-----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, UlDfuPt7RpGNsy1dZZL5HRfEY952PwgsnP1g9EEGrfsvBhottIxavhqxEv4AueFV 6ccPr5gHShGYVJO2ikUwYA== 0000950135-00-002890.txt : 20000516 0000950135-00-002890.hdr.sgml : 20000516 ACCESSION NUMBER: 0000950135-00-002890 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 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-Q SEC ACT: SEC FILE NUMBER: 000-23067 FILM NUMBER: 635895 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-Q 1 CONCORD COMMUNICATIONS, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ to ______________ COMMISSION FILE NUMBER 0-23067 CONCORD COMMUNICATIONS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MASSACHUSETTS 04-2710876 (State of incorporation) (IRS Employer Identification Number) 600 NICKERSON ROAD MARLBORO, MASSACHUSETTS 01752 (508) 460-4646 (ADDRESS AND TELEPHONE OF PRINCIPAL EXECUTIVE OFFICES) ---------------- INDICATE BY CHECK MARK WHETHER REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS, AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO 16,281,466 SHARES OF THE REGISTRANT'S COMMON STOCK, $0.01 PAR VALUE, WERE OUTSTANDING AS OF APRIL 30, 2000. THIS DOCUMENT CONTAINS 25 PAGES. THE EXHIBIT INDEX IS ON PAGE 24. 2 CONCORD COMMUNICATIONS, INC. FORM 10-Q, MARCH 31, 2000 CONTENTS
Item Number Page PART I: FINANCIAL INFORMATION Item 1. Financial Statements Balance sheets: March 31, 2000 and December 31, 1999 3 Statements of income: Three months ended March 31, 2000 and March 31, 1999 4 Statements of cash flows: Three months ended March 31, 2000 and March 31, 1999 5 Notes to financial statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-19 Item 3. Quantitative and Qualitative Disclosures about Market Risk 20 PART II: OTHER INFORMATION Item 1. Legal Proceedings 21 Item 2. Changes in Securities and Use of Proceeds 21 Item 3. Defaults Upon Senior Securities 21 Item 4. Submission of Matters to a Vote of Security Holders 21 Item 5. Other Information 22 Item 6. Exhibits and Reports on Form 8-K 22 SIGNATURE 23 EXHIBIT INDEX 24
2 3 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONCORD COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, DECEMBER 31, 2000 1999 ------------ ------------ ASSETS Current Assets: Cash, cash equivalents and marketable securities $56,718,871 $63,569,201 Accounts receivable, net of allowance of approximately $1,319,000 and $971,000 in 2000 and 1999, respectively 16,120,127 13,976,929 Prepaid expenses and other current assets 935,291 1,191,147 ------------ ------------ Total current assets 73,774,289 78,737,277 ------------ ------------ Equipment and Improvements, at cost: Equipment 10,565,910 9,024,983 Leasehold improvements 3,731,444 3,110,369 ------------ ------------ 14,297,354 12,135,352 Less -- Accumulated depreciation and amortization 4,755,803 4,085,950 ------------ ------------ 9,541,551 8,049,402 ------------ ------------ Deferred Tax Asset 3,963,000 3,000,000 ------------ ------------ $ 87,278,840 $ 89,786,679 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $ -- $ 898,462 Accounts payable 4,850,502 4,940,420 Accrued expenses 6,605,307 7,423,907 Deferred revenue 12,323,451 10,261,334 ------------ ------------ Total current liabilities 23,779,260 23,524,123 ------------ ------------ Long-term debt, less current portion -- 2,064,004 Redeemable preferred stock: Series A Redeemable Convertible Preferred Stock, $0.01 par value; 5,500,000 shares authorized; 5,471,465 shares issued and outstanding at December 31, 1999 (aggregate liquidation value $5,471,465) -- 4,744,115 Series B Redeemable Convertible Preferred Stock, $0.01 par value; 2,920,000 shares authorized and 2,800,000 issued and outstanding at December 31, 1999 (aggregate liquidation value $7,000,000) -- 6,978,902 ------------ ------------ Total redeemable preferred stock -- 11,723,017 ------------ ------------ Common Stock, $0.01 par value: Authorized -- 50,000,000 shares Issued and outstanding -- 16,175,156 and 14,809,533 shares, in 2000 and 1999, respectively 161,752 148,095 Additional paid-in capital 94,470,770 81,922,240 Deferred compensation (3,303,537) (3,557,794) Accumulated other comprehensive income (1,467,275) (1,386,125) Accumulated deficit (26,362,130) (24,650,881) ------------ ------------ Total stockholders' equity 63,499,580 52,475,535 ------------ ------------ $ 87,278,840 $ 89,786,679 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 3 4 CONCORD COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED ------------------------------- MARCH 31, MARCH 31, 2000 1999 ------------ ------------ Revenues: License revenues $ 14,852,527 $ 11,656,493 Service revenues 4,415,746 2,751,066 ------------ ------------ Total revenues 19,268,273 14,407,559 Cost of Revenues 2,426,363 1,788,569 ------------ ------------ Gross profit 16,841,910 12,618,990 Operating Expenses: Research and development 4,788,080 3,068,580 Sales and marketing 9,226,056 6,449,743 General and administrative 1,415,687 1,150,153 Stock-based compensation 254,257 347,585 Acquisition-related charges 4,300,000 -- ------------ ------------ Total operating expenses 19,984,080 11,016,061 ------------ ------------ Operating (loss) income (3,142,170) 1,602,929 Other income, net 755,931 718,055 ------------ ------------ (Loss) Income before income taxes (2,386,239) 2,320,984 (Benefit from) Provision for income taxes (963,000) 1,224,918 ------------ ------------ Net (loss) income before extraordinary items $ (1,423,239) $ 1,096,066 ============ ============ Extraordinary items (288,010) -- ------------ ------------ Net (loss) income after extraordinary items $ (1,711,249) $ 1,096,066 ============ ============ Accretion of redeemable preferred stock -- 31,026 ------------ ------------ Net (loss) income applicable to common stockholders $ (1,711,249) $ 1,065,040 ============ ============ Net (loss) income per common and potential common share: Basic $ (0.11) $ 0.08 ============ ============ Diluted $ (0.11) $ 0.06 ============ ============ Weighted average common and potential common shares outstanding: Basic 15,731,684 14,154,601 ============ ============ Diluted 15,731,684 16,697,575 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 4 5 CONCORD COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
THREE MONTHS ENDED ------------------------------- MARCH 31, MARCH 31, 2000 1999 ------------ ------------ Cash Flows from Operating Activities: Net (loss) income $ (1,711,249) $ 1,065,040 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 669,853 424,969 Stock-based compensation 254,257 347,585 Amortization of debt issuance costs Unrealized loss on available-for-sale securities (81,150) (326,067) Changes in current assets and liabilities: Accounts receivable (2,143,198) (553,021) Prepaid expenses and other current assets 255,856 (12,060) Accounts payable (89,918) 822,639 Accrued expenses (818,600) (429,021) Deferred revenue 2,062,117 84,351 Deferred tax asset (963,000) (297,082) ------------ ------------ Net cash provided by operating activities (2,565,032) 1,151,453 ------------ ------------ Cash Flows from Investing Activities: Purchases of equipment and improvements (2,162,002) (861,660) Proceeds from (Investments in) marketable securities 1,884,403 (10,943,600) ------------ ------------ Net cash used in investing activities (277,599) (11,805,260) ------------ ------------ Cash Flows from Financing Activities: Repayments of and proceeds from bank borrowings (2,962,466) 1,258,672 Proceeds from issuance of preferred and common stock -- 125,285 Proceeds from shares issued in connection with employee stock plans 839,170 1,828,124 ------------ ------------ Net cash (used in) provided by financing activities (2,123,296) 3,212,081 ------------ ------------ Net Decrease in Cash and Cash Equivalents (4,965,927) (7,441,726) Cash and Cash Equivalents, beginning of year 10,629,528 20,913,384 ------------ ------------ Cash and Cash Equivalents, end of year $ 5,663,601 $ 13,471,658 ============ ============ Supplemental Disclosure of Cash Flow Information: Cash paid for interest $ 33,592 $ 21,800 ============ ============ Cash paid for taxes $ 147,306 $ -- ============ ============ Supplemental Disclosure of Noncash Transactions: Accretion of dividends on preferred stock $ -- $ 31,026 ============ ============ Deferred compensation related to grants of stock options $ 254,257 $ (325,165) ============ ============ Conversion of redeemable convertible preferred stock to common stock $ 11,723,017 $ -- ============ ============ Unrealized loss on available-for-sale securities $ (81,150) $ (326,067) ============ ============ Tax benefit associated with employee stock options $ -- $ 1,500,000 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 5 6 CONCORD COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS FORM 10-Q, MARCH 31, 2000 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1. INTERIM FINANCIAL STATEMENTS The accompanying financial statements have been presented by Concord Communications, Inc., (the "Company") without audit (except that the balance sheet information as of December 31, 1999 has been derived from audited financial statements) in accordance with generally accepted accounting principles for interim financial statements and with the instructions to Form 10-Q and Regulation S-X pertaining to interim financial statements. Accordingly, these interim financial statements do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. The financial statements reflect all adjustments and accruals which management considers necessary for a fair presentation of financial position as of March 31, 2000 and December 31, 1999, and results of operations for the three ended March 31, 2000 and 1999. The results for the interim periods presented are not necessarily indicative of results to be expected for any future period. The financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company's 1999 Annual Report on Form 10-K filed with the Securities and Exchange Commission in March 2000. 2. NET (LOSS) INCOME PER SHARE The Company follows the provisions of SFAS No. 128, Earnings Per Share, effective December 15, 1997. SFAS No. 128 establishes standards for computing and presenting earnings per share and applies to entities with publicly held common stock or potential common stock. The dilutive effect of potential common shares for the three months ended March 31, 1999, consisting of outstanding stock options and redeemable preferred stock, is determined using the treasury method. Calculations of basic and diluted net income per common share and potential common share are as follows:
THREE MONTHS ENDED ------------------ MARCH 31, MARCH 31, 2000 1999 ---- ---- Net (loss) income .......................................... $ (1,711,249) $ 1,065,040 ============ ============ Weighted average common shares outstanding ............... 15,731,684 14,154,601 Potential common shares pursuant to stock options ........ -- 1,300,079 Potential common shares pursuant to conversion of redeemable preferred stock ............. -- 1,242,895 ------------ ------------ Diluted weighted average shares .......................... 15,731,684 16,697,575 ============ ============ Basic net (loss) income per common share ................. $ (0.11) $ 0.08 ============ ============ Diluted net (loss) income per common and potential common share .............................. $ (0.11) $ 0.06 ============ ============
Diluted weighted average shares outstanding do not include 796,349 and 20,628 common equivalent shares for the three months ended March 31, 2000 and 1999, respectively, as their effect would have been antidilutive. 3. COMPREHENSIVE INCOME 6 7 Comprehensive (loss) income for the three months ended March 31, 2000 and 1999 is as follows:
2000 1999 Net (loss) income $(1,711,249) $ 1,065,040 =========== =========== Unrealized loss on marketable securities (81,150) (326,067) ----------- ----------- Comprehensive income $ 1,792,399 $ 738,973 =========== ===========
4. TAX PROVISION The Company has recorded a tax benefit of $963,000 in the three months ended March 31, 2000, based on its effective tax rate for 2000, computed in accordance with SFAS No. 109, Accounting for Income Taxes. The Company's 2000 effective tax rate includes the effect of the anticipated reversal of a valuation allowance on deferred tax assets recorded by FirstSense prior to its acquisition by the Company and research and development credits expected to be earned during the year. 5. ACQUISITIONS On February 4, 2000, the Company consummated a transaction pursuant to which it acquired FirstSense Software, Inc. ("FirstSense"). Under the terms of the agreement, the shareholders and option holders of FirstSense received an aggregate of 1,940,000 equivalent Concord shares to effect the business combination. The transaction is being accounted for as a pooling of interests. All inter-company transactions have been eliminated as a result of the business combination. As a part of the transaction, the Company incurred direct, acquisition-related charges of approximately $4,300,000. All of such costs have been expensed in fiscal 2000 upon consummation of the FirstSense acquisition in February 2000. 7 8 CONCORD COMMUNICATIONS, INC. FORM 10-Q, MARCH 31, 2000 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Concord develops, markets and supports next-generation performance management solutions. With the recent acquisitions of Empire Technologies, Inc. and FirstSense Software, Inc., 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. 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. In particular, some statements contained in this Form 10-Q and the Company's Annual Report and Form 10-K, for the fiscal year ended December 31, 1999, are not historical statements (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; statements related to acquisitions and the integration of acquired companies; and our 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. 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 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 our 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 integration of acquired products and other risks detailed in the our filings with the Securities and Exchange Commission. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain financial data as percentages of the Company's total revenue:
THREE MONTHS ENDED ------------------ MARCH 31, MARCH 31, 2000 1999 ---- ---- Revenues: License revenues 77.1% 80.9% Service revenues 22.9% 19.1% ----- ----- Total revenues 100.0% 100.0% Cost of revenues 12.6% 12.4% ----- ----- Gross profit 87.4% 87.6% Operating expenses: Research and development 24.8% 21.3% Sales and marketing 47.9% 44.8% General and administrative 7.3% 8.0% Stock-based compensation 1.3% 2.4% Acquisition-related charges 22.3% -- ----- ----- (Loss) Income from operations (16.3%) 11.1% ----- ----- Other income, net 3.9% 5.0% ----- ----- Extraordinary items (1.5%) -- ----- ----- (Loss) Income before income taxes (13.9%) 16.1% ----- ----- (Benefit from) Provision for income taxes (5.0%) 4.9% ----- ----- Net (loss) income (8.9%) 11.2% ----- ----- Accretion of redeemable preferred stock -- (0.2%) ----- ----- Net (loss) income available to common stockholders (8.9%) 11.0% ----- -----
8 9 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") 97-2, Software Revenue Recognition. Under SOP 97-2, software license revenues are recognized upon execution of a contract and delivery of software, provided that the license fee is fixed and determinable, no significant production, modification or customization of the software is required and collection is considered probable by management. In 1999, software license revenues are recognized in accordance with SOP 97-2, as modified by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition with respect to Certain Transactions. 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 $7.0 million and $2.2 million of revenues from international locations in the three months ended March 31, 2000 and 1999, representing 36.3% and 15.3% 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 18.8% and 11.8% of total revenues in the three months ended March 31, 2000 and 1999, respectively. The continued increase in revenues from international locations 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. The Company's total revenues increased 33.7% to $19.3 million in the three months ended March 31, 2000 from $14.4 million in the three months ended March 31, 1999. LICENSE REVENUES. The Company's license revenues are derived from the licensing of software products. License revenues increased 27.4% to $14.8 million, or 77.1% of total revenues, in the three months ended March 31, 2000 from $11.7 million, or 80.9% of total revenues, in the three months ended March 31, 1999. The increase in license revenues resulted from increased sales to new customers and additional sales to existing customers for new products and upgrades of existing licenses. SERVICE REVENUES. The Company's service revenues consist of fees for maintenance, training and professional services. Service revenues increased 60.5% to $4.4 million, or 22.9% of total revenues, in the three months ended March 31, 2000 from $2.8 million, or 19.1% of total revenues, in the three months ended March 31, 1999. The increase in service revenues was attributed to an increase in revenue from maintenance contracts, training and professional services for new and existing customers. COST OF REVENUES. Cost of revenues includes expenses associated with royalty costs, production, fulfillment and product documentation, along with personnel costs associated with providing customer support in connection with maintenance and professional service contracts. Royalty costs are comprised of third party software costs. Cost of revenues increased 35.7% to $2.4 million, or 12.6% of total revenues, in the three months ended March 31, 2000 from $1.8 million, or 12.4% of total revenues, in the three months ended March 31, 1999, resulting in gross margins of 87.4% and 87.6% in each respective period. The increase in cost of revenues was primarily the result of increased spending in customer support to be more responsive to a growing customer base. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses consist primarily of personnel costs associated with software development. Research and development expenses increased 56.0% to $4.8 million, or 24.8% of total revenues, in the three months ended March 31, 2000 from $3.1 million, or 21.3% of total revenues, in the three months ended March 31, 1999. The increase in research and development expenses was primarily due to the use of outside contractors for consulting and recruiting along with increased headcount in research and development from 80 to 103 for the period from March 31, 1999 to March 31, 2000. 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, advertising and other promotional expenses. Sales and marketing expenses increased 43.0% to $9.2 million, or 47.9% of total revenues, in the three months ended March 31, 2000 from $6.4 million, or 44.8% of total revenues, in the three months ended March 31, 1999. 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. 9 10 Headcount in sales and marketing increased from 109 to 132 people from March 31, 1999 to March 31, 2000. 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 increased 21.8% to $1.4 million, or 7.3% of total revenues, in the three months ended March 31, 2000 from $1.2 million, or 8.0% of total revenues, in the three months ended March 31, 1999. The increase in absolute dollars is associated with an increase of costs in general support areas. Headcount in general and administrative functions increased from 30 to 47 people from March 31, 1999 to March 31, 2000. General and administrative expenses declined as a percentage of total revenues during the period due to a significant increase in revenues during that period. OTHER INCOME. Other income consists of interest earned on funds available for investment net of interest paid in connection with an outstanding term loan. The Company had net other income of $756,000 for the three months ended March 31, 2000 and net other income of $718,000 for the three months ended March 31, 1999. The increase in net other income is attributed to the investment of cashflows from the Company's operations. LIQUIDITY AND CAPITAL RESOURCES The Company 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 yielding the Company net proceeds of approximately $34.7 million. The Company had yielding working capital of $50.0 million at March 31, 2000. Net cash (used in) provided by operating activities was ($2.6) million and $1.2 million for the three months ended March 31, 2000 and 1999, respectively. Cash, cash equivalents and marketable securities were $56.7 million and $63.6 million at March 31, 2000 and 1999, respectively. The decrease in cash was the result of acquisition-related charges and repayment of acquisition-related debt. Deferred revenues increased for the three months ended March 31, 2000 by $2.1 million due to an increase in overall sales activity; the increase was primarily generated from deferred maintenance contracts. Investing activities have consisted of the acquisition of property and equipment, most notably computer and networking equipment to support the growing employee base and corporate infrastructure and also investments in marketable securities. The Company manages its market risk on its investment securities by selecting investment grade securities with the highest credit ratings of relatively short duration that trade in highly liquid markets. Financing activities consisted primarily of the issuance of common stock and exercise of options during the three months ended March 31, 2000 and 1999 and from the proceeds from borrowings on a subordinated debt financing. 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 is limited. The Company has determined that its initial public offering did not cause another ownership change. In addition, NOL carryforwards acquired as a result of the FirstSense acquisition are also restricted as a result of a prior ownership change. The Company has deferred tax assets of approximately $19.7 million composed primarily of net operating loss carryforwards and research and development credits. The Company has partially reserved for these deferred tax assets by recording a valuation allowance of $16.7 million. The net tax asset is based on the Company's estimate of NOL carryforwards it expects to use in the next two years; all other tax assets have been fully reserved. Pursuant to paragraphs 20 to 25 of SFAS No. 109, the Company considered both positive and negative evidence in assessing the need for a valuation allowance at December 31, 1998 and 1999. The factors that weighed most heavily on the Company's decision to record a valuation allowance were (i) the substantial restrictions on the use of certain of its existing NOL carryforwards and (ii) the uncertainty of future profitability. As a result of the Company's 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. The FirstSense NOL carryforwards are limited to $4.2 million per year. Pursuant to the provisions of SFAS No. 109, the Company used all of its remaining unrestricted NOL and credit carryforwards in computing the 1998 tax provision. As a part of restating its financial statements to reflect the FirstSense acquisition, the Company determined that approximately $3.0 million of 10 11 valuation allowance previously recorded by FirstSense prior to the acquisition was not necessary, given the Company's estimates of future taxable income. Accordingly, pursuant to SFAS No. 109, the Company recorded an asset and reduced its provision for income taxes in the period in which such NOL carryforwards were generated by FirstSense. The Company is also subject to rapid technological change, competition from substantially larger competitors, a limited family of products and other related risks, as more thoroughly described in the "Risk Factors" section 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 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. 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 March 31, 2000, 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. 11 12 RISK FACTORS References in these risk factors to "we," "our" the "Company" and "us" refer to Concord Communications, Inc., a Massachusetts corporation. Any investment in our common stock involves a high degree of risk. If any of the following risks actually occur, our business, results of operations and financial condition would likely suffer. 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(R) product in 1995. Accordingly, we have only a limited operating history in the network performance management market upon which you can evaluate our business and prospects can be based. We incurred significant net losses in each of the five fiscal years prior to earning a small profit in 1997. 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. 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 business and markets, our recent acquisitions and our limited operating history in our current market, we believe that one should not rely on period-to-period comparisons of our financial results as an indication of our future performance. In light of our strong performance in 1998, we used all of our remaining unrestricted tax net operating loss and credit carryforwards in 1998. Accordingly, we recorded a tax 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. 12 13 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. 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 - - 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: 13 14 - - 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 assess properly and address the needs of this market. OUR SUCCESS IS DEPENDENT UPON SALES TO TELECOMMUNICATIONS CARRIERS. We derive a significant portion of our revenues, and likely will continue to, from the sales of our products to telecommunications carriers. Our future performance depends upon telecommunications carriers' increased incorporation of our products and services as part of their package of product and service offerings to end users. Our products may fail to perform favorably in and become an accepted component of the telecommunications carriers' product and service offerings. The volume of sales of our products and services to telecommunications carriers may increase slower than we expect or may decrease. MARKET ACCEPTANCE OF OUR eHEALTH(TM) PRODUCT FAMILY IS CRITICAL TO OUR SUCCESS. We currently derive substantially all of our revenues from our eHealth(TM) 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 our eHealth(TM) product will increase or even remain at current levels. Factors that may affect the market acceptance of our products include: - - the availability and price of competing products and technologies; and - - the success of our sales efforts and those of our marketing partners. Moreover, if demand for performance management software products increases, we anticipate that our competitors will introduce additional competitive products and new competitors could enter our market and offer alternative products. Product introductions by our competitors may also reduce future market acceptance of our products. OUR INDUSTRY IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE. OUR SUCCESS DEPENDS UPON MAINTENANCE OF STANDARD PROTOCOLS. The software industry is characterized by: - - rapid technological change; - - frequent introductions of new products; - - changes in customer demands; and - - evolving industry standards. The introduction of products embodying new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable. Our Network Health(R) products' analysis and reporting, as well as the quality of its reports, depends upon its utilization of the industry-standard Simple Network Management Protocol (SNMP) and the data resident in conventional Management Information Bases (MIBs). Any change in these industry standards, the development of vendor-specific proprietary MIB technology, or the emergence of new network technologies could affect the compatibility of our Network Health(R) products with these devices which, in turn, could affect its analysis and generation of comprehensive reports or the quality of the reports. Furthermore, although our products currently run on industry-standard UNIX operating systems and Windows NT, any significant change in industry-standard operating systems could affect the demand for, or the pricing of, our products. 14 15 WE MUST INTRODUCE PRODUCT ENHANCEMENTS AND NEW PRODUCTS ON A TIMELY BASIS. Because of rapid technological change in the software industry and potential changes in the performance management software market and industry standards, the life cycle of versions of our eHealth(TM) products is difficult to estimate. We cannot assure that: - - we will successfully develop and market enhancements to our eHealth(TM) products or successfully develop new products that respond to technological changes, evolving industry standards or customer requirements; - - we will not experience difficulties that could delay or prevent the successful development, introduction and sale of such enhancements or new products; or - - 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. 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 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 15 16 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 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. We license from third parties, generally on a non-exclusive basis, certain technologies used by our products. The termination of any such licenses, or the failure of the third-party licensors to maintain adequately or update their products, could result in delay in our shipment of certain of our products while we seek to implement technology offered by alternative sources, and any required replacement licenses could prove costly. While it may be necessary or desirable in the future to obtain other licenses relating to one or more of our products or relating to current or future technologies, we cannot 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 we begin of commercial shipments or, if discovered, that we will successfully correct such errors in a timely manner or at all. The occurrence of errors and failures in our products could result in loss of or delay in market acceptance of our products, and alleviating such errors and failures could require significant expenditure of capital and other resources by us. WE MAY NOT HAVE SUFFICIENT PROTECTION AGAINST PRODUCT LIABILITY CLAIMS. Since our products are used by our customers to predict future network 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 16 17 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. 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 MANAGE SUCCESSFULLY OUR GROWTH. We have experienced significant growth in our sales and operations and in the complexity of our products and product distribution channels. We have increased and are continuing to increase the size of our sales force and coverage territories. Furthermore, we have established and are continuing to establish additional distribution channels through third party relationships. Our growth, coupled with the rapid evolution of our markets, has placed, and is likely to continue to place, significant strains on our administrative, operational and financial resources and increase demands on our internal systems, procedures and controls. OUR SUCCESS DEPENDS ON OUR RETENTION OF KEY PERSONNEL. Our performance depends substantially on the performance of our key technical and senior management personnel, none of whom is bound by an employment agreement. We may lose the services of any of such persons. We do not maintain key person life insurance policies on any of our employees. Our success depends on our continuing ability to identify, hire, train, motivate and retain highly qualified management, technical, and sales and marketing personnel, including recently hired officers and other employees. We experience intense competition for such personnel. We cannot assure that we will successfully attract, assimilate or retain highly qualified technical, managerial or sales and marketing personnel in the future. 17 18 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 COMMON STOCK PRICE COULD EXPERIENCE SIGNIFICANT VOLATILITY. We completed an initial public offering of our common stock during October 1997. The market price of our common stock may be highly volatile and could be subject to wide fluctuations in response to: - - variations in results of operations; - - announcements of technological innovations or new products by us or our competitors; - - changes in financial estimates by securities analysts; or - - other events or factors. In addition, the financial markets have experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of many high technology companies and that often have been unrelated to the operating performance of such companies or have resulted from the failure of the operating results of such companies to meet market expectations in a 18 19 particular quarter. Broad market fluctuations or any failure of our operating results in a particular quarter to meet market expectations may adversely affect the market price of our common stock. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against such a company. Such litigation could result in substantial costs and a diversion of our attention and resources. WE MAY NEED FUTURE CAPITAL FUNDING. We plan to continue to expend substantial funds on the continued development, sales and marketing of the eHealth(TM) product family. We cannot 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. 19 20 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments. The Company does not invest in derivative financial instruments, other financial instruments or derivative commodity instruments for which fair value disclosure would be required under SFAS No. 107. All of the Company's investments are in investment grade securities with high credit ratings of relatively short duration that trade in highly liquid markets and are carried at fair value on the Company's books. Accordingly, the Company has no quantitative information concerning the market risk of participating in such investments. Primary Market Risk Exposures. The Company's primary market risk exposure is in the area of interest rate risk. The Company's investment portfolio of cash equivalents 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. 20 21 CONCORD COMMUNICATIONS, INC. FORM 10-Q, MARCH 31, 2000 PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is not a party to any litigation that it believes could have a material adverse effect on the business, results of operations and financial condition of the Company. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (c) 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 merger was accounted for as a pooling of interests. The Company has filed a Form S-3 Registration Statement to cover the resale of the securities issued in the merger. On February 4, 2000, the Company completed a merger with FirstSense Software, Inc. The Company has reserved for issuance in connection with the merger, 1,940,000 shares of Concord Common Stock. The Company issued the shares in a private placement transaction pursuant to Section 4(2) under the Securities Act of 1933. The merger was accounted for as a pooling of interests. The Company has filed a Form S-3 Registration Statement to cover the resale of the securities issued in the merger. (d) 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. The net proceeds to the Company from the IPO, after deducting underwriting discounts and commissions and other offering expenses were approximately $34.7 million. To date, the Company has not utilized any of the net proceeds from the IPO. The Company has invested all such net proceeds primarily in US treasury obligations and other interest bearing investment grade securities. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable 21 22 ITEM 5. OTHER INFORMATION Not Applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The exhibits listed in the accompanying Exhibit Index on page 23 are filed or incorporated by reference as part of this Report. (b) Reports on Form 8-K - - Current Report on Form 8-K, date January 20, 2000, was filed with the Commission on January 26, 2000 for announcement of the merger with FirstSense Software, Inc. - - Current Report on Form 8-K, dated February 4, 2000, was filed with the Commission on February 10, 2000 to detail the acquisition of FirstSense Software, Inc. - - Amendment No. 1 to the Current Report on Form 8-K, dated February 4, 2000, was filed with the Commission on April 19, 2000 for disclosure of the Financial Statements of FirstSense Software, Inc. as of December 31, 1999. - - Amendment No. 2 to the Current Report on Form 8-K, dated February 4, 2000, was filed with the Commission on April 21, 2000 to include a Financial Data Schedule for Amendment No. 1. - - Current Report on Form 8-K, dated February 28, 2000, was filed with the Commission on March 1, 2000 for disclosure of Consolidated Financial Statements of the Company as of December 31, 1999. 22 23 CONCORD COMMUNICATIONS, INC. FORM 10-Q, MARCH 31, 2000 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Concord Communications, Inc. /s/ Melissa H. Cruz Date: May 15, 2000 Name: Melissa H. Cruz Title: Executive Vice President of Finance and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
23 24 CONCORD COMMUNICATIONS, INC. FORM 10-Q, MARCH 31, 2000 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION 27.01 Financial Data Schedule
24 EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 5,664 51,055 17,439 1,319 0 935 14,297 4,755 87,279 23,779 0 0 0 94,632 (31,132) 87,279 14,852 19,268 353 2,426 19,984 0 756 (2,386) (963) (1,423) 0 288 0 (1,711) (0.11) (0.11)
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