-----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, HjKHQE5KHPls5UyoFGeHC3qH+U+3dvLHSNCI51KeAO1n4cQQ1nmiK/dVopAdw6uq +mrsPvyQTs6akwTSMIiDmg== 0000950135-02-003604.txt : 20020809 0000950135-02-003604.hdr.sgml : 20020809 20020809145958 ACCESSION NUMBER: 0000950135-02-003604 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020809 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: 1934 Act SEC FILE NUMBER: 000-23067 FILM NUMBER: 02724663 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 b43712cce10vq.txt CONCORD COMMUNICATIONS INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended June 30, 2002. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from ____________ to ______________ COMMISSION FILE NUMBER 0-23067 CONCORD COMMUNICATIONS, INC. (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-2710876 (State of incorporation) (IRS Employer Identification Number) 600 NICKERSON ROAD MARLBORO, MASSACHUSETTS 01752 (508) 460-4646 (Address and telephone of principal executive offices) ---------------- INDICATE BY CHECK MARK WHETHER REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS, AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- --- 17,106,158 SHARES OF THE REGISTRANT'S COMMON STOCK, $0.01 PAR VALUE, WERE OUTSTANDING AS OF AUGUST 7, 2002. THIS DOCUMENT CONTAINS 41 PAGES. THE EXHIBIT INDEX IS ON PAGE 32. CONCORD COMMUNICATIONS, INC. FORM 10-Q, JUNE 30, 2002 CONTENTS PAGE PART I: FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets: June 30, 2002 and December 31, 2001 3 Condensed Consolidated Statements of Operations: Three and six months ended June 30, 2002 and June 30, 2001 4 Condensed Consolidated Statements of Cash Flows: Six months ended June 30, 2002 and June 30, 2001 5 Notes to Condensed Consolidated Financial Statements 6-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-25 Item 3. Quantitative and Qualitative Disclosures about Market Risk 26 PART II: OTHER INFORMATION Item 1. Legal Proceedings 27 Item 2. Changes in Securities and Use of Proceeds 27 Item 3. Defaults Upon Senior Securities 27 Item 4. Submission of Matters to a Vote of Security Holders 28 Item 5. Other Information 28 Item 6. Exhibits and Reports on Form 8-K 28 SIGNATURE 29 CERTIFICATIONS 30-31 EXHIBIT INDEX 32 2 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONCORD COMMUNICATIONS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31, 2002 2001 ------------- ------------- (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 12,840,071 $ 9,010,811 Marketable securities 59,627,403 59,333,068 Restricted cash 1,013,576 -- Accounts receivable, net of allowance of $1,438,740 and $1,409,835 at June 30, 2002 and December 31, 2001, respectively 16,067,969 16,537,131 Prepaid expenses and other current assets 3,015,474 3,057,797 ------------- ------------- Total current assets 92,564,493 87,938,807 ------------- ------------- Equipment and improvements, at cost: Equipment 21,402,432 19,636,704 Leasehold improvements 6,017,789 5,956,710 ------------- ------------- 27,420,221 25,593,414 Less-- accumulated depreciation and amortization 17,800,046 14,798,688 ------------- ------------- 9,620,175 10,794,726 ------------- ------------- Deferred tax asset 3,500,000 3,500,000 Other long-term assets 288,858 246,655 ------------- ------------- 3,788,858 3,746,655 ------------- ------------- Total assets $ 105,973,526 $ 102,480,188 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 3,170,897 $ 3,553,417 Accrued expenses 13,012,297 13,278,825 Deferred revenue 24,418,301 22,141,078 ------------- ------------- Total current liabilities 40,601,495 38,973,320 ------------- ------------- Stockholders' Equity: Common stock, $0.01 par value: Authorized-- 50,000,000 shares Issued and outstanding-- 17,092,304 and 16,901,193 shares at June 30, 2002 and December 31, 2001, respectively 170,923 169,012 Additional paid-in capital 97,980,898 96,365,287 Deferred compensation (116,630) (241,547) Accumulated other comprehensive income 1,130,642 1,892,264 Accumulated deficit (33,793,802) (34,678,148) ------------- ------------- Total stockholders' equity 65,372,031 63,506,868 ------------- ------------- Total liabilities and stockholders' equity $ 105,973,526 $ 102,480,188 ============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 CONCORD COMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED ------------------------------- ------------------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Revenues: License revenues $ 12,258,006 $ 13,481,341 $ 26,318,613 $ 26,552,175 Service revenues 10,693,176 8,132,413 20,869,781 15,492,911 ------------ ------------ ------------ ------------ Total revenues 22,951,182 21,613,754 47,188,394 42,045,086 Cost of Revenues Cost of license revenues 394,318 583,182 960,749 1,279,569 Cost of service revenues 3,721,300 3,812,255 7,539,958 8,077,295 ------------ ------------ ------------ ------------ Total cost of revenues 4,115,618 4,395,437 8,500,707 9,356,864 ------------ ------------ ------------ ------------ Gross profit 18,835,564 17,218,317 38,687,687 32,688,222 ------------ ------------ ------------ ------------ Operating Expenses: Research and development 5,445,192 6,280,825 11,186,659 12,685,696 Sales and marketing 11,890,066 12,886,783 24,024,619 25,306,029 General and administrative 1,772,095 2,244,952 3,826,795 4,791,711 Stock-based compensation 27,043 48,607 59,708 240,430 ------------ ------------ ------------ ------------ Total operating expenses 19,134,396 21,461,167 39,097,781 43,023,866 ------------ ------------ ------------ ------------ Operating loss (298,832) (4,242,850) (410,094) (10,335,644) Other Income (Expense) Interest income 802,864 861,174 1,578,906 1,660,765 Other expense (16,374) (43,913) (44,823) (49,916) ------------ ------------ ------------ ------------ Total other income, net 786,490 817,261 1,534,083 1,610,849 ------------ ------------ ------------ ------------ Income (loss) before income taxes 487,658 (3,425,589) 1,123,989 (8,724,795) Provision for income taxes 92,586 20,000 239,643 86,298 ------------ ------------ ------------ ------------ Net income (loss) $ 395,072 $ (3,445,589) $ 884,346 $ (8,811,093) ============ ============ ============ ============ Net income (loss) per common and potential common share: Basic $ 0.02 $ (0.21) $ 0.05 $ (0.53) ============ ============ ============ ============ Diluted $ 0.02 $ (0.21) $ 0.05 $ (0.53) ============ ============ ============ ============ Weighted average common and potential common shares outstanding: Basic 17,017,410 16,672,323 16,974,305 16,616,432 ============ ============ ============ ============ Diluted 17,861,027 16,672,323 17,969,848 16,616,432 ============ ============ ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 CONCORD COMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED ------------------------------- JUNE 30, JUNE 30, 2002 2001 ------------ ------------ Cash Flows from Operating Activities: Net income (loss) $ 884,346 $ (8,811,093) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 3,001,358 3,026,726 Stock-based compensation 59,708 240,430 Changes in current assets and liabilities: Accounts receivable 469,162 3,774,474 Prepaid expenses and other current assets 42,323 (419,966) Accounts payable (382,520) (922,507) Accrued expenses (1,020,288) 2,006,085 Deferred revenue 2,277,223 3,441,053 ------------ ------------ Net cash provided by operating activities 5,331,312 2,335,202 ------------ ------------ Cash Flows from Investing Activities: Purchases of equipment and improvements (1,826,807) (2,601,672) Change in other assets (42,203) (10,870) Investments in marketable securities (2,592,258) (10,867,377) Deposit of restricted cash (1,013,576) -- Proceeds from sales of marketable securities 2,290,061 7,770,679 ------------ ------------ Net cash used in investing activities (3,184,783) (5,709,240) ------------ ------------ Cash Flows from Financing Activities: Proceeds from issuance of common stock 1,682,731 755,589 ------------ ------------ Net cash provided by financing activities 1,682,731 755,589 ------------ ------------ Net increase (decrease) in cash and cash equivalents 3,829,260 (2,618,449) Cash and cash equivalents, beginning of period 9,010,811 10,725,265 ------------ ------------ Cash and cash equivalents, end of period $ 12,840,071 $ 8,106,816 ============ ============ Supplemental Disclosure of Cash Flow Information: Cash paid for taxes $ 129,557 $ 49,000 ============ ============ Supplemental Disclosure of Noncash Transactions: Reversal of deferred compensation related to forfeitures of of stock options $ (65,209) $ (1,129,486) ============ ============ Retirement of fully depreciated assets $ -- $ 343,467 ============ ============ Unrealized (loss) gain on available-for-sale securities $ (7,862) $ 654,673 ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 CONCORD COMMUNICATIONS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FORM 10-Q, JUNE 30, 2002 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation The accompanying condensed consolidated financial statements have been presented by Concord Communications, Inc. (the "Company" or "Concord") unaudited (except the balance sheet information as of December 31, 2001 which has been derived from audited financial statements) in accordance with accounting principles generally accepted in the United States for interim financial statements and with the instructions to Form 10-Q and Regulation S-X pertaining to interim financial statements. Accordingly, these interim financial statements do not include all information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The financial statements reflect all adjustments and accruals of a normal recurring nature, which management considers necessary for a fair presentation of the Company's financial position as of June 30, 2002 and December 31, 2001, and the Company's results of operations for the three and six months ended June 30, 2002 and 2001. The results for the interim periods presented are not necessarily indicative of results to be expected for any future period. The financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company's 2001 Annual Report on Form 10-K filed with the Securities and Exchange Commission in March 2002. (b) Principles of Consolidation The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. (c) Cash, Cash Equivalents and Marketable Securities The Company follows the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Company has classified its marketable securities as available-for-sale and recorded them at fair value, with the unrealized gains and losses reported as a separate component of stockholders' equity until realized. The Company considers highly liquid investments, purchased with an original maturity of 90 days or less, to be cash equivalents. Cash and cash equivalents were $12,840,071 and $9,010,811 at June 30, 2002 and December 31, 2001, respectively, and consisted primarily of money market funds. (d) Restricted Cash Restricted cash totaling $1,013,576 at June 30, 2002 consists of money market funds held in our name and custodied with a major financial institution. Such funds are being used as collateral under a letter of credit arrangement with a Company supplier. (e) Revenue Recognition The Company's revenues consist of software license revenues and service revenues. Software license revenues are recognized in accordance with the American Institute of Certified Public Accountants' Statement of Position ("SOP") 97-2, Software Revenue Recognition, as modified by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition with respect to Certain Transactions. Under SOP 97-2, software license revenues are recognized upon execution of a contract and delivery of software, provided that the license fee is fixed or determinable, no significant production, modification or customization of the software is required and collection is considered probable by management. Revenues under multiple-element arrangements, which typically include 6 software products, services and maintenance sold together, are allocated to each element using the residual method in accordance with SOP 98-9. Under the residual method, the fair value of the undelivered elements is deferred and subsequently recognized when these elements are delivered. The Company has established sufficient vendor specific objective evidence for professional services, training, and maintenance and customer support services based on the price charged when these elements are sold separately. Accordingly, software license revenues are recognized under the residual method in arrangements in which software is licensed with professional services, training, and maintenance and customer support services. Service revenues include professional services, training and maintenance and customer support fees. Professional services are not essential to the functionality of the other elements in an arrangement and are accounted for separately. Service revenues are recognized as the services are performed. Maintenance revenues, a component of service revenues, are derived from customer support agreements generally entered into in connection with initial software license sales and subsequent renewals. Maintenance and customer support fees include the right to unspecified upgrades on a when-and-if-available basis and ongoing technical support. Maintenance revenues are recognized ratably over the term of the maintenance period. Payments for maintenance fees are generally made in advance and are included in deferred revenue. As of June 30, 2002 and December 31, 2001, deferred revenue includes approximately $19.4 million and $17.1 million, respectively, of deferred maintenance revenues. (f) Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (g) Financial Instruments, Concentration of Credit Risk and Significant Customers The Company has estimated the fair value of financial instruments using available market information and appropriate valuation methodologies. The carrying values of cash, cash equivalents, restricted cash, marketable securities, accounts receivable, and accounts payable approximate fair market value due to the short-term nature of these financial instruments. Financial instruments that potentially subject the Company to concentrations of credit risk are principally cash, cash equivalents, restricted cash, marketable securities and accounts receivable. The Company has no significant off-balance-sheet or concentration of credit risk exposure such as foreign exchange contracts, option contracts or other foreign hedging arrangements. The Company maintains its cash, cash equivalents, restricted cash and marketable securities with established financial institutions. Concentration of credit risk with respect to accounts receivable is limited to certain customers to whom the Company makes substantial sales. To reduce its credit risk, the Company routinely assesses the financial strength of its customers. The Company maintains an allowance for potential credit losses but historically has not experienced any significant losses related to individual customers or groups of customers in any particular industry or geographic area. No individual customer or reseller accounted for more than 10% of revenues for the three and six months ended June 30, 2002 or June 30, 2001. No one customer accounted for more than 10% of accounts receivable as of June 30, 2002. One customer accounted for 13.4% of accounts receivable at December 31, 2001; a total of 7.2% of the receivables from this customer was included in the Company's deferred revenue at December 31, 2001. As of June 30, 2002, this customer represented 4.2% of accounts receivable. (h) Reclassifications Certain amounts in the prior period's financial statements have been reclassified to conform to the current period's presentation. 2. BASIC AND DILUTED INCOME/LOSS PER COMMON SHARE 7 The Company computes earnings per share following the provisions of SFAS No. 128, Earnings per Share. SFAS No. 128 establishes standards for computing and presenting earnings per share and applies to entities with publicly held common stock or potential common stock. Basic net income (loss) per share is computed using the weighted-average number of common shares outstanding for a period. Diluted net income (loss) per share is computed using the weighted-average number of common and dilutive common-equivalent shares outstanding for the period. Diluted net loss per share is the same as basic net loss per share for the three and six months ended June 30, 2001, as the effects of potential common stock are antidilutive. Dilutive common-equivalent shares primarily consist of employee stock options. The dilutive effect of outstanding stock options is computed using the treasury stock method. For the three and six months ended June 30, 2002, employee stock options to purchase 2,131,725 and 2,017,582 shares, respectively, were outstanding but not included in the diluted weighted-average share calculation as their effects would have been antidilutive. For the three and six months ended June 30, 2001, employee stock options to purchase 2,540,323 and 2,495,353 shares, respectively, were outstanding but not included in the diluted weighted-average share calculation as the effect would have been antidilutive as a result of the Company's reported loss for the periods. Calculation of the basic and diluted net income (loss) per share and potential common share are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED --------------------------- -------------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2002 2001 2002 2001 ----------- ------------ ----------- ------------ NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ 395,072 $ (3,445,589) $ 884,346 $ (8,811,093) =========== ============ =========== ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 17,017,410 16,672,323 16,974,346 16,616,432 POTENTIAL COMMON SHARES PURSUANT TO STOCK OPTIONS 843,617 -- 995,543 -- ----------- ------------ ----------- ------------ DILUTED WEIGHTED AVERAGE SHARES 17,861,027 16,672,323 17,969,848 16,616,432 =========== ============ =========== ============ BASIC NET INCOME (LOSS) PER COMMON SHARE 0.02 (0.21) 0.05 (0.53) =========== ============ =========== ============ DILUTED NET INCOME (LOSS) PER COMMON AND POTENTIAL COMMON SHARE 0.02 (0.21) 0.05 (0.53) =========== ============ =========== ============
3. COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) for the three and six months ended June 30, 2002 and 2001 is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED ---------------------- ------------------------ JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2002 2001 2002 2001 -------- ----------- --------- ----------- NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $395,072 $(3,445,589) $ 884,346 $(8,811,093) UNREALIZED GAIN (LOSS) ON MARKETABLE SECURITIES 590,046 (287,315) (7,862) 654,673 -------- ----------- --------- ----------- COMPREHENSIVE INCOME (LOSS) $985,118 $(3,732,904) $ 876,484 $(8,156,420) ======== =========== ========= ===========
4. SEGMENT REPORTING AND INTERNATIONAL INFORMATION The Company follows the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. SFAS No. 131 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate, discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, in making decisions on how to allocate resources and assess performance. The Company's chief decision making group, as defined under SFAS No. 131, is the executive management committee which is comprised of the executive officers of the Company. 8 The following table presents the approximate revenues by major geographical regions:
THREE MONTHS ENDED SIX MONTHS ENDED ----------------------------- ---------------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2002 2001 2002 2001 ----------- ------------ ------------ ------------ United States $14,660,000 $ 13,534,000 $ 29,356,000 $ 26,578,000 Europe 5,504,000 4,904,000 10,899,000 9,053,000 Rest of the World 2,787,000 3,176,000 6,933,000 6,414,000 ----------- ------------ ------------ ------------ Total $22,787,000 $ 21,614,000 $ 47,188,000 $ 42,045,000 =========== ============ ============ ============
No one country, except the United States, accounts for greater than 10% of total revenues. Substantially all of the Company's assets are located in the United States. The Company's reportable segments are determined by customer type: managed service providers/ telecommunications carriers (MSP/TC) and enterprise. The accounting policies of the segments are the same as those described in Note 1. The executive management committee evaluates segment performance based on revenues. Accordingly, all expenses are considered corporate level activities and are not allocated to segments. Also, the executive management committee does not assign assets to these segments. The table presents the approximate revenues by reportable segment: THREE MONTHS ENDED SIX MONTHS ENDED -------------------------- -------------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2002 2001 2002 2001 ----------- ------------ ------------ ------------ MSP/TC $ 7,870,000 $ 10,480,000 $ 17,791,000 $ 18,931,000 Enterprise 15,081,000 11,134,000 29,397,000 23,114,000 ----------- ------------ ------------ ------------ Total $22,951,000 $ 21,614,000 $ 47,188,000 $ 42,045,000 =========== ============ ============ ============ 5. RECENT ACCOUNTING PRONOUNCEMENTS In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 144 further refines the requirements of SFAS No. 121, which required that companies (1) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable based on its undiscounted future cash flows and (2) measure an impairment loss as the difference between the carrying amount and fair value of the asset. In addition, SFAS No. 144 provides guidance on accounting and disclosure issues surrounding long-lived assets to be disposed of by sale. The Company adopted SFAS No. 144 beginning on January 1, 2002. The adoption did not have any impact on the Company's consolidated financial position, results of operations or cash flows. In November 2001, the Emerging Issues Task Force issued EITF 01-14 relating to the accounting for reimbursements received for out-of-pocket expenses. In accordance with EITF 01-14, reimbursements received for out-of-pocket expenses incurred should be characterized as revenues in the statement of operations. The Company has historically accounted for reimbursements received for out-of-pocket expenses incurred as a reduction to cost of service revenues in the statement of operations to offset the costs incurred. The Company adopted EITF 01-14 on January 1, 2002, and comparative financial statements for prior periods are reclassified to comply with the guidance in EITF 01-14. During the three and six months ended June 30, 2002, reimbursed out-of-pocket expenses totaled $11,851 and $18,051, respectively. During the three and six months ended June 30, 2001, reimbursed out-of-pocket expenses totaled $23,114 and $27,114. There was no impact on the gross profit as a percentage of total revenues or gross margin for the three and six month periods ended June 30, 2002 or 2001. 9 CONCORD COMMUNICATIONS, INC. FORM 10-Q, JUNE 30, 2002 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Concord develops, markets and supports the eHealthTM Suite of scalable information technology ("IT") infrastructure fault and performance management software solutions. Concord's eHealthTM Suite integrates fault and performance management of the systems, applications and networks that comprise today's IT infrastructure. Concord's solutions optimize the performance and availability of IT infrastructures on which enterprises, managed service providers and telecommunication carriers depend for their day-to-day business and operational success. Concord's software solutions monitor fault conditions throughout the infrastructure in real time; test availability and responsiveness of critical services; collect, consolidate, normalize and analyze a high volume of data from the IT infrastructure; alert IT personnel to faults and potential outages, maximize uptime of the IT infrastructure and automatically execute corrective action to restore availability, if desired. Concord does not provide forecasts of its future financial performance. From time to time, however, the information provided by Concord or statements made by our employees may contain forward-looking statements. In particular, some statements contained in Concord's Form 10-Q for the quarterly period ended June 30, 2002 are not historical statements including, but not limited to, statements concerning the plan and objectives of management, increases in revenues (domestically and internationally), increases in absolute dollars or decreases as a percentage of revenues in sales and marketing, research and development and general and administrative expenses (domestically and internationally), Concord's ability to use deferred tax assets, Concord's success in competing in international markets, Concord's expected future profitability and Concord's expected liquidity and capital resources. This document contains forward-looking statements. Any statements contained herein that do not describe historical facts are forward-looking statements. The Company makes such forward-looking statements under the provisions of the "safe harbor" section of the Private Securities Litigation Reform Act of 1995. The forward-looking statements contained herein are based on current expectations but are subject to a number of risks and uncertainties. The facts that could cause actual results to differ materially from current expectations include the following: risks of intellectual property rights and litigation, risks in technology development and commercialization, risks in product development and market acceptance of and demand for the Company's products, risks of downturns in economic conditions generally, and in the software, networking and telecommunications industries specifically, risks associated with competition and competitive pricing pressures, risks associated with international sales, risks associated with the Company's recent acquisitions and other risks detailed in this Form 10-Q under the heading "Factors that Could Affect Future Results" and elsewhere in the Company's filings with the Securities and Exchange Commission. 10 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain financial data as percentages of the Company's total revenues:
UNAUDITED THREE MONTHS ENDED SIX MONTHS ENDED ----------------------- ---------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2002 2001 2002 2001 -------- -------- --------- -------- Revenues: License revenues 53.4% 62.4% 55.8% 63.2% Service revenues 46.6% 37.6% 44.2% 36.8% ----- ----- ----- ----- Total revenues 100.0% 100.0% 100.0% 100.0% Cost of Revenues Cost of license revenues 1.7% 2.7% 2.0% 3.0% Cost of service revenues 16.2% 17.6% 16.0% 19.2% ----- ----- ----- ----- Total cost of revenues 17.9% 20.3% 18.0% 22.2% ----- ----- ----- ----- Gross profit 82.1% 79.7% 82.0% 77.8% ----- ----- ----- ----- Operating Expenses: Research and development 23.7% 29.1% 23.7% 30.2% Sales and marketing 51.8% 59.6% 50.9% 60.2% General and administrative 7.7% 10.4% 8.1% 11.4% Stock-based compensation 0.1% 0.2% 0.1% 0.6% ----- ----- ----- ----- Total operating expenses 83.4% 99.3% 82.9% 102.4% ----- ----- ----- ----- Loss from operations -1.3% -19.6% -0.9% -24.6% Other income, net 3.4% 3.8% 3.3% 3.8% ----- ----- ----- ----- Income (loss) before taxes 2.1% -15.8% 2.4% -20.8% Provision for income taxes 0.4% 0.1% 0.5% 0.2% ----- ----- ----- ----- Net income (loss) 1.7% -15.9% 1.9% -21.0% ----- ----- ----- -----
REVENUES. Concord's revenues consist of software license revenues and service revenues. Software license revenues are recognized in accordance with the American Institute of Certified Public Accountants' Statement of Position ("SOP") 97-2, Software Revenue Recognition, as modified by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions. Under SOP 97-2, software license revenues are recognized upon execution of a contract and delivery of software, provided that the license fee is fixed or determinable, no significant production, modification or customization of the software is required and collection is considered probable by management. Revenues under multiple-element arrangements, which typically include software products and maintenance sold together, are allocated to each element using the residual method in accordance with SOP 98-9. Service revenues are recognized as the services are performed. Maintenance revenues, a component of service revenues, are derived from customer support agreements generally entered into in connection with initial license sales and subsequent renewals. Maintenance revenues are recognized ratably over the term of the maintenance period. Payments for maintenance fees are generally made in advance. TOTAL REVENUES. The Company's total revenues increased 6.2% to $23.0 million in the three months ended June 30, 2002 from $21.6 million in the three months ended June 30, 2001. Total revenues increased 12.2% to $47.2 million in the six months ended June 30, 2002 from $42.0 million in the six months ended June 30, 2001. LICENSE REVENUES. Concord's license revenues are derived from the licensing of software products. License revenues decreased 9.1% to $12.3 million, or 53.4% of total revenues, in the three months ended June 30, 2002 from $13.5 million, or 62.4% of total revenues, in the three months ended June 30, 2001. License revenues decreased .9% to $26.3 million, or 55.8% of total revenues, in the six months ended June 30, 2002, from $26.6 million, or 63.2% of total revenues in the six months ended June 30, 2001. The decrease in license revenues for the three months and six months ended June 30, 2002 was due to the general slowdown of the economy in the United States and abroad. The slowdown in the economy, combined with the announcement by a large American 11 telecommunications firm that it had improperly accounted for some expenses, has created uncertainties for some of our customers that has resulted in a decrease in, postponement of, or cancellation of their IT infrastructure purchases. The decrease in license revenues as a percent of total revenues was the result of a significant increase in service revenues, consisting mainly of maintenance revenues. SERVICE REVENUES. Concord's service revenues consist of fees for maintenance, training and professional services. Service revenues increased 31.5% to $10.7 million, or 46.6% of total revenues, in the three months ended June 30, 2002 from $8.1 million, or 37.6% of total revenues, in the three months ended June 30, 2001. Service revenues increased 34.7% to $20.9 million, or 44.2% of total revenues, in the six months ended June 30, 2002 from $15.5 million, or 36.8% of total revenues, in the six months ended June 30, 2001. The increase in service revenues for the three months and six months ended June 30, 2002 was attributed to an increase of our customer base and the resulting demand for services by these customers. INTERNATIONAL REVENUES. Concord's international revenues increased 2.6% to $8.3 million or 36.1% of total revenues for the three months ended June 30, 2002 from $8.1 million, or 37.4% of total revenues, for the three months ended June 30, 2001. International revenues increased 15.3% to $17.8 million or 37.8% of total revenues for the six months ended June 30, 2002 from $15.5 million, or 36.8% of total revenues, for the six months ended June 30, 2001. International revenues are primarily driven by customers based in Europe, as well as the continued expansion of operations outside the United States. SEGMENT REVENUES. Concord's reportable segments are determined by customer type: managed service providers/telecommunications carriers ("MSP/TC") and enterprise. Concord's MSP/TC revenues decreased 24.9% to $7.9 million, or 34.3% of total revenues, for the three months ended June 30, 2002 from $10.5 million, or 48.5% of total revenues, for the three months ended June 30, 2001. MSP/TC revenues decreased 6.0% to $17.8 million, or 37.7% of total revenues, for the six months ended June 30, 2002 from $18.9 million, or 45.0% of total revenues, for the six months ended June 30, 2001. The decrease in MSP/TC revenues for the three months and six months ended June 30, 2002 was due to the general slowdown of the economy in the United States and abroad, particularly within the telecommunications sector. The decrease in MSP/TC revenues as a percent of total revenues was the result of a significant increase in enterprise revenues, including both new and existing customers. Concord's enterprise revenues increased 35.4% to $15.1 million, or 65.7% of total revenues, for the three months ended June 30, 2002 from $11.1 million, or 51.5% of total revenues, for the three months ended June 30, 2001. Enterprise revenues increased 27.2% to $29.4 million, or 62.3% of total revenues, for the six months ended June 30, 2002 from $23.1 million, or 55.0% of total revenues, for the six months ended June 30, 2001. The increase in enterprise revenues for the three and six months ended June 30, 2002 was due to a significant increase in new orders from both new and existing customers. COST OF REVENUES. Cost of revenues includes expenses associated with royalty costs, production, fulfillment and product documentation, along with personnel costs associated with providing customer support in connection with maintenance, training and professional service contracts. Royalty costs are composed of third party software costs. Cost of revenues decreased 6.4% to $4.1 million, or 17.9% of total revenues, in the three months ended June 30, 2002 from $4.4 million, or 20.3% of total revenues, in the three months ended June 30, 2001, resulting in gross margins of 82.1% and 79.7% respectively. Cost of revenues decreased 9.1% to $8.5 million, or 18.0% of total revenues, in the six months ended June 30, 2002, from $9.4 million, or 22.3% of total revenues, in the six months ended June 30, 2001. The decrease in cost of revenues as a percent of total revenues was driven by increased efficiencies and better management of expenses in the operations and customer support organizations. We expect to maintain our cost of revenues as a percentage of total revenues; however, this will depend upon our royalty costs and our revenue growth, among other factors. Accordingly, there can be no assurance that we will be successful in maintaining our cost of revenues as a percentage of total revenues. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses consist primarily of personnel costs associated with software development. Research and development expenses decreased 13.3% to $5.4 million, or 23.7% of total revenues, in the three months ended June 30, 2002 from $6.3 million, or 29.1% of total revenues, in the three months ended June 30, 2001. Research and development expenses decreased 11.8% to $11.2 million, or 23.7% of total revenues, in the six months ended June 30, 2002 from $12.7 million, or 30.2% of total revenues, in the six months ended June 30, 2001. The decrease in research and development expenses was primarily due to a 12 decrease in headcount in research and development from 149 to 126 people for the period from June 30, 2001 to June 30, 2002 as well as a reduction of discretionary expenses for the three and six month periods ended June 30, 2002 compared to June 30, 2001. We intend to decrease our research and development expenses as a percentage of total revenues. Our ability to decrease these expenses as a percentage of revenue will depend upon our revenue growth, among other factors. Accordingly, there can be no assurance that we will be successful in decreasing our research and development expenses as a percentage of total revenues. SALES AND MARKETING EXPENSES. Sales and marketing expenses consist primarily of salaries, commissions to sales personnel and agents, travel, tradeshow participation, public relations, advertising and other promotional expenses. Sales and marketing expenses decreased 7.7% to $11.9 million, or 51.8% of total revenues, in the three months ended June 30, 2002 from $12.9 million, or 59.6% of total revenues, in the three months ended June 30, 2001. Sales and marketing expenses decreased 5.1% to $24.0 million, or 50.9% of total revenues, in the six months ended June 30, 2002 from $25.3 million, or 60.2% of total revenues, in the six months ended June 30, 2002. The decrease in sales and marketing expenses was primarily the result of a reduction in sales bonuses and commissions due to the reduction in license revenues in 2002 as well as a reduction in headcount in sales and marketing from 194 to 183 people from June 30, 2001 to June 30, 2002. We intend to decrease our sales and marketing expenses as a percentage of total revenues. Our ability to decrease these expenses as a percentage of revenue will depend upon our revenue growth, among other factors. Accordingly, there can be no assurance that we will be successful in decreasing our expenses as a percentage of total revenues. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist primarily of salaries for financial, accounting, legal, administrative and management personnel. General and administrative expenses decreased 21.1% to $1.8 million, or 7.7% of total revenues, in the three months ended June 30, 2002 from $2.2 million, or 10.4% of total revenues, in the three months ended June 30, 2001. General and administrative expenses decreased 20.1% to $3.8 million, or 8.1% of total revenues, in the six months ended June 30, 2002 from $4.8 million, or 11.4% of total revenues, in the six months ended June 30, 2001. The decrease in general and administrative expenses is due to a decrease in headcount from 42 to 31 people from June 30, 2001 to June 30, 2002 as well as a reduction in discretionary expenses. We expect to decrease these expenses as a percentage of total revenues, however, this will ultimately depend upon our revenue growth, among other factors. Accordingly, there can be no assurance that we will be successful in decreasing our expenses as a percentage of total revenues. STOCK-BASED COMPENSATION. Stock-based compensation relates to the issuance of stock options with exercise prices below the deemed fair value of the Company's common stock at the date of grant. Deferred stock-based compensation resulted solely from the issuance of stock options to employees of FirstSense Software, Inc. (FirstSense) in connection with the Company's acquisition of FirstSense on February 4, 2000 and is amortized through charges to operations over the vesting period of the options, which is generally four years. Stock-based compensation was approximately $27,000 and $49,000 for the three months ended June 30, 2002 and 2001, respectively, and was approximately $60,000 and $240,000 for the six months ended June 30, 2002 and 2001, respectively. The Company recorded forfeitures of deferred stock based compensation of approximately $30,000 and $57,000 for the three months ended June 30, 2002 and 2001, respectively, and approximately $65,000 and $1.1 million for the six months ended June 30, 2002 and 2001, respectively, related to forfeitures of stock options by terminated employees. OTHER INCOME. Other income consists of interest earned on funds available for investment, net of foreign currency exchange gains and losses and miscellaneous foreign taxes. The Company had net other income of $786,000 and $817,000 for the three months ended June 30, 2002 and 2001, respectively. The Company had net other income of $1.5 million and $1.6 million for the six month periods ended June 30, 2002 and 2001. PROVISION FOR INCOME TAXES. The Company recorded an income tax provision of approximately $93,000 in the three months ended June 30, 2002 and approximately $240,000 in the six months ended June 30, 2002. The income tax provisions for the three and six months ended June 30, 2002 are mainly related to foreign taxes resulting from the profitability of certain of the Company's foreign operations. No income tax provisions were recorded during the three and six months ended June 30, 2001. 13 LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2002, the Company had cash, cash equivalents, restricted cash and marketable securities of $73.5 million, an increase of $5.2 million from $68.3 million as of December 31, 2001. Concord had working capital of $52.0 million and $49.0 million as of June 30, 2002 and December 31, 2001, respectively. The increase in working capital was primarily attributable to an increase in cash, cash equivalents and marketable securities due to income from continuing operations during 2002. Net cash provided by operating activities was $5.3 million for the six months ended June 30, 2002 and $2.3 million for the six months ended June 30, 2001. Accounts receivable decreased $469,000 primarily due to a reduction in license revenues during the quarter ended June 30, 2002. Deferred revenue increased $2.3 million mainly due to an increase in new and renewed maintenance contracts. Investing activities have consisted of the acquisition of property and equipment, most notably computer and networking equipment to support the corporate infrastructure and also investments in marketable securities. The Company manages its market risk on its investment securities by selecting investment grade securities with the highest credit ratings of relatively short duration that trade in highly liquid markets. Financing activities consisted primarily of the issuance of common stock from the exercise of stock options during the six months ended June 30, 2002 and 2001. As of June 30, 2002, the Company has future payments under facility and certain equipment lease agreements expiring through June 2007 of $3.5 million, $6.7 million and $4.1 million in one year, one to three years, and thereafter, respectively. The Company has deferred tax assets of approximately $21.9 million, the largest component of which represents net operating loss ("NOL") carryforwards and research and development credits. The Company has significantly reserved for these deferred tax assets by recording a valuation allowance of $18.4 million. The resulting net deferred tax asset is based on the Company's estimate of NOL carryforwards it expects to use in the future; all other tax assets have been fully reserved. Pursuant to paragraphs 20 to 25 of SFAS No. 109, the Company considered both positive and negative evidence in assessing the need for a valuation allowance at June 30, 2002 and December 31, 2001. The factors that weighed most heavily on the Company's decision to record a valuation allowance were (i) the substantial restrictions on the use of certain of its existing NOL and credit carryforwards and (ii) the uncertainty of future profitability. In addition, the Company is subject to rapid technological change, competition from substantially larger competitors, a limited family of products and other related risks, as more thoroughly described in the "Risk Factors" section of the Company's Form 10-K for the year ended December 31, 2001 and in the "Factors that Could Affect Future Results" section of this Form 10-Q. As a result, the Company found the evidence described above to be the most reliable objective evidence available in determining that a valuation allowance against its tax assets would be necessary. Pursuant to the Tax Reform Act of 1986, the utilization of NOL carryforwards for tax purposes may be subject to an annual limitation if a cumulative change of ownership of more than 50% occurs over a three-year period. At December 31, 2001, the utilization of approximately $2,309,000 of the Company's NOL carryforwards are restricted to $330,000 per year as a result of an ownership change that occurred in 1995. In addition, the utilization of approximately $15,663,000 of NOL carryforwards that were acquired as a result of the FirstSense acquisition is also restricted as a result of a prior ownership change of FirstSense. Utilization of the FirstSense NOL carryforwards is limited to $4.3 million per year. As of December 31, 2001, the Company's NOL deferred tax asset includes approximately $2.3 million pertaining to the benefit associated with the exercise and subsequent disqualifying disposition of incentive stock options by the Company's employees. When and if the Company realizes this asset, the resulting change in the valuation allowance will be credited directly to additional paid-in capital, pursuant to the provisions of SFAS No. 109. 14 As of June 30, 2002, Concord's principal sources of liquidity included cash, cash equivalents, restricted cash and marketable securities. The Company believes that its current cash, cash equivalents, restricted cash and marketable securities and cash provided by future operations will be sufficient to meet the working capital and anticipated capital expenditure requirements for at least the next 12 months. Although operating activities may provide cash in certain periods, to the extent Concord experiences growth in the future, its operating and investing activities may require additional cash. Consequently, any such future growth may require Concord to obtain additional equity or debt financing. CRITICAL ACCOUNTING POLICIES In December 2001, the SEC requested that all registrants list their three to five most "critical accounting policies" in the Management Discussion and Analysis section of their Annual Report on Form 10-K. The SEC indicated that a "critical accounting policy" is one which is both important to the portrayal of the company's financial condition and results and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We believe that the following three accounting policies fit this definition: Revenue Recognition, Accounts Receivable and Accounting for Income Taxes. (a) Revenue Recognition Policy We recognize revenue from the sale of software licenses when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed or determinable and collection of the resulting receivable is reasonably assured. Delivery generally occurs when product is delivered to a common carrier and the delivery terms are FOB Concord. All revenues generated from our worldwide operations are approved at our corporate headquarters, located in the United States. At the time of the transaction, we assess whether the fee associated with our revenue transaction is fixed or determinable and whether or not collection is reasonably assured. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction. If a significant portion of a fee is due after our normal payment terms, which are usually 30 to 60 days from invoice date, we account for the fee as not being fixed or determinable. In these cases, we usually recognize revenue when the fee is due. We assess collection based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. We do not request collateral from our customers. If we determine that collection of a fee is not reasonably assured, we defer the fee and usually recognize revenue upon receipt of cash. For all sales, in the absence of a signed license agreement, we use either a purchase order or purchase order equivalent as evidence of an arrangement. If a signed license agreement is obtained, we use either the license agreement or the license agreement and a purchase order as evidence of an arrangement. Sales through our resellers are usually evidenced by a master agreement governing the relationship together with purchase orders on a transaction-by-transaction basis. For arrangements with multiple obligations (for example, undelivered maintenance and support), we allocate revenue to each component of the arrangement using the residual value method based on the fair value of the undelivered elements. This means that we defer revenue from the fee arrangement equivalent to the fair values of the undelivered elements. We determine fair values for ongoing maintenance and support obligations using our internal pricing policies for maintenance and by referencing the prices at which we have sold separate maintenance contract renewals to our customers. We determine fair values of services, such as training or consulting, by referencing the prices at which we have separately sold comparable services to our customers. Our arrangements do not generally include clauses involving acceptance of our products by our customers. However, if an arrangement includes an acceptance provision, revenue recognition occurs upon the earlier of receipt of a written customer acceptance or expiration of the acceptance period. (b) Accounts Receivable Policy 15 We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer's current credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based on a percentage of our accounts receivable, our historical experience and any specific customer collection issues that we have identified. While management believes such credit losses have historically been within our expectations and appropriate reserves have been established, we cannot guarantee that we will continue to experience the same credit loss rates that we have experienced in the past. (c) Accounting for Income Taxes Policy As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. To do this, we estimate our actual current tax liabilities, while also assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income. To the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have recorded a valuation allowance of $18.4 million as of June 30, 2002, due to uncertainties related to our ability to utilize some of our deferred tax assets, primarily consisting of the utilization of certain net operating loss carryforwards from prior years. We are unsure whether we will have sufficient future taxable income to allow us to use these net operating losses before they expire. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods we may need to establish an additional valuation allowance. Establishing new or additional valuation allowances could materially adversely impact our financial position and results of operations. Our net deferred tax assets as of June 30, 2002 were $3.5 million, net of a valuation allowance of $18.4 million. The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States, with no need for management's judgment in their application. There are also areas in which the exercise of management's judgment in selecting an available alternative would not produce a materially different result. See our audited consolidated financial statements and notes thereto which begin on page F-1 of the Annual Report on Form 10-K for the year ended December, 31, 2001 and which contain accounting policies and other disclosures required by generally accepted accounting principles. 16 FACTORS THAT COULD AFFECT FUTURE RESULTS References in these risk factors to "we," "our," the "Company," "Concord," and "us" refer to Concord Communications, Inc., a Massachusetts corporation. Any investment in our common stock involves a high degree of risk. If any of the following risks actually occur, our business, results of operations and financial condition would likely suffer. This document contains forward-looking statements. Any statements contained in this document that do not describe historical facts are forward-looking statements. Concord makes such forward-looking statements under the provisions of the "safe harbor" section of the Private Securities Litigation Reform Act of 1995. In particular, statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations, which are not historical facts (including, but not limited to, statements concerning: the plans and objectives of management; increases in absolute dollars or decreases as a percentage of revenues in sales and marketing, research and development, customer support and service, and general and administrative expenses; expectations regarding increased competition and Concord's ability to compete successfully; sustenance of revenue growth both domestically and internationally; the size, scope and description of Concord's target customer market; future product development, including but not limited to anticipated expense levels to fund product development, acquisitions and the integration of acquired companies; and our expected liquidity and capital resources) constitute forward-looking statements. Forward-looking statements contained herein are based on current expectations, but are subject to a number of risks and uncertainties. Concord's actual future results may differ significantly from those stated in any forward-looking statements. Factors that may cause such differences include, but are not limited to, the factors discussed below. OUR FUTURE OPERATING RESULTS ARE UNCERTAIN. Prior to 2001, we marketed and sold our products primarily in the performance management market. In 2001, our product functionality was expanded to include both fault and performance management features to penetrate the fault management market. Accordingly, we have a limited operating history in this expanded market upon which we can evaluate our business. As currently developed, our product is an integrated fault and performance management tool that manages applications, systems and networks. The integrated fault and performance market is highly competitive and rapidly evolving. Additionally, many of our competitors in this new market have a longer operating history and greater resources. Our limited operating history and the uncertain economic climate makes the prediction of future results of operations difficult or impossible. Our prospects must be considered in light of the risks, costs, and difficulties frequently encountered by emerging companies operating in the highly competitive software industry. WE CANNOT ENSURE THAT OUR REVENUES WILL GROW OR THAT WE WILL BE PROFITABLE. As a company, we have expended considerable resources to develop innovative products that have enabled us to penetrate new markets both in the United States and internationally. As a result of these efforts, we achieved revenue growth and profitability for the fiscal years ended 2000, 1999, and 1998. However, as the worldwide economy weakened in 2001, our revenues did not grow at expected levels. We operated at a net loss and we cannot ensure that we can generate revenue growth on a quarterly or annual basis, or that we can achieve or sustain any revenue growth in the future. Our annual revenues in 2002 may be lower than our annual revenues in 2001. In an effort to return to profitability, we reduced our operating expenses for 2001 and plan to continue to limit operating expenses in 2002. However, competition in the marketplace may require us to increase our operating expenses in the future in order to: - fund higher levels of research and development; - increase our sales and marketing efforts; - develop new distribution channels; - broaden our customer support capabilities; and - expand our administrative resources in anticipation of future growth. 17 To the extent that increases in our expenses precede or are not followed by increased revenues, our profitability will continue to suffer. In addition, in view of the rapidly evolving nature of our business and markets and our limited operating history in our current market, we believe that one should not rely on period-to-period comparisons of our financial results as an indication of our future performance. OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE. We are likely to experience significant fluctuations in our quarterly operating results caused by many factors, including, but not limited to: - changes in the demand for our products by customers or group of customers; - the timing, composition, and size of orders from our customers, including the tendency for significant bookings to occur in the final two weeks of each fiscal quarter; - our customers' spending patterns and budgetary resources for fault and performance management software solutions; - the success of our new customer generation activities; - introductions or enhancements of products, or delays in the introductions or enhancements of products, by us or our competitors; - changes in our pricing policies or those of our competitors; - changes in the distribution channels through which our products are sold; - our success in anticipating and effectively adapting to developing markets and rapidly changing technologies; - our success in attracting, retaining, and motivating qualified personnel; - the publication of opinions about us and our products, or our competitors and their products, by industry analysts or others; - changes in general economic conditions; and - geopolitical conditions in the world. Though our services revenues have been increasing as a percentage of total revenues, we do not have a significant ongoing revenue stream that may mitigate quarterly fluctuations in operating results, as do other software companies with a longer history of operations. Increases in our revenues will also depend on our successful implementation of our distribution strategy as we attempt to expand our channels of distribution. Due to the buying patterns of certain of our customers and also to our own sales incentive programs focused on annual sales goals, revenues in our fourth quarter could be higher than revenues in our first quarter of the following year. There also may be other factors, such as seasonality and the timing of receipt and delivery of orders within a fiscal quarter, that significantly affect our quarterly results, which are difficult to predict given our limited operating history. Our quarterly sales and operating results depend generally on: - the volume and timing of orders within the quarter; - the tendency of sales to occur late in fiscal quarters; and - our fulfillment of orders received within the quarter. A significant portion of our product sales occur in the final two weeks of each fiscal quarter. Any delay in the shipment of products prior to the end of the quarter may result in decreased revenues for the quarter. Additionally, 18 intense competition and budgetary constraints placed upon our customers typically increase during the final two weeks of a fiscal quarter and may adversely affect the revenues for that quarter. In addition, our expense levels are based in part on our expectations of future orders and sales, which are extremely difficult to predict. A substantial portion of our operating expenses is related to personnel, facilities and equipment, and sales and marketing programs. Accordingly, we may not be able to adjust our fixed expenses quickly enough to address any significant shortfall in demand for our products in relation to our expectations. Due to all of the foregoing factors, we believe that our quarterly operating results are likely to vary significantly in the future. Therefore, in some future quarter our results of operations may fall below the expectations of securities analysts and investors. In such event, the trading price of our common stock will likely suffer. THE MARKET FOR INTEGRATED FAULT AND PERFORMANCE MANAGEMENT SOFTWARE IS EMERGING. The market for our integrated fault and performance solution is in an early stage of development. Although the rapid expansion and increasing complexity of computer applications, systems, and networks in recent years has increased the demand for fault and performance management software products, the awareness of, and the need for, an integrated fault and performance solution is a recent development. Because the market for this solution is only beginning to develop, it is difficult to assess: - the size of this market; - the appropriate features and prices for products to address this market; - the optimal distribution strategy; and - the competitive environment that will develop. The development of this market and our growth will depend significantly upon the desire and success of telecommunication carriers, managed services providers, and enterprises to integrate fault and performance management for their applications, systems, and networks. Moreover, it will depend on the willingness of telecommunication carriers, managed service providers, systems integrators, and outsourcers to integrate fault and performance management software into their product and service offerings. The market for integrated fault and performance management software may not grow or we may fail to assess and address the needs of this market. THE MARKET FOR OUR PRODUCTS IS INTENSELY COMPETITIVE. The market for our products is new, intensely competitive, rapidly evolving, and subject to technological change. Our current and future competitors include: - report toolset vendors; - fault management software vendors; - application performance software vendors; - enterprise management software, framework and platform providers; - large, well established management framework companies that have developed network management platforms; - developers of network element management solutions; - probe vendors. We expect competition to persist, increase, and intensify in the future with possible price competition developing in our markets. Many of our current and potential competitors have longer operating histories and significantly greater financial, technical and marketing resources and name recognition than us. We do not believe our market 19 will support a large number of competitors and their products. If we do not provide products that achieve success in our market in the short term, we could suffer an insurmountable loss in market share and brand name acceptance. We cannot ensure that we will compete effectively with current and future competitors. THE MARKET FOR PERFORMANCE AND FAULT MANAGEMENT OF SOFTWARE APPLICATIONS, SYSTEMS AND NETWORKS IS BECOMING INCREASINGLY TARGETED BY LARGER COMPANIES WITH SUBSTANTIALLY GREATER RESOURCES. A considerable portion of our revenues is generated from sales of products that manage both the fault and performance aspects of software applications and systems. This market is very competitive and we are in direct competition with larger companies with substantially greater resources. These larger companies are able to devote considerable resources to the development of competitive products and the creation and maintenance of direct and indirect sales channels. The continued presence of these larger companies in this market may impact our ability to retain or increase our market share. MARKET ACCEPTANCE OF OUR EHEALTH(TM) PRODUCT FAMILY IS CRITICAL TO OUR SUCCESS. We currently derive substantial product revenues from our eHealth(TM) product family, and we expect that revenues from these products will continue to account for almost all of our product revenues in the foreseeable future. Broad market acceptance of these products is critical to our future success. We cannot ensure that market acceptance of our eHealth(TM) Suite of products will increase or even remain at current levels. Factors that may affect the market acceptance of our integrated solution include: - the availability and price of competing solutions, products and technologies; and - the success of our sales efforts and those of our marketing partners. Moreover, if demand for integrated fault and performance management software products increases, we anticipate that our competitors will introduce additional competitive products and new competitors could enter our market and offer alternative products resulting in decreased market acceptance of our products. WE MAY NEED FUTURE CAPITAL FUNDING. We plan to continue to expend substantial funds on the continued development, marketing, and sale of the eHealth(TM) product family. We cannot ensure that our existing capital resources including the proceeds from our initial public offering during October 1997, and any funds that may be generated from future operations together will be sufficient to finance our future operations or that other sources of funding will be available on terms acceptable to us, if at all. In addition, future sales of substantial amounts of our securities in the public market could adversely affect prevailing market prices and could impair our future ability to raise capital through the sale of our securities. WE MUST INTRODUCE PRODUCT ENHANCEMENTS AND NEW PRODUCTS ON A TIMELY BASIS. Because of rapid technological change in the software industry and potential changes in the IT infrastructure, fault and performance management software market, and changes in industry standards, the life cycle of versions of our eHealth(TM) products is difficult to estimate. We cannot ensure that: - we will successfully develop and market enhancements to our eHealth(TM) products or successfully develop new products that respond to technological changes, evolving industry standards or customer requirements; - we will not experience difficulties that could delay or prevent the successful development, introduction and sale of such enhancements or new products; or - such enhancements or new products will adequately address the requirements of the marketplace and achieve market acceptance. THE NEED FOR OUR PRODUCTS MAY DECREASE IF MANUFACTURERS INCORPORATE OUR PRODUCT FEATURES INTO THEIR PRODUCT OFFERINGS. 20 Our products manage the performance of computer applications, systems, and networks. Presently, manufacturers of both hardware and software have not implemented these management functions into their products in any significant manner. These products typically include, but are not limited to, operating systems, workstations, network devices, and software. If manufacturers begin to incorporate these management functions into their products it may decrease the value of our products and have a substantial impact on our business. ANY ANNOUNCEMENTS BY COMPANIES CITING ACCOUNTING IMPROPRIETIES MAY ADVERSELY IMPACT OUR REVENUES. The announcement by a large American telecommunications firm near the end of the fiscal quarter that it had improperly accounted for some expenses created uncertainties for some of our customers. Specifically, banks holding debt for this telecommunications company reduced expenditures to mitigate the exposure created by the telecommunications company's actions. The Company's sales suffered in the final weeks of the quarter as many of our customers considerably decreased, postponed or potentially canceled IT infrastructure purchases due to this uncertainty. It is likely that similar announcements by other companies would impact the Company's future sales. THE IMPACT OF THE RECENT TERRORIST ATTACKS AND THE RISK OF FUTURE TERRORIST ATTACKS MAY ADVERSELY IMPACT OUR REVENUES. The tragic events of September 11, 2001 impacted our sales to companies in the New York City area and our sales to the United States government. These markets have not yet recovered from the events of September 11, 2001 and it is impossible to determine when, and if, they will recover. Sales in the New York City area and sales to the United States government are a significant source of revenues for us and our business may be adversely affected as these areas recover. Additionally, recent terrorist warnings, both in the United States and internationally, suggest the possibility of future terrorist attacks. As we sell products both in the United States and internationally, the occurrence of future terrorist attacks may adversely affect our business. OUR SUCCESS IS DEPENDENT UPON SALES TO TELECOMMUNICATION CARRIERS, SERVICE PROVIDERS, AND ENTERPRISE CUSTOMERS. We derive and likely will continue to derive a significant portion of our revenues from the sales of our products to telecommunication carriers, service providers, and enterprise customers. These markets worldwide have suffered from a turbulent economy during 2000, 2001 and 2002, turbulence that has been exacerbated by the tragic events of September 11, 2001 and their aftermath. We have been negatively affected by the downturn in capital spending within these markets. The volume of sales of our products and services to telecommunication carriers, service providers, and enterprise customers may increase slower than we expect or may decrease. OUR COMMON STOCK PRICE COULD EXPERIENCE SIGNIFICANT VOLATILITY. The market price of our common stock may be highly volatile and could be subject to wide fluctuations in response to: - variations in results of operations; - announcements of technological innovations or new products by us or our competitors; - changes in financial estimates by securities analysts; or - other events or factors. In addition, the financial markets have experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of many high technology companies and that often have been unrelated to the operating performance of such companies or have resulted from the failure of the operating results of such companies to meet market expectations in a particular quarter. Broad market fluctuations or any failure of our operating results in a particular quarter to meet market expectations may adversely affect the market price of our common stock leading to an increased risk of securities class action litigation. Such litigation could result in substantial costs and a diversion of our attention and resources. 21 OUR INDUSTRY IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE. OUR SUCCESS DEPENDS UPON MAINTENANCE OF STANDARD PROTOCOLS. The software industry is characterized by: - rapid technological change; - frequent introductions of new products; - changes in customer demands; and - evolving industry standards. The introduction of products embodying new technologies and the emergence of new industry standards can render existing products and integrated solutions obsolete and unmarketable. Our eHealth(TM) - Network product's analysis and reporting, as well as the quality of its reports, depends upon its utilization of the industry-standard Simple Network Management Protocol ("SNMP") and the data resident in conventional Management Information Bases ("MIBs"). Any change in these industry standards, the development of vendor-specific proprietary MIB technology, or the emergence of new network technologies could affect the compatibility of our eHealth(TM) - Network products with these devices, which in turn could affect its analysis and generation of comprehensive reports or the quality of the reports. Similarly, our Live Health(TM) - Fault Manager product receives only SNMP traps from failing devices, systems, and applications. Any change in these industry standards could hinder the effectiveness of this product. Furthermore, although our eHealth(TM) Suite of products currently runs on industry-standard UNIX operating systems and Windows NT, any significant change in industry-standard operating systems could affect the demand for, or the pricing of, our products and solutions and those of our competitors. WE RELY ON STRATEGIC PARTNERS AND OTHER EVOLVING DISTRIBUTION CHANNELS. Our distribution strategy is to develop multiple distribution channels, including sales through: - strategic marketing partners; - value added resellers; - system integrators; - telecommunication carriers; - original equipment manufacturers; and - independent software vendors and international distributors. We have developed a number of these relationships and intend to continue to develop new "channel partner" relationships. Our success will depend in large part on our development of these additional distribution relationships and on the performance and success of these third parties, particularly telecommunication carriers and other network service providers. We sell our products in the United States through both direct sales to customers and indirect sales to customers through our channel partners. Internationally, we sell our products almost exclusively through indirect sales via our channel partners. Our international channel partners are located in Europe, the Middle East, Africa, Asia, and North and South America and are subject to local laws, regulations, and customs that may make it difficult to accurately assess the potential revenues that can be generated from a certain market. Our success depends upon our ability to attract and retain valuable channel partners and to accurately assess the size and vitality of the markets in which our products are sold. While we have implemented policies and procedures to achieve this, we cannot predict the extent to which we are able to attract and retain valuable channel partners. Additionally, our channel partners may not be successful in marketing and selling our products. We may: - fail to attract important and effective channel partners; - fail to penetrate our targeted market segments through the use of channel partners; or 22 - lose any of our channel partners, as a result of competitive products offered by other companies, or products developed internally by these channel partners or otherwise. WE MAY FAIL TO MANAGE SUCCESSFULLY OUR GROWTH. We have experienced reductions in our sales and operations personnel; our products have become increasingly complex; and our product distribution channels are being developed and expanded. The rapid evolution of our markets and the increasing complexity of our products has placed, and is likely to continue to place, significant strains on our administrative, operational, and financial resources and increase demands on our internal systems, procedures, and controls that may impact our ability to grow our business. OUR SUCCESS DEPENDS ON OUR RETENTION OF KEY PERSONNEL. Our performance depends substantially on the performance of our key technical and senior management personnel. We may lose the services of any of such persons. We do not maintain key person life insurance policies on any of our employees. Our success depends on our continuing ability to identify, hire, train, motivate, and retain highly qualified management, technical, and sales and marketing personnel. We experience intense competition for such personnel and are constantly exploring new avenues for attracting and retaining key personnel. However, we cannot ensure that we will successfully attract, assimilate, or retain highly qualified technical, managerial or sales and marketing personnel in the future. OUR FAILURE TO EXPAND INTO INTERNATIONAL MARKETS COULD HARM OUR BUSINESS. We intend to continue to expand our operations outside of the United States and enter additional international markets, primarily through the establishment of channel partner arrangements. We expect to commit additional time and development resources to customizing our products and services for selected international markets and to developing international sales and support channels. We cannot ensure that such efforts will be successful. We face certain difficulties and risks inherent in doing business internationally, including, but not limited to: - costs of customizing products and services for international markets; - dependence on independent resellers; - multiple and conflicting regulations; - exchange controls; - longer payment cycles; - unexpected changes in regulatory requirements; - import and export restrictions and tariffs; - difficulties in staffing and managing international operations; - greater difficulty or delay in accounts receivable collection; - potentially adverse tax consequences; - the burden of complying with a variety of laws outside the United States; - the impact of possible recessionary environments in economies outside the United States; - political and economic instability; and - exposure to foreign currency fluctuations. Our successful expansion into certain countries will require additional modification of our products, particularly national language support. Presently, virtually all of our current export sales are denominated in United States 23 dollars. To the extent that international sales continue to be denominated in U.S. dollars, an increase in the value of the United States dollar relative to other currencies could make our products and services more expensive and, therefore, potentially less competitive in international markets. In certain European Union countries, however, we have introduced pricing in Euros in 2002. To the extent that future international sales are denominated in foreign currency, our operating results will be subject to risks associated with foreign currency fluctuation. Additionally, as we increase our international sales, seasonal fluctuations in revenue generation resulting from lower sales that typically occur during the summer months in Europe and other parts of the world may affect our total revenues. OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS MAY HARM OUR COMPETITIVE POSITION. Our success depends significantly upon our proprietary technology. We rely on a combination of patent, copyright, trademark and trade secret laws, non-disclosure agreements, and other contractual provisions to establish, maintain, and protect our proprietary rights. These means afford only limited protection. We have ten issued and seven pending U.S. patents, and various foreign counterparts. We cannot ensure that patents will issue from our pending applications or from any future applications or that, if issued, any claims allowed will be sufficiently broad to protect our technology. In addition, we cannot ensure that any patents that have been or may be issued will not be challenged, invalidated or circumvented, or that any rights granted by those patents would protect our proprietary rights. Failure of any patents to protect our technology may make it easier for our competitors to offer equivalent or superior technology. We have sought also to protect our intellectual property through the use of copyright, trademark, and trade secret laws. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or services, or to obtain and use information that we regard as proprietary. Third parties may also independently develop similar technology without breach of our proprietary rights. In addition, the laws of some foreign countries do not protect proprietary rights to as great an extent as do the laws of the United States. In addition, many of our products are licensed under end user license agreements (also known as "shrinkwrap" licenses) that are not signed by licensees. The law governing the enforceability of shrinkwrap license agreements is not settled in most jurisdictions. There can be no guarantee that we would achieve success in enforcing one or more shrinkwrap license agreements if we sought to do so in a court of law. WE LICENSE CERTAIN TECHNOLOGIES FROM THIRD PARTIES. We license from third parties, generally on a non-exclusive basis, certain technologies used in our products. The termination of any such licenses, or the failure of the third-party licensors to adequately maintain or update their products, could result in delay in our shipment of certain of our products while we seek to implement technology offered by alternative sources, and any required replacement licenses could prove costly. While it may be necessary or desirable in the future to obtain other licenses relating to one or more of our products or relating to current or future technologies, we cannot ensure that we will be successful in doing so on commercially reasonable terms or at all. INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS WOULD HARM OUR BUSINESS. Although we do not believe that we are infringing upon the intellectual property rights of others, claims of infringement are becoming increasingly common as the software industry develops legal protections for software products. Litigation may be necessary to protect our proprietary technology, and third parties may assert infringement claims against us with respect to their proprietary rights. Any claims or litigation can be time-consuming and expensive regardless of their merit. Infringement claims against us can cause product release delays, require us to redesign our products, or require us to enter into royalty or license agreements, which agreements may not be available on terms acceptable to us or at all. 24 PRODUCT DEFECTS COULD RESULT IN THE LOSS OF OR DELAY IN MARKET ACCEPTANCE OF OUR PRODUCTS. As a result of their complexity, software products may contain undetected errors or failures when first introduced or as new versions are released. We cannot ensure that, despite testing by us and testing and use by current and potential customers, errors will not be found in new products we ship or, if discovered, that we will successfully correct such errors in a timely manner or at all. The occurrence of errors and failures in our products could result in loss of, or delay in, market acceptance of our products, and alleviating such errors and failures could require significant expenditure of capital and other resources by us. WE MAY NOT HAVE SUFFICIENT PROTECTION AGAINST PRODUCT LIABILITY CLAIMS. Because our products are used by our customers to identify and predict current and future application, system, and network problems and to avoid failures of the network to support critical business functions, design defects, software errors, misuse of our products, incorrect data from network elements, or other potential problems, within or out of our control, may arise from the use of our products and could result in financial or other damages to our customers. While we do not maintain product liability insurance, our license agreements with our customers typically contain provisions designed to limit our exposure to potential claims as well as any liabilities arising from such claims. As a matter of practice, our license agreements limit our liability in regards to product liability claims, and in many agreements, our maximum liability for product liability claims is limited to the equivalent of the cost of the products licensed under that agreement. However, any litigation or similar procedure related to a product liability claim may require considerable resources to be expended that could adversely affect our business and financial condition and decrease future revenues. 25 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK DERIVATIVE FINANCIAL INSTRUMENTS, OTHER FINANCIAL INSTRUMENTS AND DERIVATIVE COMMODITY INSTRUMENTS. The Company does not have any derivative financial instruments, other financial instruments or derivative commodity instruments for which fair value disclosure would be required. All of the Company's investments are in investment grade securities with high credit ratings of relatively short duration that trade in highly liquid markets and are carried at fair value on the Company's books. Accordingly, the Company has no quantitative information concerning the market risk of participating in such investments. PRIMARY MARKET RISK EXPOSURES. The Company's primary market risk exposure is in the area of interest rate risk. The Company's investment portfolio of cash equivalents and marketable securities is subject to interest rate fluctuations, but the Company believes this risk is immaterial due to the short-term nature of these investments. Substantially all of the Company's business outside the United States is conducted in U.S. dollar-denominated transactions, whereas the Company's operating expenses in its international branches are denominated in local currency. The Company has no foreign exchange contracts, option contracts or other foreign hedging arrangements. The Company believes that the operating expenses of its foreign operations are immaterial, and therefore any associated market risk is unlikely to have a material adverse effect on the Company's business, results of operations or financial condition. The Company's current export sales are denominated in United States dollars. To the extent that international sales continue to be denominated in United States dollars, an increase in the value of the United States dollar relative to other currencies could make the Company's products and services more expensive and, therefore, potentially less competitive in international markets. 26 CONCORD COMMUNICATIONS, INC. FORM 10-Q, JUNE 30, 2002 PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is not a party to any litigation that it believes could have a material adverse effect on the business, results of operations and financial condition of the Company. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (a) Issuance of Securities On February 4, 2000, the Company completed a merger with FirstSense Software, Inc. The Company has reserved for issuance in connection with the merger, 1,940,000 shares of Concord Common Stock and has issued 1,799,000 of such shares. The Company issued the shares in a private placement transaction pursuant to Section 4(2) under the Securities Act of 1933. The merger was accounted for as a pooling of interests. The Company filed a Form S-3 Registration Statement to cover the resale of the securities issued in the merger. (b) Use of Proceeds On October 16, 1997, the Company commenced an initial public offering ("IPO") of 2,900,000 shares of common stock, par value $.01 per share (the "Common Stock"), of the Company pursuant to the Company's final prospectus dated October 15, 1997 (the "Prospectus"). The Prospectus was contained in the Company's Registration Statement on Form S-1, which was declared effective by the Securities and Exchange Commission (SEC File No. 333-33227) on October 15, 1997. Of the 2,900,000 shares of Common Stock offered, 2,300,000 shares were offered and sold by the Company and 600,000 shares were offered and sold by certain shareholders of the Company. As part of the IPO, the Company granted the several underwriters an over allotment option to purchase up to an additional 435,000 shares of Common Stock (the "Underwriters' Option"). The IPO closed on October 21, 1997 upon the sale of 2,900,000 shares of Common Stock to the underwriters. On October 24, 1997, the Representatives, on behalf of the several underwriters, exercised the Underwriters' Option, purchasing 435,000 additional shares of Common Stock from the Company. The aggregate offering price of the shares of Common stock in the IPO to the public was $40,600,000 (exclusive of the Underwriters' Option), with proceeds to the Company and selling shareholders, after deduction of the underwriting discount, of $29,946,000 (before deducting offering expenses payable by the Company) and $7,812,000 respectively. The aggregate offering price of the Underwriters' Option exercised was $6,090,000, with proceeds to the Company, after deduction of the underwriting discount, of $5,663,700 (before deducting offering expenses payable by the Company). The aggregate amount of expenses incurred by the Company in connection with the issuance and distribution of the shares of Common Stock offered and sold in the IPO were approximately $3.6 million, including $2.7 million in underwriting discounts and commissions and $950,000 in other offering expenses. The net proceeds to the Company from the IPO, after deducting underwriting discounts and commissions and other offering expenses were approximately $34.7 million. To date, the Company has not utilized any of the net proceeds from the IPO. The Company has invested all such net proceeds primarily in US treasury obligations and other interest bearing investment grade securities. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable 27 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable ITEM 5. OTHER INFORMATION Not Applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The exhibits listed in the accompanying Exhibit Index on page 32 and 33 are filed or incorporated by reference as part of this Report. (b) Reports on Form 8-K A report on Form 8-K was filed with the Commission on June 14, 2002 to report that the Company dismissed Arthur Andersen LLP as the Company's independent certifying accountants. The Company also reported that it engaged PricewaterhouseCoopers LLP as its independent certifying accountants for the year ending December 31, 2002. 28 CONCORD COMMUNICATIONS, INC. FORM 10-Q, JUNE 30, 2002 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Concord Communications, Inc. /s/ Melissa H. Cruz ----------------------------------------- August 9, 2002 Name: Melissa H. Cruz Title: Executive Vice President, Business Services and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 29 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Concord Communications, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John A. Blaeser, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ John A. Blaeser John A. Blaeser President and Chief Executive Officer August 9, 2002 30 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Concord Communications, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Melissa H. Cruz, Executive Vice President, Business Services and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Melissa H. Cruz Melissa H. Cruz Executive Vice President, Business Services and Chief Financial Officer August 9, 2002 31 CONCORD COMMUNICATIONS, INC. FORM 10-Q, JUNE 30, 2002 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION SEC DOCUMENT REFERENCE ----------- ----------- ---------------------- 3.01 Restated Articles of Organization of the Company Exhibit No. 3.01 on Form 10-K, for the period ended December 31, 1997 3.02 Restated By-laws of the Company Exhibit No. 3.02 on Form 10-K, for the period ended December 31, 1998 10.01 Working Capital Loan Agreement between the Company and Exhibit No. 10.01 to Registration Silicon Valley Bank dated April 3, 1997 Statement on Form S-1 (No. 333-33227) 10.02 Revolving Promissory Note made by the Company in favor of Exhibit No. 10.02 to Registration Silicon Valley Bank Statement on Form S-1 (No. 333-33227) 10.03 Equipment Line of Credit Letter Agreement between the Exhibit No. 10.03 to Registration Company and Fleet Bank dated as of June 9, 1997 Statement on Form S-1 (No. 333-33227) 10.04 1995 Stock Plan of the Company Exhibit No. 10.04 to Registration Statement on Form S-1 (No. 333-33227) 10.05 1997 Stock Plan of the Company Exhibit No. 10.01 on Form 10-Q, for the period ended June 30, 1998 10.06 1997 Stock Plan of the Company, as amended on March 12, Exhibit No. 10.06 on Form 10-K, for 1998, March 1, 1999, May 15, 1999 and March 8, 2000 the period ended December 31, 2000 10.07 1997 Employee Stock Purchase Plan of the Company Exhibit No. 10.06 to Registration Statement on Form S-1 (No. 333-33227) * 10.08 1997 Non-Employee Director Stock Option Plan as amended Exhibit No. 10.08 to Current Report on March 12, 1998, March 8, 2000, April 25, 2001 and on Form 10-Q February 6, 2002 10.09 The Profit Sharing/401(K) Plan of the Company Exhibit No. 10.08 to Registration Statement on Form S-1 (No. 333-33227) 10.10 Lease Agreement between the Company and John Hancock Mutual Exhibit No. 10.09 to Registration Life Insurance Company dated March 17, 1994, as amended on Statement on Form S-1 (No. March 25, 1997 333-33227) 10.11 First Amendment to Lease Agreement between the Company and Exhibit No. 10.10 to Registration John Hancock Mutual Life Insurance Company dated March 25, Statement on Form S-1 (No. 1997 333-33227) 10.12 Form of Indemnification Agreement for directors and Exhibit No. 10.11 to Registration officers of the Company Statement on Form S-1 (No. 333-33227) 10.13 Restated Common Stock Registration Rights Agreement between Exhibit No. 10.12 to Registration the Company and certain investors dated August 7, 1986 Statement on Form S-1 (No. 333-33227) 10.14 Amended and Restated Registration Rights Agreement between Exhibit No. 10.13 to Registration the Company and certain investors dated December 28, 1995 Statement on Form S-1 (No. 333-33227) 10.15 Management Change in Control Agreement between the Company Exhibit No. 10.14 to Registration and John A. Blaeser dated as of August 7, 1997 Statement on Form S-1 (No. 333-33227) 10.16 Management Change in Control Agreement between the Company Exhibit No. 10.15 to Registration and Kevin J. Conklin dated as of July 23, 1997 Statement on Form S-1 (No. 333-33227) 10.17 Management Change in Control Agreement between the Company Exhibit No. 10.16 to Registration and Ferdinand Engel dated as of July 23, 1997 Statement on Form S-1 (No. 333-33227) 10.18 Management Change in Control Agreement between the Company Exhibit No. 10.17 to Registration and Gary E. Haroian dated as of July 23, 1997 Statement on Form S-1 (No. 333-33227) 10.19 Management Change in Control Agreement between the Company Exhibit No. 10.18 on Form 10-Q and Melissa H. Cruz dated as of June 12, 2000 filed on August 14, 2000 10.20 Management Change in Control Agreement between the Company Exhibit No. 10.18 to Registration and Daniel D. Phillips, Jr. dated as of July 23, 1997 Statement on Form S-1 (No. 333-33227) 10.21 Stock Option Agreement dated January 1, 1996 between the Exhibit No. 10.19 to Registration Company and John A. Blaeser Statement on Form S-1 (No. 333-33227) 10.22 Stock Option Agreement dated January 1, 1996 between the Exhibit No. 10.20 to Registration Company and John A. Blaeser Statement on Form S-1 (No. 333-33227) 10.23 Letter Agreement between the Company and Silicon Valley Exhibit No. 10.21 to Registration Bank dated March 25, 1996 together with the Loan Statement on Form S-1 (No. Modification Agreement dated November 14, 1996 333-33227) 10.24 Form of Shrink-Wrap License Exhibit No. 10.22 to Registration Statement on Form S-1 (No. 333-33227) 10.25 Agreement and Plan of Reorganization dated as of October Exhibit No. 2.1 on Form 8-K filed 19, 1999 by and among Concord Communications, Inc., E on November 12, 1999 Acquisition Corp., Empire Technologies, Inc. and the stockholders of Empire Technologies, Inc. 10.26 Agreement and Plan of Reorganization dated as of January Exhibit No. 2.1 on Form 8-K filed 20, 2000 by and among Concord Communications, Inc., F on February 10, 2000 Acquisition Corp., and FirstSense Software, Inc. 10.27 Registration Rights Agreement dated as of February 4, 2000 Exhibit No. 99.1 on Form 8-K filed by and among Concord Communications, Inc. and Timothy on February 10, 2000 Barrows, as Securityholder Agent 10.28 2000 Non-Executive Employee Equity Incentive Plan Exhibit 10.28 on Form 10-K, for the period ended December 31, 2000
32
EXHIBIT INDEX EXHIBIT NO. DESCRIPTION SEC DOCUMENT REFERENCE ----------- ----------- ---------------------- 10.29 Management Change in Control Agreement between the Company Exhibit No. 10.29 on Form 10-Q and Ellen Kokos dated as of February 2, 2001 filed on May 9, 2001 10.30 Management Change in Control Agreement between the Company Exhibit No. 10.30 on Form 10-Q and John F. Hamilton dated as of April 16, 2001 filed July 31, 2001 10.31 2001 Non-Executive Employee Stock Purchase Plan Exhibit No. 10.31 on Form 10-Q filed on November 5, 2001 *10.32 Management Agreement between the Company and John Hamilton Exhibit No. 10.32 to Current Report dated May 6, 2002 on Form 10-Q 21.01 Subsidiaries of the Company 23.01 Consent of Arthur Andersen LLP 23.02 Consent of KPMG LLP
* filed herewith 33 EX-10.08 3 b43712ccexv10w08.txt 1997 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN EXHIBIT 10.08 CONCORD COMMUNICATIONS, INC. 1997 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN (AS AMENDED MARCH 12, 1998, MARCH 8, 2000, APRIL 25, 2001, FEBRUARY 6, 2002) 1. PURPOSE. This Non-Qualified Stock Option Plan, to be known as the 1997 Non-Employee Director Stock Option Plan (hereinafter, this "Plan") is intended to promote the interests of CONCORD COMMUNICATIONS, INC. (hereinafter, the "Company") by providing an inducement to obtain and retain the services of qualified persons who are not employees or officers of the Company to serve as members of its Board of Directors (the "Board"). 2. AVAILABLE SHARES. The total number of shares of Common Stock, par value $.01 per share, of the Company (the "Common Stock") for which options may be granted under this Plan shall not exceed three hundred thirty thousand (330,000) shares, subject to adjustment in accordance with Section 10 of this Plan; provided, however, that such number of shares shall not be subject to adjustment by reason of the stock split in the form of a stock dividend declared by the Board of the Directors of the Company on August 7, 1997. Shares subject to this Plan are authorized but unissued shares or shares that were once issued and subsequently reacquired by the Company. If any options granted under this Plan are surrendered before exercise or lapse without exercise, in whole or in part, the shares reserved therefor shall continue to be available under this Plan. 3. ADMINISTRATION. This Plan shall be administered by the Board or by a committee appointed by the Board (the "Committee"). In the event the Board fails to appoint or refrains from appointing a Committee, the Board shall have all power and authority to administer this Plan. In such event, the word "Committee" wherever used herein shall be deemed to mean the Board. The Committee shall, subject to the provisions of the Plan, have the power to construe this Plan, to determine all questions hereunder, and to adopt and amend such rules and regulations for the administration of this Plan as it may deem desirable. No member of the Board or the Committee shall be liable for any action or determination made in good faith with respect to this Plan or any option granted under it. 4. AUTOMATIC GRANT OF OPTIONS. Subject to the availability of shares under this Plan, (a) each person who becomes a member of the Board on or after October 16, 1997 and who is not an employee or officer of the Company during the term of the Plan (a "Non-Employee Director"), shall be granted on the date such person is first elected to the Board, without further action by the Board, an option to purchase 20,000 shares of Common Stock, and (b) each person who is a Non-Employee Director immediately following the final adjournment of each Annual Meeting of Stockholders of the Company during the term of this Plan shall be automatically granted on each such date an option to purchase 7,500 shares of Common Stock. The options to be granted under this Section 4 shall be the only options ever to be granted at any time to such member under this Plan. The number of shares covered by options granted under this Section 4 shall be subject to adjustment in accordance with the provisions of Section 10 of this Plan. 5. OPTION PRICE. The purchase price of the stock covered by an option granted pursuant to this Plan shall be 100% of the fair market value of such shares on the day the option is granted. The option price will be subject to adjustment in accordance with the provisions of Section 10 of this Plan. For purposes of this Plan, 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 last business day for which the prices or quotes discussed in this sentence are available prior to the date such option is granted 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 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 List. However, if the Common Stock is not publicly traded at the time an option is granted under the Plan, "fair market value" shall be deemed to be 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. 34 6. PERIOD OF OPTION. Unless sooner terminated in accordance with the provisions of Section 8 of this Plan, an option granted hereunder shall expire on the date which is ten (10) years after the date of grant of the option. 7. (a) VESTING OF SHARES AND NON-TRANSFERABILITY OF OPTIONS. Options granted under this Plan shall not be exercisable until they become vested. Options granted under this Plan shall vest in the optionee and thus become exercisable, in accordance with the following schedule, provided that the optionee has continuously served as a member of the Board through such vesting date:
Percentage of Option Shares for Which Option Will be Exercisable Date of Vesting -------------------------- --------------- 25% one year from the date of grant 6.25% per quarter on the last day of the quarter beginning the quarter ending immediately following the date to occur which is one year from the date of grant
The number of shares as to which options may be exercised shall be cumulative, so that once the option shall become exercisable as to any shares it shall continue to be exercisable as to said shares, until expiration or termination of the option as provided in this Plan. (b) Non-transferability. Any option granted pursuant to this Plan shall not be assignable or transferable other than by will or the laws of descent and distribution or pursuant to a domestic relations order and shall be exercisable during the optionee's lifetime only by him or her. 8. TERMINATION OF OPTION RIGHTS. (a) In the event an optionee ceases to be a member of the Board for any reason other than death or permanent disability, any then unexercised portion of options granted to such optionee shall, to the extent not then vested, immediately terminate and become void; any portion of an option which is then vested but has not been exercised at the time the optionee so ceases to be a member of the Board may be exercised, to the extent it is then vested, by the optionee within 60 days of the date the optionee ceased to be a member of the Board; and all options shall terminate after such 60 days have expired. (b) In the event that an optionee ceases to be a member of the Board by reason of his or her death or permanent disability, any option granted to such optionee may be exercised, to the extent of the number of shares with respect to which he or she could have exercised it on the date of death or permanent disability, by the optionee (or by the optionee's personal representative, heir or legatee, in the event of death) until the scheduled expiration date of the option. 9. EXERCISE OF OPTIONS AND RESALE RESTRICTIONS. (a) EXERCISE OF OPTION. Subject to the terms and conditions of this Plan and the option agreements, an option granted hereunder shall, to the extent then exercisable, be exercisable in whole or in part by giving written notice to the Company by mail or in person addressed to the Chief Financial Officer at 600 Nickerson Road, Marlboro, Massachusetts 01752, its principal executive offices, stating the number of shares with respect to which the option is being exercised, accompanied by payment in full for such shares. Payment may be (a) in United States dollars in cash or by check, (b) in whole or in part in shares of the Common Stock of the Company already owned by the person or persons exercising the option or shares subject to the option being exercised (subject to such restrictions and guidelines as the Board may adopt from time to time), valued at fair market value determined in accordance with the provisions of Section 5 or (c) 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; provided, however, that there shall be no such exercise at any one time as to fewer than one hundred (100) shares or all of the remaining shares then purchasable by the person or persons exercising the option, if fewer than one hundred (100) shares. The Company's transfer agent shall, on behalf of the Company, prepare a certificate or certificates representing such shares acquired pursuant to 35 exercise of the option, shall register the optionee as the owner of such shares on the books of the Company and shall cause the fully executed certificate(s) representing such shares to be delivered to the optionee as soon as practicable after payment of the option price in full. The holder of an option shall not have any rights of a stockholder with respect to the shares covered by the option, except to the extent that one or more certificates for such shares shall be delivered to him or her upon the due exercise of the option. (b) RESALE RESTRICTIONS. Under no circumstances may shares acquired pursuant to the exercise of options granted pursuant to this Plan be disposed of on or prior to the date that is six months after the date such options were granted. 10. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION AND OTHER EVENTS. Upon the occurrence of any of the following events, an optionee's rights with respect to options granted to him or her hereunder shall be adjusted as hereinafter provided: (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) RECAPITALIZATION ADJUSTMENTS. In the event of a reorganization, recapitalization, merger, consolidation, or any other change in the corporate structure or shares of the Company, to the extent permitted by Rule 16b-3 under the Securities Exchange Act of 1934, adjustments in the number and kind of shares authorized by this Plan and in the number and kind of shares covered by, and in the option price of outstanding options under this Plan necessary to maintain the proportionate interest of the optionee and preserve, without exceeding, the value of such option, shall be made. Notwithstanding the foregoing, no such adjustment shall be made which would, within the meaning of any applicable provisions of the Internal Revenue Code of 1986, as amended, constitute a modification, extension or renewal of any Option or a grant of additional benefits to the holder of an Option. (c) 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. (d) ADJUSTMENTS. Upon the happening of any of the foregoing events, the class and aggregate number of shares set forth in Sections 2 and 4 of this Plan that are subject to options which previously have been or subsequently may be granted under this Plan shall also be appropriately adjusted to reflect such events. The Board shall determine the specific adjustments to be made under this Section 10 and its determination shall be conclusive. (e) 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 vesting of all outstanding options issued pursuant hereto will be accelerated so that all outstanding options are vested and exercisable in full prior to the consummation of any such Acquisition. If such options are not exercised prior to the consummation of such Acquisition, and are not assumed or replaced by the successor entity, such options will terminate. 11. RESTRICTIONS ON ISSUANCE OF SHARES. Notwithstanding the provisions of Sections 4 and 9 of this Plan, the Company shall have no obligation to deliver any certificate or certificates upon exercise of an option until one of the following conditions shall be satisfied: (i) The issuance of shares with respect to which the option has been exercised is at the time of the issue of such shares effectively registered under applicable Federal and state securities laws as now in force or hereafter amended; or 36 (ii) Counsel for the Company shall have given an opinion that the issuance of such shares is exempt from registration under Federal and state securities laws as now in force or hereafter amended; and the Company has complied with all applicable laws and regulations with respect thereto, including without limitation all regulations required by any stock exchange upon which the Company's outstanding Common Stock is then listed. 12. LEGEND ON CERTIFICATES. The certificates representing shares issued pursuant to the exercise of an option granted hereunder shall carry such appropriate legend, and such written instructions shall be given to the Company's transfer agent, as may be deemed necessary or advisable by counsel to the Company in order to comply with the requirements of the Securities Act of 1933 or any state securities laws. 13. REPRESENTATION OF OPTIONEE. If requested by the Company, the optionee shall deliver to the Company written representations and warranties upon exercise of the option that are necessary to show compliance with Federal and state securities laws, including representations and warranties to the effect that a purchase of shares under the option is made for investment and not with a view to their distribution (as that term is used in the Securities Act of 1933). 14. OPTION AGREEMENT. Each option granted under the provisions of this Plan shall be evidenced by an option agreement, which agreement shall be duly executed and delivered on behalf of the Company and by the optionee to whom such option is granted. The option agreement shall contain such terms, provisions and conditions not inconsistent with this Plan as may be determined by the officer executing it. 15. TERMINATION AND AMENDMENT OF PLAN. Options may no longer be granted under this Plan ten (10) years after the Approval Date, and this Plan shall terminate when all options granted or to be granted hereunder are no longer outstanding. The Board may at any time terminate this Plan or make such modification or amendment thereof as it deems advisable; provided, however, that the Board may not, without approval of the stockholders, modify or amend this Plan, if such approval is required by the Federal securities laws or applicable regulatory authorities (at the time of any such modification or amendment). Termination or any modification or amendment of this Plan shall not, without consent of a participant, affect his or her rights under an option previously granted to him or her. The Plan was adopted by the Board of Directors in July 1997 and by the stockholders of the Company on September 9, 1997. The Plan was amended on March 12, 1998 by the Board of Directors to increase the number of option shares granted to Directors on the date such person is first elected to the Board from 7,500 shares to 20,000 shares and to increase the number of option shares automatically granted to Directors immediately following the final adjournment of each Annual Meeting of Stockholders from 1,875 shares to 5,000 shares. The Plan was further amended on March 8, 2000 by the Board of Directors to increase the number of shares authorized for issuance under the Plan by 35,000 subject to approval of the amendment of the Plan by the stockholders of the Company at the next meeting of stockholders. The stockholders of the Company approved such amendment on April 25, 2000. The Plan was further amended on April 25, 2001 to increase the number of option shares automatically granted to Directors immediately following the final adjournment of each Annual Meeting of Stockholders from 5,000 shares to 7,500 shares. The Plan was further amended on February 6, 2002 by the Board of Directors to increase the number of shares authorized for issuance under the Plan by 200,000 subject to approval of the amendment of the Plan by the stockholders of the Company at the next meeting of stockholders. 16. WITHHOLDING OF INCOME TAXES. Upon the exercise of an option, the Company, in accordance with Section 3402(a) of the Internal Revenue Code, may require the optionee to pay withholding taxes in respect of amounts considered to be compensation includible in the optionee's gross income. 17. COMPLIANCE WITH REGULATIONS. It is the Company's intent that the Plan comply in all respects with Rule 16b-3 under the Securities Exchange Act of 1934 (or any successor or amended provision thereof) and any applicable Securities and Exchange Commission interpretations thereof. If any provision of this Plan is deemed not to be in compliance with Rule 16b-3, the provision shall be null and void. 18. GOVERNING LAW. The validity and construction of this Plan and the instruments evidencing options shall be governed by the laws of the Commonwealth of Massachusetts, without giving effect to the principles of conflicts of law thereof. 37 EX-10.32 4 b43712ccexv10w32.txt MANAGEMENT AGREEMENT WITH JOHN HAMILTON EXHIBIT 10.32 CONCORD COMMUNICATIONS, INC. MANAGEMENT AGREEMENT BETWEEN THE COMPANY AND JOHN HAMILTON May 6, 2002 Mr. John Hamilton 400 Nickerson Road Marlboro, MA 01752 Dear John: The purpose of this letter agreement is to memorialize the terms and conditions under which your employment with Concord Communications, Inc. ("Concord") will terminate. In consideration for Concord agreeing to these terms and conditions, you agree to execute this letter agreement on or before May 28, 2002. By signing and returning this letter agreement to Concord, you agree to the terms and conditions set forth in the numbered paragraphs below, including the release of claims set forth in paragraph 3. Therefore, you are advised to consult with your attorney before signing this letter and you may take up to twenty one (21) days to do so. If you sign this letter, you may change your mind and revoke your agreement during the seven (7) day period after you have signed it. If you do not so revoke, this letter will become a legally binding agreement between you and the Company upon the expiration of the seven (7) day revocation period. If you choose not to sign this letter by May 28, 2002 or revoke this letter agreement as described above, your employment will terminate on May 28, 2002 and you will not receive any benefits from the Company after that date. You will, however, receive payment on that date for any unused vacation time accrued through the termination date. Also, regardless of signing this letter, you may elect to continue receiving group medical/dental insurance pursuant to the federal "COBRA" law, 29 U.S.C. ss. 1161 ET SEQ. All premium costs shall be paid by you on a monthly basis for as long as, and to the extent that, you remain eligible for COBRA continuation. You should consult the COBRA materials to be provided by the Company for details regarding these benefits. If you choose not to sign this letter agreement, or revoke this letter agreement in the next seven days, all other benefits, including life insurance and long-term disability, will cease upon your termination date.The following numbered paragraphs set forth the terms and conditions which will apply if you timely sign and return this letter agreement and do not revoke it within the seven (7) day period: 1. TERMINATION DATE - Your effective date of termination from the Company is November 6, 2002 (the "Termination Date"). From the date of this letter agreement until the termination date, you will be employed by Concord under the position title of Consultant. Effective on the date of this letter, you will no longer be an officer of Concord. Your stock options will continue to vest until the Termination Date. You agree that you will take no action that will cause Concord, any of its subsidiaries or officers or directors to be legally bound. In addition, you will make yourself available should Concord deem your testimony necessary or advisable in connection with any pending or threatened litigation. 2. DESCRIPTION OF SEVERANCE BENEFITS - The severance benefits paid to you if you timely sign and return this letter are described in Attachment A to this letter agreement. 3. RELEASE - In consideration for Concord agreeing to the terms of this letter agreement (and providing the benefits contained in Attachment A), which includes payment of benefits which you acknowledge you would not otherwise be entitled to receive, you hereby fully, forever, irrevocably and unconditionally releases, remises and discharges the Company, its officers, directors, stockholders, corporate affiliates, and subsidiaries, agents and employees from any and all claims, charges, complaints, demands, actions, causes of action, suits, rights, debts, sums of money, costs, accounts, reckonings, covenants, contracts, agreements, promises, doings, omissions, damages, executions, 38 obligations, liabilities, and expenses (including attorneys' fees and costs), of every kind and nature which you ever had or now have against the Company, its officers, directors, stockholders, corporate affiliates, subsidiaries and parent companies, agents and employees arising out of your employment with or separation from the Company including, but not limited to, all employment discrimination claims under Title VII of the Civil Rights Act of 1964, 42 U.S.C.ss.2000e ET SEQ., the Age Discrimination in Employment Act, 29 U.S.C.,ss.621 ET SEQ., the Americans With Disabilities Act of 1990, 42 U.S.C.,ss.12101 ET SEQ., and the Massachusetts Fair Employment Practices Act, M.G.L. c.151B,ss.1 ET SEQ., all as amended, and all claims arising out of the Fair Credit Reporting Act, 15 U.S.C.ss.1681 ET SEQ., the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C.ss.1001 ET SEQ., the Massachusetts Civil Rights Act, M.G.L. c.12ss.ss.11H and 11I, the Massachusetts Equal Rights Act, M.G.L. c.93ss.102 and M.G.L. c.214,ss.1C, the Massachusetts Labor and Industries Act, M.G.L. c. 149,ss.1 ET SEQ., and the Massachusetts Privacy Act, M.G.L. c.214,ss.1B, all as amended, and all common law claims including, but not limited to, actions in tort, defamation and breach of contract, and any claim or damage arising out of your employment with or separation from the Company (including a claim for retaliation) under any common law theory or any federal, state or local ordinance not expressly referenced above. 4. NON-DISCLOSURE AND NON-COMPETITION - You acknowledge your obligation to keep confidential all non-public information concerning the Company which you acquired during the course of your employment with the Company, as stated more fully in the non-disclosure agreement you executed at the inception of your employment which remains in full force and effect. You further acknowledge and reaffirm your obligations under the non-competition agreement you previously executed for the benefit of the Company at the inception of your employment which also remains in full force and effect (see attached). 5. RETURN OF COMPANY PROPERTY - You confirm that you have returned to the Company all keys, files, records (and copies thereof), equipment and other Company-owned property in your possession (see attachment A). You further agree to leave intact all electronic Company documents, including those which you developed or help develop during your employment. 6. NON-DISPARAGEMENT - You understand and agree that as a condition for payment to you of the consideration herein described, you shall not make any false, disparaging or derogatory statements to any media outlet, industry group, financial institution or current or former employee, consultant, client or customer of the Company regarding the Company or any of its directors, officers, employees, agents or representatives or about the Company's business affairs and financial condition. 7. AMENDMENT - This letter agreement shall be binding upon the parties and may not be modified in any manner, except by an instrument in writing of concurrent or subsequent date signed by duly authorized representatives of the parties hereto. This letter agreement is binding upon and shall inure to the benefit of the parties and their respective agents, assigns, heirs, executors, successors and administrators. 8. WAIVER OF RIGHTS - No delay or omission by the Company in exercising any right under this letter agreement shall operate as a waiver of that or any other right. A waiver or consent given by the Company on any one occasion shall be effective only in that instance and shall not be construed as a bar or waiver of any right on any other occasion. 9. VALIDITY - Should any provision of this letter agreement be declared or be determined by any court of competent jurisdiction to be illegal or invalid, the validity of the remaining parts, terms or provisions shall not be affected thereby and said illegal or invalid part, term or provision shall be deemed not to be a part of this letter agreement. 10. CONFIDENTIALITY - To the extent permitted by law, you understand and agree that as a condition for payment to you of the severance benefits herein described, the terms and contents of this letter agreement, and the contents of the negotiations and discussions resulting in this letter agreement, shall be maintained as confidential by you and your agents and representatives and shall not be disclosed to any third party except to the extent required by federal or state law or as otherwise agreed to in writing by the Company. 11. NATURE OF AGREEMENT - You understand and agree that this letter agreement is a severance agreement and does not constitute an admission of liability or wrongdoing on the part of the Company. 39 12. ACKNOWLEDGMENTS - You acknowledge that you have been given at least twenty one (21) days to consider this letter agreement, including Attachment A, and that the Company advised you to consult with an attorney of your own choosing prior to signing this letter agreement. You understand that you may revoke this letter agreement by giving written notice received by the VP, Human Resources, for a period of seven (7) days after you sign this letter agreement, and the letter agreement shall not be effective or enforceable until the expiration of this seven (7) day revocation period. 13. VOLUNTARY ASSENT - You affirm that no other promises or agreements of any kind have been made to or with you by any person or entity whatsoever to cause you to sign this letter agreement, and that you fully understand the meaning and intent of this letter agreement. You state and represent that you have had an opportunity to fully discuss and review the terms of this letter agreement, including Attachment A, with an attorney. You further state and represent that you have carefully read this letter agreement, including Attachment A, understand the contents herein, freely and voluntarily assent to all of the terms and conditions hereof, and sign your name of your own free act. 14. APPLICABLE LAW - This agreement shall be interpreted and construed by the laws of the Commonwealth of Massachusetts, without regard to conflict of laws provisions. You hereby irrevocably submit to and acknowledge and recognize the jurisdiction of the courts of the Commonwealth of Massachusetts, or if appropriate, a federal court located in Massachusetts (which courts, for purposes of this agreement, are the only courts of competent jurisdiction), over any suit, action or other proceeding arising out of, under or in connection with this letter agreement or the subject matter hereof. 15. ENTIRE AGREEMENT - This letter agreement, including Attachment A, contains and constitutes the entire understanding and agreement between the parties hereto with respect to your severance benefits and the settlement of claims against the Company and cancels all previous oral and written negotiations, agreements, commitments, writings in connection therewith. If you have any questions about the matters covered in this letter, please call Melissa Cruz. Sincerely, By: /s/ Melissa Cruz ------------------------------------ Melissa Cruz Executive Vice President and CFO I hereby agree to the terms and conditions set forth above and in Attachment A. I have been given at least twenty one (21) days to consider this letter agreement (including Attachment A) and I have chosen to execute this on the date below. I intend that this letter agreement will become a binding agreement between me and the Company if I do not revoke my acceptance in seven (7) days. /s/ John F. Hamilton Date 5/6/02 - ----------------------------- -------------------------------------- 40 ATTACHMENT A Termination of employment with Concord Communications, Inc. (the "Company") will be effective November 6, 2002. Your final paycheck will be paid on November 15, 2002. Concord will pay you for the period from May 6, 2002 to November 6, 2002 at an annualized base salary rate of $190,000, provided however that this base salary rate will increase to $210,000 (annualized) on July 1, 2002. In addition, Concord Communications, Inc. will pay your severance as described in the paragraph entitled "Severance" below, payable with the normal payroll cycle. You will receive commissions at your normal commission rate for the period up to May 6, 2002. You will receive no commissions or payment of any kind after May 6, 2002 except as expressly described in the letter agreement or this attachment. SEVERANCE. Effective on the Termination Date (November 6, 2002), Concord will pay to you your regular base salary (annualized at $210,000) until such time as you have accepted employment; provided that such amounts will in no event be less than one month's base salary, nor more than six (6) months' base salary. You agree to notify Concord immediately upon acceptance of employment. All amounts will be payable on the normal payroll cycle. Please note that, in order to receive the severance, the attached Release must be signed. Any payments made to you under this paragraph are subject to applicable, if any, federal, state and local withholding, payroll and other taxes. Provided that you sign the letter agreement and the release included in that document, you will receive the medical, dental and other benefits normally provided to Concord employees from the date of this letter until the termination of your payments from Concord. Please be advised that all property of the Company must be returned to Concord immediately including, without limitation, all computer equipment, computer accessories, client database, demonstration software, business cards, software programs, keys, credit cards, customer lists, price lists, promotional materials, files, reports, data memoranda, sales brochures, telephone charge cards, manuals, diskettes, business or marketing plans, and reports, which you are holding or using or which are under your control. Please contact Tom Hopkins at 508-303-4365 to make arrangements to return all materials and equipment. Please submit any outstanding expense reports for approval by May 31,2002. All expense reports will be processed immediately and reimbursement checks, if required, will be mailed directly to your residence. If expense reports are not submitted by that time, they may not be approved and processed timely. Contingent upon signing the attached release, your medical insurances (if applicable) will continue through the severance period. You will receive separate notification of your eligibility for COBRA insurance continuation. Please contact Dan Williams no later than 60 days from the termination date regarding your stock options, if applicable. Please contact Cara Leger no later than 60 days from your termination date regarding your 401(k) plan, if applicable. In addition, please be informed that your obligations under the Employee Confidentiality Agreement, which you signed on your first date of employment, shall survive the termination of your employment regardless of the manner of such termination and shall be binding upon your heirs, assigns, personal representatives, executors, and administrators. 41 -----END PRIVACY-ENHANCED MESSAGE-----