board; provided, however, that if a majority of the Board is eligible to participate in the Plan or in any other stock option or other stock plan of the Company or any of its affiliates, or has been so eligible at any time within the preceding year, any grant to directors of Options must be made by, or only in accordance with the recommendation of, a Committee consisting of three or more persons, who may but need not be members of the Board or employees of the Company, appointed by the Board but having full authority to act in the matter, none of whom is eligible to participate in this Plan or any other stock option or other stock plan of the Company or any of its affiliates, or has been eligible at any time within the preceding year. The requirements imposed by the preceding sentence shall also apply with respect to grants to officers who are not also members of the Board. Once appointed, the Committee shall continue to serve until otherwise directed by the Board. D. PERFORMANCE-BASED COMPENSATION. The Board, in its discretion, may take such action as may be necessary to ensure that Stock Rights granted under the Plan qualify as "qualified performance-based compensation" within the meaning of Section 162(m) of the Code and applicable regulations promulgated thereunder ("Performance-Based Compensation"). Such action may include, in the Board's discretion, some or all of the following (i) if the Board determines that Stock Rights granted under the Plan generally shall constitute Performance-Based Compensation, the Plan shall be administered, to the extent required for such Stock Rights to constitute Performance-Based Compensation, by a Committee consisting solely of two or more "outside directors" (as defined in applicable regulations promulgated under Section 162(m) of the Code), (ii) if any Non-Qualified Options with an exercise price less than the fair market value per share of Common Stock are granted under the Plan and the Board determines that such Options should constitute Performance-Based Compensation, such options shall be made exercisable only upon the attainment of a pre-established, objective performance goal established by the Committee, and such grant shall be submitted for, and shall be contingent upon shareholder approval and (iii) Stock Rights granted under the Plan may be subject to such other terms and conditions as are necessary for compensation recognized in connection with the exercise or disposition of such Stock Right or the disposition of Common Stock acquired pursuant to such Stock Right, to constitute Performance-Based Compensation. 3. ELIGIBLE EMPLOYEES AND OTHERS. ISOs may be granted only to employees of the Company or any Related Corporation. Non-Qualified Options, Awards and authorizations to make Purchases may be granted to any employee, officer or director (whether or not also an employee) or consultant of the Company or any Related Corporation. The Committee may take into consideration a recipient's individual circumstances in determining whether to grant a Stock Right. The granting of any Stock Right to any individual or entity shall neither entitle that individual or entity to, nor disqualify such individual or entity from, participation in any other grant of Stock Rights. 3 4. STOCK. The stock subject to Stock Rights shall be authorized but unissued shares of Common Stock of the Company, par value $.01 per share (the "Common Stock"), or shares of Common Stock reacquired by the Company in any manner. The aggregate number of shares which may be issued pursuant to the Plan is 2,500,000, subject to adjustment as provided in paragraph 13. If any Option granted under the Plan shall expire or terminate for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part or shall be repurchased by the Company, the unpurchased shares of Common Stock subject to such Option shall again be available for grants of Stock Rights under the Plan. No employee of the Company or any Related Corporation may be granted Options to acquire, in the aggregate, more than 70% of the aggregate number of shares of Common Stock which may be issued pursuant to the Plan during any fiscal year of the Company. If any Option granted under the Plan shall expire or terminate for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part or shall be repurchased by the Company, the shares subject to such Option shall be included in the determination of the aggregate number of shares of Common Stock deemed to have been granted to such employee under the Plan. 5. GRANTING OF STOCK RIGHTS. Stock Rights may be granted under the Plan at any time on or after October 16, 1997 and prior to October 15, 2007. The date of grant of a Stock Right under the Plan will be the date specified by the Committee at the time it grants the Stock Right; provided, however, that such date shall not be prior to the date on which the Committee acts to approve the grant. 6. MINIMUM OPTION PRICE; ISO LIMITATIONS. A. PRICE FOR NON-QUALIFIED OPTIONS, AWARDS AND PURCHASES. Subject to paragraph 2(D) (relating to compliance with Section 162(m) of the Code), the exercise price per share specified in the agreement relating to each Non-Qualified Option granted, and the purchase price per share of stock granted in any Award or authorized as a Purchase, under the Plan may be less than the fair market value of the Common Stock of the Company on the date of grant; provided that, in no event shall such exercise price or such purchase price be less than the lesser of (i) the book value per share of Common Stock as of the end of the fiscal year of the Company immediately preceding the date of such grant, or (ii) 50 percent of the fair market value per share of Common Stock on the date of such grant. B. PRICE FOR ISOS. The exercise price per share specified in the agreement relating to each ISO granted under the Plan shall not be less than the fair market value per share of Common Stock on the date of such grant. In the case of an ISO to be granted to an employee owning stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Related Corporation, the price per share specified in the agreement relating to such ISO shall not be less than one hundred ten percent (110%) of the fair market value per share of Common Stock on the date of grant. For purposes of determining stock ownership under this paragraph, the rules of Section 424(d) of the Code shall apply. C. $100,000 ANNUAL LIMITATION ON ISO VESTING. Each eligible employee may be granted Options treated as ISOs only to the extent that, in the aggregate under this Plan and all incentive stock option plans of the Company and any Related Corporation, ISOs do not become exercisable for the first time by such employee during any calendar year with respect to stock having a fair market value (determined at the time the ISOs were granted) in excess of $100,000. The Company intends to designate any Options granted in excess of such limitation as Non-Qualified Options, and the Company shall issue separate certificates to the optionee with respect to Options that are Non-Qualified Options and Options that are ISOs. D. DETERMINATION OF FAIR MARKET VALUE. If, at the time an Option is granted under the Plan, the Company's Common Stock is publicly traded, "fair market value" shall be determined as of the date of grant or, if the prices or quotes discussed in this sentence are unavailable for such date, the last business day for which such prices or quotes are available prior to the date of grant and shall mean (i) the average (on that date) of the high and low prices of the Common Stock on the principal national securities exchange on which the Common Stock is 4 traded, if the Common Stock is then traded on a national securities exchange; or (ii) the last reported sale price (on that date) of the Common Stock on the Nasdaq National Market, if the Common Stock is not then traded on a national securities exchange; or (iii) the closing bid price (or average of bid prices) last quoted (on that date) by an established quotation service for over-the-counter securities, if the Common Stock is not reported on the Nasdaq National Market. If the Common Stock is not publicly traded at the time an Option is granted under the Plan, "fair market value" shall mean the fair value of the Common Stock as determined by the Committee after taking into consideration all factors which it deems appropriate, including, without limitation, recent sale and offer prices of the Common Stock in private transactions negotiated at arm's length. 7. OPTION DURATION. Subject to earlier termination as provided in paragraphs 9 and 10 or in the agreement relating to such Option, each Option shall expire on the date specified by the Committee, but not more than (i) ten years from the date of grant in the case of Options generally and (ii) five years from the date of grant in the case of ISOs granted to an employee owning stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Related Corporation, as determined under paragraph 6(B). Subject to earlier termination as provided in paragraphs 9 and 10, the term of each ISO shall be the term set forth in the original instrument granting such ISO, except with respect to any part of such ISO that is converted into a Non-Qualified Option pursuant to paragraph 16. 8. EXERCISE OF OPTION. Subject to the provisions of paragraphs 9 through 12, each Option granted under the Plan shall be exercisable as follows: A. VESTING. The Option shall either be fully exercisable on the date of grant or shall become exercisable thereafter in such installments as the Committee may specify. B. FULL VESTING OF INSTALLMENTS. Once an installment becomes exercisable, it shall remain exercisable until expiration or termination of the Option, unless otherwise specified by the Committee. C. PARTIAL EXERCISE. Each Option or installment may be exercised at any time or from time to time, in whole or in part, for up to the total number of shares with respect to which it is then exercisable. D. ACCELERATION OF VESTING. The Committee shall have the right to accelerate the date that any installment of any Option becomes exercisable; provided that the Committee shall not, without the consent of an optionee, accelerate the permitted exercise date of any installment of any Option granted to any employee as an ISO (and not previously converted into a Non-Qualified Option pursuant to paragraph 16) if such acceleration would violate the annual vesting limitation contained in Section 422(d) of the Code, as described in paragraph 6(C). 9. TERMINATION OF EMPLOYMENT. Unless otherwise specified in the agreement relating to such ISO, if an ISO optionee ceases to be employed by the Company and all Related Corporations other than by reason of death or disability as defined in paragraph 10, no further installments of his or her ISOs shall become exercisable, and his or her ISOs shall terminate after the passage of 60 days from the date of termination of his or her employment, but in no event later than on the specified expiration dates of such ISOs, except to the extent that such ISOs (or unexercised installments thereof) have been converted into Non-Qualified Options pursuant to paragraph 16. For purposes of this paragraph 9, a leave of absence with the written approval of the Committee shall not be considered an interruption of employment under the Plan, provided that such written approval contractually obligates the Company or any Related Corporation to continue the employment of the employee after the approved period of absence. Employment shall also be considered as continuing uninterrupted during any other bona fide leave of absence (such as those attributable to illness, military obligations or governmental service) provided that the period of such leave does not exceed 90 days or, if longer, any period during which such optionee's right to reemployment is guaranteed by statute or by contract. A bona fide leave of absence with the written approval of the Committee shall not be considered an interruption of employment under this paragraph 9, provided that such written approval contractually obligates the Company or any Related Corporation to continue the employment of the 5 optionee after the approved period of absence. ISOs granted under the Plan shall not be affected by any change of employment within or among the Company and Related Corporations, so long as the optionee continues to be an employee of the Company or any Related Corporation. Nothing in the Plan shall be deemed to give any grantee of any Stock Right the right to be retained in employment or other service by the Company or any Related Corporation for any period of time. 10. DEATH; DISABILITY. A. DEATH. If an ISO optionee ceases to be employed by the Company and all Related Corporations by reason of his or her death, any ISO owned by such optionee may be exercised, to the extent otherwise exercisable on the date of death, by the estate, personal representative or beneficiary who has acquired the ISO by will or by the laws of descent and distribution, at any time prior to the earlier of (i) the specified expiration date of the ISO or (ii) 180 days from the date of the optionee's death. B. DISABILITY. If an ISO optionee ceases to be employed by the Company and all Related Corporations by reason of his or her disability, such optionee shall have the right to exercise any ISO held by him or her on the date of termination of employment, for the number of shares for which he or she could have exercised it on that date, at any time prior to the earlier of (i) the specified expiration date of the ISO or (ii) 180 days from the date of the termination of the optionee's employment. For the purposes of the Plan, the term "disability" shall mean "permanent and total disability" as defined in Section 22(e)(3) of the Code or any successor statute. 11. ASSIGNABILITY. No ISO shall be assignable or transferable by the optionee except by will or by the laws of descent and distribution, and during the lifetime of the optionee shall be exercisable only by such optionee. Stock Rights other than ISOs shall be transferable to the extent set forth in the agreement relating to such Stock Right. 12. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by instruments (which need not be identical) in such forms as the Committee may from time to time approve. Such instruments shall conform to the terms and conditions set forth in paragraphs 6 through 11 hereof and may contain such other provisions as the Committee deems advisable which are not inconsistent with the Plan, including restrictions applicable to shares of Common Stock issuable upon exercise of Options. The Committee may specify that any Non-Qualified Option shall be subject to the restrictions set forth herein with respect to ISOs, or to such other termination and cancellation provisions as the Committee may determine. The Committee may from time to time confer authority and responsibility on one or more of its own members and/or one or more officers of the Company to execute and deliver such instruments. The proper officers of the Company are authorized and directed to take any and all action necessary or advisable from time to time to carry out the terms of such instruments. 13. ADJUSTMENTS. Upon the occurrence of any of the following events, an optionee's rights with respect to Options granted to such optionee hereunder shall be adjusted as hereinafter provided, unless otherwise specifically provided in the written agreement between the optionee and the Company relating to such Option: A. STOCK DIVIDENDS AND STOCK SPLITS. If the shares of Common Stock shall be subdivided or combined into a greater or smaller number of shares or if the Company shall issue any shares of Common Stock as a stock dividend on its outstanding Common Stock, the number of shares of Common Stock deliverable upon the exercise of Options shall be appropriately increased or decreased proportionately, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivision, combination or stock dividend. B. CONSOLIDATIONS OR MERGERS. If the Company is to be consolidated with or acquired by another entity in a merger or other reorganization in which the holders of the outstanding voting stock of the Company immediately preceding the consummation of such event, shall, immediately following such event, hold, as a group, less than a majority of the voting securities of the surviving or successor entity, or in the event of a sale of all or substantially all of the Company's assets or otherwise (each, an "Acquisition"), the Committee may take one or more 6 of the following actions: (i) provide for the acceleration and/or termination of any time period relating to the exercise of the Options, (ii) provide for the purchase of the Options, upon the optionee's request, for the amount in cash that could have been received upon the exercise of the Options and sale of the shares obtained thereby, (iii) adjust the terms of the Options in a manner determined by the Committee, (iv) cause the Options to be assumed, or new rights substituted therefor, by another entity or (v) make such other provision as the Committee may consider equitable and in the best interests of the Company. C. RECAPITALIZATION OR REORGANIZATION. In the event of a recapitalization or reorganization of the Company (other than a transaction described in subparagraph B above) pursuant to which securities of the Company or of another corporation are issued with respect to the outstanding shares of Common Stock, an optionee upon exercising an Option shall be entitled to receive for the purchase price paid upon such exercise the securities he or she would have received if he or she had exercised such Option prior to such recapitalization or reorganization. D. MODIFICATION OF ISOS. Notwithstanding the foregoing, any adjustments made pursuant to subparagraphs A, B or C with respect to ISOs shall be made only after the Committee, after consulting with counsel for the Company, determines whether such adjustments would constitute a "modification" of such ISOs (as that term is defined in Section 424 of the Code) or would cause any adverse tax consequences for the holders of such ISOs. If the Committee determines that such adjustments made with respect to ISOs would constitute a modification of such ISOs or would cause adverse tax consequences to the holders, it may refrain from making such adjustments. E. RESTRICTED SECURITIES. If any person or entity owning restricted Common Stock obtained by exercise of an Option made hereunder receives new or additional or different shares or securities ("New Securities") in connection with a transaction described in subparagraphs A, B or C above, as a result of owning such restricted Common Stock, such New Securities shall be subject to all of the conditions and restrictions applicable to the restricted Common Stock with respect to which such New Securities were issued. F. ISSUANCES OF SECURITIES. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares subject to Options. No adjustments shall be made for dividends paid in cash or in property other than securities of the Company. G. FRACTIONAL SHARES. No fractional shares shall be issued under the Plan. Any fractional shares which, but for this subparagraph G, would have been issued to an optionee pursuant to an Option, shall be deemed to have been issued and immediately sold to the Company for their fair market value, and the optionee shall receive from the Company cash in lieu of such fractional shares. H. ADJUSTMENTS. Upon the happening of any of the events described in subparagraphs A, B or C above, the class and aggregate number of shares set forth in paragraph 4 hereof that are subject to Stock Rights which previously have been or subsequently may be granted under the Plan shall also be appropriately adjusted to reflect the events described in such subparagraphs. The Committee shall determine the specific adjustments to be made under this paragraph 13 and, subject to paragraph 2, its determination shall be conclusive. 14. MEANS OF EXERCISING OPTIONS. An Option (or any part or installment thereof) shall be exercised by giving written notice to the Company at its principal office address, or to such transfer agent as the Company shall designate. Such notice shall identify the Option being exercised and specify the number of shares as to which such Option is being exercised, accompanied by full payment of the purchase price therefor either (a) in United States dollars in cash or by check, (b) at the discretion of the Committee, through delivery of shares of Common Stock having a fair market value equal as of the date of the exercise to the cash exercise price of the Option, (c) at 7 the discretion of the Committee, by delivery of the optionee's personal recourse note bearing interest payable not less than annually at no less than 100% of the lowest applicable Federal rate, as defined in Section 1274(d) of the Code, (d) at the discretion of the Committee and consistent with applicable law, through the delivery of an assignment to the Company of a sufficient amount of the proceeds from the sale of the Common Stock acquired upon exercise of the Option and an authorization to the broker or selling agent to pay that amount to the Company, which sale shall be at the participant's direction at the time of exercise, or (e) at the discretion of the Committee, by any combination of (a), (b), (c) and (d) above. If the Committee exercises its discretion to permit payment of the exercise price of an ISO by means of the methods set forth in clauses (b), (c), (d) or (e) of the preceding sentence, such discretion shall be exercised in writing at the time of the grant of the ISO in question. The holder of an Option shall not have the rights of a shareholder with respect to the shares covered by such Option until the date of issuance of a stock certificate to such holder for such shares. Except as expressly provided above in paragraph 13 with respect to changes in capitalization and stock dividends, no adjustment shall be made for dividends or similar rights for which the record date is before the date such stock certificate is issued. 15. TERM AND AMENDMENT OF PLAN. This Plan was adopted by the Board in July 1997 and by the stockholders of the Company on September 9, 1997. The Plan was amended on March 12, 1998 to increase the number of shares authorized for issuance under the Plan by 750,000 shares to 1,500,000, and such amendment was approved by the stockholders of the Company at the Annual Meeting held on April 30, 1998. On March 1, 1999, the Board of Directors further amended the Plan to increase the number of shares authorized for issuance under the Plan by 1,000,000 shares to 2,500,000 shares and to make certain other minor modifications, subject to approval of the amendment of the Plan by the stockholders of the Company at the next Meeting of Stockholders. If the approval of the amendment by the stockholders is not obtained prior to March 1, 2000, any grants of ISOs under the Plan which include shares from the additional number of shares authorized by the amendment made prior to that date but subsequent to the date of the amendment will be rescinded. The Plan shall expire at the end of the day on October 15, 2007 (except as to Options outstanding on that date). Subject to the provisions of paragraph 5 above, Options may be granted under the Plan prior to the date of stockholder approval of the Plan. The Board may terminate or amend the Plan in any respect at any time, except that, without the approval of the stockholders obtained within 12 months before or after the Board adopts a resolution authorizing any of the following actions: (a) the total number of shares that may be issued under the Plan may not be increased (except by adjustment pursuant to paragraph 13); (b) the provisions of paragraph 3 regarding eligibility for grants of ISOs may not be modified; (c) the provisions of paragraph 6(B) regarding the exercise price at which shares may be offered pursuant to ISOs may not be modified (except by adjustment pursuant to paragraph 13); and (d) the expiration date of the Plan may not be extended. Except as otherwise provided in this paragraph 15, in no event may action of the Board or stockholders alter or impair the rights of a grantee, without such grantee's consent, under any Stock Right previously granted to such grantee. 16. MODIFICATIONS OF ISOS; CONVERSION OF ISOS INTO NON-QUALIFIED OPTIONS. Subject to paragraph 13(D), without the prior written consent of the holder of an ISO, the Committee shall not alter the terms of such ISO (including the means of exercising such ISO) if such alteration would constitute a modification (within the meaning of Section 424(h)(3) of the Code). The Committee, at the written request or with the written consent of any optionee, may in its discretion take such actions as may be necessary to convert such optionee's ISOs (or any installments or portions of installments thereof) that have not been exercised on the date of conversion into Non-Qualified Options at any time prior to the expiration of such ISOs, regardless of whether the optionee is an employee of the Company or a Related Corporation at the time of such conversion. Such actions may include, but shall not be limited to, extending the exercise period of such ISOs. At the time of such conversion, the Committee (with the consent of the optionee) may impose such conditions on the exercise of the resulting Non-Qualified Options as the Committee in its discretion may determine, provided that such conditions shall not be inconsistent with this Plan. Nothing in the Plan shall be deemed to give any optionee the right to have such optionee's ISOs converted into Non-Qualified Options, and no such conversion shall occur until and unless the Committee takes appropriate action. Upon the taking of such action, the Company shall issue separate certificates to the optionee with respect to Options that are Non-Qualified Options and Options that are ISOs. The Committee, with the consent of the optionee, may also terminate any portion of any ISO that has not been exercised at the time of such conversion. 17. APPLICATION OF FUNDS. The proceeds received by the Company from the sale of shares pursuant to Options granted and Purchases authorized under the Plan shall be used for general corporate purposes. 8 18. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION. By accepting an ISO granted under the Plan, each optionee agrees to notify the Company in writing immediately after such optionee makes a Disqualifying Disposition (as described in Sections 421, 422 and 424 of the Code and regulations thereunder) of any stock acquired pursuant to the exercise of ISOs granted under the Plan. A Disqualifying Disposition is generally any disposition occurring on or before the later of (a) the date two years following the date the ISO was granted or (b) the date one year following the date the ISO was exercised. 19. WITHHOLDING OF ADDITIONAL INCOME TAXES. Upon the exercise of a Non-Qualified Option, the transfer of a Non-Qualified Stock Option pursuant to an arm's-length transaction, the grant of an Award, the making of a Purchase of Common Stock for less than its fair market value, the making of a Disqualifying Disposition (as defined in paragraph 18), the vesting or transfer of restricted stock or securities acquired on the exercise of an Option hereunder, or the making of a distribution or other payment with respect to such stock or securities, the Company may withhold, or may require the grantee to pay, additional withholding taxes in respect of amounts that constitute compensation includible in gross income. The Committee in its discretion may condition (i) the exercise of an Option, (ii) the transfer of a Non-Qualified Stock Option, (iii) the grant of an Award, (iv) the making of a Purchase of Common Stock for less than its fair market value, or (v) the vesting or transferability of restricted stock or securities acquired by exercising an Option, on the grantee's making satisfactory arrangement for such withholding. Such arrangement may include payment by the grantee in cash or by check of the amount of the withholding taxes or, at the discretion of the Committee, by the grantee's delivery of previously held shares of Common Stock or the withholding from the shares of Common Stock otherwise deliverable upon exercise of a Option shares having an aggregate fair market value equal to the amount of such withholding taxes. 20. GOVERNMENTAL REGULATION. The Company's obligation to sell and deliver shares of the Common Stock under this Plan is subject to the approval of any governmental authority required in connection with the authorization, issuance or sale of such shares. Government regulations may impose reporting or other obligations on the Company with respect to the Plan. For example, the Company may be required to send tax information statements to employees and former employees that exercise ISOs under the Plan, and the Company may be required to file tax information returns reporting the income received by grantees of Options in connection with the Plan. 21. GOVERNING LAW. The validity and construction of the Plan and the instruments evidencing Stock Rights shall be governed by the laws of the Commonwealth of Massachusetts, or the laws of any jurisdiction in which the Company or its successors in interest may be organized. EX-13.01 3 1999 ANNUAL REPORT MD&A 1 Exhibit 13.01 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company develops, markets and supports next-generation performance management solutions. Substantially all of the Company's revenues have been derived from the Network Health product family which began shipping in the first quarter of 1995. The Company does not provide forecasts of its future financial performance. From time to time, however, the information provided by the Company or statements made by its employees may contain forward looking statements. In particular, some statements contained in this Annual Report and the Company's Form 10-K, for the fiscal year ended December 31, 1999, are not historical statements (including, but not limited to, statements concerning the plan and objectives of management; increases in sales and marketing, research and development and general and administrative expenses; expenses associated with Year 2000 and the Company's expected liquidity and capital resources). 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 the Company's filings with the Securities and Exchange Commission. On October 19, 1999, the Company entered into an Agreement and Plan of Reorganization (the "Merger Agreement") providing for the merger (the "Merger") of E Acquisition Corp., a Georgia corporation and wholly-owned subsidiary of the Company ("Merger Sub"), with and into Empire Technologies, Inc. ("Empire"). The Merger was effected on October 29, 1999 (the "Effective Date") pursuant to a Certificate of Merger filed with the Secretary of State of the State of Georgia on that date. Pursuant to the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of the common stock, no par value per share, of Empire (the "Empire Common Stock") was converted into 815,248 shares of common stock, $.01 par value per share, of the Company (the "Concord Common Stock"). Concord issued an aggregate of 815,248 shares of Concord Common Stock to the stockholders of Empire in the Merger in a private placement transaction pursuant to Section 4(2) under the Securities Act of 1933. Empire is a provider of solutions for proactive self-management of UNIX and Windows NT systems, as well as mission-critical applications. The Merger was accounted for as a pooling-of-interests. All transactions between the two companies have been eliminated in the combined results. The Results of Operations reflect these combined results. SUBSEQUENT EVENT On February 4, 2000, the Company completed a merger with privately-held FirstSense Software, Inc. FirstSense is a provider of application and service response management solutions. The Company has reserved for issuance in connection with the merger, 1,940,000 shares of Concord's common stock. The transaction is being accounted for as a pooling-of-interests. 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain financial data as percentages of the Company's total revenue. All prior-period financial statements presented have been reinstated for the acquisition of Empire Technologies, Inc. (See Note 3 to financial statements). Fiscal Year 1999 1998 1997 - -------------------------------------------------------------------------------- Revenues: License revenues 78.3 % 83.5 % 89.2 % Service revenues 21.7 % 16.5 % 10.8 % --------------------------------------- Total revenues 100.0 % 100.0 % 100.0 % Cost of revenues 12.0 % 11.3 % 14.1 % --------------------------------------- Gross Profit 88.0 % 88.7 % 85.9 % --------------------------------------- Operating expenses: Research and development 16.9 % 17.8 % 24.5 % Sales and marketing 38.1 % 42.3 % 49.2 % General and administrative 5.5 % 6.8 % 10.0 % Stock-based compensation 3.8 % 2.4 % -- Acquisition-related charges 0.8 % -- -- --------------------------------------- Operating income 22.9 % 19.5 % 2.2 % Other income, net 4.6 % 5.5 % 1.5 % --------------------------------------- Income before income taxes 27.5 % 25.0 % 3.7 % Provision for income taxes 8.8 % 1.3 % -- --------------------------------------- Net income 18.7 % 23.7 % 3.7 % --------------------------------------- REVENUES The Company's revenues consist of software license revenues and service revenues. Software license revenues are recognized in accordance with the American Institute of Certified Public Accountants' Statement of Position ("SOP") No. 97-2, Software Revenue Recognition, as modified by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition with respect to Certain Transactions. Software license revenues are recognized upon execution of a contract and delivery of software, provided that the license fee is fixed and determinable, no significant production, modification or customization of the software is required and collection is considered probable by management. Service revenues are recognized as the services are performed. Maintenance revenues are derived from customer support agreements generally entered into in connection with initial license sales and subsequent renewals. Maintenance revenues are recognized ratably over the term of the maintenance period. Payments for maintenance fees are generally made in advance. INTERNATIONAL REVENUES The Company recognized $16.3 million, $7.3 million and $2.4 million of revenues from international locations in 1999, 1998 and 1997, representing 24.2%, 17.6% and 11.6% of total revenues, respectively. The Company's revenues from international locations were primarily generated from customers located in Europe. Revenues from customers located in Europe accounted for 13.1%, 12.6% and 10.3% of total revenues in 1999, 1998 and 1997, respectively. The continued increase in revenues from international locations as a percentage of total revenues is primarily the result of the Company's expansion of its operations outside the United States which has included both the hiring of additional personnel as well as the establishment of additional reseller agreements. The Company believes that continued growth and profitability will require further expansion of its sales in international markets. The Company expects to commit additional time and development resources to customizing its products and services for selected international markets. TOTAL REVENUES Total revenues were $67.3 million, $41.5 million and $20.7 million in 1999, 1998 and 1997, respectively, representing increases of 62.4% from 1998 to 1999 and 100.5% from 1997 to 1998. LICENSE REVENUES The Company's license revenues are derived from the licensing of software products. License revenues were $52.7 million, $34.6 million and $18.5 million, in 1999, 1998 and 1997, respectively, representing increases of 52.3% from 1998 to 1999 and 87.5% from 1997 to 1998. License revenues accounted for 78.3%, 83.5% and 89.2% of total revenues in 1999, 1998 and 1997, respectively. The increase in license revenues in absolute dollars resulted from increased sales to new customers and additional sales to existing customers for new products and upgrades of existing licenses. The decrease in license revenues as a percent of total revenues was the result of a significant increase in service revenues due to larger service opportunities in the installed customer base. There were no price increases for products during 1999. 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) SERVICE REVENUES The Company's service revenues consist of fees for maintenance, training and professional services. Service revenues were $14.6 million, $6.9 million and $2.2 million in 1999, 1998 and 1997, respectively, representing increases of 113.4% from 1998 to 1999 and 208.2% from 1997 to 1998. Service revenues accounted for 21.7%, 16.5% and 10.8% of total revenues in 1999, 1998 and 1997, respectively. The increase in service revenues was attributed to an increase in revenue from maintenance contracts, training and professional services generated by new and existing service offerings into an expanded installed customer base. 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 services contracts. Royalty costs are composed of third party software costs. Cost of revenues were $8.1 million, $4.7 million and $2.9 million in 1999, 1998 and 1997, respectively, representing increases of 72.9% from 1998 to 1999 and 59.9% from 1997 to 1998. Cost of revenues accounted for 12.0%, 11.3% and 14.1% of total revenues in 1999, 1998 and 1997, respectively, resulting in gross margins of 88.0%, 88.7% and 85.9% in each respective period. The increase in cost of revenues, as well as the decrease in the gross margin percentages from 1998 to 1999 was primarily the result of increased spending in customer support to be more responsive to growing customer needs. The improvement in the gross margin percentages from 1997 to 1998 was attributable to lower royalty unit costs associated with the higher sales volumes during the 1998 period. RESEARCH AND DEVELOPMENT Expenses Research and development expenses consist primarily of personnel costs associated with software development. Research and development expenses were $11.4 million, $7.4 million and $5.1 million in 1999, 1998 and 1997, respectively, representing an increase of 54.5% from 1998 to 1999 and 45.7% from 1997 to 1998. Research and development expenses accounted for 20.7%, 20.2% and 24.5% of total revenues in 1999, 1998 and 1997, respectively. The increase in absolute dollars was primarily due to increased headcount in research and development from 57 to 81 people from 1998 to 1999 and 42 to 57 people from 1997 to 1998. The Company anticipates that it will continue to commit substantial resources to research and development in the future and that product development expenses may increase in absolute dollars in future periods. SALES AND MARKETING EXPENSES Sales and marketing expenses consist primarily of salaries, commissions to sales personnel and agents, travel, tradeshow participation, public relations and other promotional expenses. Sales and marketing expenses were $25.7 million, $17.5 million and $10.2 million in 1999, 1998 and 1997, respectively, representing an increase of 46.6% from 1998 to 1999 and 72.2% from 1997 to 1998. Sales and marketing expenses accounted for 38.1%, 42.3% and 49.2% of total revenues in 1999, 1998 and 1997, respectively. The increase in absolute dollars was primarily the result of increased headcount to continue to build the direct sales force along with additional marketing and promotional activities to penetrate the market. The decline in sales and marketing expenses as a percentage of total revenues is due to sales productivity improvements resulting from the expansion of the Network Health product family, increased revenues from existing customers and improved lead generation. Headcount in sales and marketing at the end of 1999, 1998 and 1997 was 119, 76 and 45 people, respectively. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses consist primarily of salaries for financial, administrative and management personnel and related travel expenses, as well as legal and accounting expenses. General and administrative expenses were $3.7 million, $2.8 million and $2.1 million in 1999, 1998 and 1997, respectively, representing an increase of 31.3% from 1998 to 1999 and 36.1% from 1997 to 1998. General and administrative expenses accounted for 5.5%, 6.8% and 10.0% of total revenues in 1999, 1998 and 1997, respectively. The increase in absolute dollars reflects personnel growth and associated costs in general support areas. General and administrative expenses declined as a percentage of total revenues due to a significant increase in revenues. ACQUISITION-RELATED EXPENSES Acquisition-related expenses included accounting, legal and investment banking fees associated with the acquisition of Empire Technologies, Inc. OTHER INCOME (EXPENSE), NET Other income consists of interest earned on funds available for investment net of interest expense in connection with the financing of capital equipment. The Company realized net other income of $3.1 million, $2.3 million and $306,000, respectively, in 1999, 1998 and 1997. INCOME TAXES The difference between the expected combined federal and state tax rate and the Company's effective tax rate in 1999 relates primarily to the use of currently-generated tax credits and tax assets acquired as a part of the Empire acquisition. The difference in 1998 and 1997 relates primarily to the use of substantially all of the Company's unrestricted NOL carryforwards. In addition, the Company received a tax benefit of approximately $500,000 pursuant to the exercise of employee stock options in 1998 and a tax benefit of approximately $4.9 million pursuant to the exercise of employee stock options in 1999. The Company recorded this benefit as a component of additional paid-in capital. 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations, prior to its initial public offering, primarily through the private sale of equity securities and a credit line for equipment purchases. On October 24, 1997, the Company completed its initial public offering of 3,335,000 shares of Common Stock at a price of $14.00 per share. Of these shares, 2,735,000 were issued by the Company and 600,000 were sold by selling shareholders. The Company received net proceeds of approximately $34.7 million. The Company had working capital of $55.4 million at December 31, 1999. Net cash provided by operating activities was $11.6 million, $16.1 million and $2.3 million in 1999, 1998 and 1997, respectively. Cash, cash equivalents and marketable securities were $62.0 million, $51.2 million and $36.9 million in 1999, 1998 and 1997, respectively. Deferred revenues increased for the year ended December 31, 1999 by $4.4 million due to an increase in overall sales activity; $4.1 million of this increase came from deferred maintenance contracts and $294,000 was the result of service and software license sales with remaining contingencies such as completion of services, product acceptance and credit worthiness. Investing activities have consisted of the acquisition of property and equipment, most notably computer and networking equipment to support the growing employee base and corporate infrastructure and also investments in marketable securities. The Company manages its market risk on its investment securities by selecting investment grade securities with the highest credit ratings of relatively short duration that trade in highly liquid markets. Financing activities consisted primarily of the issuance of common stock and exercise of options during 1999 and 1998 and from the proceeds from and repayments of bank borrowings in connection with equipment purchases during 1997. Pursuant to the Tax Reform Act of 1986, the utilization of net operating loss carryforwards for tax purposes may be subject to an annual limitation if a cumulative change of ownership of more than 50% occurs over a three-year period. As a result of the Company's 1995 preferred stock financings, such a change in ownership has occurred. As a result of this ownership change, the use of the net operating loss carryforwards will be limited. The Company has determined that its initial public offering did not cause another ownership change. The Company has deferred tax assets of approximately $13.9 million composed primarily of net operating loss carryforwards and research and development credits. The Company has fully reserved for these deferred tax assets by recording a valuation allowance of $13.9 million, as the Company believes that it is more likely than not that it will not be able to realize this asset. Pursuant to paragraphs 20 to 25 of Statement of Financial Accounting Standards No. 109, the Company considered both positive and negative evidence in assessing the need for a valuation allowance at December 31, 1998 and 1999. The factors that weighed most heavily on the Company's decision to record a full valuation allowance were (i) the substantial restrictions on the use of its existing net operation loss (NOL) carryforwards and (ii) the uncertainty of future profitability. As a result of the ownership change described above, the future use of approximately $10.9 million of the Company's NOL carryforwards are limited to only $330,000 per year; the substantial majority of such NOL carryforwards will expire before they can be used. Pursuant to the provisions of SFAS No. 109, the Company used all of its remaining unrestricted NOL and credit carryforwards in computing the 1998 tax provision. The Company is also subject to rapid technology changes, competition from substantially larger competitors, a limited family of products and other related risks, as more thoroughly described in the "Risk Factors" section of the Company's Form 10-K, for the fiscal year ended December 31, 1999. The Company's dependence on a single product family in an emerging market makes the prediction of future results difficult, if not impossible, especially in the highly competitive software industry. As a result, the Company found the evidence described above to be the most reliable objective evidence available in determining that a full valuation allowance against its tax assets would be necessary. The Company's net operating loss deferred tax asset includes approximately $3.4 million pertaining to the benefit associated with the exercise and subsequent disqualifying disposition of incentive stock options by the Company's employees. When and if the Company realizes this asset, the resulting change in the valuation allowance will be credited directly to additional paid-in capital, pursuant to the provisions of SFAS No. 109. The difference between the expected combined federal and state tax rate and the Company's effective tax rate in 1999 relates primarily to the use of currently-generated tax credits and tax assets acquired as a part of the Empire acquisition. The difference in 1998 and 1997 relates primarily to the use of substantially all of the Company's unrestricted NOL carryforwards. In addition, the Company received a tax benefit of approximately $500,000 pursuant to the exercise of employee stock options in 1998 and a tax benefit of approximately $4.9 million pursuant to the exercise of employee stock options in 1999. The Company recorded this benefit as a component of additional paid-in capital. 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The Company's current export sales are denominated in United States dollars. To the extent that international sales continue to be denominated in United States dollars, an increase in the value of the United States dollar relative to other currencies could make the Company's products and services more expensive and, therefore, potentially less competitive in international markets. As of December 31, 1999, the Company's principal sources of liquidity included cash and marketable securities. The Company believes that its current cash and market securities and cash provided by future operations will be sufficient to meet its working capital and anticipated capital expenditure requirements for the next 12 months. Although operating activities may provide cash in certain periods, to the extent the Company experiences growth in the future, its operating and investing activities may require significant cash. Consequently, any such future growth may require the Company to obtain additional equity or debt financing. YEAR 2000 COMPLIANCE / YEAR 2000 READINESS DISCLOSURE STATEMENT The Company was aware of the issues associated with the programming code in existing computer systems and software products as the millennium (Year 2000) approached. The Company set up a task force which consisted of the Director of IT and Operations, the Manager of System Applications and representative personnel from each functional area. This task force addressed the Year 2000 issue in the following categories: the Network Health product; internal business computer systems and software applications; internal systems other than computer hardware and software; and systems of the Company's external suppliers and service providers. The Company also assessed its Year 2000 associated costs, risks and potential contingency plans. Despite the Company's efforts with respect to the Year 2000 issue, there can be no assurance that the Company's business, results of operations or financial condition would not be materially adversely affected by the failure of the Company's products, its internal systems and applications or the systems of its third party suppliers and service providers to properly operate or manage data beyond 1999. NETWORK HEALTH PRODUCT In 1997, the Company initiated the necessary development to ensure Year 2000 compliance in the Network Health family of applications and believes it has achieved Year 2000 compliance in Network Health 4.1 which was released in August 1998. The Company's existing customers can receive this release, at no charge, through their annual software maintenance contract. The Company requires its customers to purchase software maintenance in order to receive product support. Specifically, the Company defines Year 2000 Compliance as the following: no value for current date will cause any interruption in operation; date-based functionality must behave consistently for dates prior to, during, and after Year 2000; in all interfaces and data storage, the century in any date must be specified either explicitly or by unambiguous algorithms or inferencing rules; Year 2000 must be recognized as a leap year. The Company's definition of Year 2000 Compliance is adopted from the British Standard Institute's Definition of Year 2000 Conformity Requirements (PD2000-1). A copy of the standard is available for review on the Company's website. The Company makes no guarantee of, claims no responsibility for, and disclaims any liability to its customers, with respect to Year 2000 compliance of operating platforms, hardware, software, or other products not developed by the Company, including equipment monitored by the Network Health product. None of the Company's customers have reported any Year 2000 related problems with the Company's Network Health product. INTERNAL BUSINESS COMPUTER SYSTEMS AND SOFTWARE APPLICATIONS In 1998, the Company commenced a Year 2000 date conversion project to address all internal existing computer systems, software applications, and related computer equipment (e.g. printers) used in conjunction with its internal operations. The Company identified, modified, upgraded, and/or replaced any systems that had been identified as non-Year 2000 compliant to minimize the possibility of a material disruption to its business. The Company finished assessing all existing internal systems and completed the compliance process on these systems before the end of 1999. INTERNAL SYSTEMS OTHER THAN COMPUTER HARDWARE AND SOFTWARE The operation of office and facilities equipment such as fax machines, photocopiers, telephone switches, security systems, elevators, and other common devices could also have been affected by the Year 2000 issue. The Company identified and remedied any Year 2000 issues on its office and facilities equipment. SYSTEMS OF EXTERNAL SUPPLIERS AND SERVICE PROVIDERS The Company initiated communications with third party suppliers of the computers, software, and other equipment used, operated, or maintained by the Company to identify and, to the extent possible, to resolve any issues regarding the Year 2000 issue. The Company also initiated communications with facilities service providers upon which the Company relies for daily operations. All external suppliers and service providers had been asked to provide 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) a written assurance that they were also preparing to be Year 2000 compliant in a timely manner, and that their products/services will be available to the Company up to and beyond the Year 2000, without interruption. A response was received from 100% of these suppliers and service providers. There were no Y2000 associated problems with systems operated by other companies upon which the Company relies. ASSOCIATED COSTS To date, the Company has not incurred any material costs related to the assessment, upgrade or replacement of existing systems identified as non-Year 2000 compliant. Management has assessed the total Year 2000 compliance expense and found that the amounts required to be expensed in 1999 did not have an adverse material effect on its business, results of operations or financial condition. ASSOCIATED RISKS The Company believes it has identified and resolved all Year 2000 issues that could have materially adversely affected its business, financial condition or results of operations. However, management realizes it may not be possible to determine, at this time, with complete certainty that all Year 2000 problems affecting the Company were corrected. As a result, the Company could be at risk of experiencing a significant number of operational inconveniences and inefficiencies that may divert management's time and attention from its ordinary business activities and at risk of experiencing a lesser number of serious system or product failures that may require significant efforts by the Company to prevent or alleviate material business disruptions. CONTINGENCY PLANS The Company recognizes the importance of readiness for potential worst case scenarios. As a result, the Company worked to identify scenarios with significant risks, which could have required contingency plans and had contingency plans in place before the end of 1999. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments. The Company does not invest in derivative financial instruments, other financial instruments or derivative commodity instruments for which fair value disclosure would be required under SFAS No. 107. All of the Company's investments are in investment grade securities with high credit ratings of relatively short duration that trade in highly liquid markets and are carried at fair value on the Company's books. Accordingly, the Company has no quantitative information concerning the market risk of participating in such investments. Primary Market Risk Exposures. The Company's primary market risk exposure is in the area of interest rate risk. The Company's investment portfolio of cash equivalents is subject to interest rate fluctuations, but the Company believes this risk is immaterial due to the short-term nature of these investments. Substantially all of the Company's business outside the United States is conducted in U.S. dollar-denominated transactions, whereas the Company's operating expenses in its international branches are denominated in local currency. The Company has no foreign exchange contracts, option contracts or other foreign hedging arrangements. The Company believes that the operating expenses of its foreign operations are immaterial, and therefore any associated market risk is unlikely to have a material adverse effect on the Company's business, results of operations or financial condition. PRICE RANGE OF COMMON STOCK The Company effected its initial public offering on October 24, 1997 at a price of $14.00 per share. Since that date, the Company's Common Stock has traded on the Nasdaq National Market under the symbol CCRD. The following table sets forth, for the period indicated, the high and low closing sales prices for the Common Stock, all as reported by the Nasdaq National Market. Period High Low - -------------------------------------------------------------------------------- October 16, 1997 - December 31, 1997 $ 23.25 $ 15.75 Fiscal 1998: First Quarter $ 28.75 $ 15.13 Second Quarter 29.38 21.25 Third Quarter 45.13 26.00 Fourth Quarter 56.75 31.25 Fiscal Year 56.75 15.13 Fiscal 1999: First Quarter $ 68.25 $ 43.75 Second Quarter 58.00 36.56 Third Quarter 56.75 34.75 Fourth Quarter 64.00 38.00 Fiscal Year 68.25 34.75 EX-21.01 4 SUBSIDIARIES 1 EXHIBIT 21.01 SUBSIDIARIES Concord Communications Securities Corporation 600 Nickerson Road Marlboro, MA 01752 Empire Technologies, Inc. 2675 Pacers Ferry Road, Suite 150 Atlanta, GA 30339 Concord Communications International, Inc. 600 Nickerson Road Marlboro, MA 01752 CCA Holdings, Inc. 600 Nickerson Road Marlboro, MA 01752 EX-23.01 5 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.01 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT As independent public accountants, we hereby consent to the incorporation of our report dated January 17, 2000 included in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8 (File nos. 333-31484, 333-78087, 333-51945, 333-40645 and 333-38363). Arthur Andersen LLP ARTHUR ANDERSEN LLP Boston, Massachusetts March 27, 2000 EX-27.01 6 FINANCIAL DATA SCHEDULE
5 1 U.S. DOLLARS 12-MOS DEC-31-1999 JAN-1-1999 DEC-31-1999 1 9,104 52,940 14,396 930 0 1,286 10,903 3,294 84,405 21,354 0 0 0 76,504 (13,453) 84,405 52,708 67,343 2,432 8,086 43,875 0 3,117 18,499 5,593 12,906 0 0 0 12,906 .91 .85
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