Concord Communications, Inc. Form 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington DC 20549
Form 10-K
|
|
|
þ |
|
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
|
|
|
For the fiscal year ended December 31, 2004 |
|
OR |
|
o
|
|
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) |
400 Nickerson Road
Marlborough, Massachusetts 01752
(508) 460-4646
(Address and telephone number of principal executive
offices)
Securities registered pursuant to Section 12(b) of the
Act: None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, par value $0.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act
Rule 12b-2): Yes þ No o
The aggregate market value of the voting stock held by
non-affiliates of the Registrant, based on the closing sale
price of the registrants common stock on June 30,
2004, as reported on the NASDAQ National Market was
approximately $208,801,000
The number of shares outstanding of Common Stock as of
March 11, 2005 was 18,494,361.
DOCUMENTS INCORPORATED BY REFERENCE
|
|
|
Document |
|
Form 10-K Reference |
|
|
|
Portions of the Registrants Proxy Statement for its Annual
Meeting of Stockholders to be held on May 4, 2005 to be
filed within 120 days of the end of the fiscal year ended
December 31, 2004. |
|
Part III, Items 10, 11, 12 and 14 |
TABLE OF CONTENTS
PART I
This document contains forward-looking statements. Any
statements contained herein that do not describe historical
facts are forward-looking statements. Concord Communications,
Inc. (Concord) makes such forward-looking statements
under the provisions of the safe harbor provided in
Section 21E of the Securities Exchange Act of 1934. The
forward-looking statements contained herein are based on current
expectations, but are subject to a number of risks and
uncertainties. Concords actual future results may differ
significantly from those stated in any forward-looking
statements. Factors that may cause such differences include, but
are not limited to, the factors discussed elsewhere in this
Form 10-K under the heading Factors That Could Affect
Future Results.
Overview and Recent Acquisitions
Concord provides a Business Service Management (BSM)
software solution to enterprises and service providers.
Concords software solution, the eHealth® Suite,
|
|
|
|
|
maps information technology (IT) services to
business needs, |
|
|
|
measures the actual end user experience; and |
|
|
|
manages application, system and network infrastructures. |
On February 22, 2005, we completed the acquisition of
Aprisma Holdings, Inc. Prior to its acquisition by Concord,
Aprisma Holdings, Inc. was a privately held software company
owned by Gores Technology Group and its operating subsidiary,
Aprisma Management Technologies, Inc. (Aprisma). The
purchase price was $93.0 million, which payment was
adjusted by (i) the amount of net debt owing by Aprisma to
certain of its lenders at the time of closing (which debt will
be paid off by Concord) and (ii) certain payment
obligations owing by Aprisma under its equity participation
plan. Concords cash payment to acquire Aprisma on
February 22, 2005 was approximately $82.4 million. The
acquisition was completed in the first quarter of 2005 and will
be accounted for under the purchase method of accounting in the
three months ended March 31, 2005 (see Note 14 of the
Notes to Consolidated Financial Statements).
Aprismas SPECTRUM® software manages the availability
of IT infrastructures and the business services that rely on
them. Concord believes that strategically combining the two
companies complementary technologies will enable Concord
to expand its ability to deliver a new generation of intelligent
BSM software that maps IT services to business processes,
measures the actual end-use experience, and manages the entire
IT infrastructure. Aprisma, which profitably generated
approxmately $43.8 million in 2004 revenues, will operate
as a business within Concord.
On January 5, 2005, we completed the acquisition of
privately held Vitel Software, Incorporated. Vitels
software enables enterprises and service providers to manage the
performance of voice networks and messaging systems that are
either internet protocol-based, time division
multiplexing-based, or include a hybrid of both. In addition,
Concords eHealth for Voice provides a unified view into
the performance of voice networks built on equipment from
multiple vendors such as market leaders Avaya, Cisco, and Nortel
Networks. The purchase price was $4.1 million, including
$0.1 million in direct costs of acquisition and was
substantially paid in cash during the three months ending
March 31, 2005. The acquisition will be accounted for under
the purchase method of accounting in the three months ending
March 31, 2005. (see Note 14 of the Notes to
Consolidated Financial Statements).
On July 17, 2003, we completed the acquisition of privately
held netViz. netVizs software enables users to visualize
business processes and allows them to map relationships within
the supporting technology infrastructure through data-driven
icons. Consideration for the acquisition totaled
$10.3 million, including transaction costs of
$0.3 million. The consideration paid to netVizs
stockholders consisted of $5.0 million in cash paid at
closing and $5.0 million of our common stock. (see
Note 2 of the Notes to Consolidated Financial Statements).
1
We were organized as a Massachusetts corporation in 1980 under
the name Concord Data Systems, Inc., and changed our name to
Concord Communications, Inc. in 1986. Our principal executive
offices are located at 400 Nickerson Road, Marlboro,
Massachusetts 01752 and our telephone number is 508-460-4646.
Our web site is http://www.concord.com/. We make
available, free of charge, through our website, Annual Reports
on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, and amendments to those reports filed
or furnished as soon as reasonably practicable after we have
filed them with the Securities and Exchange Commission. The
information posted on our web site is not incorporated into this
Annual Report. The public can also obtain access to such reports
at the Securities and Exchange Commissions Public
Reference Room at 450 Fifth Street, NW, Washington, DC
20549, by calling the SEC at 1-800-SEC-0330 or by accessing the
SECs website which is http://www.sec.gov/.
Business Service Management Market
Business process automation has resulted in tremendous increases
in productivity and profitability, but has also presented new
business challenges. For one, maintaining the availability and
performance of business services has become more critical.
Specifically, Line of Business (LOB) and IT managers
require knowledge of the following metrics to understand how IT
relates to business services provided:
|
|
|
|
|
Availability of the services is critical, because a service that
is not available has a detrimental effect on the business; |
|
|
|
Performance of the services matters because slow services have
an economic cost and may indicate that more serious problems are
to follow; and |
|
|
|
Service capacity. Excess service capacity is expensive. However,
inadequate capacity leads to shortages or outages. IT managers
rely on capacity data to closely manage expenses as well as to
plan additional investments necessary to provide particular
levels of service. |
Business Service Management (BSM) solutions provide
knowledge about availability, performance and service capacity.
These solutions link IT services to business needs. They help
detect problems before end users are impacted. They enable IT
managers and their business counterparts to speak a common
language. They also help IT managers and the LOB manage their
portfolio of IT services.
Using solutions to holistically view business services, rather
than narrowly view the infrastructure and application
components, helps companies reduce costs and increase revenue by
maintaining higher availability and better performance of
business services. The core benefits of BSM include:
|
|
|
|
|
Maintaining business service delivery by quickly identifying and
correcting IT service problems; |
|
|
|
Creating a high level of customer service and satisfaction; |
|
|
|
Sustaining the companys revenue stream; |
|
|
|
Creating a unified business focus for the whole
company management, business units, and the IT staff; |
|
|
|
Improving communication between the IT department and the
business units; and |
|
|
|
Increasing the value of the IT resource. |
General
Concord develops, markets and supports a BSM software solution,
the eHealth® Suite. The eHealth Suite of
products is designed for three main functions: map, measure, and
manage.
|
|
|
|
|
MAP eHealth maps IT services to business
processes and delivers an executive business view to key
performance indicators. |
|
|
|
MEASURE eHealth measures the actual end-user
experience. This is the most effective method to determine how
well a business service is being delivered. Observational
testing is one method of |
2
|
|
|
|
|
directly measuring actual user experience, while synthetic
testing simulates the same. Concords eHealth
delivers both of these measurement capabilities, allowing
organizations to see the impact of IT services on the business. |
|
|
|
MANAGE eHealth manages the end-to-end IT
infrastructure and enables IT organizations to move away from
the stove-pipe management frameworks of the past. As
a result, IT organizations are better able to meet or exceed
service level agreements (SLAs) with their line of
business customers, increase uptime, accelerate performance and
reduce costs. |
Market Segments Served
Specific business market segments that we target are enterprises
across a number of key verticals and service providers.
|
|
|
|
|
Enterprises use our eHealth® Suite of products to
protect their revenue by ensuring that critical applications are
available when needed. Our software also allows them to reduce
expenses by limiting the need for incremental IT administrators
and equipment as their business and IT infrastructures expand.
IT personnel can also use our software to plan the future
capacity of their IT infrastructure. Concord sells into 17
different vertical markets, with a focus on financial services,
insurance, manufacturing, and retail. Government is also a key
target market for Concord. |
|
|
|
Service providers include both managed service providers and
traditional telecommunication companies. Managed service
providers are those organizations that provide IT services to
enterprises for a fee. These companies use the
eHealth® Suite to monitor compliance with service
level agreements, maintain the quality of their services and
introduce new services for their business customers.
Telecommunication carriers that provide services like cable,
broadband internet and wireless services to residential and
commercial businesses rely on the eHealth® Suite to
maintain the quality of their services such as network and
bandwidth services, web hosting, data center/co-location
services or to provide internet services. |
We market to our customers through a direct sales force, sales
agents, value-added resellers, distributors, managed service
providers and telecommunication carriers. As of
December 31, 2004, we had over 3,000 eHealth customer
accounts operating in and serving a broad variety of industries.
Additionally, we had several thousand netViz customers, also
with a broad industry vertical mix. One North American
telecommunications customer accounted for 10.1% of revenues in
2004 and no individual customer or reseller accounted for more
than 10% of revenues in 2003 and 2002.
The eHealth® Solution
Our eHealth® Suite software is automated, scalable,
web-based management software for business-critical
applications, systems, and networks. We work to incorporate the
following distinctive features into our software:
Easy to Deploy and Manage. Often, our software can
be installed quickly. Once installed, our products have logical
drilldowns and their use is intuitive. Our reporting provides
easy to understand metrics with information about critical areas
of the infrastructure and related services. The
eHealth® Suite is designed to simplify management of
the heterogeneous mix of network devices, client and server
operating systems, hardware platforms, technologies, and
applications that typically comprise todays IT
infrastructures.
Wide Technology Coverage. eHealth®
embeds algorithms, intelligence, knowledge, and analysis for
hundreds of different devices and many applications. This saves
customers enormous amounts of time in collecting detailed data
from various devices. It also quickly enables management across
a broad spectrum of industry standard applications like
Microsoft Exchange and Information Internet Server; open source
Apache; CRM systems from Siebel; application services like
Citrix; industry standard operating systems like UNIX, Microsoft
Windows NT and Windows 2000, and Linux; and industry
standard networking technologies such as ATM, Frame Relay, VoIP,
Quality of Service (QoS), DSL, cable, and wireless.
3
Flexible Reporting. eHealth can generate
many types of reports for multiple levels of management. For
example, chief information officers can get a general overview
of application availability and performance while technical
personnel can get detailed reports about specific transactions,
client and server components, hardware equipment components,
bandwidth components and network services.
Highly Scalable. eHealth is scaleable to
meet the demands of management as an organizations IT
infrastructure expands. Add-on software licenses or additional
agent software can be purchased as a customer grows and expands.
As expansion occurs, eHealth is capable of data
collection, analysis, and reporting for up to 80,000 elements by
a single console. Our distributed architecture allows
configurations, viewable from a single console that supports
collection and reporting of up to 1,000,000 elements.
Products and Technology
eHealth contains three solution sets designed to manage
applications, servers and networks. eHealth® also
contains a number of suite-wide products that operate across
applications, networks and servers such as the Business Service
Console and Live Health.
eHealth® E2E Console
eHealth® E2E console is the centerpiece of the
eHealth Suite. It provides a centralized view of
availability and performance data across applications, systems
and networks. It is a graphical user interface for end-users and
administrators that combines an efficient engine for collecting
data, an industry standard database, and flexible reporting
capabilities. It analyzes collected information, along with the
raw data, and stores the information in the database. This
analysis and information is available via the console, and it is
also accessible through a web based user interface or through
scheduled reports.
eHealth® for Applications
This solution enables IT personnel to manage the availability
and performance of applications through the following methods:
|
|
|
|
|
Synthetic Testing is the execution of repeatable,
scheduled simulated application transactions. Active testing can
take place at the desktop, server, or router, providing
availability or performance data about an application from these
strategic locations in customers infrastructures. |
|
|
|
Observational Monitoring collects application
performance information from actual users in a non-intrusive,
observational manner; it occurs at the client desktop and
measures the actual experience of the end user. |
|
|
|
Managing Applications on Servers helps IT
personnel optimize the performance and availability of
applications running on systems, such as Apache, Microsoft
Exchange, SQL Server and Oracle. Our solution works by
collecting application metrics from eHealth®
application insight modules residing on application servers. |
Using the methods described for application management, IT
personnel can analyze the historical availability and
performance of applications. IT personnel can also analyze the
availability and performance through our eHealth®
Live Health product for real-time detection of degrading
performance and declining availability.
eHealth® for Systems provides
information about servers and systems. It also enables IT
personnel to manage the performance and availability of these
devices and collects metrics such as available memory and disk
space from Concords and other third-party agents. The
information is stored in the database. Comprehensive analysis is
then performed on various combinations of metrics and time
periods. The information is also delivered to Concords
eHealth® Live Health application for real-time
detection of system failures, potential outages, and delays.
eHealth® for Networks
manages the performance and availability of key network devices
such as LANs, WANs, Frame Relay, ATM, QoS, Wireless LAN, DSL,
VoIP, cable technologies and Remote Ac-
4
cess Equipment. This product discovers, analyzes, and reports on
network resources. This allows network managers to track
performance, plan capacity, and detect sources of service delay.
This permits network managers to understand service levels,
proactively address potential network failures, manage bandwidth
and capacity, watch for security violations, and understand the
usage patterns of the network and the networks various
elements. It integrates with operational support systems
(OSS) from Lucent, Newbridge, Hewlett-Packard,
Micromuse, and Ciscos VPN Solutions Center.
eHealth® Suite Wide Solutions
|
|
|
|
|
eHealth® Live
Health identifies outages, potential outages
and sources of delay across applications in real time, enabling
rapid problem diagnosis. eHealth® Live Health
provides out-of-the-box profiles that detect IT slowdowns and
service degradation. |
|
|
|
Distributed eHealth® runs and
manages eHealth® applications across multiple
eHealth® systems as if they are one system. Our
distributed architecture solution allows configurations,
viewable from a single console, which supports collection and
reporting of up to 1,000,000 data elements. |
|
|
|
Netviz® enables users to
visualize business processes and allows them to map
relationships within the supporting technology infrastructure
through data-driven icons. |
|
|
|
Spectrum® manages the health and
performance of networks and the business services that rely on
them, including performing root cause analysis, event
correlation, service modeling, and topological discovery and
display. |
|
|
|
Vitel IVIZE Product enables
enterprises and service providers to manage the performance of
next-generation IP and legacy voice networks and messaging
systems, including voice mail, from multiple vendors. |
Sales and Marketing
We sell our products in the United States through a direct sales
force, sales agents, and value added resellers
(VARs). Internationally we sell primarily through
distributors.
As of December 31, 2004, we had 30 North America sales
teams, each composed of one direct sales person and a shared
regional resource pool of technical pre-sales people. The North
America sales teams rolled up into 8 regions targeting the
following four divisions: East, Central, West, and Federal
Government. We had 25 international sales teams, also composed
of one direct sales person and three shared regional resource
pools of technical pre-sales people. The international sales
teams rolled up into 7 regions targeting the following three
geographic divisions: Europe, Middle East and Africa; Asia/
Pacific; and Latin America. In addition, we employed 25 inside
sales, technical and management individuals who support both the
North America and International sales teams. As of
December 31, 2004, we employed 125 sales personnel.
In 2004, we had relationships with 11 North American VARs and 64
international VARs. It is the responsibility of each sales team
to manage all sales within its geographic territory by managing
sales agents, VARs, distributors, network service providers and
outsourcers, as well as selling directly to customers. In 2003,
we introduced the Concord Authorized Reseller (CAR)
program, which provides for a fixed annual fee, product,
services, and sales training to our VARs and distributors. This
program was set up to improve the ability of the indirect
channel to better penetrate international markets, such as
Europe and the Asia/ Pacific region.
Additionally, we had relationships with 228 telecommunication
carriers and managed service providers. These carriers and
service providers offer our products as part of their service
offerings. As of December 31, 2004, we also had
relationships with development partners that work with our
direct sales force, including Alcatel SA, Cap Gemini
Ernst & Young, Cisco Systems, Inc., Dimension Data,
Hewlett-Packard Co., KPMG Consulting, Juniper Networks, Inc.,
Nortel Networks Corp., and Siemens AG. We also have a
professional services referral program aimed at our key
network-consulting partners. Under this program, we will provide
professional services through these partners directly to our
customers.
5
We generate sales leads through seminars, trade shows, internet
postings, press articles, referrals, mass mailings and cold
calling as well as through relationships with sales agents,
distributors, VARs, network service providers and outsourcers.
As of December 31, 2004, we employed 34 marketing personnel
who position, promote, and market our products. These
individuals are engaged in a variety of activities, including
direct marketing, public relations, tradeshows, advertising,
internet postings, and seminars.
Customer Service
Our post-sales support organization is responsible for providing
ongoing technical support, professional service and training for
our customers. For an annual maintenance fee, a customer
receives telephone, email, and web-based support, as well as
updated product releases. We offer support
coverage 24 hours a day, seven days a week to
customers for an additional annual fee. We offer a web-based
tool, Service Express, which enables customers to find, via our
website, answers to questions and solutions to technical support
issues. We also provide a toll-free customer support line to all
customers via our call center located in the United States and
Australia. In early 2003, we opened a call center in Australia
in order to improve our ability to support our customers and
resellers in the Asia-Pacific region. Support personnel are on
call to answer the technical support calls and generally provide
same-day responses to questions that cannot be resolved during
the initial call. All calls are logged, opened, tracked, and
closed with regular updates to the customer, our sales teams,
and our executive management team.
As of December 31, 2004, we employed 42 technical
post-sales support personnel and 4 inside sales representatives.
In addition, we had 48 professional service and training
personnel who provide services to our customers on a
fee-for-service basis.
Research and Product Development
Our future success depends in large part on our ability to
enhance existing products and develop new products that maintain
technological competitiveness and deliver value to existing and
new customers. We have made and intend to continue to make
substantial investments in product development. Extensive
product development input is obtained through customers; our
monitoring of end user needs and changes in the marketplace.
During 2002, we introduced a new distributed infrastructure with
a focus on large-scale installations and ease of administration.
The introductions of new technologies like DSL, VPN, SAN,
wireless, and others rounded out the end-to-end solution set in
that same year. During 2003, we integrated the Oracle database
software into our products, which enabled us to replace the
Ingres database with the Oracle product. We now offer one single
database solution to our customers. We also added significant
enhancements to our wireless offerings and introduced our VoIP
product. In 2004, we developed and released the Business
Services Console, supplementing our current E2E Console, by
providing our customers senior managers with a top-level
view of key IT business services.
Research and product development expenses, excluding in process
research & development (IPRD) expenses,
were $25.2 million, $22.8 million and
$21.9 million in 2004, 2003 and 2002, respectively,
representing 23.7%, 21.9% and 23.3% of total revenues for those
3 years. IPRD expenses were $0.1 million, $1.0 and $0
in 2004, 2003 and 2002, respectively, representing 0.1%, 1.0%
and 0.0% of total revenues for those 3 years. IPRD in 2004
relates to the licensing of components of Tavves
technology, which will become redundant with the acquisition of
Aprisma, as this acquired company has similar technology.
We anticipate that we will continue to commit substantial
resources to research and development in the future and that
product development expenses may increase in absolute dollars in
future periods. To date, our development efforts have not
resulted in any capitalized software development costs. As of
December 31, 2004, our product development organization
consisted of 116 people.
6
License and Service Revenues
Our revenues are generated from license revenues and service
revenues. License revenues represent fees earned from licensing
our software. License revenues accounted for 47.1%, 52.1% and
54.6% of total revenues in 2004, 2003 and 2002, respectively.
Concords service revenues consist of fees for maintenance,
training and professional services. Service revenues accounted
for 52.9% 47.9% and 45.4% of total revenues in 2004, 2003 and
2002, respectively. See Results of Operations in the
Managements Discussion and Analysis of Financial Condition
and Results of Operations for a more complete discussion of
license and service revenues.
Competition
We compete with the following types of companies:
|
|
|
(i) application performance software vendors such as
Mercury Interactive; |
|
|
(ii) fault management software vendors such as
Hewlett-Packard Company, Micromuse, Inc., and Smarts (acquired
by EMC); |
|
|
(iii) enterprise management software, framework and
platform providers such as BMC Software, Inc. and Computer
Associates, Inc; |
|
|
(iv) large, well established network management framework
companies such as International Business Machines Corporation
and Lucent Technologies Inc.; |
|
|
(v) wireless management vendors like Valient Corporation
and TTI Team Telecom International Ltd.; |
|
|
(vi) probe vendors such as NetScout Systems, Inc.; and |
|
|
(vii) reporting niche vendors such as InfoVista and Visual
Networks, Inc. |
Additional competitors, including large networking or
telecommunication equipment manufacturers, telecommunications
service providers, and computer hardware and software companies,
may enter this market. In addition, one or more of our customers
may develop competing products internally, or one or more of the
companies we have developed relationships with, such as the
network management platform developers and probe vendors, may
develop products that compete more directly with our products.
Many of our current and prospective competitors have
significantly greater financial, sales and marketing, technical
and other resources than we do. As a result, these competitors
may be able to devote greater resources than us to the
development, promotion, sale, and support of their products.
Moreover, these companies may introduce additional products that
are competitive with or better than our products or may enter
into strategic relationships to offer better products than those
we currently offer. Our products may not effectively compete
with such new products. In addition to the risk that other
products will be developed, current and prospective competitors
may be able to market, sell and support their products more
effectively.
Intellectual Property and Other Proprietary Rights
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. However, use of contractual, statutory
and common law protections of our proprietary technologies offer
only limited protection.
We have thirteen issued U.S. patents, twelve pending
U.S. patent applications, and various foreign counterparts.
We cannot ensure that patents will issue from our pending
applications or from any future applications or that, if issued,
any claims allowed will be sufficiently broad to protect our
technology. In addition, we cannot ensure that any patents that
have been or may be issued will not be challenged, invalidated
or circumvented, or that any rights granted 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.
7
We also continue 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 or otherwise misappropriate 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.
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 shrink-wrap licenses)
that are not signed by licensees. The law governing the
enforceability of shrink-wrap license agreements is not settled
in most jurisdictions. There can be no guarantee that we would
achieve success in enforcing one or more shrink-wrap license
agreements if we sought to do so in a court of law.
Revenue by Geographic region
The following table presents Concords revenue by major
geographic regions (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December, 31 | |
|
|
| |
|
|
2004 | |
|
Percent Change | |
|
2003 | |
|
Percent Change | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
United States
|
|
$ |
69,549 |
|
|
|
17.2 |
% |
|
$ |
59,325 |
|
|
|
2.6 |
% |
|
$ |
57,812 |
|
United Kingdom
|
|
|
7,526 |
|
|
|
(27.7 |
)% |
|
|
10,412 |
|
|
|
81.7 |
% |
|
|
5,731 |
|
Europe (excluding the U.K.)
|
|
|
16,112 |
|
|
|
(19.1 |
)% |
|
|
19,907 |
|
|
|
19.6 |
% |
|
|
16,640 |
|
Rest of the World
|
|
|
13,001 |
|
|
|
(9.8 |
)% |
|
|
14,419 |
|
|
|
5.5 |
% |
|
|
13,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
106,188 |
|
|
|
2.0 |
% |
|
$ |
104,063 |
|
|
|
10.9 |
% |
|
$ |
93,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
65.5 |
% |
|
|
|
|
|
|
57.0 |
% |
|
|
|
|
|
|
61.6 |
% |
United Kingdom
|
|
|
7.1 |
% |
|
|
|
|
|
|
10.0 |
% |
|
|
|
|
|
|
6.1 |
% |
Europe (excluding the U.K.)
|
|
|
15.2 |
% |
|
|
|
|
|
|
19.1 |
% |
|
|
|
|
|
|
17.7 |
% |
Rest of the World
|
|
|
12.2 |
% |
|
|
|
|
|
|
13.9 |
% |
|
|
|
|
|
|
14.6 |
% |
Revenues are assigned to a country and geographic region based
upon the location of our salespeople, which is generally the
same as the country and geographic location of the customer. No
one country, except the United States, accounted for greater
than 10% of total revenues in 2004 and 2002. No one country,
except the United States and the United Kingdom, accounted for
greater than 10% of total revenues in 2003.
Business Segment Data
Enterprise customers comprised 54.4%, 55.0% and 57.8% of
revenues in 2004, 2003 and 2002, respectively. Managed service
providers and telecommunication carriers comprised 45.6%, 45.0%
and 42.2% of revenues in 2004, 2003 and 2002, respectively. See
Note 13 of Notes to Consolidated Financial Statements for
information regarding revenue and profitability by segment. Also
see Results of Operations in the Managements
Discussion and Analysis of Financial Condition and Results of
Operations for a more complete discussion of segment revenues
and profitability.
Employees
As of December 31, 2004, we had a total of 443 employees,
all but 59 of whom were based in the United States. Of the
total, 116 were in research and development, 94 were in customer
service, 125 were in sales, 34 were in marketing, 35 were in
operations and information technology, and 39 were in finance,
human resources and administration. Our future performance
depends in part, upon the continued service of our key
engineering, technical support, and sales personnel. Competition
for such personnel can be intense and we cannot assure that we
will be successful in attracting or retaining such personnel in
the future. None of our employees are represented by a labor
union; however, in France, our employees are represented by
workers councils or other representational organizations.
We have not experienced any work stoppages and believe that our
employee relations are good.
8
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 provided in Section 21E of the
Securities Exchange Act of 1934. In particular, statements
contained in Managements 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 Concords
ability to compete successfully; sustenance of revenue growth
both domestically and internationally; the size, scope and
description of Concords 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. Concords actual future results may differ
significantly from those stated in any forward-looking
statements. Factors that may cause such differences include, but
are not limited to, the factors discussed below.
|
|
|
Our future operating results are uncertain. |
We offer a Business Service Management (BSM)
software solution to enterprise customers, managed service
providers, and telecommunication carriers. This software, the
eHealth® Suite, maps information technology
(IT) services to business needs, measures the actual
end user experience, and manages application, system and network
infrastructures. We have a limited operating history in the BSM
market upon which we can evaluate our business. This market is
highly competitive, rapidly evolving, and targeted by many
competitors with longer operating histories in the BSM market
and greater resources. Our limited operating history, intense
competition in the market, and an uncertain economic climate
make the accurate prediction of future results of operations
difficult or impossible.
In addition to marketing and selling the eHealth®
Suite in the BSM market, we acquired Aprisma in February 2005, a
privately held software company, that also provides a software
solution for the BSM market. Aprismas Spectrum®
software manages the health and performance of networks and the
business services that rely on them, including performing root
cause analysis, event correlation, service modeling, and
topological discovery and display. While we intend to provide a
solution for the BSM market that maximizes the functionality of
both the eHealth® Suite and Spectrum®
software, our limited operating history marketing and selling
this integrated solution, the risks associated with integrating
both the companies and the software products, and intense
competition in the market make it difficult to predict our
future results of operations.
In addition to sales of our eHealth® Suite,
we will continue to sell netViz® products, which
enable customers to visualize business processes and map
relationships within the supporting technology infrastructure
through data-driven icons. On January 5, 2005, Concord
acquired Vitel, a provider of voice performance management
solutions, which enables enterprises and service providers to
manage the performance of next-generation IP and legacy voice
network and messaging systems, including voice mail, from
multiple vendors. We have a limited operating history in the
product markets of netViz and Vitel, which makes the accurate
prediction of future results of operations difficult or
impossible.
Our future operating results must be considered in light of
these factors.
9
|
|
|
Our acquisitions of netViz Corporation and Vitel Software,
Inc. presents many risks, and we may not realize the financial
and strategic goals we anticipate at the time of these
acquisitions. |
On July 15, 2003, we acquired netViz Corporation and on
January 5, 2005, we acquired Vitel Software, Inc. The
acquisition of these companies provides us the opportunities to
extend our capabilities in the data driven icon and voice
network performance and management markets. However, we may fail
to:
|
|
|
|
|
successfully integrate the acquired products; |
|
|
|
successfully integrate personnel and management structures; |
|
|
|
provide products or services that meet the demands of these
markets; |
|
|
|
develop an effective business strategy for these markets; |
|
|
|
retain key customers; |
|
|
|
retain key employees; |
|
|
|
effectively control costs associated with the integration
(including research and development costs); |
|
|
|
meet expected timelines for product development and
commercialization; and |
|
|
|
account for exposure to liabilities of the acquired companies
that were not known or accurately evaluated by us prior to
consummating the acquisitions. |
|
|
|
Our acquisition of Aprisma Management Technologies, Inc.
presents many risks, and we may not realize the financial and
strategic goals we anticipate at the time of the acquisition. |
On February 22, 2005, we acquired Aprisma Management
Technologies, Inc. The acquisition of Aprisma will enable us to
expand our ability to deliver a new generation of intelligent
BSM software that maps information technology services to
business processes, measures the actual end-user experience, and
manages the entire IT infrastructure. The achievement of our
financial and strategic goals from this acquisition depends on
the successful integration of the two companies and our failure
to successfully integrate could adversely affect our business.
We must integrate our operations, people, and technology.
However, we may fail to:
|
|
|
|
|
successfully integrate the acquired products; |
|
|
|
implement a successful sales strategy for the integrated company; |
|
|
|
attract and retain key distribution partners; |
|
|
|
successfully integrate personnel and management structures; |
|
|
|
provide products or services that meet the demands of the market; |
|
|
|
gain expected efficiencies and other financial benefits from the
integrated company; |
|
|
|
retain key employees; |
|
|
|
effectively control costs associated with the integration of
these companies (including research and development costs); |
|
|
|
meet expected timelines for product development and
commercialization; and |
|
|
|
account for exposure to liabilities of Aprisma that were not
known or accurately evaluated by us prior to consummating the
acquisition. |
|
|
|
We cannot ensure that our revenues will grow or that we will
again be profitable. |
We have expended considerable resources to the research and
development of new technologies and new or improved product
features that have enabled us to retain existing customers and
penetrate new markets both in the United States and
internationally. Despite this expenditure of resources, we
cannot ensure that we
10
can generate revenue growth on a quarterly or annual basis, or
that we can achieve or sustain any revenue growth in the future.
In an effort to again achieve and maintain profitability and
adequately fund research and development, we continue to work to
reduce our operating expenses while maintaining funding for
product development. 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; |
|
|
|
increase sales staff and sales training programs; |
|
|
|
develop new distribution channels; |
|
|
|
broaden our customer support capabilities; and |
|
|
|
respond to unforeseeable economic or business circumstances. |
To the extent that increases in our operating expenses precede
or are not followed by increased revenues, our goal of attaining
profitability will be at risk.
|
|
|
Our operating results may fluctuate and you could lose the
value of your investment. |
We are likely to experience significant fluctuations in our
operating results caused by many factors, including, but not
limited to:
|
|
|
|
|
changes in the demand for our products by customers or groups 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 (including the fiscal
year end); |
|
|
|
difficulties penetrating new markets for our products; |
|
|
|
costs associated with the integration of acquired companies
and/or new technologies; |
|
|
|
our customers spending patterns and budgetary resources
for our products; |
|
|
|
geopolitical conditions in the world; |
|
|
|
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 |
|
|
|
changes in accounting rules. |
Though our service 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.
11
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.
|
|
|
We have increased our leverage as a result of the sale of the
3.0% Convertible Senior Notes due 2023. |
In connection with the sale of the Notes, we have incurred
$86.25 million of indebtedness. As a result of this
indebtedness, our interest payment obligations have increased.
The degree to which we are now leveraged could adversely affect
our ability to obtain further financing for working capital,
acquisitions or other purposes and could make us more vulnerable
to industry downturns and competitive pressures. Our ability to
meet our debt service obligations will be dependent upon our
future performance, which may be subject to the financial,
business and other factors affecting our operations, many of
which are beyond our control.
|
|
|
Our debt service obligations may adversely affect our cash
flow. |
A higher level of indebtedness increases the risk that we may
default on our debt obligations. We cannot assure that we will
be able to generate sufficient cash flow to pay the interest on
our debt or that future working capital, borrowings or equity
financing will be available to pay or refinance such debt. If we
are unable to generate sufficient cash flow to pay the interest
on our debt, we may have to delay or curtail our research and
development programs. The level of our indebtedness among other
things, could:
|
|
|
|
|
make it difficult for us to make payments on the Notes; |
|
|
|
make it difficult for us to obtain any necessary financing in
the future for working capital, capital expenditures, debt
service requirements or other purposes; |
|
|
|
limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we compete; and |
|
|
|
make us more vulnerable in the event of a downturn in our
business. |
|
|
|
Our success is dependent upon sales to telecommunication
carriers and managed service providers. |
We derive and likely will continue to derive a significant
portion of our revenues from the sales of our products to
telecommunication carriers and managed service providers. We
expect that revenue from telecommunication carriers and managed
service providers will be 40% to 50% of total revenues. Despite
our expectations, these markets have been negatively affected by
a general weakness in capital spending; making future results
difficult to predict. The volume of sales of our products and
services to telecommunication carriers and managed service
providers may increase at a slower rate than we expect or our
sales to these customers may decrease.
|
|
|
The market for business service management software is an
emerging market and if we fail to assess it accurately, our
business could suffer. |
The market is in an early stage of development. Targeting this
market is central to the development and marketing of our
products, but this market is emerging, and it is difficult to
assess:
|
|
|
|
|
the size of the market; |
|
|
|
the appropriate features and prices for products to address this
market; |
|
|
|
the optimal distribution strategy; and |
|
|
|
the market that will develop and the impact of large competitors
within the market. |
Presently, this market is very competitive and we are in direct
competition with larger companies that have substantially
greater resources to fund the development of competitive
products and the creation and
12
maintenance of direct and indirect sales channels. The rapidly
evolving BSM market and the continued presence of larger
companies in this market may impact our ability to retain or
increase our market share.
|
|
|
Increased royalty costs and our reliance on third party
technology partners could adversely impact our business. |
We license from third parties, generally on a non-exclusive
basis, certain technologies used in our products. The
incorporation of third party technology is an important
component of our product development and an increase in royalty
costs associated with our distribution of third party
technologies could impact our business. Additionally, the
termination of any such licenses, or the failure of third-party
licensors to adequately maintain or update their products, could
result in delay in shipment of certain of our products while we
seek to implement technology offered by alternative sources, and
any required replacement licenses and associated royalties could
prove costly and impact our business.
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.
|
|
|
The markets for our products are intensely competitive and
rapidly evolving and competition could harm our ability to sell
products and services and could reduce our revenues. |
We sell software in the BSM market to help companies effectively
manage their applications, systems, and networks. We offer
availability and performance products to manage the IT
infrastructure, and therefore compete both with companies that
market comprehensive products to manage the IT infrastructure
and with companies that market products for particular segments
of the IT infrastructure (e.g., applications and networks). The
markets for our products are intensely competitive and rapidly
evolving. Our competitors include:
|
|
|
|
|
application performance software vendors; |
|
|
|
fault management software vendors; |
|
|
|
IT visualization software vendors; |
|
|
|
application availability and performance management software
vendors; |
|
|
|
report toolset niche vendors; |
|
|
|
enterprise management software, framework and platform providers; |
|
|
|
software vendors providing service assurance for the wireless
market; |
|
|
|
large, well-established management framework companies that have
developed network or application management platforms; |
|
|
|
developers of network element management solutions; |
|
|
|
probe vendors; |
|
|
|
telecommunication vendors; |
|
|
|
system agent vendors; and |
|
|
|
vendors that provide, as a service, some of the functionality of
our products. |
We expect competition to persist, increase, and intensify in the
future, which will likely result in price competition within our
market. If we do not provide products that achieve success in
our market in the short term, or lower our prices to compete
more effectively, 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.
13
|
|
|
Market acceptance of our eHealth® products
and services is critical to our success. |
We currently derive significant revenues from the sale of
eHealth® Suite products and services, and we expect
that revenues from these products and services will continue to
account for a significant portion of our revenues in the
foreseeable future. Broad market acceptance of these products
and services is critical to our future success. We cannot ensure
that market acceptance of our eHealth® Suite
products and services will increase or even remain at current
levels. Factors that may affect the market acceptance of our
products and services include:
|
|
|
|
|
the availability and price of competing integrated solutions,
products and technologies; |
|
|
|
our ability to continue to provide product functionality and
related services to meet the needs of our market; |
|
|
|
our ability to continue research and development at levels
necessary for the growth of our business; |
|
|
|
the demand for integrated, as opposed to stand-alone,
solutions; and |
|
|
|
the success of our sales efforts and those of our marketing
partners. |
Moreover, if demand for integrated fault and performance
management software products and services increases, we
anticipate that our competitors will introduce additional
competitive products and services and new competitors could
enter our market and offer alternative products and services
resulting in decreased market acceptance of our products and
services.
|
|
|
Market acceptance of Spectrum® products and
services is critical to our success. |
As a result of the acquisition of Aprisma on February 22,
2005 we will market and sell Spectrum® products and
services, from which we expect to derive significant revenue.
Broad market acceptance of these products and services is
critical to our future success. We cannot ensure that market
acceptance of Spectrum® products and services will increase
or even remain at current levels. Factors that may affect the
market acceptance of our products and services include:
|
|
|
|
|
the availability and price of competing integrated solutions,
products and technologies; |
|
|
|
our ability to continue to provide product functionality and
related services to meet the needs of our market; |
|
|
|
our ability to continue research and development at levels
necessary for the growth of our business; and |
|
|
|
the success of our sales efforts and those of our marketing
partners. |
Moreover, if demand increases for software products that provide
root cause analysis, event correlation, service modeling, and
topological discovery and display, we anticipate that our
competitors will introduce additional competitive products and
services and new competitors could enter our market and offer
alternative products and services resulting in decreased market
acceptance of our products and services.
|
|
|
Market acceptance of our netViz® products is
critical to our success. |
We market and sell netViz products and services. Our revenue is
derived primarily from the sale of eHealth Suite products
and services, but revenue derived from the sale of netViz
products and services constitutes an important component of our
quarterly and annual results. Market acceptance of the netViz
products and services is critical to our future success. We
cannot ensure that market acceptance of netViz products and
services will increase or even remain at current levels. Factors
that may affect the market acceptance of netViz products and
services include:
|
|
|
|
|
the availability and price of competitive products and services; |
|
|
|
the ability of others to develop products and services that meet
the needs of the market; |
14
|
|
|
|
|
our ability to continue to provide product functionality and
related services to meet the needs of our market; |
|
|
|
our ability to continue research and development at levels
necessary for the growth of our business; |
|
|
|
the demand for data-driven visualization software; and |
|
|
|
the success of our sales efforts and those of our channel
partners. |
Moreover, if demand for data-driven visualization products
increases, we anticipate increased competition in the market
from existing and new competitors that could enter our market
and offer alternative products resulting in decreased market
acceptance of our products.
|
|
|
We may need future capital funding which may be unavailable
on favorable terms, or at all. |
We plan to continue to expend substantial funds on the continued
development, marketing, and sale of our products. We have
approximately $159.5 million in short term investments
(cash, cash equivalents and marketable securities), excluding
restricted cash totaling $0.1 million as of
December 31, 2004, which was reduced by approximately
$82.4 million on February 22, 2005 due to the
acquisition of Aprisma. However, we cannot ensure that our
existing capital resources 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 in order to remain competitive. |
Because of rapid technological change in the software industry,
potential changes in the architecture of the IT infrastructure,
changes in the software markets in which our product and
services are sold, and changes in industry standards, the market
acceptance of updated versions of our products is difficult to
estimate. We cannot ensure that:
|
|
|
|
|
we will successfully develop and market enhancements to our
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
enhancements or new products; or |
|
|
|
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. |
Our products manage the performance and availability 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.
|
|
|
Current geopolitical instability and the continuing threat of
domestic and international terrorist attacks may adversely
impact our revenues. |
International tensions, exacerbated by the war in Iraq and the
war against global terrorism, contribute to an uncertain
political and economic climate, both in the United States and
globally, which may affect our
15
ability to generate revenue on a predictable basis. As we sell
products both in the United States and internationally, the
threat of future terrorist attacks may adversely affect our
business.
|
|
|
An adverse impact on our outsourcing activities may affect
our business. |
We currently outsource, on a limited basis, development and
testing of certain software products to locations in Europe and
Asia. Our efforts to outsource development and testing of
software may be adversely affected by various factors,
including: geopolitical instability, political conditions in
countries where our development and testing activities occur,
increased costs associated with outsourcing, relationships with
independent contractors performing such product development and
testing, and the enforceability of legal arrangements by which
we protect our intellectual property rights in connection with
these activities. The occurrence of any event that would
adversely affect our outsourcing of development and testing of
software may have an impact on our business.
|
|
|
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; |
|
|
|
announcements of results of operations by other companies; |
|
|
|
announcements by government or other agencies regarding the
economic health of the United States and the rest of the world; |
|
|
|
announcements relating to financial improprieties by public
companies; 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.
|
|
|
Our industry is subject to rapid technological change. Our
failure to maintain standard protocols could affect our
sales. |
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 product solutions obsolete and unmarketable.
While we actively work to develop products that operate with
standard protocols, any change in industry standards or the
emergence of new network technologies could affect the
compatibility of our products, which in turn could affect the
demand for, or the pricing of, our products and services.
16
|
|
|
We rely on strategic partners and other evolving distribution
channels who may not be able to market or sell our products and
services effectively. |
Our distribution strategy is to develop multiple distribution
channels, including sales through:
|
|
|
|
|
strategic marketing partners; |
|
|
|
value added resellers; |
|
|
|
service providers |
|
|
|
system integrators; |
|
|
|
telecommunication carriers; |
|
|
|
original equipment manufacturers; and |
|
|
|
independent software vendors and international distributors. |
We have focused on identifying and developing our key
distribution partners worldwide to maximize the success of our
indirect sales. Our success will depend in large part on our
development of these distribution relationships and on the
performance and success of other third parties that distribute
our products and services, particularly telecommunication
carriers and other network service providers. We sell our
products and services in the United States through both direct
sales to customers and indirect sales to customers through our
channel partners. Outside the United States, we sell our
products and services primarily through indirect sales via our
channel partners, but direct sales to customers have been
increasing as we have expanded our sales personnel in our
markets. 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 and services 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 financially stable, motivated channel
partners. Additionally, our channel partners may not be
successful in marketing and selling our products and services.
We may:
|
|
|
|
|
fail to attract important and effective channel partners; |
|
|
|
fail to penetrate our targeted market segments through the use
of channel partners; or |
|
|
|
lose any of our channel partners as a result of competitive
products and services offered by other companies, products and
services developed internally by these channel partners, their
financial insolvency or otherwise. |
|
|
|
We may fail to manage successfully the growth of our
business. |
We have experienced employee turnover in our sales and
operations personnel. Our products and services have become
increasingly complex, and our distribution channels are being
developed and expanded. The rapid evolution of our markets and
the increasing complexity of our products and services have
placed, and are 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 and we
may be unable to recruit, integrate and retain the personnel we
need. |
Our performance depends substantially on the performance of our
key technical, senior management, and sales and marketing
personnel. We may lose the services of any of such persons. 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.
17
|
|
|
Our failure to continue 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 continued establishment and maintenance of
channel partner arrangements. As mentioned above, we have
concentrated recently on developing more focused relationships
with fewer key distributors. 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.
In addition 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 collections; |
|
|
|
potentially adverse tax consequences; |
|
|
|
compliance 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 and services,
particularly national language support. Presently, the majority
of our 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 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. While we do maintain a foreign
currency-hedging program on accounts receivable, 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, product and services
agreements, non-disclosure agreements, and other contractual
provisions to establish, maintain, and protect our proprietary
rights. These means afford only limited protection.
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
18
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, some of our products are licensed
under end user license agreements (also known as shrink-wrap
licenses) that are not signed by licensees. The law governing
the enforceability of shrink-wrap license agreements is not
settled in most jurisdictions. There can be no guarantee that we
would achieve success in enforcing one or more shrink-wrap
license agreements if we sought to do so in a court of law.
Patent Infringement Litigation, including patent infringement
litigation with Micromuse, Inc., could adversely affect our
business.
We acquired Aprisma Management Technologies, Inc.
(Aprisma) in February 2005. Aprisma is engaged in
patent infringement suits with Micromuse, Inc. Aprisma filed a
complaint for patent infringement against Micromuse, Inc. in the
U.S. District Court for the District of New Hampshire in
December 2002, and Micromuse, Inc. filed a complaint for patent
infringement against Aprisma in the United States District Court
for the Southern District of New York in January 2005. Both
cases remain pending, with trials presently unscheduled.
We will vigorously protect our intellectual property, but patent
litigation, with or without merit, could be time-consuming and
expensive to litigate or settle and could divert managements
attention from focusing on the core business. We cannot ensure
that we will prevail in either suit. An adverse decision in
either suit could materially affect our business by:
(i) impairing our ability to market, sell, and distribute
our products, (ii) incurring a substantial financial
exposure in the form of patent infringement damages,
(iii) incurring royalty costs to secure a license to
continue marketing, selling, and distributing our products, if
any such license is available, (iv) losing rights to
company patents, and (v) requiring significant investment
to costly, non-infringing technology, if possible.
Any of these results would increase our expenses and could
decrease the functionality of our products, which would make our
products less attractive to our current or potential customers.
We have agreed in some of our customer agreements, and may agree
in the future, to indemnify other parties for any expenses or
liabilities resulting from claimed infringements of the
proprietary rights of third parties. If we are required to make
payments pursuant to these indemnification agreements, it could
have an adverse effect on our business, results of operations
and financial condition.
|
|
|
Intellectual property infringement claims could result in
costly litigation and could harm our business. |
As mentioned above, 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 may not be
available on terms acceptable to us or at all.
|
|
|
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 IT infrastructure 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. 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.
19
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.
|
|
|
Changes in accounting policies could adversely affect our
business. |
Our financial statements are prepared in conformity with United
States Generally Accepted Accounting Principles
(U.S. GAAP). A change in U.S. GAAP could
significantly impact our reported financial results and could
retroactively affect prior reporting periods. Our accounting
policies that have been, or may be, affected by changes in
U.S. GAAP include:
|
|
|
|
|
software revenue recognition; |
|
|
|
measurement of stock-based compensation at fair value in
accordance with Financial Accounting Standards Board Statement
No. 123R Share-Based Payment; and |
|
|
|
accounting for goodwill and other intangible assets. |
Changes in U.S. GAAP in these areas or others may have a
significant impact on our business.
|
|
|
The conviction of Arthur Andersen LLP may limit potential
recoveries related to their prior service as our independent
auditors. |
Arthur Andersen LLP served as our independent auditors until
June 10, 2002. On June 10, 2002, we dismissed Arthur
Andersen LLP and on June 11, 2002, we retained
PricewaterhouseCoopers LLP as our independent auditors. On
June 15, 2002, Arthur Andersen LLP was found guilty
on federal obstruction of justice charges arising from the
governments investigation of Enron Corporation. Following
this conviction, on August 31, 2002, Arthur Andersen LLP
ceased operations and can no longer reissue its audit reports or
provide its consent to include its audit reports in financial
reports filed with the Securities and Exchange Commission
(SEC). Accordingly, Arthur Andersen LLP has not
performed any procedures in connection with the preparation and
filing of this report. Events arising out of the indictment and
conviction will likely preclude Arthur Andersen LLP from
satisfying any claims arising from the provision of auditing
services to us, including claims that may arise out of Arthur
Andersen LLPs audit of financial statements incorporated
by reference in this quarterly report.
SEC rules require us to present historical audited financial
statements in various SEC filings, along with consents from
Arthur Andersen LLP to include its audit report in those
filings. In light of the cessation of Arthur Andersen LLPs
SEC practice, we will not be able to obtain the consent of
Arthur Andersen LLP for the inclusion of its audit report in our
relevant current and future filings. The SEC has provided
regulatory relief designed to allow companies that file reports
with the SEC to dispense with the requirement to file a consent
of Arthur Andersen LLP in certain circumstances, but purchasers
of securities sold under our registration statements, which were
not filed with the consent of Arthur Andersen LLP for the
inclusion of its audit report will not be able to file suit
against Arthur Andersen LLP pursuant to Section 11(a)(4) of
the Securities Act and therefore their right of recovery under
that section may be limited as a result of the lack of our
ability to obtain the consent of Arthur Andersen LLP. If the SEC
ceases to accept financial statements from a prior period
audited by Arthur Andersen LLP for which Arthur Andersen LLP
will not reissue an audit report prior to the date on which our
periodic reports are due, our ability to make timely filings
with the SEC and access the capital markets could be impaired.
In that case, we would not be able to make timely filings with
the SEC or access the public capital markets unless another
independent accounting firm were able to audit the financial
statements originally audited by Arthur Andersen LLP.
Our corporate headquarters and principal facilities are located
in approximately 142,400 square feet of office space in
Marlborough, Massachusetts under lease arrangements that expire
in August 2007. These principal facilities accommodate our
finance, administration and operations, research and
development, customer support, marketing, and sales departments.
We also lease office space in Atlanta, GA and
20
Gaithersburg, MD. In addition, we lease sales office space in
Dallas, TX; Plymouth, MI; Spokan, WA; Bellevue, WA; Tyson, VA;
Morrisville, NC; Gold River, CA; Bay Area, CA; Mesa, AZ; United
Kingdom; France; Germany; the Netherlands; Spain; Sweden;
Australia; Hong Kong; Japan; Singapore; Mexico; South Korea and
China. We believe that our current facilities are adequate for
our needs through the next twelve months and that, should it be
needed, suitable additional or substitute space will be
available to accommodate expansion of our operations on
commercially reasonable terms, although there can be no
assurance in this regard.
Our reportable segments are determined by customer type: managed
service providers/telecommunication carriers and enterprise. We
evaluate segment performance based on revenue only. Accordingly,
all of our facilities are used by each of our operating segments.
|
|
Item 3. |
Legal Proceedings |
On April 30, 2004, we received a letter from LMS Technology
Distributions SDN BHD (LMS) of Malaysia that demands
that we reimburse LMS for approximately $4.65 million in
alleged losses arising out of our purported wrongful termination
of a Concord Authorized Reseller Agreement (the CAR
Agreement) with LMS. We dispute that the CAR Agreement was
wrongfully terminated or that LMS is owed any of the amounts
claimed, and we intend to defend vigorously against the demand.
It is not possible to predict or determine the outcome of these
demands or to provide ranges of losses that may arise, if any.
In November 2003, Concord received notice from a former sales
employee in France, stating that he was wrongfully dismissed in
July 2003. The former employee filed a wrongful termination
lawsuit against Concord claiming approximately $0.4 million
in damages. In January 2005, the Labor Court of Poissy issued
its decision on the former employees unfair dismissal and
failure to pay commissions claims. The court found that we did
not fulfill our obligations as required by French law and
awarded the former employee approximately $12,000. Accordingly,
Concord has accrued a liability of $12,000 at December 31,
2004.
On December 6, 2002, Aprisma filed a complaint for patent
infringement against Micromuse, Inc. in the U. S. District Court
for the District of New Hampshire. This case remains pending,
with a trial presently unscheduled. This case involves
Aprismas claim that Micromuses systems management
products, including NetcoolÒ products such as
Netcool/OMNIbus, Impact and Precision infringe the following
U.S. Patents: 5,436,909; 5,504,921; 5,777,549; 5,696,486;
5,768,501; and 6,064,304. Aprisma seeks injunctive relief and
damages based on Micromuses infringement. Micromuse has
denied infringement, and has alleged that the asserted patents
are invalid and are unenforceable. On January 11, 2005,
following a two-day hearing, the Court issued a Memorandum and
Order in which it adopted the proposed claim construction of the
seven disputed claim terms at issue offered by Aprisma. Based on
the Courts claim construction ruling, the parties filed
summary judgment motions on the issue of infringement, for which
they are awaiting a hearing.
On January 26, 2005, Aprisma was named as a defendant in
litigation filed in the Southern District of New York alleging
patent infringement of various U.S. patents allegedly owned by
Micromuse. This case remains pending, with a trial presently
unscheduled. This case involves Micromuses claim that
Aprismas SNMP support products, the SPECTRUM Assurance
Server, the SPECTRUM Alarm Monitor, Gateways and MPLS Manager
products infringe the following U.S. Patents: 6,192,034;
6,219,648; 6,330,598; 6,687,335; 6,763,333; 5,936,547; and
6,766,375. Micromuse seeks declaratory, injunctive relief and
damages for Aprismas alleged infringement. On March 8,
2005, Aprisma filed a Motion to Dismiss or Transfer the
Complaint to the District of New Hampshire. This Motion remains
pending. We believe the allegations in this suit are without
merit and we intend to vigorously defend against them.
|
|
Item 4. |
Submission of Matters to a Vote of Security Holders |
No matters were submitted to a vote of security holders during
the fourth quarter of the fiscal year ended December 31,
2004.
21
PART II
|
|
Item 5. |
Market for the Registrants Common Stock and Related
Stockholder Matters |
Our Common Stock trades on the NASDAQ National Market under the
symbol CCRD. The following table sets forth, for the
periods indicated, the high and low intraday sales prices for
the Common Stock, all as reported by the NASDAQ National Market.
Price Range of Common Stock
|
|
|
|
|
|
|
|
|
|
Period |
|
High | |
|
Low | |
|
|
| |
|
| |
Fiscal 2004:
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
21.02 |
|
|
$ |
13.60 |
|
|
Second Quarter
|
|
|
15.65 |
|
|
|
10.33 |
|
|
Third Quarter
|
|
|
11.45 |
|
|
|
7.87 |
|
|
Fourth Quarter
|
|
|
11.22 |
|
|
|
7.76 |
|
Fiscal 2003:
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
11.50 |
|
|
$ |
6.60 |
|
|
Second Quarter
|
|
|
15.38 |
|
|
|
8.58 |
|
|
Third Quarter
|
|
|
16.95 |
|
|
|
11.67 |
|
|
Fourth Quarter
|
|
|
23.12 |
|
|
|
13.18 |
|
As of March 10, 2005, we had approximately 281 holders
of record of our common stock. This number does not include
beneficial owners holding shares of our Common Stock through
nominee names.
Dividend Policy
We did not declare or pay any cash dividends on our capital
stock during the fiscal years ended 2004 or 2003. We currently
anticipate that we will retain all future earnings for use in
our business and we do not anticipate that we will pay any cash
dividends in the foreseeable future. The payment of any future
dividends will be at the discretion of our Board of Directors
and will depend upon, among other things, future earnings,
operations, capital requirements, our general financial
condition, general business conditions and contractual
restrictions on the payment of dividends, if any.
Use of Proceeds
On October 16, 1997, Concord commenced an initial public
offering (IPO) of 2,900,000 shares of Common
Stock pursuant to a final prospectus dated October 15, 1997
(the Prospectus). The Prospectus was contained in
our 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 registered,
2,300,000 shares were offered and sold by Concord and
600,000 shares were offered and sold by certain
shareholders of Concord. As part of the IPO, Concord 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. The managing underwriters for
the IPO were Nationsbanc Montgomery Securities Inc., BancAmerica
Robertson Stephens and Wessels, Arnold and Henderson, L.L.C.
(the Representatives). On October 24, 1997, the
Representatives, on behalf of the several underwriters,
exercised the Underwriters Option, purchasing 435,000
additional shares of our Common Stock. The aggregate offering
price of the IPO to the public was $40,600,000 (exclusive of the
Underwriters Option), with proceeds to Concord and the
selling shareholders, after deduction of the underwriting
discount, of $29,946,000 (before deducting offering expenses
payable by Concord) and $7,812,000, respectively. The aggregate
offering price of the Underwriters Option exercised was
$6,090,000, with proceeds to Concord, after deduction of the
underwriting discount, of $5,663,700 (before deducting offering
expenses payable by Concord). The aggregate amount of expenses
22
incurred by Concord in connection with the issuance and
distribution of the shares of Common Stock offered and sold in
the IPO were approximately $3.6 million, including
$2.7 million in underwriting discounts and commissions and
$950,000 in other offering expenses.
None of the expenses paid by Concord in connection with the IPO
or the exercise of the Underwriters Option was paid,
directly or indirectly, to directors, officers, persons owning
ten percent or more of the Concords equity securities, or
affiliates of Concord.
The net proceeds to Concord from the IPO, after deducting
underwriting discounts and commissions and other offering
expenses were approximately $34.7 million. To date, we have
not utilized any of the net proceeds from the IPO. Concord has
invested all such net proceeds primarily in US treasury
obligations and other interest bearing investment grade
securities. None of the net proceeds from the IPO was used to
pay, directly or indirectly, directors, officers, persons owning
ten percent or more of Concords equity securities, or
affiliates of Concord.
|
|
Item 6. |
Selected Financial Data |
The following selected consolidated financial data should be
read in conjunction with our consolidated financial statements
and related notes to those statements and
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this Form 10-K. The selected financial data as of and for
each of the five fiscal years in the period ended
December 31, 2004 have been derived from our audited
consolidated financial statements. The historical results are
not necessarily indicative of the operating results to be
expected in the future.
Concord adopted Statement of Financial Accounting Standards
(SFAS) No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections as of January 1,
2003. The adoption of SFAS No. 145 retroactively
changes guidance related to the reporting of gains and losses
from extinguishment of debt as extraordinary items. The effect
of SFAS No. 145 on our consolidated statement of
operations data for the five years ended December 31, 2004
is for amounts previously recorded as Extraordinary loss
on early extinguishment of debt to instead be recorded as
a component of Other income, net. We have
reclassified extraordinary loss of $0.22 million, net of
tax benefit of $0.07 million, for the year ended
December 31, 2000. There were no extraordinary items in the
years ended December 31, 2004, 2003, 2002 and 2001.
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in thousands, except per share data) | |
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License revenues
|
|
$ |
49,973 |
|
|
$ |
54,267 |
|
|
$ |
51,230 |
|
|
$ |
54,406 |
|
|
$ |
69,464 |
|
|
Service revenues
|
|
|
56,215 |
|
|
|
49,796 |
|
|
|
42,614 |
|
|
|
33,572 |
|
|
|
22,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
106,188 |
|
|
|
104,063 |
|
|
|
93,844 |
|
|
|
87,978 |
|
|
|
91,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of license revenues
|
|
|
3,490 |
|
|
|
3,117 |
|
|
|
1,850 |
|
|
|
2,272 |
|
|
|
1,997 |
|
|
Cost of service revenues
|
|
|
17,488 |
|
|
|
16,127 |
|
|
|
15,120 |
|
|
|
15,544 |
|
|
|
11,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
20,978 |
|
|
|
19,244 |
|
|
|
16,970 |
|
|
|
17,816 |
|
|
|
13,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
85,210 |
|
|
|
84,819 |
|
|
|
76,874 |
|
|
|
70,162 |
|
|
|
78,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
25,218 |
|
|
|
22,827 |
|
|
|
21,973 |
|
|
|
24,284 |
|
|
|
21,624 |
|
|
Sales and marketing
|
|
|
49,911 |
|
|
|
48,352 |
|
|
|
47,383 |
|
|
|
51,041 |
|
|
|
42,996 |
|
|
General and administrative
|
|
|
11,676 |
|
|
|
9,035 |
|
|
|
7,665 |
|
|
|
8,705 |
|
|
|
8,403 |
|
|
Asset impairment charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,337 |
|
|
Acquisition-related charges
|
|
|
|
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
4,300 |
|
|
In-process research and development
|
|
|
100 |
|
|
|
994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
86,905 |
|
|
|
81,248 |
|
|
|
77,021 |
|
|
|
84,030 |
|
|
|
79,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(1,695 |
) |
|
|
3,571 |
|
|
|
(147 |
) |
|
|
(13,868 |
) |
|
|
(1,277 |
) |
Other income, net
|
|
|
1,049 |
|
|
|
2,084 |
|
|
|
2,916 |
|
|
|
3,161 |
|
|
|
2,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(646 |
) |
|
|
5,655 |
|
|
|
2,769 |
|
|
|
(10,707 |
) |
|
|
1,573 |
|
(Benefit from) provision for income taxes
|
|
|
(112 |
) |
|
|
(2,015 |
) |
|
|
568 |
|
|
|
447 |
|
|
|
447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common shareholders
|
|
$ |
(534 |
) |
|
$ |
7,670 |
|
|
$ |
2,201 |
|
|
$ |
(11,154 |
) |
|
$ |
1,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common and potential common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.03 |
) |
|
$ |
0.44 |
|
|
$ |
0.13 |
|
|
$ |
(0.67 |
) |
|
$ |
0.07 |
|
|
Diluted
|
|
$ |
(0.03 |
) |
|
$ |
0.42 |
|
|
$ |
0.12 |
|
|
$ |
(0.67 |
) |
|
$ |
0.07 |
|
Weighted average common and potential common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
18,280 |
|
|
|
17,534 |
|
|
|
17,057 |
|
|
|
16,683 |
|
|
|
16,144 |
|
|
Diluted
|
|
|
18,280 |
|
|
|
18,208 |
|
|
|
17,627 |
|
|
|
16,683 |
|
|
|
16,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and marketable securities (net of
restricted cash)
|
|
$ |
159,455 |
|
|
$ |
161,891 |
|
|
$ |
72,831 |
|
|
$ |
68,344 |
|
|
$ |
63,251 |
|
Working capital
|
|
|
147,925 |
|
|
|
149,433 |
|
|
|
57,792 |
|
|
|
48,966 |
|
|
|
54,131 |
|
Total assets
|
|
|
223,491 |
|
|
|
218,426 |
|
|
|
105,930 |
|
|
|
102,480 |
|
|
|
102,276 |
|
Long-term debt, net of current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible senior notes
|
|
|
86,250 |
|
|
|
86,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
$ |
91,529 |
|
|
$ |
87,841 |
|
|
$ |
68,936 |
|
|
$ |
63,507 |
|
|
$ |
70,746 |
|
24
|
|
Item 7. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
You should read the following discussion together with our
Consolidated Financial Statements and related Notes to
Consolidated Financial Statements that are included elsewhere in
this Report. The following discussion contains forward-looking
statements that reflect plans, estimates, trends and beliefs.
Our actual results could differ materially from those discussed
in the forward-looking statements. See Factors That Could
Affect Future Results herein.
Overview
We are a software company that provides a solution to enterprise
customers, managed service providers and telecommunication
carriers. Our solution, the eHealth® Suite of
products, maps IT services to business needs, measures the
actual end user experience and manages application, system and
network infrastructure. Our software simplifies the management
of the underlying technology and infrastructure required to
deliver business services.
We sell our products worldwide through a direct sales force,
channel partners, and other resellers. We have sales offices in
13 countries, including the United States and we have customers
in 63 countries.
For the fiscal year ended December 31, 2004, we increased
our revenue while reducing profitability year over year. Our
total revenues are generated from license revenue and service
revenue. In 2004, total revenues were $106.2 million, up 2%
from $104.1 million in 2003. Our diluted loss per share was
$0.03 per share in 2004. Our diluted income per share was
$0.42 per share in fiscal 2003. We generated
$0.1 million in operating cash during the year and finished
2004 with $159.5 million of cash, cash equivalents, and
marketable securities.
After benefiting from an economic recovery which started in the
second quarter of 2002 and continued throughout 2003, we
encountered sales and marketing execution issues in the first
quarter of 2004, which negatively affected our licenses revenues
in that quarter and slowed our growth for the year. We have
replaced sales personnel in many of the underperforming areas.
Internal initiatives implemented in the third quarter of 2004,
such as targeted marketing programs and specific sales
incentives, helped improve our effectiveness in the second half
of 2004.
Last year, we made several major improvements to our eHealth
Suite, which allow IT managers to map IT services to business
processes and deliver an executive view of key performance
indicators. We introduced the Business Service Console, a
product that provides executives a single view into an
organizations IT infrastructure. In addition, we continued
to increase our penetration into our installed base; most of our
license revenue came from existing customers returning to buy
new eHealth® capabilities. Finally, we hired a new
Executive Vice President of Field Operations and Professional
Services to lead us in our next phase of growth.
In October 2004, Concord consummated an offer to purchase any
and all outstanding options to purchase shares of its common
stock with an exercise price per share of $25.00 or more granted
under its 1997 Stock Plan (the Option Repurchase).
In connection with the Option Repurchase, Concord incurred
compensation expense of $3.3 million, excluding fees and
expenses, in the three-month period ended December 31,
2004. The compensation expense was distributed as follows:
$0.2 millions in cost of service revenues,
$1.3 millions in research and development expenses,
$0.5 million in sales and marketing expenses, and
$1.3 million in general and administrative expenses. The
option purchase price was determined to be the weighted average
fair market value as calculated by the Black-Scholes
option-pricing model. Substantially all eligible option holders
elected to tender their options to Concord pursuant to the terms
and conditions of the Option Repurchase. We purchased a total of
965,242 options pursuant to the terms and conditions of the
Option Repurchase. These shares were returned to the pool of
options available for new grants under the 1997 Stock Plan.
On January 5, 2005, we completed the acquisition of
privately held Vitel Corporation. Vitels software enables
enterprises and service providers to manage the performance of
next-generation IP and legacy voice networks and messaging
systems, including voice mail, from multiple vendors such as
market leaders Avaya and Nortel Networks. The purchase price was
at $4.1 million, including direct costs of the acquisition
of $0.1 million, and was paid in cash. The acquisition will
be accounted for under the purchase method of
25
accounting in the three months ending March 31, 2005. (See
Note 14 of the Notes to Consolidated Financial Statements).
On February 22, 2005, we acquired Aprisma, a privately held
software company owned by Gores Technology Group. Aprismas
SPECTRUM® software manages the health and performance of
networks and the business services that rely on them, including
performing root cause analysis, fault management, event
correlation, service modeling, and topological discovery and
display. These technologies are critical to managing the
availability of IT infrastructures and related business
services. The purchase price was $93.0 million, which
payment was adjusted by (i) the amount of net debt owing by
Aprisma to certain of its lenders at the time of closing (which
debt will be paid off by Concord) and (ii) certain payment
obligations owing by Aprisma under its equity participation
plan. Concords cash payment to acquire Aprisma on
February 22, 2005 was approximately $82.4 million. The
acquisition will be accounted for under the purchase method of
accounting in the three months ending March 31, 2005. (See
Note 14 of the Notes to Consolidated Financial Statements).
Managements Outlook
In the coming year, our first goal is to integrate the acquired
technologies of Aprisma and Vitel.
|
|
|
|
|
Aprisma Our investment in Aprisma
SPECTRUM® is based on our assumption that market demand for
integrated performance and fault management solutions is
growing. The acquisition of Aprisma allows us to access this
integrated market. Aprisma will initially be managed as a
business unit reporting to our CEO. However, we will be
immediately merging our finance, HR, and internal IT departments
to achieve some economies of scale. We expect to
cross-compensate salespeople on joint deals. |
|
|
|
Vitel Vitel provides Concord the ability to address
a significant portion of the voice market. Historically, Concord
was only able to address a small fraction of the traditional
enterprise voice network market. Vitels strength is that
their products manage legacy telephony devices from Nortel and
Avaya. With the acquisition of Vitel, Concord has expanded its
ability to increase our penetration of this market. We have
integrated the sales, development and business support
functions. No significant savings are expected from this
integration. |
These acquisitions are considered important as they will
significantly increase the breadth of products that Concord
brings to market. Combined, this will provide Concord with an
expanded solution set, which can address the needs of customers
to get BSM solutions from a single vendor. We expect this
expanded solution set will increase our average sale price to
new customers as these customers will purchase an increased
number of products from Concord.
Our second goal is to strengthen sales of new and enhanced
products to current and new markets. To accomplish this, we are
planning several new product releases, expanding our presence in
the traditional enterprise voice network market and positioning
ourselves in the wireless market as more applications migrate to
2.5 and 3G environments. This will be challenging as these
markets have the potential to be very large; the technology in
many cases will be unfamiliar to us and there will be many
competitors focused on these markets as well.
Metrics that we are tracking to measure success in this area
include:
|
|
|
1) percentage of sales of our newer products (such as
application management revenue) as a percent of total revenues; |
|
|
2) number of new customer accounts; |
|
|
3) average sales price per new customer accounts; and |
|
|
4) number of transactions over $100,000. |
Our third goal is to achieve profitability by increasing
revenues while continuing to closely manage our expenses. The
2004 combined revenues of Concord and Aprisma were approximately
$150.0 million.
26
Achieving profitability will be challenging for several reasons.
Achieving profitability requires that we become more efficient
by increasing our license revenues while maintaining or
decreasing our operating expenses. We monitor a certain number
of metrics internally to gauge our success in this area such as:
|
|
|
1) revenue per employee, |
|
|
2) percentage of direct and indirect revenue |
|
|
3) geographic revenue |
|
|
4) research and development expense as a percentage of
total sales, |
|
|
5) sales and marketing expense as a percentage of total
sales. |
Trends and Uncertainties
Key trends and related uncertainties include:
|
|
|
1) Consolidation is beginning to take place in our
industry. Customers are increasingly coming to expect more
robust solutions at a lower price. This puts increased demands
on companies like ours to become more efficient and produce
software code of higher quality at a lower price. |
|
|
2) Niche vendors are struggling and are dropping prices to
remain viable. While in the long run, this trend will benefit
Concord, in the short run it forces us to also drop prices to
remain competitive. |
|
|
3) The network market appears to be more mature. Customers
are increasingly buying solutions for systems that are not as
mission critical as in previous years, and these customers
expect to pay less for the same amount of product. |
|
|
4) There is becoming a greater need to partner. Customers
want to standardize on a set of products and are more favorably
inclined to make an investment in software where the
standardization is easier. Tighter integrated solutions are
considered cost efficient as they reduce the management costs.
Outsourcing research and development is becoming more common.
Cost structures overseas for research and development labor
tends to be exponentially lower than in domestic markets. In
order to stay competitive with foreign and domestic competitors,
companies like Concord must invest in outsourcing software
development to keep costs low. |
Critical Accounting Policies, Significant Estimates and
Judgments
The accompanying discussion and analysis of our financial
condition and results of operations are based upon our
consolidated financial statements, which have been prepared in
accordance with generally accepted accounting principles in the
United States (US GAAP). The preparation of
consolidated financial statements requires us to make estimates
and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. These estimates form the
basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other
sources. We base our estimates and judgments on historical
experience and on various other assumptions that we believe are
reasonable under the circumstances. However, future events are
subject to change and the best estimates and judgments routinely
require adjustment. US GAAP requires us to make estimates and
judgments in several areas. If actual results differ
significantly from managements estimates and projections,
there could be a material effect on our financial statements.
See our audited consolidated financial statements and notes
thereto of this Annual Report on Form 10-K and which
contain accounting policies and other disclosures required by US
GAAP.
We believe that the policies, significant estimates and
judgments discussed below are the most critical to our financial
statements and the understanding of our financial condition and
results of operations because their application places the most
significant demands on managements judgment.
27
Our 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. Software license revenues
are recognized when persuasive evidence of an arrangement exists
and delivery of the software has occurred, provided that the
license fee is fixed or determinable, collection is considered
reasonably assured and no customer acceptance clauses exist. 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. If
an arrangement includes a right of return for the possibility
that the software does not meet published specifications during
the warranty period, which is typically 90 days, revenue is
recognized upon shipment if all other criteria are met as our
product is mature and we have not experienced returns of our
products. If the fee is determined not to be fixed or
determinable, revenue is recognized when the fees become due. If
collection is not considered reasonably assured, revenue is
recognized upon the receipt of cash. Revenues under
multiple-element arrangements, which typically include software
products, services, maintenance and sometimes undelivered
specified software upgrades 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 remainder of the
arrangement consideration is allocated to the software. We have
established sufficient vendor specific objective evidence for
professional services, training, maintenance, customer support
services and specified software upgrades 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, maintenance, customer support
services and specified software upgrades.
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, provided evidence
of an arrangement exists, fees are fixed or determinable, and
collection is considered reasonably assured.
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 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.
We license our software to end-users and resellers. Decisions
regarding revenue recognition are centralized at our corporate
headquarters, located in the United States. Our arrangements
with customers do not generally include provisions involving
acceptance of our products by our customers. However, if a
customer arrangement includes an acceptance provision, revenue
recognition occurs upon the earlier of receipt of a written
customer acceptance or expiration of the acceptance period. With
respect to revenues from our channel partners and other
resellers, we recognize revenue upon delivery of our software to
the channel partner or reseller. We do not offer any right of
return, price protection or similar rights to our channel
partners and other resellers.
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 to resellers are usually evidenced by a master agreement
governing the relationship together with purchase orders on a
transaction-by-transaction basis.
Delivery generally occurs when product is delivered to a common
carrier and the delivery terms are FOB Concord. The costs of
shipping and handling related to the delivery of the product is
included in revenue. In the case of arrangements with resellers,
revenue is recognized upon delivery to the reseller. Most of
these arrangements involve a sell-through by the reseller to an
end user. For a reseller, evidence usually comes in the form of
a purchase order typically identifying the end-user.
28
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, depending upon the
region, we account for the fee as not being fixed or
determinable. In these cases, we recognize revenue when the fees
become 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 recognize revenue
upon receipt of cash. Concords channel partners and other
resellers are responsible to Concord upon delivery.
For arrangements with multiple elements (for example,
undelivered maintenance and support or undelivered specified
software upgrades), 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 value 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 value of services, such as training
or consulting, by referencing the prices at which we have
separately sold comparable services to our customers. For
specified undelivered software upgrades, we determine fair value
of these upgrades by referencing the prices at which we sell
upgrades separately to our customers.
The majority of our sales transactions are completed using
standard terms and conditions; however, there are agreements
that contain non-standard terms and conditions. As a result,
significant contract interpretation is sometimes required to
determine the appropriate accounting, including whether the
deliverables specified in a multiple obligations arrangement
should be treated as separate units of accounting for revenue
recognition purposes, and if so, how the price should be
allocated among the deliverable elements and when to recognize
the revenue for each element. Changes in the allocation of the
sales price between deliverable elements might impact the timing
of revenue recognition, but would not change the total revenue
recognized for the transaction.
We record our trade accounts receivable at the invoiced amount;
these accounts do not bear interest. We perform ongoing credit
evaluations of our customers and adjust credit limits based upon
payment history and the customers 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 our historical experience and any specific
customer collection issues that we have identified. We review
our allowance for doubtful accounts on a monthly basis. We
review all past due balances over 60 days individually for
collectability. We charge account balances against the allowance
when we feel it is probable the receivable will not be
recovered. We do not have any off-balance-sheet credit exposure
to our customers.
While credit losses have historically been within our
expectations and the 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. Thus, if
the financial condition of our customers were to deteriorate,
our actual losses may exceed our estimates, and additional
allowances would be required.
|
|
(c) |
Accounting for Income Taxes |
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 and expense
accruals, 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
29
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. To the extent we
reverse any portion of the valuation allowance, we must
recognize a benefit within the tax provision in the statement of
operations or to additional paid-in capital for the benefit of
deductions for stock option exercises.
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 not placed any reserve on our
deferred tax assets by recording a valuation allowance. The
resulting net deferred tax asset of $14.0 million at
December 31, 2004 is based on our estimate that future
taxable income we expect to generate will be sufficient to
realize the net deferred asset. In the event the actual results
differ from the estimates or we adjust these estimates in future
periods, we may need to establish another valuation allowance.
Establishing new or additional valuation allowances could
materially adversely impact our financial position and results
of operations.
|
|
(d) |
Accounting for Acquisitions and Acquired In-process
Research and Development |
The purchase price of businesses acquired accounted for as
purchase business combinations, is allocated to the tangible and
intangible assets acquired based on their estimated fair values
with any amount in excess of such allocations designated as
goodwill, in accordance with SFAS No. 141, Business
Combinations. Our accounting for acquisitions involves
significant judgments and estimates regarding primarily, but not
limited to: the fair value of acquired intangible assets, which
are based on projections of future revenues and cash flows,
assumptions regarding discount factors, royalty rates, tax
rates, amortization methodologies and related useful lives, as
well as the fair value of other acquired assets and assumed
liabilities, including potential contingencies and deferred
income taxes. The valuation of purchased intangibles is based
upon estimates of the future performance and cash flows from the
acquired business. If different assumptions are used, it could
materially impact the purchase price allocations and our
financial position and results of operations. Our identifiable
assets are generally amortized at the greater of (a) the
ratio that current revenues bear to the total of current and
anticipated future revenues or (b) the straight-line method
over their respective remaining useful lives.
We completed our acquisition of netViz on July 13, 2003,
which was accounted for under the purchase method of accounting
and resulted in recording significant goodwill and other
intangible asset balances. The purchase price of netViz has been
allocated to the assets acquired and liabilities assumed at
their estimated fair values on the date of acquisition, as
determined by management and, with respect to the identifiable
intangible assets, an appraisal. The values of the completed
technology, reseller relationships, maintenance relationships,
contractor agreements and trade name/trademarks of netViz were
determined using the income approach. The income approach
requires a projection of revenues and expenses specifically
attributed to the intangible assets. The discounted cash flow
(DCF) method is then applied to the potential income
streams after making necessary adjustments with respect to such
factors as the wasting nature of the identifiable intangible
assets and the allowance of a fair return on the net tangible
assets and other intangible assets employed. There are several
variations on the income approach, including the
relief-from-royalty method, the avoided cost method, and the
lost profits method.
The relief-from-royalty method was used to value the trade
name/trademarks of netViz. The relief-from-royalty method is
used to estimate the cost savings that accrue to the owner of
the intangible assets that would otherwise have to pay royalties
or licensee fees on revenues earned through the use of the
asset. The royalty rate used in the analysis is based on an
analysis of empirical, market-derived royalty rates for
guideline intangible assets. Typically, revenue is projected
over the expected remaining useful life of the intangible asset.
The market-derived royalty rate is then applied to estimate the
royalty savings. The key assumptions used in valuing the trade
name/trademarks of netViz are as follows: royalty rate 1%,
discount rate 21%, tax rate 40% and estimated average economic
life of 3 years.
30
The avoided cost method was used to value the reseller
relationships and contractor agreements of netViz. The avoided
cost method considers the concept of avoided cost as an
indicator of value. The avoided cost method is appropriate for
estimating the fair value of an asset where reliable data for
sales of comparable property are not available and where the
property does not directly produce an income stream. The key
assumptions used in valuing the reseller relationships of netViz
are as follows: tax rate 40% and estimated average economic life
of 5 years. The key assumptions used in valuing the
contractor agreements of netViz are as follows: tax rate 40% and
estimated average economic life of 4 years.
The completed technology (software) of netViz was valued
using the income approach without variation. The key assumptions
used in valuing the completed technology of netViz are as
follows: discount rate 21%, tax rate 40% and estimated life of
4 years. The key assumptions used in valuing the
maintenance relationships of netViz are as follows: discount
rate 21%, tax rate 40% and estimated average economic life of
5 years.
We completed our acquisition of Vitel on January 5, 2005.
The values of the completed technology (software), reseller
relationships, and maintenance relationships for Vitel were
determined using the income approach.
The relief-from-royalty method was used to value the completed
technology. The key assumptions used in valuing the completed
technology of Vitel are as follows: royalty rate 5%, discount
rate 18.5%, tax rate 40% and estimated average economic life of
5 years.
The maintenance relationships of Vitel were valued using the
income approach without variation. The key assumptions used in
valuing the maintenance relationships of Vitel are as follows:
discount rate 18.5%, tax rate 40% and estimated average economic
life of 6 years.
The avoided cost method was used to value the reseller
relationship of Vitel. The key assumptions used in valuing the
reseller relationships of Vitel are as follows: tax rate 40% and
estimated average economic life of 5 years.
We completed our acquisition of Aprisma on February 22,
2005. We are still in the process of performing our allocation
of purchase price and valuation of identifiable intangibles, but
we expect to assign a significant portion of the purchase price
to identifiable intangibles and goodwill.
We have also completed our accounting of the license agreement
with Tavve whereby Concord licensed components of Tavves
technology. Our accounting for the Tavve license as in-process
research & development involved significant judgments
and estimates regarding primarily, but not limited to: assessing
if the acquired technology has reached technological feasibility
and if the acquired technology has no alternative future use.
Technological feasibility is established when either of two sets
of criteria is met:
|
|
|
a) the detail program design has been completed,
documented, and traced to product specifications and its
high-risk development issues have been resolved; or |
|
|
b) a working model of the product has been finished and
determined to be complete and consistent with the product design. |
Upon acquiring the licensed components of Tavves
technology, Concord did not have a completed product design and
did not have a working model, as defined. In addition, the
purchased source code has no alternative future use, i.e.,
Concord will not use the source code for any other purpose than
described above. The detailed program design for the integration
of Tavves technology into Concord eHealth®
Suite of products has not been completed. The acquisition of
Aprisma eliminates our need for this technology, which will now
become redundant.
|
|
(e) |
Valuation of Long-Lived Tangible and Intangible Assets and
Goodwill |
We have significant long-lived tangible and intangible assets
and goodwill, which are susceptible to valuation adjustments as
a result of changes in various factors or conditions. The
long-lived tangible assets are fixed assets, which are
depreciated over their estimated useful lives. The long-lived
intangible assets are
31
completed technology (software), reseller relationships,
maintenance relationships and trade name/trademarks, which are
amortized at the greater of (a) the ratio that current
revenues bear to the total of current and anticipated future
revenues or (b) the straight line method over their
respective remaining useful lives; and contractor agreements,
which are being amortized using the straight-line method over
their useful lives. Goodwill is not amortized.
At each quarter-end, the carrying value of the completed
technology (software) is compared to its net realizable
value (NRV). NRV is the estimated future gross
revenues from products that incorporate the software reduced by
the estimated future costs of disposal. If NRV is less than the
carrying value, the excess is written-off and the then current
NRV becomes the new carrying value of the software. We assess
the potential impairment of other identifiable intangible assets
and fixed assets whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors
we consider important, which could trigger an impairment of such
assets, include the following:
|
|
|
|
|
significant underperformance relative to historical or projected
future operating results; |
|
|
|
significant changes in the manner of or use of the acquired
assets or the strategy for our overall business; |
|
|
|
significant negative industry or economic trends; |
|
|
|
significant decline in our stock price for a sustained
period; and |
|
|
|
a decline in our market capitalization below net book value. |
Future adverse changes in these or other unforeseeable factors
could result in an impairment charge that would impact future
results of operations and financial position in the reporting
period identified.
Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, or SFAS 142
requires goodwill acquired as a result of a purchase method
business combination to be tested for impairment using a
two-step process. The first step compares the fair value of the
reporting unit with the units carrying value, including
goodwill. When the carrying value of the reporting unit is
greater than fair value, the units goodwill may be
impaired, and the second step must be completed to measure the
amount of the goodwill impairment charge, if any. In the second
step, the implied fair value of the reporting units
goodwill is compared with the carrying amount of the units
goodwill. If the carrying amount is greater than the implied
fair value, the carrying value of the goodwill must be written
down to its implied fair value. Goodwill is required to be
tested for impairment at least annually, or more frequently when
events and circumstances occur indicating that the recorded
goodwill might be impaired. We perform the annual assessment at
June 30 of each fiscal year.
As of June 30, 2004, we performed our annual test for
impairment on the carrying value of goodwill of our MSP/ TC and
Enterprise reporting units. We compared the fair value of each
reporting unit to which goodwill has been allocated to its book
value and determined that no impairment existed at that date.
Factors we consider important, which could trigger an impairment
of goodwill, include the following:
|
|
|
|
|
significant underperformance relative to historical or projected
future operating results; |
|
|
|
significant negative industry or economic trends; |
|
|
|
significant decline in our stock price for a sustained
period; and |
|
|
|
a decline in our market capitalization below net book value. |
Future adverse changes in these or other unforeseeable factors
could result in an impairment charge that would impact future
results of operations and financial position in the reporting
period identified.
Significant judgments and estimates are involved in determining
the useful lives of our intangible assets, determining what
reporting units exist and assessing when events or circumstances
would require an interim impairment analysis of goodwill or
other long-lived assets to be performed. Changes in events or
circumstances, including but not limited to technological
advances or competition which could result in shorter useful
32
lives, additional reporting units which may require alternative
methods of estimating fair value, or economic or market
conditions which may affect previous assumptions and estimates,
could have a significant impact on our results of operations or
financial position through accelerated amortization expense or
impairment charges.
Results of Operations
The following table sets forth, for the periods indicated,
certain financial data as percentages of Concords total
revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License revenues
|
|
|
47.1 |
% |
|
|
52.1 |
% |
|
|
54.6 |
% |
|
Service revenues
|
|
|
52.9 |
|
|
|
47.9 |
|
|
|
45.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of license revenues
|
|
|
3.3 |
|
|
|
3.0 |
|
|
|
2.0 |
|
|
Cost of service revenues
|
|
|
16.5 |
|
|
|
15.5 |
|
|
|
16.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
19.8 |
|
|
|
18.5 |
|
|
|
18.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
80.2 |
|
|
|
81.5 |
|
|
|
81.9 |
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
23.7 |
|
|
|
21.9 |
|
|
|
23.4 |
|
|
Sales and marketing
|
|
|
47.0 |
|
|
|
46.5 |
|
|
|
50.5 |
|
|
General and administrative
|
|
|
11.0 |
|
|
|
8.7 |
|
|
|
8.2 |
|
|
Acquisition-related charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-process research and development
|
|
|
0.1 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
81.8 |
|
|
|
78.1 |
|
|
|
82.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(1.6 |
) |
|
|
3.4 |
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
4.2 |
|
|
|
2.7 |
|
|
|
3.3 |
|
|
Interest expense
|
|
|
(3.1 |
) |
|
|
(0.2 |
) |
|
|
0.0 |
|
|
Other expense
|
|
|
(0.1 |
) |
|
|
(0.4 |
) |
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
|
1.0 |
|
|
|
2.1 |
|
|
|
3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(0.6 |
) |
|
|
5.5 |
|
|
|
2.9 |
|
|
|
|
|
|
|
|
|
|
|
(Benefit from) provision for income taxes
|
|
|
(0.1 |
) |
|
|
(1.9 |
) |
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(0.5 |
)% |
|
|
7.4 |
% |
|
|
2.3 |
% |
|
|
|
|
|
|
|
|
|
|
33
Total Revenues
Concords total revenues are generated from license revenue
and service revenue. License revenues are derived from the
licensing of software products. Service revenues consist of fees
for maintenance, training and professional services.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
|
|
Percent | |
|
|
|
|
2004 | |
|
Change | |
|
2003 | |
|
Change | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
License Revenues
|
|
$ |
49,973 |
|
|
|
(7.9 |
)% |
|
$ |
54,267 |
|
|
|
5.9 |
% |
|
$ |
51,230 |
|
Service Revenues
|
|
|
56,215 |
|
|
|
12.9 |
% |
|
|
49,796 |
|
|
|
16.9 |
% |
|
|
42,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$ |
106,188 |
|
|
|
2.0 |
% |
|
$ |
104,063 |
|
|
|
10.9 |
% |
|
$ |
93,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Total Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License Revenues
|
|
|
47.1 |
% |
|
|
|
|
|
|
52.1 |
% |
|
|
|
|
|
|
54.6 |
% |
Service Revenues
|
|
|
52.9 |
% |
|
|
|
|
|
|
47.9 |
% |
|
|
|
|
|
|
45.4 |
% |
License Revenues
Concords license revenues are derived from the licensing
of software products.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
|
|
Percent | |
|
|
|
Percent | |
|
|
|
|
2004 | |
|
Change | |
|
2003 | |
|
Change | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
License Revenues
|
|
$ |
49,973 |
|
|
|
(7.9 |
)% |
|
$ |
54,267 |
|
|
|
5.9 |
% |
|
$ |
51,230 |
|
Percent of Total Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License Revenues
|
|
|
47.1 |
% |
|
|
|
|
|
|
52.1 |
% |
|
|
|
|
|
|
54.6 |
% |
Fiscal 2004 compared to fiscal 2003: The decrease in
license revenues in absolute dollars from 2003 to 2004 was due
to a decrease in large sales transactions with European service
providers, mainly in Germany and the UK. This decrease was
partially offset by $2.4 million in license revenues
generated by netViz, a company which was acquired by Concord in
July 2003.
Fiscal 2003 compared to fiscal 2002: The increase in
license revenues in absolute dollars from 2002 to 2003 was due
to an increase in sales to European service providers and to the
license revenues generated by netViz, a company acquired in
2003. The increase in sales to European service providers was
driven by the increased demand for outsourced services by
European enterprises, which in turn, are using these services to
reduce their operational costs. NetViz contributed over
$1.0 million of the license revenues in 2003 while
increased sales to European service providers comprise the
majority of the balance of the increase.
The continuing decrease of license revenues as a percent of
total revenues from 2003 to 2004 and from 2002 to 2003 was the
result of a significant increase in service revenues during the
same periods, consisting primarily of maintenance revenue
increases. Our large customer installed base that continues to
renew their annual maintenance contracts drives this trend.
New eHealth customer accounts
License revenues are partially dependent on our ability to sell
to new eHealth customer accounts. New eHealth
customer accounts represent the number of new customer accounts
that purchase software from the Concord eHealth®
Suite of products. NetViz new customer accounts are excluded
from this count as these products are not considered key drivers
of our primary business. Due to the nature of netViz®
products, customers that purchase netViz® products do not
generate significant revenue for the initial or subsequent
purchase.
34
License revenues are partially dependent on our ability to sell
to new customer accounts. License revenues can also be dependent
on the number of transactions over $100,000 that we are able to
close during the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
|
|
Percent | |
|
|
|
Percent | |
|
|
|
|
2004 | |
|
Change | |
|
2003 | |
|
Change | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
New eHealth Customer Accounts
|
|
|
86 |
|
|
|
(41.5 |
)% |
|
|
147 |
|
|
|
(45.6 |
)% |
|
|
270 |
|
eHealth transactions greater than $100K
|
|
|
153 |
|
|
|
( 7.3 |
)% |
|
|
165 |
|
|
|
1.9 |
% |
|
|
162 |
|
Percent of Total Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New eHealth Customer Accounts
|
|
|
15 |
% |
|
|
|
|
|
|
18 |
% |
|
|
|
|
|
|
21 |
% |
Fiscal 2004 compared to fiscal 2003: The decrease in the
number of sales to new eHealth customer accounts from
2003 to 2004 was due, primarily, to sales and marketing
execution issues in the first quarter of 2004. Our sales teams
focused their efforts mainly on our large install base in the
first two quarters of 2004. Internal initiatives implemented in
the third quarter of 2004, such as targeted marketing programs
and specific sales incentives, helped improve our effectiveness
at winning new eHealth customer accounts in the third and
fourth quarters of 2004. The decrease in the number of
transactions greater than $100,000 in 2004 was driven by a
decrease in transactions generated by our indirect channel.
Fiscal 2003 compared to fiscal 2002: The decrease in the
number of sales to new customer accounts from 2002 to 2003 is
due primarily, to an increase in repeat sales to our customer
base driven by the release of new functionality that continues
to appeal to our existing customer base. The slight increase in
the number of transactions greater than $100,000 is due
primarily to the investment in the solution selling training of
our sales force; this training provides a business-focused
approach to the sales process.
There were no material price increases for products during 2004,
2003, or 2002. Inflation did not have a significant impact on
our revenues or income during 2004, 2003 or 2002.
Service Revenues
Concords service revenues consist of fees for maintenance,
training and professional services.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
|
|
Percent | |
|
|
|
Percent | |
|
|
|
|
2004 | |
|
Change | |
|
2003 | |
|
Change | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Service Revenues
|
|
$ |
56,215 |
|
|
|
12.9 |
% |
|
$ |
49,796 |
|
|
|
16.9 |
% |
|
$ |
42,614 |
|
Percent of Total Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service Revenues
|
|
|
52.9 |
% |
|
|
|
|
|
|
47.9 |
% |
|
|
|
|
|
|
45.4 |
% |
Fiscal 2004 compared to fiscal 2003: The increase in
service revenues from 2003 to 2004 was due mainly to an increase
in maintenance revenues, which are generated from new and
renewed maintenance contracts, and the maintenance generated by
netViz. Service revenues generated by netViz contributed
approximately $1.8 million of the increase. Increased
service revenues from new and renewed maintenance contracts,
driven by our large install base, comprised the balance of the
increase.
Fiscal 2003 compared to fiscal 2002: The increase in
service revenues, from 2002 to 2003, was due to a significant
increase in maintenance revenues, which are generated from new
and renewed maintenance contracts, and the maintenance generated
by netViz. NetViz contributed over $0.6 million in service
revenue in 2003 while increased service revenues from new and
renewed maintenance contracts primarily comprised the balance of
the increase.
Maintenance revenues represent fees earned by granting our
customers rights to technical support, software product
upgrades, and maintenance patches during the support period,
which is usually one year. The majority of our license customers
purchase maintenance upon the initial licensing of our software.
In addition, the majority of these customers renew their
maintenance agreements annually. An increase in the number of
35
our customers and the resulting demand for these services
further helped drive the increase in service revenues from 2003
to 2004 and from 2002 to 2003.
Direct and Indirect Revenues
Concord markets its products in the United States primarily
through a direct sales force. Internationally, Concord markets
primarily through indirect channels, which include channel
partners and other resellers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
|
|
Percent | |
|
|
|
Percent | |
|
|
|
|
2004 | |
|
Change | |
|
2003 | |
|
Change | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(Dollars in thousands) | |
|
|
Direct
|
|
$ |
69,226 |
|
|
|
7.9 |
% |
|
$ |
64,162 |
|
|
|
(5.5 |
)% |
|
$ |
67,925 |
|
Indirect
|
|
|
36,962 |
|
|
|
(7.4 |
)% |
|
|
39,901 |
|
|
|
53.9 |
% |
|
|
25,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$ |
106,188 |
|
|
|
2.0 |
% |
|
$ |
104,063 |
|
|
|
10.9 |
% |
|
$ |
93,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Total Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
|
65.2 |
% |
|
|
|
|
|
|
61.7 |
% |
|
|
|
|
|
|
72.4 |
% |
Indirect
|
|
|
34.8 |
% |
|
|
|
|
|
|
38.3 |
% |
|
|
|
|
|
|
27.6 |
% |
Fiscal 2004 compared to fiscal 2003: The increase of
direct sales in 2004 in both absolute dollars and percentage of
revenue is due to improved performance by the domestic sales
force due to our continued investment in sales training as well
as large deals with domestic service providers. The decrease in
indirect sales for the same period is due to lower sales in
Europe and Asia. Sales execution issues in Asia in the first
quarter of 2004 explain in part this decrease. We have since
replaced sales personnel in that region.
Fiscal 2003 compared to fiscal 2002: The increase of
indirect sales is primarily driven by increased sales in Europe,
which are usually done through resellers. In 2003, we introduced
the Concord Authorized Reseller (CAR) program, which
provides, for a fixed annual fee, product, services, and sales
training to our VARs and distributors. This training had a
positive impact in 2003 on the ability of the indirect channel
to better penetrate international markets, such as Europe.
International Revenues
Concord has twelve international subsidiaries and five
international branch offices. Concord has customers in 63
countries.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
|
|
Percent | |
|
|
|
Percent | |
|
|
|
|
2004 | |
|
Change | |
|
2003 | |
|
Change | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
United Kingdom
|
|
$ |
7,526 |
|
|
|
(27.7 |
)% |
|
$ |
10,412 |
|
|
|
81.7 |
% |
|
$ |
5,731 |
|
Europe (excluding the U.K.)
|
|
|
16,112 |
|
|
|
(19.1 |
)% |
|
|
19,907 |
|
|
|
19.6 |
% |
|
|
16,640 |
|
Rest of the World
|
|
|
13,001 |
|
|
|
(9.8 |
)% |
|
|
14,419 |
|
|
|
5.5 |
% |
|
|
13,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
36,639 |
|
|
|
(18.1 |
)% |
|
$ |
44,738 |
|
|
|
24.2 |
% |
|
$ |
36,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Total Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom
|
|
|
7.1 |
% |
|
|
|
|
|
|
10.0 |
% |
|
|
|
|
|
|
6.1 |
% |
Europe (excluding the U.K.)
|
|
|
15.2 |
% |
|
|
|
|
|
|
19.1 |
% |
|
|
|
|
|
|
17.7 |
% |
Rest of the World
|
|
|
12.2 |
% |
|
|
|
|
|
|
13.9 |
% |
|
|
|
|
|
|
14.6 |
% |
Fiscal 2004 compared to fiscal 2003: The decrease in
international revenues in both absolute dollars and percentage
of revenues for 2004 was due mainly to strong demand by European
managed service providers in Germany and the UK in 2003. Sales
to these segments in Europe were lower in 2004 as demand for our
products was not as robust as compared to the corresponding
prior year periods. Sales in specific countries and
36
regions can be affected by large transactions and can lead to
unpredictable buying patterns. This variability can lead to
fluctuations in revenues between regions.
Fiscal 2003 compared to fiscal 2002: The increase in
international revenues as a percentage of total revenues was
driven primarily by strong demand by European service providers,
manly due to several specific large transactions in 2003.
The increase in international revenues as a percentage of total
revenues is primarily the result of Concords expansion of
its operations outside the United States, which has included
both the hiring of additional personnel as well as the
establishment of additional reseller relationships.
Although international revenues decreased year over year, we
expect revenue from international customers will continue to be
approximately 30% to 50% of total revenues. We continue to
commit additional time, training, and development resources to
customizing our products and services for selected international
markets and this will improve our ability to meet our
international sales targets. We believe that continued growth
and profitability will require further expansion of our sales,
marketing and customer service functions in international
markets. However, there can be no assurance that we will be
successful in meeting this estimate.
Segment Revenues
Concords reportable segments are determined by customer
type: managed service providers/telecommunication carriers
(MSP/ TC) and enterprise.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
|
|
Percent | |
|
|
|
Percent | |
|
|
|
|
2004 | |
|
Change | |
|
2003 | |
|
Change | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Segment Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MSP/ TC
|
|
$ |
48,374 |
|
|
|
3.2 |
% |
|
$ |
46,872 |
|
|
|
18.3 |
% |
|
$ |
39,636 |
|
|
Enterprise
|
|
|
57,814 |
|
|
|
1.1 |
% |
|
|
57,191 |
|
|
|
5.5 |
% |
|
|
54,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$ |
106,188 |
|
|
|
2.0 |
% |
|
$ |
104,063 |
|
|
|
10.9 |
% |
|
$ |
93,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Total Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MSP/ TC
|
|
|
45.6 |
% |
|
|
|
|
|
|
45.0 |
% |
|
|
|
|
|
|
42.2 |
% |
|
Enterprise
|
|
|
54.4 |
% |
|
|
|
|
|
|
55.0 |
% |
|
|
|
|
|
|
57.8 |
% |
Fiscal 2004 compared to fiscal 2003: The increase in MSP/
TC revenue in absolute dollars and as a percentage of total
revenue, from 2003 to 2004 was driven by several large
telecommunication carriers orders in the US. The increase
in enterprise revenues in absolute dollars was due to an
increase in demand for our products from repeat sales to
existing customers.
Fiscal 2003 compared to fiscal 2002: The increase in MSP/
TC revenue in absolute dollars and as a percentage of total
revenues from 2002 to 2003 was driven primarily by increased
sales to European based MSP/ TC customers. The increase in
enterprise revenues in absolute dollars was due to an increase
in demand for our products from new customers and repeat sales
to existing customers.
We expect that MSP/ TC revenue will continue to be approximately
40% to 50% of total revenues; however, there can be no assurance
that we will be successful in meeting this estimate.
Revenues Recognized in Connection With Third Party
Software.
Concord bundles third party software in some of its products
when it determines that bundling such software is cost-effective
or increases the effectiveness of Concords products. In
some instances, Concord has determined that it can be cost
prohibitive to develop such software applications, especially if
such applications are already available in the marketplace. In
addition, bundling third party software allows Concord, in
certain instances, to accelerate the delivery of increased
functionality within a short timeframe.
37
Revenues generated by Concord products that included third party
software were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
|
|
Percent | |
|
|
|
Percent | |
|
|
|
|
2004 | |
|
Change | |
|
2003 | |
|
Change | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Revenues
|
|
$ |
15,628 |
|
|
|
27.3 |
% |
|
$ |
12,281 |
|
|
|
271.8 |
% |
|
$ |
3,303 |
|
Percent of Total Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
14.7 |
% |
|
|
|
|
|
|
11.8 |
% |
|
|
|
|
|
|
3.5 |
% |
Fiscal 2004 compared to fiscal 2003: The increase of
revenues from third party software in 2004 as compared to 2003
in both absolute dollars and percentage of total revenues was
mostly driven by increased demand for Oracle® database
software that is integrated into our product offering. Demand
for the Oracle® database product is also driven by the
transition of our large installed base from the Ingres database
to the Oracle® database.
Fiscal 2003 compared to fiscal 2002: In 2002, we
integrated the Oracle® database software into our product
offering; this enabled us to replace the Ingres database with
the Oracle® product and to offer one single database
solution to our customers. In the first quarter of 2003, we
repackaged some of our product offerings to increase the value
proposition of some components of the eHealth Suite; this
repackaging, which included the Oracle database in some
instances, resulted in new products with a higher average
selling price. This repackage resulted in higher revenues
recognized in connection with third party software.
Cost of Revenues
Cost of revenues includes cost of license revenues and cost of
service revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
|
|
Percent | |
|
|
|
Percent | |
|
|
|
|
2004 | |
|
Change | |
|
2003 | |
|
Change | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Cost of License Revenues
|
|
$ |
3,490 |
|
|
|
12.0 |
% |
|
$ |
3,117 |
|
|
|
68.5 |
% |
|
$ |
1,850 |
|
Cost of Service Revenues
|
|
|
17,488 |
|
|
|
8.4 |
% |
|
|
16,127 |
|
|
|
6.7 |
% |
|
|
15,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Revenues
|
|
$ |
20,978 |
|
|
|
9.0 |
% |
|
$ |
19,244 |
|
|
|
13.4 |
% |
|
$ |
16,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Total Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of License Revenues
|
|
|
3.3 |
% |
|
|
|
|
|
|
3.0 |
% |
|
|
|
|
|
|
2.0 |
% |
Cost of Service Revenues
|
|
|
16.5 |
% |
|
|
|
|
|
|
15.5 |
% |
|
|
|
|
|
|
16.1 |
% |
Cost of License Revenues
Cost of license revenues includes expenses associated with
royalty fees, production, fulfillment of orders, product
documentation and amortization expense associated with the
completed technology intangible asset. Royalty costs are
composed of third party software costs. The amortization expense
is related to the acquisition of netViz.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
|
|
Percent | |
|
|
|
Percent | |
|
|
|
|
2004 | |
|
Change | |
|
2003 | |
|
Change | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Cost of License Revenues
|
|
$ |
3,490 |
|
|
|
12.0 |
% |
|
$ |
3,117 |
|
|
|
68.5 |
% |
|
$ |
1,850 |
|
Percent of Total Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of License Revenues
|
|
|
3.3 |
% |
|
|
|
|
|
|
3.0 |
% |
|
|
|
|
|
|
2.0 |
% |
Fiscal 2004 compared to fiscal 2003: The increase of cost
of license revenues in absolute dollars is driven mainly by
higher royalty costs, which are fees paid to third party
software companies.
38
Fiscal 2003 compared to fiscal 2002: The increase of cost
of license revenues in absolute dollars is driven by
amortization expense and higher royalty costs. The factors
contributed approximately 21% and 56%, respectively, of the
increase in cost of license revenues.
Expenses Recognized in Connection With Third Party
Software.
Royalty costs are comprised of third party software costs. Costs
associated with revenues generated by Concord products that
included third party software were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
|
|
Percent | |
|
|
|
Percent | |
|
|
|
|
2004 | |
|
Change | |
|
2003 | |
|
Change | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Expenses
|
|
|
1,801 |
|
|
|
29.0 |
% |
|
|
1,396 |
|
|
|
104.7 |
% |
|
$ |
682 |
|
Percent of Total Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
1.7 |
% |
|
|
|
|
|
|
1.3 |
% |
|
|
|
|
|
|
0.7 |
% |
Fiscal 2004 compared to fiscal 2003: The increase in
royalty costs was mostly driven by increased demand for
Oracle® database software that is integrated into our
product offering. Demand for the Oracle® database product
is also driven by the transition of our large installed base
from the Ingres database to the Oracle®database. In 2002,
we integrated the Oracle® database software into our
product offering; this enabled us to replace the Ingres database
we used previously with the Oracle® product and to offer
one single database solution to our customers. As our installed
base has grown, the number of products under maintenance, which
includes third party software, has also increased. Third party
maintenance charges are usually based on the number of sold
units.
Fiscal 2003 compared to fiscal 2002: The increase in
royalty costs is mostly driven by the cost of distribution of
the Oracle database and the related maintenance costs.
Cost of Service Revenues
Cost of service revenues includes the personnel costs associated
with providing customer support in connection with maintenance,
training and professional service contracts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
|
|
Percent | |
|
|
|
Percent | |
|
|
|
|
2004 | |
|
Change | |
|
2003 | |
|
Change | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Cost of Service Revenues
|
|
|
17,488 |
|
|
|
8.4 |
% |
|
|
16,127 |
|
|
|
6.7 |
% |
|
|
15,120 |
|
Percent of Total Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Service Revenues
|
|
|
16.5 |
% |
|
|
|
|
|
|
15.5 |
% |
|
|
|
|
|
|
16.1 |
% |
Fiscal 2004 compared to fiscal 2003: The increase in
absolute dollars and percentage of revenues was driven by
supporting a growing base of service customers in the US, which
resulted in an increase in personnel and related costs in
servicing those customers.
Fiscal 2003 compared to fiscal 2002: The increase in
absolute dollars is attributable to the costs associated with
the opening, in the first quarter of 2003, of a technical
support call center in Australia, which is servicing our
customers in the Asia-Pacific region.
The decrease of the cost of service revenues as a percentage of
revenue from 2002 to 2003 is mainly attributable to investments
made in our information technology infrastructure, which have
improved the productivity of the service organization.
39
Gross Profit
Total gross profit includes gross profit from license revenues
and gross profit from service revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
|
|
Percent | |
|
|
|
Percent | |
|
|
|
|
2004 | |
|
Change | |
|
2003 | |
|
Change | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Gross Profit
|
|
$ |
85,210 |
|
|
|
0.5 |
% |
|
$ |
84,819 |
|
|
|
10.3 |
% |
|
$ |
76,874 |
|
Percent of Total Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
80.2 |
% |
|
|
|
|
|
|
81.5 |
% |
|
|
|
|
|
|
81.9 |
% |
Fiscal 2004 compared to fiscal 2003: The increase in
total gross profit, in absolute dollars, is driven by the
increase of total revenues, while the decrease of the gross
profit percentage is driven by the increase in royalty and a
full year of amortization expenses related to the netViz
acquisition.
Fiscal 2003 compared to fiscal 2002: The increase in
total gross profit, in absolute dollars is driven by the
increase of total revenues. The decrease of the gross profit
percentage is driven by the increase in royalty costs.
We expect to increase our gross profit in absolute dollars;
however, this will depend upon our revenue growth, among other
factors. Accordingly, there can be no assurance that we will be
successful in increasing our gross profit on an absolute basis
of total revenues.
Research and Development Expenses
Research and development expenses consist primarily of personnel
costs associated with software development.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
|
|
Percent | |
|
|
|
Percent | |
|
|
|
|
2004 | |
|
Change | |
|
2003 | |
|
Change | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Research and Development
|
|
$ |
25,218 |
|
|
|
10.5 |
% |
|
$ |
22,827 |
|
|
|
3.9 |
% |
|
$ |
21,973 |
|
Percent of Total Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development
|
|
|
23.7 |
% |
|
|
|
|
|
|
21.9 |
% |
|
|
|
|
|
|
23.4 |
% |
Fiscal 2004 compared to fiscal 2003: The increase in
research and development expenses in both absolute dollars and
percentage of revenues was related to the compensation expenses
related to the Option Repurchase program, severance costs for
reduction in force, and offshore development consulting. The
Option Repurchase program accounted for 57% of the increase in
research and development expenses. The severance costs and
offshore development costs accounted for 13% and 28%,
respectively, to the increase in research and development costs.
Offshore development consulting consists of consultants engaged
to accelerate the time to market of certain modules of our
eHealth® Suite of products.
Fiscal 2003 compared to fiscal 2002: The increase is due
to the acquisition of netViz, which resulted in higher
headcount, increased consulting fees and amortization expenses.
Each of these factors contributed 73%, 14% and 13% to the
increase. Research and development expenses would have remained
similar to 2002 when excluding the impact of the netViz
acquisition.
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 total revenues 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.
40
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
|
|
Percent | |
|
|
|
Percent | |
|
|
|
|
2004 | |
|
Change | |
|
2003 | |
|
Change | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Sales and Marketing
|
|
$ |
49,911 |
|
|
|
3.2 |
% |
|
$ |
48,352 |
|
|
|
2.0 |
% |
|
$ |
47,383 |
|
Percent of Total Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Marketing
|
|
|
47.0 |
% |
|
|
|
|
|
|
46.5 |
% |
|
|
|
|
|
|
50.5 |
% |
Fiscal 2004 compared to fiscal 2003: The increase is due
to the acquisition of netViz and increased sales expenses, which
were partially offset by lower marketing expenses. NetViz sales
and marketing functions accounted for about $0.5 million of
the increase in costs. Excluding netViz, the increase of
$2.7 million in sales expenses is driven by ongoing
recruiting fees due to sales turnover, severance costs related
to terminations of sales employees, higher travel expenses,
sales commissions and bonus payments to our sales force due to
the increase attainment rate by some of our sales teams, and
compensation cost associated with the Option Repurchase program.
Each of these factors contributed 24%, 19%, 15%, 11% and 13%,
respectively, to the increase. The decrease of $1.6 million
in marketing expenses was mainly driven by lower
headcount-related expenses and lower travel expenses. Each
factor contributed about 54% and 14%, respectively, to the
decrease.
Fiscal 2003 compared to fiscal 2002: The increase in
absolute dollars is due to the acquisition of netViz and
increased sales expenses, which were partially offset by lower
marketing expenses. The integration and investments made in the
sales and marketing functions of netViz account for about
$0.4 million of the increase. Sales expenses increased by
approximately $3.7 million due to additional headcount and
higher sales commissions and bonus payments to our sales force
resulting from higher license revenues. Our sales force is
compensated on the initial sales of licenses and services. Each
factor contributed approximately 32% and 58%, respectively, to
the increase. Marketing expenses decreased by approximately by
$3.2 million due to lower marketing program spending and
lower headcount. Each factor contributed about 36% and 31%,
respectively, to the decrease.
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 sales and
marketing expenses as a percentage of total revenues.
General and Administrative Expenses
General and administrative expenses consist primarily of
salaries for financial, accounting, legal, investor relations,
human resources, administrative and management personnel.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
|
|
Percent | |
|
|
|
Percent | |
|
|
|
|
2004 | |
|
Change | |
|
2003 | |
|
Change | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
General and Administrative
|
|
$ |
11,676 |
|
|
|
29.2 |
% |
|
$ |
9,035 |
|
|
|
17.9 |
% |
|
$ |
7,665 |
|
Percent of Total Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative
|
|
|
11.0 |
% |
|
|
|
|
|
|
8.7 |
% |
|
|
|
|
|
|
8.2 |
% |
Fiscal 2004 compared to fiscal 2003: The increase in
general and administrative expenses in both absolute dollars and
percentage of revenues was primarily attributed to the
compensation expenses related to the Option Repurchase program,
and increased fees relating to compliance with the
Sarbanes-Oxley Act of 2002. The increased fees incurred include
legal, audit and consulting fees. Each factor contributed
approximately 48% and 40%, respectively, to the variance. Lower
bad debt expenses due to an adjustment to the allowance for
doubtful accounts resulting from a refinement in methodology
partially offset these increases and contributed (11%) to the
variance. The adjustment to the allowance for doubtful accounts
resulted in the
41
amount of $0.9 million, which served to reduce general and
administrative expenses and had an impact of $0.03 per
share on our diluted earnings per share.
Fiscal 2003 compared to fiscal 2002: The increase in
absolute dollars from 2002 to 2003 was due to the integration of
netViz, higher salary and bonus expenses, increased
administrative fees, which include legal and auditing fees, and
an increase in the use of consultants in preparation for new
rules governing publicly-traded companies in the United States.
Lower bad debt expenses offset these increases, in part. Each
factor contributed approximately 10%, 48%, 34%, 14%, and (39%),
respectively, to the variance.
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.
Acquisition-Related Charges
Acquisition-related charges in 2003 were expenses associated
with the acquisition of netViz; these include mostly legal and
audit fees.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
|
|
Percent | |
|
|
|
Percent | |
|
|
|
|
2004 | |
|
Change | |
|
2003 | |
|
Change | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Acquisition-related charges
|
|
$ |
|
|
|
|
0.0 |
% |
|
$ |
40 |
|
|
|
0.0 |
% |
|
$ |
|
|
Percent of Total Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related charges
|
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
There were no acquisition related charges incurred in 2002 or
2004.
In-Process Research & Development Expenses
In process research & development expenses relate to
our licensing of components of Tavves technology. Concord
has licensed Tavves root cause analysis and discovery of
layer 2 and 3 network topology to build upon our current
position in optimizing application availability and performance
across networks and systems.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
|
|
Percent | |
|
|
|
Percent | |
|
|
|
|
2004 | |
|
Change | |
|
2003 | |
|
Change | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
In-process research & development
|
|
$ |
100 |
|
|
|
(89.9) |
% |
|
$ |
994 |
|
|
|
0.0 |
% |
|
$ |
|
|
Percent of Total Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-process research & development
|
|
|
0.1 |
% |
|
|
|
|
|
|
1.0 |
% |
|
|
|
|
|
|
0.0 |
% |
Concord completed two purchases of source code from Tavve; one
totaling $1.0 million in 2003 and the second for
$0.1 million in 2004. There were no in process
research & development expenses incurred in 2002.
42
Other Income
Other income consists of interest earned on funds available for
investment, interest expenses payable on the Convertibles Senior
Notes issued in December 2003, foreign currency exchange gains
and losses and miscellaneous foreign taxes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
|
|
Percent | |
|
|
|
Percent | |
|
|
|
|
2004 | |
|
Change | |
|
2003 | |
|
Change | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Interest Income
|
|
$ |
4,471 |
|
|
|
59.2 |
% |
|
$ |
2,808 |
|
|
|
(10.2 |
)% |
|
$ |
3,127 |
|
Interest Expense
|
|
|
(3,283 |
) |
|
|
1245.5 |
% |
|
|
(244 |
) |
|
|
1335.3 |
% |
|
|
(17 |
) |
Other
|
|
|
(139 |
) |
|
|
(71.0 |
)% |
|
|
(480 |
) |
|
|
147.4 |
% |
|
|
(194 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income, net
|
|
$ |
1,049 |
|
|
|
(49.7 |
)% |
|
$ |
2,084 |
|
|
|
(28.5 |
)% |
|
$ |
2,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Total Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
1.0 |
% |
|
|
|
|
|
|
2.1 |
% |
|
|
|
|
|
|
3.1 |
% |
Fiscal 2004 compared to fiscal 2003: The
$1.7 million increase in interest income in 2004 as
compared to 2003 is attributable to the additional interest
income generated by the investment of the $83.0 million in
proceeds from the issuance of our 3.0% Senior Convertible
Notes due 2023 (the Notes) in December 2003.
Interest expense includes interest paid on the Notes and
amortization of the issuance costs which primarily consist of
investment banker, legal and other professional fees. Interest
expense was $2.6 million while amortization expense was
$0.7 million, respectively, for 2004. Issuance costs are
being amortized over a five-year period to the first date
holders of the Notes may require Concord to repurchase the
outstanding Notes.
The decrease in other expenses in 2004 as compared to 2003 is
due to smaller foreign currency transaction and translation
losses attributable to the U.S. dollar remaining stable or
slightly weaker against certain foreign currencies offset by the
U.S. dollar strengthening against the Euro.
Fiscal 2003 compared to fiscal 2002: The decrease of
interest income is due to lower yield on our investment
portfolio, which is driven by lower interest rates. Concord
incurred interest expenses of $0.2 million following the
issuance of $86.25 million in Convertible Senior Notes in
December of 2003. The increase in other expenses is due to
larger foreign currency transaction and translation losses
attributable to a weaker U.S. dollar.
Provision for Income Taxes
The provision for income taxes relates to federal, state and
foreign taxes resulting from the profitability of certain of our
foreign operations and the release of a portion of our deferred
tax asset valuation reserve.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
|
|
Percent | |
|
|
|
Percent | |
|
|
|
|
2004 | |
|
Change | |
|
2003 | |
|
Change | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
(Benefit from) provision for income taxes
|
|
$ |
(112 |
) |
|
|
(94.4 |
)% |
|
$ |
(2,015 |
) |
|
|
(454.8 |
)% |
|
$ |
568 |
|
Percent of Total Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Benefit from) provision for income taxes
|
|
|
(0.1 |
)% |
|
|
|
|
|
|
(1.9 |
)% |
|
|
|
|
|
|
0.6 |
% |
Fiscal 2004 compared to fiscal 2003: In 2004, we recorded
an income tax benefit of $0.8 million in connection with
the increase of our deferred tax assets, net of the effect of
items benefited in the additional paid in capital and other
comprehensive income accounts. This was offset by approximately
$0.7 million in foreign and state income taxes.
Fiscal 2003 compared to fiscal 2002: In 2003, we recorded
an income tax benefit of $2.6 million in connection with
the reversal of our non-cash deferred tax valuation allowance;
this was offset by approximately $0.6 million in foreign
taxes. In 2002, the provision mostly related to foreign taxes.
43
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
|
December 31, | |
|
|
|
December 31, | |
|
|
2004 | |
|
Change | |
|
2003 | |
|
Change | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Working Capital
|
|
$ |
147,925 |
|
|
|
(1.0 |
)% |
|
$ |
149,433 |
|
|
|
158.6 |
% |
|
$ |
57,792 |
|
Cash, cash equivalents and marketable securities (net of
restricted cash)
|
|
$ |
159,455 |
|
|
|
(1.5 |
)% |
|
$ |
161,891 |
|
|
|
122.3 |
% |
|
$ |
72,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
Change | |
|
2003 | |
|
Change | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Cash provided by operating activities
|
|
$ |
143 |
|
|
|
(98.6 |
)% |
|
$ |
10,387 |
|
|
|
81.5 |
% |
|
$ |
5,724 |
|
Cash used for investing activities
|
|
$ |
(56,426 |
) |
|
|
46.3 |
% |
|
$ |
(38,574 |
) |
|
|
452.6 |
% |
|
$ |
(6,980 |
) |
Cash provided by financing activities
|
|
$ |
2,663 |
|
|
|
(96.9 |
)% |
|
$ |
87,261 |
|
|
|
3247.2 |
% |
|
$ |
2,607 |
|
Working capital
Fiscal 2004 compared to fiscal 2003: The decrease in
working capital is driven by decline in cash, cash equivalents,
and marketable securities.
Fiscal 2003 compared to fiscal 2002: The increase in
working capital, from 2002 to 2003, is primarily due to the
issuance of $86.25 million of convertible senior notes, for
which we received $82.7 million, net of commissions and
fees. The rest of the increase is due, in part, to an increase
of $6.0 million of cash, cash equivalents and marketable
securities, which was the cash generated through our normal
operations.
Cash, cash equivalents and marketable securities (net of
restricted cash)
Cash, cash equivalents and marketable securities consist of
highly liquid investments in time deposits held at major banks,
commercial paper, United States government agency discount
notes, money market mutual funds and other money market
securities with original maturities of 90 days or less.
Fiscal 2004 compared to fiscal 2003: The decrease of
cash, cash equivalents and marketable securities is mainly due
to an increase in the unrealized loss in marketable securities
following the increase of interest rates.
Fiscal 2003 compared to fiscal 2002: The increase of
cash, cash equivalents and marketable securities is primarily
due to the issuance of convertible senior notes; this accounts
for $82.7 million of the increase. The rest of change is
due to the increase in net income and changes in various working
capital components.
Cash provided by operating activities
Cash flows from operating activities fluctuations are driven by
changes in net income, accrued expenses, accounts receivable and
deferred taxes.
Fiscal 2004 compared to fiscal 2003: Cash flows from
operating activities decreased due to a decline in profitability
from 2003 to 2004. Average daily sales outstanding
(DSO) for the quarter increased to 76 days at
December 31, 2004 compared to 72 days at
December 31, 2003. DSO is calculated by dividing the period
end accounts receivable by the quarterly revenue. DSO measures
both the age, in terms of days, of our accounts receivable and
the average time it takes to turn the receivable into cash.
There are a number of factors affecting DSO, including our
payment terms, collection ability and the timing of sales made
during a quarter.
Fiscal 2003 compared to fiscal 2002: Cash flows from
operating activities increased due to an improvement in
profitability from 2002 to 2003. Average daily sales outstanding
(DSO) for the quarter increased to 72 days at
December 31, 2003 compared to 66 days at
December 31, 2002.
44
Cash used for investing activities
Investing activities have consisted of the investments in
marketable securities, acquisition of property and equipment,
most notably computer and networking equipment to support the
corporate infrastructure, and business acquisitions. Concord
manages its market risk on its investment securities by
selecting investment grade securities with the highest credit
ratings and relatively short duration that trade in highly
liquid markets.
Fiscal 2004 compared to fiscal 2003: The increase in cash
used in investing activities is mainly due to the timing of
purchase and sales of marketable securities. Following the
issuance of $86.25 million of Convertible Senior Notes,
Concord invested these funds into marketable securities.
Fiscal 2003 compared to fiscal 2002: The increase from
2002 to 2003 in cash used in investing activities is mainly due
to the timing of the purchases and maturities of investments and
the acquisition of netViz. These factors contributed 80% and 13%
to the change, respectively.
Cash provided by financing activities
Financing activities consisted primarily of the issuance of
Common Stock and debt.
Fiscal 2004 compared to fiscal 2003: In 2004, Concord
received approximately $2.7 million from the exercise of
employee stock options. There was no issuance of debt in 2004.
On December 8, 2003, Concord received $82.7 million,
net of fees and commissions, following the issuance of
$86.25 million of Convertible Senior Notes. The issuance of
these Notes explains the change from 2003 to 2004 in the cash
provided by financing activities.
Fiscal 2003 compared to fiscal 2002: In 2002, Concord
received approximately $2.6 million from the exercise of
employee stock options. There was no issuance of debt in 2002.
Contractual obligations
The following table is a summary of our contractual obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Facility and certain equipment leases
|
|
$ |
4,053 |
|
|
$ |
2,275 |
|
|
$ |
887 |
|
|
$ |
196 |
|
|
$ |
3 |
|
|
$ |
7,414 |
|
Minimum royalties payments
|
|
|
565 |
|
|
|
565 |
|
|
|
565 |
|
|
|
|
|
|
|
|
|
|
|
1,695 |
|
Convertible notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,250 |
|
|
|
|
|
|
|
86,250 |
|
Interest payments on the Convertible Notes
|
|
|
2,588 |
|
|
|
2,588 |
|
|
|
2,588 |
|
|
|
2,588 |
|
|
|
|
|
|
|
10,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commitments
|
|
$ |
7,206 |
|
|
$ |
5,428 |
|
|
$ |
4,040 |
|
|
$ |
89,034 |
|
|
$ |
3 |
|
|
$ |
105,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concord leases its facilities and certain equipment under
operating lease agreements extending through August 2007.
Concords remaining lease commitments for all leased
facilities and equipment with an initial or remaining term of at
least one-year total $7.4 million.
Concord has entered into several software license agreements for
exclusive worldwide licenses to distribute or utilize certain
patented computer software. Concord bundles third-party software
in some of its products when it determines that bundling such
software is cost-effective or increases the effectiveness of
Concords products. The minimum royalties payment for these
exclusive arrangements is $1.7 million for 2005 to 2007.
On December 8, 2003, Concord raised $82.7 million, net
of fees and commissions, following the issuance of convertible
senior notes with a principal of $86.25 million. The
Convertible Senior Notes mature in 2023 and bear interest of
3.0%, payable semi-annually in June and December of each year.
Concord intends to use the net proceeds of the offering for
working capital and general corporate purposes and potentially
for future acquisitions of complementary businesses and
technologies. Holders of the Convertible Senior Notes may elect
to convert some or all of the outstanding Convertible Senior
Notes upon certain events, including a
45
change in control or if during a conversion period, the closing
price of our stock exceeds $32.24, which is 120% of the
conversion price ($26.87) for 20 trading days in a period of 30
trading days, which starts on the first business day of a
quarter. If the threshold is met, then holders may convert their
Convertible Senior Notes into our Common Stock at any time
during the succeeding 90 days, beginning on the 30th
trading day of the quarter. We may redeem some or all of the
Convertible Senior Notes at any time on or after
December 15, 2008. Holders have the right to require
Concord to purchase all or a portion of their notes for cash on
December 15, 2008, December 15, 2013, and
December 15, 2018. If Concord elects to redeem on
December 15, 2008, our contractual obligation for interest
payments in 2008 would be reduced by approximately
$0.1 million.
As of December 31, 2004, Concords stock price had not
exceeded 120% of the conversion price on any trading day since
December 8, 2003 and no other events had occurred which
would make the Convertible Senior Notes convertible. Holders may
convert the notes into shares of our common stock at an initial
conversion rate of 37.2148 shares of common stock per
$1,000 principal amount of notes (representing a conversion
price of approximately $26.87 per share which converts into
3,209,776 shares of common stock), subject to adjustment.
We may redeem some or all of the convertible senior notes on or
after December 15, 2008.
As of December 31, 2004, Concord had available for
U.S. federal income tax purposes net operating loss carry
forwards of approximately $24.1 million, which expire at
various dates through 2024. In addition, as of December 31,
2004, Concord had U.S. federal research and development tax
credit carry forwards of approximately $2.8 million, which
expire at various dates through 2022. Under current tax law, the
utilization of net operating loss and research and development
tax credit carry forwards may be subject to annual limitations
in the event of certain changes in ownership. Pursuant to the
Tax Reform Act of 1986, the utilization of net operating loss
carry forwards for tax purposes may be subject to an annual
limitation if a cumulative change of ownership of more than 50%
occurs over a three-year period.
As of December 31, 2004, Concords principal sources
of liquidity included cash, cash equivalents, and marketable
securities. Concord believes that its current cash, cash
equivalents, marketable securities and cash provided by future
operations will be sufficient to meet its 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.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board
(FASB) issued a revision to SFAS No. 123,
SFAS 123R Share-Based Payment.
SFAS No. 123R requires all companies to measure
compensation costs for all share-based payments, including stock
options, at fair value and expense such payments over the
service period. SFAS No. 123R specifies that companies
must use an option-pricing model to estimate fair value,
although it does not specifically require the use of a
particular model. The new standard is effective for interim or
annual periods beginning after June 15, 2005, and,
therefore, will be effective for Concord beginning with the
third quarter of 2005. Under the provisions of FAS 123R,
companies can select from three transition methods for the
implementation of this standard. The modified prospective method
would require all new awards that are granted after the
effective date to use the provisions of FAS 123R. Under this
method, for vested awards that are outstanding on the effective
date of FAS 123R, a company would not have to record any
additional compensation expense. For unvested awards that are
outstanding on the effective date of FAS 123R and were
previously included as part of pro forma net income and earnings
per share under the provisions of FAS 123 would be charged to
expense over the remaining vesting period, without any changes
in measurement. The second alternative is a variation of the
modified prospective method, which would allow companies to
restate earlier interim periods in the year that FAS 123R is
adopted using the applicable FAS 123 pro forma amounts. Under
the third alternative, the modified retrospective method,
companies would apply the modified prospective method and also
restate their prior financial statements to include the amounts
that were previously recognized in their pro forma disclosures
under the original
46
provisions of FAS 123. Currently, we disclose the estimated
effect on net income of these share-based payments in the
footnotes to the financial statements and the estimated fair
value of the share-based payments has historically been
determined using the Black-Scholes pricing model. We have not
determined which option-pricing model or transition method to
use upon implementation of this standard and have not yet
completed our evaluation of the impact of
SFAS No. 123R, but expect the adoption to have a
material effect on our consolidated financial statements.
In December 2004, the FASB issued Statement No. 153,
Exchanges of Nonmonetary Assets Amendment of APB
Opinion No. 29. The provisions of
SFAS No. 153 are based upon the principle that
exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged and it eliminates the narrow
exception for nonmonetary exchanges of similar productive assets
and replaces it with a broader exception for exchanges of
nonmonetary assets that do not have commercial
substance. The provisions in SFAS 153 are effective
for nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. Concord does not expect the
adoption of SFAS 153 to have a material effect on its
consolidated financial statements.
The FASB has issued two FASB Staff Positions (FSP) that
provide accounting guidance on how companies should account for
the effects of the American Jobs Creation Act of 2004 that was
signed into law on October 22, 2004.
The American Jobs Creation Act of 2004 allows for temporary
dividend deductions equal to 85% of cash dividends received
during the tax year from controlled foreign corporations and
invested in the United States. The result of this legislation
could affect how companies report their deferred income tax
balances. The first FSP is FSP SFAS 109-1 and concludes
that the tax relief from this legislation should be accounted
for as a special deduction instead of a tax rate
reduction. The second FSP is FSP SFAS 109-2 and gives a
company additional time to evaluate the effects of the
legislation on any plan for reinvestment or repatriation of
foreign earning for purposes of applying FASB Statement
No. 109, Accounting for Income Taxes. Concord has
not yet completed its evaluation of the provisions of the
American Jobs Creation Act of 2004. The repatriation of foreign
earnings would not have a material effect on Concords
consolidated financial statements. We do not anticipate the
repatriation of foreign earnings to the United States in the
future.
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk
|
|
(a) |
Market and Interest Rate Risk |
Most of Concords current export sales are denominated in
United States dollars. To the extent that a majority of our
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 our products and
services more expensive and, therefore, potentially less
competitive in international markets. Substantially all of our
business outside the United States is conducted in
U.S. dollar-denominated transactions, whereas our operating
expenses in our international branches are denominated in local
currency. We believe that the operating expenses of our foreign
operations are immaterial, and therefore any associated market
risk is unlikely to have a material adverse effect on our
business, results of operations or financial condition.
At December 31, 2003 Concord had $86.25 million of
convertible senior notes with a fixed interest rate of 3%.
Accordingly, changes in the fair value of our fixed rate debt
will not have any impact.
All of Concords 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 Concords books. Accordingly, Concord has no
quantitative information concerning the market risk of
participating in such investments. Due to the short-term nature
of our investments, we believe we have minimal market risk. Our
investment portfolio of cash equivalents and marketable
securities is subject to interest rate fluctuations, but we
believe this risk is immaterial due to the short-term nature of
these investments.
47
|
|
(b) |
Foreign Currency Exchange Rate Risk |
We use forward contracts to reduce our exposure to foreign
currency risk due to fluctuations in exchange rates underlying
the value of accounts receivable denominated in foreign
currencies held until such receivables are collected. A forward
contract obligates us to exchange predetermined amounts of
specified foreign currencies at specified exchange rates on
specified dates. These forward contracts, to qualify as hedges
of existing assets, are denominated in the same currency in
which the underlying foreign currency receivables are
denominated and bear a contract value and maturity date that
approximate the value and expected settlement date,
respectively, of the underlying transactions. For contracts that
are designated and effective as hedges, unrealized gains and
losses on open contracts at the end of each accounting period,
resulting from changes in the fair value of these contracts, are
recognized in earnings in the same period as gains and losses on
the underlying foreign denominated receivables are recognized
and generally offset.
We do not enter into or hold derivatives for trading or
speculative purposes, and we only enter into contracts with
highly rated financial institutions. At December 31, 2004,
we had no forward contracts outstanding.
We plan to continue to utilize forward contracts and other
instruments in the future to reduce our exposure to exchange
rate fluctuations from accounts receivable denominated in
foreign currencies, and we may not be able to do this
successfully. Accordingly, we may experience economic loss and a
negative impact on earnings and equity as a result of foreign
currency exchange rate fluctuations. Also, as we continue to
expand our operations outside of the United States, our exposure
to fluctuations in currency exchange rates could increase.
|
|
Item 8. |
Financial Statements and Supplementary Data |
Concords financial statements together with the related
notes and the reports of PricewaterhouseCoopers LLP, independent
registered public accounting firm, are set forth in Item 15.
|
|
Item 9A. |
Controls and Procedures |
(a) Evaluation of Disclosure Controls and
Procedures. As of the end of the period covered by this
report, Concord carried out an evaluation, under the supervision
and with the participation of its management, including
Concords President and Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and
operation of Concords disclosure controls and procedures,
as defined in Exchange Act Rule 15d-14 (c). Based upon that
evaluation, Concords President and Chief Executive Officer
and Chief Financial Officer concluded that Concords
disclosure controls and procedures are effective in enabling
Concord to record, process, summarize, and report information
required to be included in Concords periodic SEC filings
within the required time period.
(b) Changes in Internal Controls over Financial
Reporting. There were no changes in Concords internal
controls over financial reporting (as defined in
Rule 13a-15 (f) under the Exchange Act) during the
fourth quarter that has materially affected, or would be
reasonably likely to materially affect Concords internal
controls over financial reporting.
Managements Report on Internal Control Over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act Rule 13a-15(f). Under the
supervision and with the participation of our management,
including our principal executive officer and principal
financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting
based on the framework in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organiza-
48
tions of the Treadway Commission. Based on our evaluation under
the framework in Internal Control Integrated
Framework, our management concluded that our internal
control over financial reporting was effective as of
December 31, 2004.
Our managements assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2004 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which is included
herein.
PART III
|
|
Item 10. |
Directors and Officers of the Registrant |
The information under the captions Election of
Directors and Section 16(a) Beneficial
Ownership Reporting Compliance as set forth in
Concords Proxy Statement for its annual stockholders
meeting to be held May 4, 2005 is incorporated herein by
reference.
Set forth below is certain information relating to each
executive officers business experience:
|
|
|
Name |
|
Position |
|
|
|
John A. Blaeser
|
|
President, Chief Executive Officer and Chairman of the Board |
Douglas A. Batt
|
|
Executive Vice President, General Counsel and Clerk |
Melissa H. Cruz
|
|
Executive Vice President, Business Services Chief Financial
Officer, Asst. Clerk and Treasurer |
Ferdinand Engel
|
|
Executive Vice President, Engineering and Chief Technology
Officer |
Michael Fabiaschi
|
|
Executive Vice President and General Manager, Spectrum Business
Unit |
Dayton Semerjian
|
|
Executive Vice President, Marketing |
Ted Williams
|
|
Executive Vice President, Worldwide Sales and Professional
Services |
Our executive officers and their ages as of December 31,
2004 are as follows:
John A. Blaeser, 63, has been Concords President,
Chief Executive Officer and Chairman of the Board, since January
1996 and a director of Concord since 1985. Prior to joining
Concord as Chief Executive Officer and President, from 1991
until 1996, Mr. Blaeser was Managing General Partner of
EG&G Venture Management, a venture capital firm.
Mr. Blaeser currently serves as a director for Network
Engines, Inc.
Douglas A. Batt, 44, has been Concords Executive
Vice President and General Counsel since November 2002, and Vice
President and General Counsel from July 2000 until November
2002. Prior to joining Concord, Mr. Batt was Technology
Counsel at Reebok International Ltd. from October 1997 until
July 2000 and from September 1991 until October 1997,
Mr. Batt was an attorney with the law firm of Goodwin
Procter LLP in Boston.
Melissa H. Cruz, 42, has been Concords Executive
Vice President, Business Services and Chief Financial Officer
since April 2000, Vice President Finance from January 2000 until
April 2000, Director of Finance from August 1998 until January
2000 and Manager, Financial Planning from August 1997 until
August 1998. Prior to joining Concord, Ms. Cruz was
Director of Finance at SeaChange International, Inc. from
November 1996 to August 1997, International Controller at Bay
Networks, Inc. from November 1993 to July 1996 and from December
1984 to November 1993, Ms. Cruz held a variety of financial
management roles at Digital Equipment Corporation.
49
Ferdinand Engel, 56, has been Concords Executive
Vice President of Engineering and Chief Technology Officer since
April 2000, Senior Vice President of Engineering of Concord from
September 1999 until April 2000 and Vice President of
Engineering of Concord from 1989 until September 1999. Prior to
joining Concord, Mr. Engel was Vice President of
Engineering for Technology Concepts at Bell Atlantic Corp.
Michael Fabiaschi, 49, has been Concords Executive
Vice President and General Manager of the Spectrum Business Unit
since the acquisition of Aprisma Management Technologies, Inc.
in February 2005. Prior to joining Concord, Mr. Fabiaschi was
the Chief Executive Officer of Aprisma Management Technologies
from October 2002 to February 2005. Prior to joining Aprisma,
Mr. Fabiaschi was the President and Chief Executive Officer of
Xelus, Inc. from November 1998 to September 2002 and President
and Chief Executive Officer of Racotek Corporation from March of
1996 to November of 1998. Prior to November 1998, Mr. Fabiaschi
was Vice President of Sales and Services for Racotek and held
various sales management positions at MAI/Basic 4.
Dayton Semerjian, 40, has been Concords Executive
Vice President of Marketing since April 2004 and Concords
Director of Marketing from April 2003 to April 2004. Prior to
joining Concord Mr. Semerjian was Principal of Inflection
Point Consulting Group from June of 2002 to April of 2003,
Executive Vice President of Worldwide Sales and Marketing of
Openreach, Inc. from April of 2000 to May of 2002 and Vice
President of Worldwide Marketing of Shiva Corporation from
August of 1996 to January 2000.
Ted Williams, 56, has been Concords Executive Vice
President, Worldwide Field Operations since October 2004. Prior
to joining Concord, Mr. Williams was Executive Vice
President of Worldwide Sales for MRO Software. From 1988 to 1993
Mr. Williams was President and Chief Operating Officer of
Comac Systems Corporation. Prior to 1988, Mr. Williams held
industry marketing positions at Project Software and
Development, Inc. and engineering positions at Stone and Webster
Engineering Corporation and Fluor Corporation.
Our Code of Business Conduct and Ethics (Code)
applies to all of our directors, officers, and employees. It is
publicly available on our website at
www.concord.com/aboutus/invest/corp govern.shtml.
Amendments to the Code and waivers of any provision thereof
which require disclosure under applicable SEC and NASDAQ rules
will be disclosed on our website.
|
|
Item 11. |
Executive Compensation |
The information under the caption Executive
Compensation as set forth in Concords Proxy
Statement for its annual stockholders meeting to be held
May 4, 2005 is incorporated herein by reference.
|
|
Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
The information under the caption Securities Ownership of
Certain Beneficial Owners and Management as set forth in
Concords Proxy Statement for its Annual Stockholders
Meeting to be held May 4, 2005 is incorporated herein by
reference.
|
|
Item 13. |
Certain Relationships and Related Transactions |
None.
|
|
Item 14. |
Principal Accountant Fees and Services |
The response to this Item will be contained in the Proxy
Statement for the annual stockholders meeting to be held on
May 4, 2005 under the caption Statement of Fees Paid
to Independent Auditors, and is incorporated herein by
reference.
50
PART IV
|
|
Item 15. |
Exhibits and Financial Statement Schedules |
(a) The following documents are filed as part of this Form:
1. Consolidated Financial Statements:
|
|
|
|
|
|
|
|
Page | |
|
|
Number | |
|
|
| |
|
|
|
52 |
|
|
|
|
|
|
|
December 31, 2004 and 2003
|
|
|
54 |
|
|
|
|
|
|
|
Years ended December 31, 2004, 2003 and 2002
|
|
|
55 |
|
|
|
|
|
|
|
Years ended December 31, 2004, 2003 and 2002
|
|
|
56 |
|
|
|
|
|
|
|
Years ended December 31, 2004, 2003 and 2002
|
|
|
57 |
|
|
|
|
58 |
|
2. Consolidated Financial Statement Schedules
Schedule II Valuation and Qualifying
Accounts Included in Note 12 of Notes to Consolidated
Financial Statements
All other financial statement schedules are omitted because they
are not applicable or the required information is included in
the consolidated financial statements and notes thereto.
(b) Exhibits:
See Exhibit Index. The Exhibits listed in the accompanying
Exhibit Index are filed or incorporated by reference as
part of this report.
51
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
of Concord Communications, Inc.:
We have completed an integrated audit of Concord Communications,
Inc.s 2004 consolidated financial statements and of its
internal control over financial reporting as of
December 31, 2004 and audits of its 2003 and 2002
consolidated financial statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Our opinions, based on our audits, are
presented below.
Consolidated financial statements
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(l) present fairly, in all
material respects, the financial position of Concord
Communications, Inc. and its subsidiaries at December 31,
2004 and 2003, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2004 in conformity with accounting principles
generally accepted in the United States of America. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, managements assessment, included in
Managements Report on Internal Control Over
Financial Reporting, appearing under Item 9A, that the
Company maintained effective internal control over financial
reporting as of December 31, 2004 based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), is
fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained,
in all material respects, effective internal control over
financial reporting as of December 31, 2004, based on
criteria established in Internal Control
Integrated Framework issued by the COSO. The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on managements
assessment and on the effectiveness of the Companys
internal control over financial reporting based on out audit. We
conducted our audit of internal control over financial reporting
in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over
financial reporting was maintained in all material respects. An
audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the
52
company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use,
or disposition of the companys assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
|
|
|
PricewaterhouseCoopers LLP |
Boston, Massachusetts
March 14, 2005
53
CONCORD COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
15,816 |
|
|
$ |
69,436 |
|
|
Marketable securities
|
|
|
143,639 |
|
|
|
92,455 |
|
|
Restricted cash
|
|
|
66 |
|
|
|
194 |
|
|
Accounts receivable, net of allowance of $423 and $1,050 at
December 31, 2004 and 2003, respectively
|
|
|
24,183 |
|
|
|
22,194 |
|
|
Deferred tax assets
|
|
|
1,763 |
|
|
|
4,638 |
|
|
Prepaid expenses and other current assets
|
|
|
8,170 |
|
|
|
4,851 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
193,637 |
|
|
|
193,768 |
|
|
|
|
|
|
|
|
Equipment and improvements:
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
|
22,557 |
|
|
|
19,433 |
|
|
Leasehold improvements
|
|
|
6,291 |
|
|
|
6,225 |
|
|
|
|
|
|
|
|
|
|
|
28,848 |
|
|
|
25,658 |
|
|
Less accumulated depreciation and amortization
|
|
|
22,622 |
|
|
|
18,961 |
|
|
|
|
|
|
|
|
|
|
|
6,226 |
|
|
|
6,697 |
|
|
|
|
|
|
|
|
Goodwill
|
|
|
6,225 |
|
|
|
6,225 |
|
Other intangible assets, net
|
|
|
2,191 |
|
|
|
3,004 |
|
|
|
|
|
|
|
|
|
|
|
8,416 |
|
|
|
9,229 |
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
12,211 |
|
|
|
4,962 |
|
Unamortized debt issuance costs and other long-term assets
|
|
|
3,001 |
|
|
|
3,770 |
|
|
|
|
|
|
|
|
|
|
|
15,212 |
|
|
|
8,732 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
223,491 |
|
|
$ |
218,426 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
6,334 |
|
|
$ |
5,218 |
|
|
Accrued expenses
|
|
|
12,171 |
|
|
|
12,627 |
|
|
Deferred revenue
|
|
|
27,207 |
|
|
|
26,490 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
45,712 |
|
|
|
44,335 |
|
|
Convertible senior notes
|
|
|
86,250 |
|
|
|
86,250 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
131,962 |
|
|
|
130,585 |
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 9)
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value:
|
|
|
|
|
|
|
|
|
|
|
Authorized 1,000,000 shares
|
|
|
|
|
|
|
|
|
|
|
Issued and outstanding none
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value:
|
|
|
|
|
|
|
|
|
|
|
Authorized 50,000,000 shares
|
|
|
|
|
|
|
|
|
|
|
Issued and outstanding 18,449,964 and
18,121,211 shares at December 31, 2004 and 2003,
respectively
|
|
|
184 |
|
|
|
181 |
|
|
Additional paid-in capital
|
|
|
117,113 |
|
|
|
111,651 |
|
|
Accumulated other comprehensive (loss) income
|
|
|
(427 |
) |
|
|
816 |
|
|
Accumulated deficit
|
|
|
(25,341 |
) |
|
|
(24,807 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
91,529 |
|
|
|
87,841 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$ |
223,491 |
|
|
$ |
218,426 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
54
CONCORD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License revenues
|
|
$ |
49,973 |
|
|
$ |
54,267 |
|
|
$ |
51,230 |
|
|
Service revenues
|
|
|
56,215 |
|
|
|
49,796 |
|
|
|
42,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
106,188 |
|
|
|
104,063 |
|
|
|
93,844 |
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of license revenues
|
|
|
3,490 |
|
|
|
3,117 |
|
|
|
1,850 |
|
|
Cost of service revenues
|
|
|
17,488 |
|
|
|
16,127 |
|
|
|
15,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
20,978 |
|
|
|
19,244 |
|
|
|
16,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
85,210 |
|
|
|
84,819 |
|
|
|
76,874 |
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
25,218 |
|
|
|
22,827 |
|
|
|
21,973 |
|
|
Sales and marketing
|
|
|
49,911 |
|
|
|
48,352 |
|
|
|
47,383 |
|
|
General and administrative
|
|
|
11,676 |
|
|
|
9,035 |
|
|
|
7,665 |
|
|
Acquisition-related charges
|
|
|
|
|
|
|
40 |
|
|
|
|
|
|
Acquired in-process research and development
|
|
|
100 |
|
|
|
994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
86,905 |
|
|
|
81,248 |
|
|
|
77,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(1,695 |
) |
|
|
3,571 |
|
|
|
(147 |
) |
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
4,471 |
|
|
|
2,808 |
|
|
|
3,127 |
|
|
Interest expense
|
|
|
(3,283 |
) |
|
|
(244 |
) |
|
|
(17 |
) |
|
Other expense
|
|
|
(139 |
) |
|
|
(480 |
) |
|
|
(194 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
|
1,049 |
|
|
|
2,084 |
|
|
|
2,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(646 |
) |
|
|
5,655 |
|
|
|
2,769 |
|
(Benefit from) provision for income taxes
|
|
|
(112 |
) |
|
|
(2,015 |
) |
|
|
568 |
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$ |
(534 |
) |
|
$ |
7,670 |
|
|
$ |
2,201 |
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common and potential common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.03 |
) |
|
$ |
0.44 |
|
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
(0.03 |
) |
|
$ |
0.42 |
|
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average common and potential common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
18,280,294 |
|
|
|
17,533,509 |
|
|
|
17,057,188 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
18,280,294 |
|
|
|
18,207,541 |
|
|
|
17,627,122 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
55
CONCORD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
|
|
|
|
$0.01 | |
|
Additional | |
|
|
|
Other | |
|
|
|
|
|
|
|
|
Number of | |
|
Par | |
|
Paid-in | |
|
Deferred | |
|
Comprehensive | |
|
Accumulated | |
|
|
|
Comprehensive | |
|
|
Shares | |
|
Value | |
|
Capital | |
|
Compensation | |
|
Income (Loss) | |
|
Deficit | |
|
Total | |
|
Income (Loss) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
BALANCE, DECEMBER 31, 2001
|
|
|
16,901,193 |
|
|
|
169 |
|
|
|
96,365 |
|
|
|
(242 |
) |
|
|
1,892 |
|
|
|
(34,678 |
) |
|
|
63,506 |
|
|
|
|
|
Shares issued in connection with employee stock plans
|
|
|
344,812 |
|
|
|
3 |
|
|
|
2,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,607 |
|
|
|
|
|
Reversal of deferred compensation related to forfeitures of
unvested stock options and restricted stock
|
|
|
|
|
|
|
|
|
|
|
(76 |
) |
|
|
76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred compensation related to grants of stock
options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106 |
|
|
|
|
|
|
|
|
|
|
|
106 |
|
|
|
|
|
Unrealized gains on available-for-sale securities, net of tax of
$0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
516 |
|
|
|
|
|
|
|
516 |
|
|
$ |
516 |
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,201 |
|
|
|
2,201 |
|
|
|
2,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 31, 2002
|
|
|
17,246,005 |
|
|
|
172 |
|
|
|
98,893 |
|
|
|
(60 |
) |
|
|
2,408 |
|
|
|
(32,477 |
) |
|
|
68,936 |
|
|
|
|
|
Shares issued in connection with employee stock plans
|
|
|
534,210 |
|
|
|
5 |
|
|
|
4,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,530 |
|
|
|
|
|
Tax benefit from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
2,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,726 |
|
|
|
|
|
Shares issued in connection with netViz acquisition
|
|
|
340,996 |
|
|
|
4 |
|
|
|
4,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,968 |
|
|
|
|
|
Amortization of deferred compensation related to grants of stock
options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
60 |
|
|
|
|
|
Unrealized losses on available-for-sale securities, net of tax
expense of $544
|
|
|
|
|
|
|
|
|
|
|
543 |
|
|
|
|
|
|
|
(1,592 |
) |
|
|
|
|
|
|
(1,049 |
) |
|
$ |
(1,049 |
) |
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,670 |
|
|
|
7,670 |
|
|
|
7,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 31, 2003
|
|
|
18,121,211 |
|
|
$ |
181 |
|
|
$ |
111,651 |
|
|
$ |
|
|
|
$ |
816 |
|
|
$ |
(24,807 |
) |
|
$ |
87,841 |
|
|
|
|
|
Shares issued in connection with employee stock plans
|
|
|
328,753 |
|
|
|
3 |
|
|
|
2,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,663 |
|
|
|
|
|
Unrealized losses on available-for-sale securities, net of tax
benefit of $806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,243 |
) |
|
|
|
|
|
|
(1,243 |
) |
|
$ |
(1,243 |
) |
Tax benefit from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
2,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,802 |
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(534 |
) |
|
|
(534 |
) |
|
|
(534 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,777 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 31, 2004
|
|
|
18,449,964 |
|
|
$ |
184 |
|
|
$ |
117,113 |
|
|
$ |
|
|
|
$ |
(427 |
) |
|
$ |
(25,341 |
) |
|
$ |
91,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
56
CONCORD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$ |
(534 |
) |
|
$ |
7,670 |
|
|
$ |
2,201 |
|
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,528 |
|
|
|
5,223 |
|
|
|
6,077 |
|
|
Gain on disposal or sale of equipment and improvements
|
|
|
(3 |
) |
|
|
(14 |
) |
|
|
(7 |
) |
|
Stock-based compensation
|
|
|
|
|
|
|
60 |
|
|
|
106 |
|
|
Amortization of debt issuance costs
|
|
|
793 |
|
|
|
59 |
|
|
|
|
|
|
Deferred tax benefit
|
|
|
(766 |
) |
|
|
(2,624 |
) |
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,989 |
) |
|
|
(4,473 |
) |
|
|
(880 |
) |
|
|
Prepaid expenses and other current assets
|
|
|
(3,319 |
) |
|
|
(1,892 |
) |
|
|
176 |
|
|
|
Accounts payable
|
|
|
1,116 |
|
|
|
1,591 |
|
|
|
31 |
|
|
|
Accrued expenses
|
|
|
(456 |
) |
|
|
2,292 |
|
|
|
(3,217 |
) |
|
|
Deferred revenue
|
|
|
717 |
|
|
|
2,551 |
|
|
|
1,207 |
|
|
|
Other assets
|
|
|
60 |
|
|
|
(56 |
) |
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
147 |
|
|
|
10,387 |
|
|
|
5,724 |
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of equipment and improvements
|
|
|
(3,226 |
) |
|
|
(3,203 |
) |
|
|
(3,520 |
) |
|
|
Investments in marketable securities
|
|
|
(86,717 |
) |
|
|
(58,895 |
) |
|
|
(20,363 |
) |
|
|
Proceeds from sales of marketable securities
|
|
|
33,484 |
|
|
|
27,860 |
|
|
|
17,742 |
|
|
|
Deposit of restricted cash
|
|
|
(66 |
) |
|
|
|
|
|
|
(839 |
) |
|
|
Release of restricted cash
|
|
|
194 |
|
|
|
645 |
|
|
|
|
|
|
|
Purchases of software
|
|
|
(99 |
) |
|
|
|
|
|
|
|
|
|
|
Acquisition of business net of cash acquired
|
|
|
|
|
|
|
(4,981 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(56,430 |
) |
|
|
(38,574 |
) |
|
|
(6,980 |
) |
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from convertible senior notes
|
|
|
|
|
|
|
86,250 |
|
|
|
|
|
|
|
Debt issuance costs
|
|
|
|
|
|
|
(3,519 |
) |
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
2,663 |
|
|
|
4,530 |
|
|
|
2,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
2,663 |
|
|
|
87,261 |
|
|
|
2,607 |
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(53,620 |
) |
|
|
59,074 |
|
|
|
1,351 |
|
Cash and cash equivalents, beginning of year
|
|
|
69,436 |
|
|
|
10,362 |
|
|
|
9,011 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$ |
15,816 |
|
|
$ |
69,436 |
|
|
$ |
10,362 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$ |
659 |
|
|
$ |
513 |
|
|
$ |
476 |
|
Cash paid for interest
|
|
$ |
2,644 |
|
|
$ |
20 |
|
|
$ |
17 |
|
Supplemental Disclosure of Noncash Financing and Investing
Transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of deferred compensation related to forfeitures of
stock options
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(76 |
) |
Retirements of fully depreciated equipment and improvements
|
|
$ |
|
|
|
$ |
4,615 |
|
|
$ |
|
|
Unrealized gain/(loss) on available-for-sale securities
|
|
$ |
(2,049 |
) |
|
$ |
(1,592 |
) |
|
$ |
516 |
|
Common stock issued to acquire business
|
|
$ |
|
|
|
$ |
4,968 |
|
|
$ |
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
57
CONCORD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
(1) |
Organization and Significant Accounting Policies |
Concord Communications, Inc. (the Company or
Concord) is primarily engaged in the development and
sale of Business Service Management (BSM) software to
enterprise customers, managed service providers and
telecommunication carriers principally located in the United
States, Europe, the Middle East, Africa, Latin America and Asia
Pacific.
The Company is subject to the risks associated with
technology-oriented companies. Primary among these risks are
competition from substitute products and the ability to
successfully develop and market the Companys current and
future products.
|
|
(a) |
Principles of Consolidation |
The accompanying 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.
|
|
(b) |
Cash, Cash Equivalents and Marketable Securities |
The Company follows the provisions of Statement of Financial
Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity
Securities. The Company has classified its investment
securities as available-for-sale and recorded them at fair
value, with the unrealized gains and losses reported as a
separate component of stockholders equity. The Company
considers highly liquid investments, purchased with an original
maturity of 90 days or less, to be cash equivalents. Cash
equivalents were $9.6 million and $57.1 million at
December 31, 2004 and 2003, respectively, and consisted
primarily of money market funds.
Restricted cash totaling $0.07 million and
$0.2 million at December 31, 2004 and 2003,
respectively, consists of money market funds held in the
Companys name and held with a major financial institution.
Such funds are being used as collateral under a letter of credit
arrangement required by a landlord for a lease that terminates
in 2007.
Concords 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.
Software license revenues are recognized when persuasive
evidence of an arrangement exists and delivery of the software
has occurred, provided that the license fee is fixed or
determinable, collection is considered reasonably assured and no
customer acceptance clauses exist. The costs of shipping and
handling related to the delivery of the product is included in
revenue. 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. If an arrangement includes a right of return for the
possibility that the software does not meet published
specifications during the warranty period, which is typically
90 days, revenue is recognized upon shipment if all other
criteria are met as the Companys product is mature and the
Company has not experienced returns of product. If the fee is
determined not to be fixed or determinable, revenue is
recognized when the fees become due. If collection is not
considered reasonably assured, revenue is recognized upon the
receipt of cash. Revenues under multiple-element arrangements,
which typically include software products, professional
services, maintenance and sometimes undelivered specified
software upgrades sold together, are allocated to each element
using the
58
CONCORD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
residual method in accordance with SOP 98-9. Under the
residual method, the fair value of the undelivered elements are
deferred and subsequently recognized when these elements are
delivered; the remainder of the arrangement consideration is
allocated to the software. The Company has established
sufficient vendor specific objective evidence for professional
services, maintenance, and specified software upgrades 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, maintenance and specified software
upgrades.
Service revenues include professional services and maintenance
fees. Professional services are not essential to the
functionality of the other elements in an arrangement and are
accounted for separately. Professional service revenues are
recognized as the services are performed, provided evidence of
an arrangement exists, fees are fixed or determinable, and
collection is considered reasonably assured.
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 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 December 31, 2004 and 2003, deferred revenue
includes $19.9 million and $20.8 million,
respectively, of deferred maintenance revenues.
The Company records trade accounts receivable at the invoiced
amount; these accounts do not bear interest. The Company
performs ongoing credit evaluations of its customers and adjusts
credit limits based upon payment history and the customers
current credit worthiness, as determined by a review of their
current credit information. The Company continuously monitors
collections and payments from its customers and maintains a
provision for estimated credit losses based on historical
experience and any specific customer collection issues that have
been identified. The Company reviews its allowance for doubtful
accounts on a monthly basis. The Company reviews all past due
balances over 60 days individually for collectability. The
Company charges account balances against the allowance when it
is probable the receivable will not be recovered. The Company
does not have any off-balance-sheet credit exposure to customers.
While credit losses have historically been within expectations
and the appropriate reserves have been established, the Company
cannot guarantee that it will continue to experience the same
credit loss rates that it has experienced in the past. Thus, if
the financial condition of customers were to deteriorate, actual
losses may exceed estimates, and additional allowances would be
required.
|
|
(f) |
Equipment and Improvements |
Equipment and improvements are recorded at cost. Depreciation is
provided for on a straight-line basis over the useful lives of
the assets, which are estimated to be three years for all assets
other than leasehold improvements, which are amortized over the
shorter of the life of the asset or the term of the lease. Upon
retirement or sale, the related cost and accumulated
depreciation or amortization is removed from the accounts and
any resulting gain or loss is included in the results of
operations. Depreciation expense of $3.7 million,
$4.8 million and $6.1 million was incurred in fiscal
years 2004, 2003 and 2002, respectively.
|
|
(g) |
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 of
America 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
59
CONCORD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
|
|
(h) |
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, accounts payable and accrued expenses approximate
fair market value due to the short-term nature of these
financial instruments. Given the relatively stable interest rate
environment, the Convertible Senior Notes fair value
approximates their carrying value. 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 or option contracts.
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. One
North American telecommunications customer accounted for 10.1%
of revenues in 2004 and no individual customer or reseller
accounted for more than 10% of revenues in 2003 or 2002. One
North American telecommunications customer accounted for
approximately 16% of accounts receivable at December 31,
2004 and no individual customer accounted for more than 10% of
the Companys accounts receivable at December 31, 2003.
|
|
(i) |
Foreign Currency Translation and Transactions |
The Company translates the assets and liabilities of its foreign
subsidiaries and branches at exchange rates in accordance with
SFAS No. 52, Foreign Currency Translation.
Revenues and expenses are translated using average exchange
rates in effect during each period. Because the Companys
subsidiaries and branches are considered extensions of domestic
operations, translation gains and losses are included in the
Companys consolidated statements of operations and are
classified as other income (expense). Transaction and
translation losses totaling $0.33 million,
$0.44 million and $0.13 million were recognized in
fiscal years 2004, 2003 and 2002, respectively.
|
|
(j) |
Derivative Financial Instruments |
The Company occasionally uses forward contracts to reduce its
exposure to foreign currency risk and variability in operating
results due to fluctuations in exchange rates underlying the
value of accounts receivable denominated in foreign currencies
until such receivables are collected. A forward contract
obligates the Company to exchange predetermined amounts of
specified foreign currencies at specified exchange rates on
specified dates. These foreign currency forward exchange
contracts are denominated in the same currency in which the
underlying foreign currency receivables are denominated and bear
a contract value and maturity date that approximate the value
and expected settlement date, respectively, of the underlying
transactions. For contracts that are designated and effective as
hedges, unrealized gains and losses on open contracts at the end
of each accounting period, resulting from changes in the fair
value of these contracts, are recognized in earnings in the same
period as gains and losses on the underlying foreign denominated
receivables are recognized and generally offset. The Company
does not enter into or hold derivatives for trading or
speculative purposes and only enters into contracts with highly
rated financial institutions. The Company did not have any open
forward contracts at either December 31, 2004 or 2003. The
Company records the gains or losses on forward contracts in
other income and expense. In the years ended December 31,
2004, 2003 and 2002 the Company did not record any material
gains or losses on forward contracts.
60
CONCORD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(k) |
Software Development Costs |
SFAS No. 86, Accounting for the Costs of Computer
Software to Be Sold, Leased or Otherwise Marketed, requires
the capitalization of certain computer software development
costs incurred after technological feasibility is established.
The Company believes that once technological feasibility of a
software product has been established, the additional
development costs incurred to bring the product to a
commercially acceptable level are not significant. There were no
capitalized software development costs related to internal
development efforts at either December 31, 2004 or 2003.
The Company may in the course of business purchase software to
be used in its products. If the purchased software has reached
technological feasibility in accordance with
SFAS No. 86, the cost to purchase this software is
capitalized and amortized at the greater of the ratio of current
period revenues to the total of anticipated future revenues or
the straight-line method over its remaining useful life. The
Company assesses the recoverability of capitalized purchased
software costs at each quarter end by comparing the carrying
value to its net realizable value (NRV). NRV is the
estimated future gross revenues from products that incorporate
the software reduced by the estimated future costs of disposal.
If NRV is less than the carrying value, the excess is
written-off and the then current NRV becomes the new carrying
value of the software. During the three months ended
December 31, 2004, the Company capitalized
$0.1 million of purchased software. The carrying value of
capitalized software at December 31, 2004 was
$0.08 million. There were no capitalized software
development costs at December 31, 2003.
|
|
(l) |
Stock-Based Compensation |
The Company accounts for employee stock-based compensation
arrangements under the provisions of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations.
SFAS No. 123, Accounting for Stock-Based
Compensation, permits the use of either a fair-value based
method or the intrinsic value method under APB No. 25 to
account for employee stock-based compensation arrangements.
Companies that elect to use the intrinsic value method provided
in APB No. 25 are required to disclose the pro forma net
income (loss) and net income (loss) per share that would have
resulted from the use of the fair value method. The Company has
provided, below, the pro forma disclosures of the effect on net
income (loss) and net income (loss) per share as if
SFAS No. 123, as amended by
61
CONCORD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure, an Amendment
to FASB Statement No. 123, had been applied in
measuring compensation expense for all periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except per share data) | |
Net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
(534 |
) |
|
$ |
7,670 |
|
|
$ |
2,201 |
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based employee compensation expense included in reported
net income (loss), net of related taxes
|
|
|
3,298 |
|
|
|
60 |
|
|
|
106 |
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based employee compensation expense determined under
fair value based method for all awards, net of related tax
effects
|
|
|
(6,810 |
) |
|
|
(9,533 |
) |
|
|
(15,553 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma loss
|
|
$ |
(4,046 |
) |
|
$ |
(1,803 |
) |
|
$ |
(13,246 |
) |
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
(.03 |
) |
|
$ |
0.44 |
|
|
$ |
0.13 |
|
|
Pro forma
|
|
$ |
(.22 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.78 |
) |
Diluted net (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
(.03 |
) |
|
$ |
0.42 |
|
|
$ |
0.12 |
|
|
Pro forma
|
|
$ |
(.22 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.78 |
) |
|
|
(m) |
Net (Loss) Income per Share |
The Company computes earnings per share following the provisions
of SFAS No. 128, Earnings Per Share. 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 potential common shares
outstanding for the period. For the year ended December 31,
2004, options to purchase 389,815 shares of the
Companys common stock had exercise prices below the
average market price. These options have been excluded from the
calculation of the diluted net loss for the year ended
December 31, 2004 solely because the effect of their
inclusion would have been anti-dilutive, due to the net loss for
the year ended December 31, 2004. For the years ended
December 31, 2003 and 2002, all dilutive potential common
shares consisted of outstanding options. The dilutive effect of
outstanding stock options is computed using the treasury stock
method. The dilutive effect of convertible preferred stock is
computed using the if-converted method.
62
CONCORD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Calculations of the basic and diluted net income (loss) per
common share and potential common shares are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December, 31 | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands except share and per share data) | |
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income applicable to common stockholders
|
|
$ |
(534 |
) |
|
$ |
7,670 |
|
|
$ |
2,201 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
18,280,294 |
|
|
|
17,533,509 |
|
|
|
17,057,188 |
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share
|
|
$ |
(.03 |
) |
|
$ |
0.44 |
|
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income applicable to common stockholders
|
|
$ |
(534 |
) |
|
$ |
7,670 |
|
|
$ |
2,201 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
18,280,294 |
|
|
|
17,533,509 |
|
|
|
17,057,188 |
|
Potential common shares pursuant to stock options
|
|
|
|
|
|
|
674,032 |
|
|
|
569,934 |
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares
|
|
|
18,280,294 |
|
|
|
18,207,541 |
|
|
|
17,627,122 |
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per share
|
|
$ |
(.03 |
) |
|
$ |
0.42 |
|
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding exclude options to
purchase shares of the Companys common stock with exercise
prices above the average market price for the year. For the
years ended December 31, 2004, 2003, and 2002 options to
purchase shares of the Companys common stock of 2,731,776,
1,931,133 and 2,113,271, respectively, have been excluded .
The Emerging Issues Task Force (EITF) has issued a final
consensus on Issue 04-08, Accounting Issues Related to
Certain Features of Contingently Convertible Debt and the Effect
on Diluted Earnings per Share, which requires that
convertible securities must be included in the a dilutive
earnings per share calculation, if dilutive, regardless of
whether the market price trigger has been met. The
Companys Convertible Senior Notes fall within the scope of
EITF 04-08. In the three months ended December 31,
2004, the Company adopted the provisions of EITF 04-08
retroactively for previously reported earnings per share
calculations. For all periods presented since the issuance of
the Convertible Senior Notes, common stock reserved for issuance
upon conversion of approximately 3,209,776 shares was not
included in diluted earnings per share because the effect of
their inclusion would have been anti-dilutive.
|
|
(n) |
Comprehensive Income (Loss) |
Comprehensive income (loss) is defined as the change in net
assets of the Company during a period from transactions
generated from non-owner sources. It includes all changes in
equity during a period except those resulting from investments
by owners and distributions to owners. The only components of
comprehensive income (loss) reported by the Company are net
income (loss) and unrealized gains (losses) on
available-for-sale securities.
Certain prior period amounts have been reclassified to conform
to the current period presentations.
63
CONCORD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(p) |
Recent Accounting Pronouncements |
In December 2004, the Financial Accounting Standards Board
(FASB) issued a revision to SFAS No. 123,
SFAS 123R Share-Based Payment.
SFAS No. 123R requires all companies to measure
compensation costs for all share-based payments, including stock
options, at fair value and expense such payments over the
service period. SFAS No. 123R specifies that companies
must use an option-pricing model to estimate fair value,
although it does not specifically require the use of a
particular model. The new standard is effective for interim or
annual periods beginning after June 15, 2005, and,
therefore, will be effective for the Company beginning with the
third quarter of 2005. Under the provisions of FAS 123R,
companies can select from three transition methods for the
implementation of this standard. The modified prospective method
would require all new awards that are granted after the
effective date to use the provisions of FAS 123R. Under
this method, for vested awards that are outstanding on the
effective date of FAS 123R, a company would not have to
record any additional compensation expense. For unvested awards
that are outstanding on the effective date of FAS 123R and
were previously included as part of pro forma net income and
earnings per share under the provisions of FAS 123 would be
charged to expense over the remaining vesting period, without
any changes in measurement. The second alternative is a
variation of the modified prospective method, which would allow
companies to restate earlier interim periods in the year that
FAS 123R is adopted using the applicable FAS 123 pro forma
amounts. Under the third alternative, the modified retrospective
method, companies would apply the modified prospective method
and also restate their prior financial statements to include the
amounts that were previously recognized in their pro forma
disclosures under the original provisions of FAS 123.
Currently, the Company discloses the estimated effect on net
income of these share-based payments in the footnotes to the
financial statements and the estimated fair value of the
share-based payments has historically been determined using the
Black-Scholes pricing model. The Company has not determined
which option-pricing model or transition method to use upon
implementation of this standard and has not yet completed its
evaluation of the impact of SFAS No. 123R, but expects
the adoption to have a material effect on its consolidated
financial statements.
In December 2004, the FASB issued Statement No. 153,
Exchanges of Nonmonetary Assets Amendment of APB
Opinion No. 29. The provisions of
SFAS No. 153 are based upon the principle that
exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged and it eliminates the narrow
exception for nonmonetary exchanges of similar productive assets
and replaces it with a broader exception for exchanges of
nonmonetary assets that do not have commercial
substance. The provisions in SFAS 153 are effective
for nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. The Company does not expect
the adoption of SFAS 153 to have a material effect on its
consolidated financial statements.
The FASB has issued two FASB Staff Positions (FSP) that
provide accounting guidance on how companies should account for
the effects of the American Jobs Creation Act of 2004 that was
signed into law on October 22, 2004. The American Jobs
Creation Act of 2004 allows for temporary dividend deductions
equal to 85% of cash dividends received during the tax year from
controlled foreign corporations and invested in the United
States. The result of this legislation could affect how
companies report their deferred income tax balances. The first
FSP is FSP SFAS 109-1 and concludes that the tax relief
from this legislation should be accounted for as a special
deduction instead of a tax rate reduction. The second FSP
is FSP SFAS 109-2 and gives a company additional time to
evaluate the effects of the legislation on any plan for
reinvestment or repatriation of foreign earning for purposes of
applying FASB Statement No. 109, Accounting for Income
Taxes. The Company has not yet completed its evaluation of
the provisions of the American Jobs Creation Act of 2004. The
repatriation of foreign earnings would not have a material
effect on the Companys consolidated financial statements.
The Company does not anticipate the repatriation of foreign
earnings to the United States in the future.
64
CONCORD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(2) |
Acquisition of netViz Corporation |
On July 17, 2003, the Company completed the acquisition of
netViz Corporation (netViz). netVizs software
enables users to visualize business processes and allows them to
map relationships within the supporting technology
infrastructure through data-driven icons. The integration of
netVizs technologies with Concords
eHealth® Suite will provide a new, more automated
means of application service optimization. This integration will
enable enterprises and service providers to employ data-driven
icons to visualize and take action on the critical relationships
between business processes, application services, and network
and system infrastructures.
The results of operations of netViz have been included in the
financial statements of the Company since the date of
acquisition.
Consideration for the acquisition totaled $10.3 million,
including transaction costs of $0.3 million. The
consideration consisted of $5.0 million in cash paid at
closing and the issuance of 340,996 shares of Common Stock,
valued at approximately $5.0 million.
The acquisition was accounted for using the purchase method of
accounting. The purchase price has been allocated to the assets
acquired and liabilities assumed at their estimated fair values
on the date of acquisition, as determined by management and,
with respect to the identifiable intangible assets, an
appraisal. The excess of the purchase price over the amounts
allocated to the assets acquired and liabilities assumed was
recorded as goodwill. The following represents the purchase
price allocation of the acquisition:
|
|
|
|
|
|
|
|
|
(In thousands) | |
Total consideration:
|
|
|
|
|
|
Cash
|
|
$ |
5,000 |
|
|
Stock
|
|
|
5,000 |
|
|
Transaction costs
|
|
|
342 |
|
|
|
|
|
|
|
Total purchase consideration
|
|
$ |
10,342 |
|
|
|
|
|
Allocation of the purchase consideration
|
|
|
|
|
|
Current assets
|
|
$ |
813 |
|
|
Equipment and improvements
|
|
|
51 |
|
|
Deferred tax asset
|
|
|
750 |
|
|
Identifiable intangible assets
|
|
|
3,410 |
|
|
Goodwill
|
|
|
6,225 |
|
|
|
|
|
|
|
Total assets acquired
|
|
|
11,249 |
|
|
Fair value of liabilities assumed
|
|
|
(907 |
) |
|
|
|
|
|
|
$ |
10,342 |
|
|
|
|
|
65
CONCORD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following are the identifiable intangible assets acquired
and the respective estimated periods over which the assets will
be amortized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization | |
|
|
Amount | |
|
Period | |
|
|
| |
|
| |
|
|
(In thousands) | |
|
(In years) | |
Completed technology (software)
|
|
$ |
2,130 |
|
|
|
4 |
|
Reseller relationships
|
|
|
570 |
|
|
|
5 |
|
Maintenance relationships
|
|
|
340 |
|
|
|
5 |
|
Contractor agreements
|
|
|
300 |
|
|
|
4 |
|
Trade name/trademark
|
|
|
70 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
3,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average amortization period:
|
|
|
|
|
|
|
4 |
|
The completed technology (software), reseller relationships,
maintenance relationships and trade name/ trademark are being
amortized at the greater of (a) the ratio that current
revenues bear to the total of current and anticipated future
revenues or (b) the straight-line method over their
respective remaining useful lives. The contractor agreements are
being amortized using the straight-line method over their useful
lives. For the years ended December 31, 2004 and 2003, the
identifiable intangible assets have been amortized using the
straight-line method over their respective remaining useful
lives. The values of the completed technology (software),
reseller relationships, maintenance relationships, contractor
agreements and trade name/trademark were determined using the
income approach. The income approach requires a projection of
revenues and expenses specifically attributed to the intangible
assets. The discounted cash flow (DCF) method is
then applied to the potential income streams after making
necessary adjustments with respect to such factors as the
wasting nature of the identifiable intangible assets and the
allowance of a fair return on the net tangible assets and other
intangible assets employed. There are several variations on the
income approach, including the relief-from-royalty method, the
avoided cost method, and the lost profits method.
The relief-from-royalty method was used to value the trade
name/trademark. The relief-from-royalty method is used to
estimate the cost savings that accrue to the owner of the
intangible assets that would otherwise have to pay royalties or
licensee fees on revenues earned through the use of the asset.
The royalty rate used in the analysis is based on an analysis of
empirical, market-derived royalty rates for guideline intangible
assets. Typically, revenue is projected over the expected
remaining useful life of the intangible asset. The
market-derived royalty rate is then applied to estimate the
royalty savings. The key assumptions used in valuing the trade
name/trademark are as follows: royalty rate 1%, discount rate
21%, tax rate 40% and estimated average economic life of
3 years.
The avoided cost method was used to value the reseller
relationships and contractor agreements. The avoided cost method
considers the concept of avoided cost as an indicator of value.
The avoided cost method is appropriate for estimating the fair
value of an asset where reliable data for sales of comparable
property are not available and where the property does not
directly produce an income stream. The key assumptions used in
valuing the reseller relationships are as follows: tax rate 40%
and estimated average economic life of 5 years. The key
assumptions used in valuing the contractor agreements are as
follows: tax rate 40% and estimated average economic life of
4 years.
The completed technology (software) and maintenance
relationships were valued using the income approach without
variation. The key assumptions used in valuing the completed
technology (software) are as follows: discount rate 21%,
tax rate 40% and estimated life of 4 years. The key
assumptions used in valuing the maintenance relationships are as
follows: discount rate 21%, tax rate 40% and estimated average
economic life of 5 years.
66
CONCORD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Pro Forma Results (Unaudited) |
The following table reflects unaudited pro forma results of
operations of the Company assuming that the netViz acquisition
had occurred on January 1, 2002 (in thousands, except per
share data):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2003 | |
|
2002 | |
|
|
| |
|
| |
Revenues
|
|
$ |
106,067 |
|
|
$ |
97,947 |
|
Net income
|
|
$ |
7,420 |
|
|
$ |
2,215 |
|
Net income per diluted share
|
|
$ |
0.41 |
|
|
$ |
0.13 |
|
The unaudited pro forma results of operations are not
necessarily indicative of the actual results that would have
occurred had the transaction actually taken place at the
beginning of these periods.
|
|
(3) |
Goodwill and Other Intangible Assets |
The changes in the carrying amount of goodwill, by reportable
segment, for the years ended December 31, 2003 and 2004 are
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MSP/TC | |
|
Enterprise | |
|
Total | |
|
|
| |
|
| |
|
| |
Balance as of January 1, 2003
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Goodwill acquired during year
|
|
|
2,800 |
|
|
|
3,425 |
|
|
|
6,225 |
|
Impairment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2003
|
|
|
2,800 |
|
|
|
3,425 |
|
|
|
6,225 |
|
Goodwill acquired during year
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2004
|
|
$ |
2,800 |
|
|
$ |
3,425 |
|
|
$ |
6,225 |
|
|
|
|
|
|
|
|
|
|
|
All of the Companys goodwill resulted from the acquisition
of netViz (see Note 2). The goodwill is tested for
impairment on June 30th of each year and whenever changes
in circumstances indicate goodwill could be impaired. As of
June 30, 2004, the Company performed its annual test for
impairment on the carrying value of goodwill of its MSP/ TC and
Enterprise reporting units. The Company compared the fair value
of each reporting unit to which goodwill has been allocated to
its book value and determined that no impairment existed at that
date.
Other intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2003 | |
|
2004 | |
|
|
| |
|
| |
|
|
|
|
Accumulated | |
|
|
|
|
|
Accumulated | |
|
|
|
|
Cost | |
|
Amortization | |
|
Net | |
|
Cost | |
|
Amortization | |
|
Net | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Completed technology (software)
|
|
$ |
2,130 |
|
|
$ |
(266 |
) |
|
$ |
1,864 |
|
|
$ |
2,130 |
|
|
$ |
(799 |
) |
|
$ |
1,331 |
|
Reseller relationships
|
|
|
570 |
|
|
|
(57 |
) |
|
|
513 |
|
|
|
570 |
|
|
|
(171 |
) |
|
|
399 |
|
Maintenance relationships
|
|
|
340 |
|
|
|
(34 |
) |
|
|
306 |
|
|
|
340 |
|
|
|
(102 |
) |
|
|
238 |
|
Contractor agreements
|
|
|
300 |
|
|
|
(37 |
) |
|
|
263 |
|
|
|
300 |
|
|
|
(112 |
) |
|
|
188 |
|
Trade name/trademark
|
|
|
70 |
|
|
|
(12 |
) |
|
|
58 |
|
|
|
70 |
|
|
|
(35 |
) |
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
3,410 |
|
|
$ |
(406 |
) |
|
$ |
3,004 |
|
|
$ |
3,410 |
|
|
$ |
(1,219 |
) |
|
$ |
2,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All of the Companys other intangible assets resulted from
the acquisition of netViz (see Note 2). Aggregate
amortization expense was $0.8 million for the year ended
December 31, 2004 and $0.4 million for
67
CONCORD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
year ended December 31, 2003. Of the 2004 amount,
$0.5 million was included in cost of revenues, and
$0.3 million was included in operating expenses. Of the
2003 amount, $0.3 million was included in cost of revenues
and $0.1 million was included in operating expenses.
Estimated amortization expense for the five succeeding fiscal
years as of December 31, 2004 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of | |
|
Operating | |
|
|
Year Ending |
|
Revenues | |
|
Expenses | |
|
Total | |
|
|
| |
|
| |
|
| |
2005
|
|
|
532 |
|
|
|
280 |
|
|
|
812 |
|
2006
|
|
|
532 |
|
|
|
269 |
|
|
|
801 |
|
2007
|
|
|
267 |
|
|
|
219 |
|
|
|
486 |
|
2008
|
|
|
|
|
|
|
92 |
|
|
|
92 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,331 |
|
|
$ |
860 |
|
|
$ |
2,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(4) |
Acquired In-Process Research and Development |
On July 11, 2003, Concord entered into a license agreement
with Tavve Software Company (Tavve) whereby Concord
licensed components of Tavves technology. Concord has
licensed Tavves root cause analysis and discovery of layer
2 and 3 network topology to build upon Concords
current position in optimizing application availability and
performance across networks and systems. The transaction, valued
at $1.2 million, included $0.2 million of prepaid
maintenance and $1.0 million of in-process research and
development. This was accounted for as
in-process-research-and-development as an integrated product has
not reached technological feasibility and has no alternative
future use. Accordingly, the $1.0 million was expensed in
2003.
Technological feasibility is established when either of two sets
of criteria is met:
|
|
|
a) the detail program design has been completed,
documented, and traced to product specifications and its
high-risk development issues have been resolved; or |
|
|
b) a working model of the product has been finished and
determined to be complete and consistent with the product design. |
Upon acquiring the licensed components of Tavves
technology, Concord did not have a completed product design at
the time of the purchase as it had not completed, documented,
and traced the detail program design to product specifications.
Concord did not have the high-risk development issues resolved.
A working model is defined as an operative version of the
computer software product that is completed in the same software
language as the product to be ultimately marketed, performs all
the major functions planned for the product, and is ready for
initial customer testing (usually identified as beta testing).
Upon acquiring the licensed components of Tavves
technology, Concord did not have a working model as defined.
In addition, the purchased source code has no alternative future
use, i.e., Concord will not use the source code for any other
purpose than described above.
The detail program design for the integration of Tavves
technology into Concord eHealth® Suite of products
has not been completed. The acquisition of Aprisma eliminates
our need for this technology, which will now become redundant.
|
|
(5) |
Convertible Senior Notes |
In December 2003, Concord issued $86.25 million in
3.0% convertible senior notes due 2023. The Convertible
Senior Notes mature on July 1, 2023 (the Convertible
Senior Notes) and bear interest at a rate of
3.00% per annum, payable semiannually on June 15 and
December 15 of each year. The Convertible Senior
68
CONCORD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Notes will rank equally to existing and future unsecured senior
indebtedness. The Convertible Senior Notes are contingently
convertible into shares of the Companys common stock at
the occurrence of specific events, including a change in control
or if during a conversion period, the closing price of Concord
stock exceeds $32.24, which is 120% of the conversion price
($26.87) for 20 trading days in a period of 30 trading days,
which starts on the first business day of a quarter. If the
threshold is met, then holders may convert their Convertible
Senior Notes into the Companys Common Stock at any time
during the succeeding 90 days, beginning on the 30th
trading day of the quarter. The Company may redeem some or all
of the Convertible Senior Notes at any time on or after
December 15, 2008. Holders have the right to require the
Company to purchase all or a portion of their notes for cash on
December 15, 2008, December 15, 2013 and
December 15, 2018.
As of December 31, 2004, the Companys Common Stock
had not exceeded 120% of the conversion price on any trading day
since the date of issuance and no other events had occurred
which would make the Convertible Senior Notes convertible. The
Convertible Senior Notes will be convertible into shares of
Common Stock at an initial conversion price of $26.87 per
share. Holders may convert the Convertible Senior Notes into
shares of Common Stock at an initial conversion rate of
37.2148 shares of Common Stock per $1,000 principal amount
of Convertible Senior Notes, which converts into
3,209,776 shares of common stock subject to adjustment.
The Convertible Senior Notes may be redeemed by the Company or
by the holders of the Notes, under certain conditions. The
Company may redeem some or all of the Convertible Notes at any
time on or after December 15, 2008. Holders of the
Convertible Senior Notes will have the right to require Concord
to repurchase some or all of the outstanding notes on
December 15, 2008, 2013, and 2018 and upon certain events,
including a change in control. Accrued interest to the
redemption date will be paid by Concord in any such redemption.
Total interest expense under this debt for the years ended
December 31, 2004 and 2003 was $3.3 million and
$0.17 million, respectively.
Under the terms of the Convertible Senior Notes, Concord is
required to comply with certain restrictive covenants, which
require that the Company maintain solvency and liquidity. The
Company was in compliance with all covenants as of
December 31, 2004.
In connection with the issuance of the Convertible Senior Notes,
the Company incurred $3.42 million of issuance costs, which
primarily consisted of investment banker fees, legal, and other
professional fees. These costs are being amortized to interest
expense over the five year period to the first date holders of
the Convertible Senior Notes may require Concord to repurchase
the outstanding Convertible Senior Notes. Amortization expense
related to the issuance costs was $0.70 million for the
year ended December 31, 2004. Amortization expense related
to issuance costs was $0.06 million for the year ended
December 31, 2003, which represents approximately one month
of amortization expense. At December 31, 2004, there were
unamortized debt issuance costs of $2.67 million.
|
|
(6) |
Marketable Securities |
It is the Companys intent to maintain a liquid investment
portfolio to support current operations and to take advantage of
investment opportunities; therefore, all marketable securities
are considered to be available-for-sale and are classified as
current assets.
69
CONCORD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The unrealized gains and fair value of marketable securities
available-for-sale as of December 31, 2004 with maturity
dates from January 19, 2005 through February 17, 2009,
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months | |
|
12 Months or More | |
|
Total | |
|
|
| |
|
| |
|
| |
|
|
Fair | |
|
Unrealized | |
|
|
|
Unrealized | |
|
|
|
Unrealized | |
Description of Securities |
|
Value | |
|
Losses | |
|
Fair Value | |
|
Losses | |
|
Fair Value | |
|
Losses | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
US government and municipal obligations
|
|
$ |
13,824 |
|
|
$ |
|
|
|
$ |
20,391 |
|
|
$ |
(126 |
) |
|
$ |
34,215 |
|
|
$ |
(126 |
) |
Foreign government obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds and notes
|
|
|
23,331 |
|
|
|
(44 |
) |
|
|
86,093 |
|
|
|
(519 |
) |
|
|
109,424 |
|
|
|
(563 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
37,155 |
|
|
$ |
(44 |
) |
|
$ |
106,484 |
|
|
$ |
(645 |
) |
|
$ |
143,639 |
|
|
$ |
(689 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unrealized gains and fair value of marketable securities
available-for-sale as of December 31, 2003 with maturity
dates from January 15, 2004 through December 1, 2008,
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months | |
|
12 Months or More | |
|
Total | |
|
|
| |
|
| |
|
| |
|
|
Fair | |
|
Unrealized | |
|
Fair | |
|
Unrealized | |
|
Fair | |
|
Unrealized | |
Description of Securities |
|
Value | |
|
Gains | |
|
Value | |
|
Gains | |
|
Value | |
|
Gains | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
US government and municipal obligations
|
|
$ |
16,512 |
|
|
$ |
67 |
|
|
$ |
8,251 |
|
|
$ |
267 |
|
|
$ |
24,763 |
|
|
$ |
334 |
|
Foreign government obligations
|
|
|
1,032 |
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
1,032 |
|
|
|
27 |
|
Corporate bonds and notes
|
|
|
16,523 |
|
|
|
123 |
|
|
|
50,137 |
|
|
|
876 |
|
|
|
66,660 |
|
|
|
999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
34,067 |
|
|
$ |
217 |
|
|
$ |
58,388 |
|
|
$ |
1,143 |
|
|
$ |
92,455 |
|
|
$ |
1,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Employee Stock Purchase Plans |
In October 2001, the Board of Directors adopted the 2001
Non-Executive Employee Stock Purchase Plan (NEESPP
Plan), which was subsequently approved by the shareholders
of the Company in April 2002. The Company has reserved 500,000
of its shares for issuance under the NEESPP Plan. Eligible
employees may purchase shares at 85% of the lower of the closing
market price at the beginning or ending date of each NEESPP Plan
payment period, as defined. Officers and directors are not
eligible employees under the NEESPP Plan. During the years ended
December 31, 2004, 2003 and 2002, 85,233, 208,331 and
180,697 shares, respectively, were issued under the NEESPP
Plan. As of December 31, 2004, 25,472 shares were
available for future issuance under the NEESPP Plan.
In May 2004, the Board of Directors adopted the 2004
Non-Executive Employee Stock Purchase Plan (2004 NEESPP
Plan), which was also approved by the shareholders of the
Company in May 2004. The Company has reserved 500,000 of its
shares for issuance under the 2004 NEESPP Plan. Eligible
employees may purchase shares up to 20,000 shares at 85% of
the lower of the closing market price at the beginning or ending
date of each 2004 NEESPP Plan payment period, as defined.
Officers and directors are not eligible employees under the 2004
NEESPP Plan. During the year ended December 31, 2004,
124,426 shares were issued under the 2004 NEESPP Plan. As
of December 31, 2004, 375,574 shares were available
for future issuance under the 2004 NEESPP Plan.
The Companys 1995 Stock Option Plan (1995
Plan) has been terminated; however, the 1995 Plan
continues to govern all options, awards, and other grants issued
and outstanding under the 1995 Plan. The 1995 Plan provided for
the granting of both incentive stock options and nonqualified
stock options.
70
CONCORD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In July 1997, the Board of Directors adopted the 1997 Stock Plan
(1997 Plan), as amended, which permits granting of
incentive and non-qualified stock options as well as other stock
rights to employees, officers, or consultants of the Company and
its subsidiaries at prices determined by the Board of Directors
prior to the Companys IPO and at market value at the date
of grant subsequent to the IPO. The 1997 Plan also permits
direct purchases of stock by individuals at prices determined by
the Board of Directors. Options become exercisable as determined
by the Board of Directors and expire up to 5 to 10 years
from the date of grant. The number of shares of common stock
subject to issuance under the 1997 Plan is 3,250,000. At
December 31, 2004, 1,130,221 shares were available for
future grant under the 1997 Plan.
In July 1997, the Board of Directors adopted the 1997
Non-employee Director Stock Option Plan
(1997 Director Plan), as amended, which was
subsequently approved by the shareholders of the Company. The
1997 Director Plan provides for the granting of
nonqualified stock options to members of the Board of Directors
who are not employees or officers of the Company. Options
generally vest over 4 years and expire up to 10 years
from the date of grant. The number of shares of common stock
originally subject to issuance under the 1997 Director Plan
was 130,000. In February 2002, the Board of Directors adopted an
amendment to the 1997 Director Plan, which was subsequently
approved by the shareholders of the Company in April 2003,
increasing the number of shares of common stock available for
future grants there under by 200,000 for a total of 330,000. At
December 31, 2004, 123,750 shares of common stock were
available for future grant under the 1997 Director Plan.
In November 2000, the Board of Directors adopted the 2000
Non-Executive Employee Equity Incentive Plan (2000 Equity
Incentive Plan). The 2000 Equity Incentive Plan provides
for the granting of nonqualified stock options, stock bonuses,
stock appreciation rights and other stock based awards to
employees of Concord who are not officers or directors of the
Company. To date, only stock options have been awarded under
this plan. Options become exercisable as determined by the Board
of Directors and expire up to 10 years from the date of
grant. The number of shares of common stock originally reserved
for issuance under the 2000 Equity Incentive Plan was 1,500,000.
In January 2002, the Board of Directors adopted an amendment to
the 2000 Equity Incentive Plan increasing the number of shares
of common stock reserved for issuance there under by 500,000 for
a total of 2,000,000. As of December 31, 2004,
160,790 shares were available for future grant under the
2000 Equity Incentive Plan.
In accordance with SFAS No. 123, the Company accounts
for stock-based compensation for employees under APB
No. 25, using the intrinsic value method and has elected
the disclosure-only alternative under SFAS No. 123 for
options granted using the Black-Scholes option pricing model
prescribed by SFAS No. 123.
The assumptions are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Risk-free interest rate
|
|
|
3.49 |
% |
|
|
3.65 |
% |
|
|
3.90 |
% |
Expected dividend yield
|
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Expected lives
|
|
|
5 years |
|
|
|
5 years |
|
|
|
7 years |
|
Expected volatility
|
|
|
91 |
% |
|
|
96 |
% |
|
|
91 |
% |
71
CONCORD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes information about options
outstanding and exercisable at December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
Options Exercisable | |
|
|
| |
|
| |
|
|
|
|
Weighted | |
|
Weighted | |
|
|
|
Weighted | |
|
|
Number of | |
|
Average | |
|
Average | |
|
Number of | |
|
Average | |
Range of | |
|
Shares | |
|
Remaining | |
|
Exercise Price | |
|
Shares | |
|
Exercise Price | |
Exercise Prices | |
|
Outstanding | |
|
Contractual Life | |
|
per Share | |
|
Exercisable | |
|
per Share | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
$ |
1.66 - 6.69 |
|
|
|
386,076 |
|
|
|
2.70 |
|
|
$ |
6.40 |
|
|
|
366,339 |
|
|
$ |
6.43 |
|
|
6.81 - 8.69 |
|
|
|
242,479 |
|
|
|
4.47 |
|
|
|
7.90 |
|
|
|
122,186 |
|
|
|
7.80 |
|
|
8.72 - 9.01 |
|
|
|
493,472 |
|
|
|
4.02 |
|
|
|
9.00 |
|
|
|
236,596 |
|
|
|
9.00 |
|
|
9.03 - 9.51 |
|
|
|
445,625 |
|
|
|
6.22 |
|
|
|
9.36 |
|
|
|
131,622 |
|
|
|
9.33 |
|
|
9.55 - 12.50 |
|
|
|
220,594 |
|
|
|
5.57 |
|
|
|
11.71 |
|
|
|
28,587 |
|
|
|
11.49 |
|
|
12.51 - 13.05 |
|
|
|
409,389 |
|
|
|
2.85 |
|
|
|
13.04 |
|
|
|
291,942 |
|
|
|
13.05 |
|
|
13.19 - 14.65 |
|
|
|
382,689 |
|
|
|
5.96 |
|
|
|
14.48 |
|
|
|
112,744 |
|
|
|
14.33 |
|
|
14.69 - 17.38 |
|
|
|
353,455 |
|
|
|
3.31 |
|
|
|
16.68 |
|
|
|
144,173 |
|
|
|
16.87 |
|
|
17.56 - 21.56 |
|
|
|
349,928 |
|
|
|
3.09 |
|
|
|
20.39 |
|
|
|
239,690 |
|
|
|
20.63 |
|
|
21.63 - 53.00 |
|
|
|
212,963 |
|
|
|
2.03 |
|
|
|
25.01 |
|
|
|
209,837 |
|
|
|
25.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,496,670 |
|
|
|
|
|
|
$ |
12.82 |
|
|
|
1,883,716 |
|
|
$ |
13.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the activity under the stock
option plans for the three-year period ended December 31,
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted | |
|
|
|
|
|
|
Average | |
|
|
Number of | |
|
Price per | |
|
Price per | |
|
|
Shares | |
|
Share | |
|
Share | |
|
|
| |
|
| |
|
| |
Outstanding at December 31, 2001
|
|
|
4,154,700 |
|
|
$ |
0.10-64.25 |
|
|
$ |
22.15 |
|
|
Granted
|
|
|
935,350 |
|
|
|
5.05-23.80 |
|
|
|
10.71 |
|
|
Exercised
|
|
|
(161,412 |
) |
|
|
0.10-21.75 |
|
|
|
6.82 |
|
|
Terminated
|
|
|
(736,185 |
) |
|
|
0.10-64.25 |
|
|
|
22.39 |
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2002
|
|
|
4,192,453 |
|
|
|
0.10-62.03 |
|
|
|
20.14 |
|
|
Granted
|
|
|
939,875 |
|
|
|
6.66-21.06 |
|
|
|
14.78 |
|
|
Exercised
|
|
|
(326,684 |
) |
|
|
0.10-18.95 |
|
|
|
8.85 |
|
|
Terminated
|
|
|
(494,709 |
) |
|
|
5.08-62.03 |
|
|
|
19.77 |
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2003
|
|
|
4,310,935 |
|
|
|
0.10-62.03 |
|
|
|
19.86 |
|
|
Granted
|
|
|
622,750 |
|
|
|
8.02-20.88 |
|
|
|
11.43 |
|
|
Exercised
|
|
|
(119,359 |
) |
|
|
0.10-14.07 |
|
|
|
7.60 |
|
|
Terminated
|
|
|
(1,317,656 |
) |
|
|
0.40-62.03 |
|
|
|
35.88 |
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2004
|
|
|
3,496,670 |
|
|
$ |
1.66-53.00 |
|
|
$ |
12.82 |
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2004
|
|
|
1,883,716 |
|
|
$ |
1.66-53.00 |
|
|
$ |
13.30 |
|
Exercisable at December 31, 2003
|
|
|
2,327,447 |
|
|
$ |
0.10-62.03 |
|
|
$ |
25.97 |
|
Exercisable at December 31, 2002
|
|
|
1,984,413 |
|
|
$ |
0.10-62.03 |
|
|
$ |
27.55 |
|
The weighted average price per share of options granted during
2004, 2003 and 2002 was $11.43, $14.78 and $10.71, respectively.
Prior to the Companys acquisition of FirstSense in 2000,
FirstSense recorded deferred compensation of $0.15 million
and $3.42 million in 2000 and 1999, respectively,
representing the
72
CONCORD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
difference between the exercise price of stock options granted
and the estimated fair market value of the underlying common
stock at the date of grant. The difference was recorded as
deferred compensation and was being amortized over the vesting
period of applicable options, typically four years. Including
amounts applicable to prior Company grants, the Company
amortized $0, $0.06 million and $0.11 million of
deferred compensation during the years ended December 31,
2004, 2003 and 2002, respectively.
The amortization of deferred compensation is recorded as an
operating expense. Additionally, the Company reversed
$0.8 million of deferred compensation in 2002, due to the
forfeiture of unvested stock options upon the termination of
certain employees.
The exercise price of all other options outstanding represents
the fair market value per share of common stock as of the date
of grant.
In October 2004, the Company consummated an offer to purchase
any and all outstanding options to purchase shares of its common
stock with an exercise price per share of $25.00 or more granted
under its 1997 Stock Plan (the Option Repurchase).
In connection with the Option Repurchase, the Company incurred
compensation expense of $3.3 million, excluding fees and
expenses, in the three-month period ended December 31, 2004.
The option purchase price was determined to be the weighted
average fair market value as calculated by the Black-Scholes
option pricing model using a risk-free interest rate of 3.85%,
average stock price of $8.99, expected dividend yield of 0%,
expected volatility of 92.2% and approximately a three year life.
The option purchase price per share was as follows:
|
|
|
|
|
|
Option Exercise Price per Share |
|
Purchase Price per Share | |
|
|
| |
|
$25.00 to $29.99
|
|
$ |
4.07 |
|
|
$30.00 to $34.99
|
|
$ |
3.84 |
|
|
$35.00 to $39.99
|
|
$ |
3.54 |
|
|
$40.00 to $44.99
|
|
$ |
3.40 |
|
|
$45.00 to 49.99
|
|
$ |
3.16 |
|
|
$50.00 to $54.99
|
|
$ |
2.99 |
|
|
$55.00 to $59.99
|
|
$ |
2.91 |
|
Greater than $60.00
|
|
$ |
2.76 |
|
Substantially all eligible option holders elected to tender
their options to the Company pursuant to the terms and
conditions of the Option Repurchase, and the Company repurchased
a total of 965,242 options. These shares were returned to the
pool of options available for new grants under the 1997 Stock
Plan.
The Company accounts for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes. This
standard requires, among other things, recognition of future tax
effects, measured by enacted tax rates, attributable to
deductible temporary differences between the financial statement
and income tax bases of assets and liabilities.
73
CONCORD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The approximate income tax effects of these temporary
differences, net operating loss and tax credit carry forwards
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Net operating loss carry forwards
|
|
|
8,192 |
|
|
$ |
5,870 |
|
Research and development and other tax credits
|
|
|
2,820 |
|
|
|
3,020 |
|
Accruals not yet deductible for tax purposes
|
|
|
1,071 |
|
|
|
1,824 |
|
Depreciation
|
|
|
1,436 |
|
|
|
882 |
|
Deferred revenue
|
|
|
778 |
|
|
|
1,064 |
|
Capitalized research and development expenses
|
|
|
30 |
|
|
|
195 |
|
Other
|
|
|
50 |
|
|
|
42 |
|
Marketable securities
|
|
|
262 |
|
|
|
(544 |
) |
NetViz Intangibles
|
|
|
(665 |
) |
|
|
(974 |
) |
Valuation reserve
|
|
|
|
|
|
|
(1,779 |
) |
|
|
|
|
|
|
|
|
Deferred tax asset
|
|
$ |
13,974 |
|
|
$ |
9,600 |
|
|
|
|
|
|
|
|
As of December 31, 2004, the Company had available for
federal income tax purposes net operating loss carry forwards of
approximately $24.1 million, which expire at various dates
through 2024. In addition, as of December 31, 2004, the
Company had federal research and development tax credit carry
forwards of approximately $2.8 million, which expire at
various dates through 2022. Under current tax law, the
utilization of net operating loss and research and development
tax credit carry forwards may be subject to annual limitations
in the event of certain changes in ownership.
As required by SFAS No. 109, the Company has evaluated
the positive and negative evidence bearing upon the
realizability of the Companys deferred tax assets, which
consist principally of net operating loss and tax credit carry
forwards. For the year ended December 31 2003, the Company
evaluated the deferred tax asset valuation allowance and
determined that $1.8 million was required based on the
Companys recent profitability and expected future
profitability. As a result, the Company recognized an income tax
benefit of $2.6 million and a credit to additional paid in
capital of $2.7 million in the year ended December 31,
2003. The tax benefit was partially offset by an income tax
expense of $0.6 million. During the year ended December 31,
2004, the Company released the remaining valuation allowance of
$1.8 million as a credit to additional paid in capital based on
cumulative profitability in recent years. The reversal of the
deferred tax assets valuation allowance is based upon
managements expectation that the Company will generate
sufficient taxable income in future periods to allow it to
realize its deferred tax assets resulting from the tax benefits
associated with its net operating loss carry forwards and its
research and development tax credit carry forwards, as well as
certain other tax benefits related to the differences in book
and tax income timing.
The factors that weighed most heavily on managements
decision to release the valuation allowances in 2003 and 2004
were the Companys history of recent profitability, current
economic conditions and forecasted profitability over the next
several years. Significant management judgment is required in
determining the provision for income taxes, the deferred tax
assets and liabilities and any valuation allowance recorded
against the net deferred tax assets. In the event that actual
results differ from these estimates or the Company adjusts these
estimates in future periods, the Company may need to establish a
valuation allowance. Establishing new or additional valuation
allowances could materially adversely impact the Companys
financial position and results of operations.
74
CONCORD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of the Companys tax provision (benefit) are
as follows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
|
|
|
$ |
50 |
|
|
$ |
|
|
|
State
|
|
|
109 |
|
|
|
100 |
|
|
|
116 |
|
|
Foreign
|
|
|
546 |
|
|
|
459 |
|
|
|
452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
655 |
|
|
|
609 |
|
|
|
568 |
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(802 |
) |
|
|
(2,524 |
) |
|
|
|
|
|
State
|
|
|
35 |
|
|
|
(100 |
) |
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(767 |
) |
|
|
(2,624 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax (benefit) provision
|
|
$ |
(112 |
) |
|
$ |
(2,015 |
) |
|
$ |
568 |
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the statutory federal tax rate to the
Companys effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Statutory rate
|
|
|
(34.0 |
)% |
|
|
34.0 |
% |
|
|
34.0 |
% |
State tax rate, net of federal benefit
|
|
|
8.3 |
|
|
|
1.2 |
|
|
|
2.8 |
|
Foreign earnings taxed at different rates
|
|
|
12.9 |
|
|
|
(1.1 |
) |
|
|
3.9 |
|
Research and development tax credits
|
|
|
|
|
|
|
(3.5 |
) |
|
|
|
|
Non-deductible expenses
|
|
|
27.0 |
|
|
|
1.6 |
|
|
|
2.9 |
|
Change in valuation allowance
|
|
|
0.0 |
|
|
|
(68.6 |
) |
|
|
(24.6 |
) |
Other
|
|
|
(31.6 |
) |
|
|
0.8 |
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17.4 |
)% |
|
|
(35.6 |
)% |
|
|
20.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(9) |
Commitments and Contingencies |
The Company leases its facilities and certain equipment under
operating lease agreements expiring through October 2008.
The Companys remaining lease commitments for all leased
facilities and equipment with an initial or remaining term of at
least one year as of December 31, 2004 are as follows (in
thousands):
|
|
|
|
|
2005
|
|
$ |
4,053 |
|
2006
|
|
|
2,275 |
|
2007
|
|
|
887 |
|
2008
|
|
|
196 |
|
2009
|
|
|
3 |
|
|
|
|
|
Total
|
|
$ |
7,414 |
|
|
|
|
|
75
CONCORD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Rent expense was $4.8 million, $4.7 million and
$4.5 million for the years ended December 31, 2004,
2003 and 2002, respectively. Certain operating leases are
subject to cost escalations with the lease expense being
recorded on a straight-line basis and the difference being
reflected as an accrued liability. As of December 31, 2004
and 2003, this deferred rent liability was $0.8 million and
$1.03 million, respectively.
The Company has entered into several software license agreements
that provide the Company with exclusive worldwide licenses to
distribute or utilize certain patented computer software. The
Company is required to pay royalties on all related sales. Under
one software license agreement, as amended, the Company was
obligated to make minimum quarterly royalty payments from 2000
through 2002. The minimum payments were non-cancelable and
nonrefundable, but any minimum payments in excess of amounts due
for actual license sales in any quarter could be used as a
credit against future royalty fees in excess of the specified
minimum payments. Under another software license agreement, the
Company was obligated to make certain minimum royalty payments
from 2002 through 2004. This obligation was secured by a letter
of credit arrangement with the royalty provider. A third
software license agreement was entered into in 2004, which
obligates the Company to make certain royalty and support
services payments through 2007. Total royalty expense under
royalty agreements was approximately $1.8 million,
$1.4 million and $0.68 million for the years ended
December 31, 2004, 2003 and 2002, respectively. The minimum
remaining royalty payments will total $1.7 million through
2007.
As permitted under Massachusetts law, the Company has agreements
whereby it indemnifies its officers and directors for certain
events or occurrences while the officer or director is, or was
serving, at the Companys request in such capacity. The
term of the indemnification period is for the officer or
directors lifetime. The maximum potential amount of future
payments the Company could be required to make under these
indemnification agreements is unlimited; however, the Company
has a Director and Officer insurance policy pursuant to which
the company may recover all or a portion of amounts it pays to
directors or officers under their indemnification agreements. As
a result of its insurance policy coverage, the Company believes
the estimated fair value of these indemnification agreements is
minimal.
The Company warrants that its software products will perform in
all material respects in accordance with its standard published
specifications in effect at the time of delivery of the licensed
products to the customer for a period of 90 days.
Additionally, the Company warrants that its maintenance services
will be performed consistent with its maintenance policy in
effect at the time those services are delivered. The Company
believes its maintenance policy is consistent with generally
accepted industry standards. If necessary, the Company would
provide for the estimated cost of product and service warranties
based on specific warranty claims and claim history; however,
the Company has never incurred significant expense under product
or services warranties. As a result, the Company believes the
estimated liability of these warranties is minimal.
The Company enters into standard indemnification agreements in
the ordinary course of its business. Pursuant to these
agreements, the Company indemnifies, holds harmless, and agrees
to reimburse the indemnified party for losses suffered or
incurred by the indemnified party, generally its business
partners or customers, in connection with any patent, copyright,
trademark, trade secret or other intellectual property
infringement claim by any third party with respect to our
products. The term of these indemnification agreements is
generally perpetual. The maximum potential amount of future
payments the Company could be required to make under these
indemnification agreements is often capped at a dollar figure.
The Company has never incurred costs to defend lawsuits or
settle claims related to these indemnification agreements. As a
result, the Company believes the estimated fair value of these
agreements is minimal.
76
CONCORD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
When, as part of an acquisition, Concord acquires all of the
stock or all or a portion of the assets and/or liabilities of a
company, it may assume liability for certain events or
occurrences that took place prior to the date of acquisition.
The maximum potential amount of future payments it could be
required to make for such obligations is undeterminable at this
time. The Company has not incurred any such liabilities or made
any such payments in the past and the Company has no liabilities
recorded for these exposures as of December 31, 2004.
On April 30, 2004, the Company received a letter from LMS
Technology Distributions SDN BHD (LMS) of Malaysia
that demands that the Company reimburse LMS for approximately
$4.65 million in alleged losses arising out of the
Companys purported wrongful termination of a Concord
Authorized Reseller Agreement (the CAR Agreement)
with LMS. The Company disputes that the CAR Agreement was
wrongfully terminated or that LMS is owed any of the amounts
claimed, and the Company intends to defend vigorously against
the demand. It is not possible to predict or determine the
outcome of these demands or to provide ranges of losses that may
arise, if any.
In November 2003, Concord received notice from a former sales
employee in France, stating that he was wrongfully dismissed in
July 2003. The former employee filed a wrongful termination
lawsuit against Concord claiming approximately $0.4 million
in damages. In January 2005, the Labor Court of Poissy issued
its decision on the former employees unfair dismissal and
failure to pay commissions claims. The court found that the
Company did not fulfill its obligations as required by French
law and awarded the former employee approximately $12,000.
Accordingly, Concord has accrued a liability of $12,000 at
December 31, 2004.
On December 6, 2002, Aprisma filed a complaint for patent
infringement against Micromuse, Inc. in the U.S. District Court
for the District of New Hampshire. This case remains pending,
with a trial presently unscheduled. This case involves
Aprismas claim that Micromuses systems management
products, including NetcoolÒ products such as
Netcool/OMNIbus, Impact and Precision infringe the following
U.S. Patents: 5,436,909; 5,504,921; 5,777,549; 5,696,486;
5,768,501; and 6,064,304. Aprisma seeks injunctive relief and
damages based on Micromuses infringement. Micromuse has
denied infringement, and has alleged that the asserted patents
are invalid and are unenforceable. On January 11, 2005,
following a two-day hearing, the Court issued a Memorandum and
Order in which it adopted the proposed claim construction of the
seven disputed claim terms at issue offered by Aprisma. Based on
the Courts claim construction ruling, the parties filed
summary judgment motions on the issue of infringement, for which
they are awaiting a hearing.
On January 26, 2005, Aprisma was named as a defendant in
litigation filed in the Southern District of New York alleging
patent infringement of various U.S. patents allegedly owned by
Micromuse. This case remains pending, with a trial presently
unscheduled. This case involves Micromuses claim that
Aprismas SNMP support products, the SPECTRUM Assurance
Server, the SPECTRUM Alarm Monitor, Gateways and MPLS Manager
products infringe the following U.S. Patents: 6,192,034;
6,219,648; 6,330,598; 6,687,335; 6,763,333; 5,936,547; and
6,766,375. Micromuse seeks declaratory, injunctive relief and
damages for Aprismas alleged infringement. On March 8,
2005, Aprisma filed a Motion to Dismiss or Transfer the
Complaint to the District of New Hampshire. This Motion remains
pending. The Company believes the allegations in this suit are
without merit and we intend to vigorously defend against them.
77
CONCORD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accrued expenses consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Payroll and payroll-related
|
|
$ |
5,820 |
|
|
$ |
5,293 |
|
Customer deposits
|
|
|
295 |
|
|
|
1,901 |
|
Deferred rent
|
|
|
761 |
|
|
|
1,025 |
|
Administrative services
|
|
|
1,019 |
|
|
|
638 |
|
Royalties
|
|
|
866 |
|
|
|
423 |
|
Sales and marketing
|
|
|
508 |
|
|
|
321 |
|
Taxes
|
|
|
881 |
|
|
|
943 |
|
Travel-related
|
|
|
528 |
|
|
|
566 |
|
Other
|
|
|
1,493 |
|
|
|
1,517 |
|
|
|
|
|
|
|
|
|
|
$ |
12,171 |
|
|
$ |
12,627 |
|
|
|
|
|
|
|
|
|
|
(11) |
Employee Benefit Plan |
The Company maintains an employee benefit plan (the
Plan)under Section 401(k) of the Internal
Revenue Code covering all eligible employees, as defined. The
Plan allows for employees to defer a portion of their salary up
to IRS maximums of pretax compensation. No matching
contributions were made to the Plan during 2004, 2003 and 2002.
|
|
(12) |
Valuation and Qualifying Accounts |
The following table sets forth activity in the Companys
accounts receivable reserve account (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net | |
|
|
|
|
|
|
Balance at | |
|
Charges to/ | |
|
|
|
|
|
|
Beginning | |
|
(Reversal of) | |
|
|
|
Balance at | |
|
|
of Year | |
|
Expense | |
|
Write-offs | |
|
End of Year | |
|
|
| |
|
| |
|
| |
|
| |
2002
|
|
$ |
1,410 |
|
|
$ |
355 |
|
|
$ |
(285 |
) |
|
$ |
1,480 |
|
2003
|
|
$ |
1,480 |
|
|
$ |
(222 |
) |
|
$ |
(208 |
) |
|
$ |
1,050 |
|
2004
|
|
$ |
1,050 |
|
|
$ |
(512 |
) |
|
$ |
(115 |
) |
|
$ |
423 |
|
During the three months ended December 31, 2004, the
Company refined its methodology for estimating credit losses
based upon historical experience, which resulted in an
adjustment to the allowance for doubtful accounts in the amount
of $0.9 million, which served to reduce general and
administrative expenses and had an impact of $0.03 per
share on the Companys diluted earnings per share.
|
|
(13) |
Segment Reporting and Geographic 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
78
CONCORD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and assess performance. The Companys 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. The Company records revenue by
geographic region based on the location of each of the
Companys sales offices.
The following table presents the revenue by major geographical
regions (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December, 31 | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
United States
|
|
$ |
69,549 |
|
|
$ |
59,325 |
|
|
$ |
57,812 |
|
United Kingdom
|
|
|
7,526 |
|
|
|
10,412 |
|
|
|
5,731 |
|
Europe (excluding the U.K.)
|
|
|
16,112 |
|
|
|
19,907 |
|
|
|
16,640 |
|
Rest of the World
|
|
|
13,001 |
|
|
|
14,419 |
|
|
|
13,661 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
106,188 |
|
|
$ |
104,063 |
|
|
$ |
93,844 |
|
|
|
|
|
|
|
|
|
|
|
No one country, except the United States, accounted for greater
than 10% of total revenues in the years ended December 31,
2004 and 2002. No one country, except the United States and the
United Kingdom, accounted for greater than 10% of total revenues
in the year ended December 31, 2003. Substantially all of
the Companys assets are located in the United States.
The Companys reportable segments are determined by
customer type: managed service providers/ telecommunication
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 revenue. Accordingly, all expenses
are considered corporate level activities and are not allocated
to segments. Also, the executive management committee does not
assign assets to these segments.
The Company currently does not provide revenues by product or
product family, as it is impractical due to the nature of its
single suite of products. Some components of the suite cannot be
categorized into a specified and defined product family while
others could be included in more than one product family. In
addition, categorization and classification of our components
into product families is changing in nature; changes in
packaging, licensing, and product categorization occur on a
frequent basis.
The following table presents the approximate revenue by
reportable segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December, 31 | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
MSP/ TC
|
|
$ |
48,374 |
|
|
$ |
46,872 |
|
|
$ |
39,636 |
|
Enterprise
|
|
|
57,814 |
|
|
|
57,191 |
|
|
|
54,208 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
106,188 |
|
|
$ |
104,063 |
|
|
$ |
93,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Acquisition of Vitel Software, Incorporated |
On January 5, 2005, Concord acquired 100% of the common
stock of privately-held Vitel Software, Incorporated
(Vitel) a provider of voice network performance
management solutions. Vitel technology enables enterprises and
service providers to manage the performance of next-generation
IP and legacy voice networks and messaging systems, including
voice mail, from multiple vendors. The purchase of Vitel will
position Concord to deliver innovative solutions to customers
before, during, and after their migration to an IP-based voice
network. This strategic acquisition will enable Concord to
proactively manage voice network performance across multiple
vendors, multiple applications, and multiple technologies.
79
CONCORD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consideration for the acquisition totaled $4.0 million of
cash purchase price and transaction costs of $0.1 million.
The acquisition will be accounted for in the three months ending
March 31, 2005 using the purchase method of accounting and
the results of operations of the acquired business since the
date of acquisition will be included in the financial statements
of the Company for the three month period ending March 31,
2005. The total purchase consideration will be allocated to the
assets and liabilities assumed at their estimated fair values on
the date of acquisition, as determined by management and, with
respect to identifiable intangible assets, an appraisal. The
allocation of purchase consideration is based upon a preliminary
appraisal of identified intangible assets which will be
finalized in the three months ended March 31, 2005. The
excess of the purchase price over the amounts allocated to
assets acquired and liabilities assumed will be recorded as
goodwill. In accordance with current accounting standards, the
goodwill will not be amortized and will be tested for impairment
annually as required by SFAS 142.
The following table summarizes the estimated fair value of the
assets acquired and liabilities assumed at the date of
acquisition.
|
|
|
|
|
|
|
|
|
(In thousands) | |
Total consideration:
|
|
|
|
|
|
Cash
|
|
$ |
4,000 |
|
|
Transaction costs
|
|
|
125 |
|
|
|
|
|
|
|
Total purchase consideration
|
|
$ |
4,125 |
|
|
|
|