UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. | |
| For the quarterly period ended March 31, 2003. |
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.
| Massachusetts (State of incorporation) |
04-2710876 (IRS Employer Identification Number) |
600 Nickerson Road
Marlboro, Massachusetts 01752
(508) 460-4646
(Address and telephone of principal executive offices)
Indicate by check mark whether registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
| YES x NO o |
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
| YES x NO o |
17,262,036 shares of the registrant’s Common stock, $0.01 par value, were outstanding as of April 29, 2003.
THIS DOCUMENT CONTAINS 41 PAGES.
THE EXHIBIT INDEX IS ON PAGE 40.
CONCORD COMMUNICATIONS, INC.
FORM 10-Q, March 31, 2003
CONTENTS
| Page | |||||
PART I: FINANCIAL INFORMATION |
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Item 1. Condensed Consolidated Financial Statements |
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Condensed Consolidated Balance Sheets: |
|||||
March 31, 2003 and December 31, 2002 |
3 | ||||
Condensed Consolidated Statements of Operations: |
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Three months ended March 31, 2003 and March 31, 2002 |
4 | ||||
Condensed Consolidated Statements of Cash Flows: |
|||||
Three months ended March 31, 2003 and March 31, 2002 |
5 | ||||
Notes to Condensed Consolidated Financial Statements |
6-9 | ||||
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
10-30 | ||||
Item 3. Quantitative and Qualitative Disclosures about Market Risk |
31 | ||||
Item 4. Controls and Procedures |
32 | ||||
PART II: OTHER INFORMATION |
|||||
Item 1. Legal Proceedings |
33 | ||||
Item 2. Changes in Securities and Use of Proceeds |
33 | ||||
Item 3. Defaults Upon Senior Securities |
33 | ||||
Item 4. Submission of Matters to a Vote of Security Holders |
33 | ||||
Item 5. Other Information |
34 | ||||
Item 6. Exhibits and Reports on Form 8-K |
34 | ||||
SIGNATURE |
35 | ||||
CERTIFICATIONS |
36-39 | ||||
EXHIBIT INDEX |
40-41 | ||||
2
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONCORD COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except share and per share data)
| March 31, | December 31, | ||||||||||
| 2003 | 2002 | ||||||||||
ASSETS |
|||||||||||
Current Assets: |
|||||||||||
Cash and cash equivalents |
$ | 16,849 | $ | 10,362 | |||||||
Marketable securities |
59,254 | 62,469 | |||||||||
Restricted cash |
689 | 839 | |||||||||
Accounts receivable, net of allowance of $1,480
at March 31, 2003 and December 31, 2002 |
18,857 | 17,417 | |||||||||
Prepaid expenses and other current assets |
2,501 | 2,882 | |||||||||
Total current assets |
98,150 | 93,969 | |||||||||
Equipment and improvements, at cost: |
|||||||||||
Equipment |
23,549 | 22,987 | |||||||||
Leasehold improvements |
6,142 | 6,111 | |||||||||
| 29,691 | 29,098 | ||||||||||
Less — accumulated depreciation and amortization |
22,263 | 20,853 | |||||||||
| 7,428 | 8,245 | ||||||||||
Deferred tax asset |
3,500 | 3,500 | |||||||||
Other long-term assets |
309 | 216 | |||||||||
| 3,809 | 3,716 | ||||||||||
Total assets |
$ | 109,387 | $ | 105,930 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|||||||||||
Current Liabilities: |
|||||||||||
Accounts payable |
$ | 1,000 | $ | 3,584 | |||||||
Accrued expenses (including customer deposits of $3,329 and
$180 at March 31, 2003 and December 31, 2002, respectively) |
12,947 | 10,062 | |||||||||
Deferred revenue |
25,722 | 23,348 | |||||||||
Total current liabilities |
39,669 | 36,994 | |||||||||
Commitments and Contingencies (Note 2) |
|||||||||||
Stockholders’ Equity: |
|||||||||||
Common stock, $0.01 par value: |
|||||||||||
Authorized - 50,000,000 shares |
|||||||||||
Issued and outstanding - 17,257,078 and 17,246,005 shares
at March 31, 2003 and December 31, 2002, respectively |
173 | 172 | |||||||||
Additional paid-in capital |
98,931 | 98,893 | |||||||||
Deferred compensation |
(40 | ) | (60 | ) | |||||||
Accumulated other comprehensive income |
2,295 | 2,408 | |||||||||
Accumulated deficit |
(31,641 | ) | (32,477 | ) | |||||||
Total stockholders’ equity |
69,718 | 68,936 | |||||||||
Total liabilities and stockholders’ equity |
$ | 109,387 | $ | 105,930 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
CONCORD COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except share and per share data)
| Three Months Ended | |||||||||||
| March 31, | March 31, | ||||||||||
| 2003 | 2002 | ||||||||||
Revenues: |
|||||||||||
License revenues |
$ | 12,909 | $ | 14,060 | |||||||
Service revenues |
11,208 | 10,177 | |||||||||
Total revenues |
24,117 | 24,237 | |||||||||
Cost of Revenues: |
|||||||||||
Cost of license revenues |
589 | 566 | |||||||||
Cost of service revenues |
4,042 | 3,819 | |||||||||
Total cost of revenues |
4,631 | 4,385 | |||||||||
Gross profit |
19,486 | 19,852 | |||||||||
Operating Expenses: |
|||||||||||
Research and development (excluding stock-based
compensation of $20 and $33, respectively) |
5,427 | 5,741 | |||||||||
Sales and marketing |
11,365 | 12,134 | |||||||||
General and administrative |
2,245 | 2,055 | |||||||||
Stock-based compensation |
20 | 33 | |||||||||
Total operating expenses |
19,057 | 19,963 | |||||||||
Operating income (loss) |
429 | (111 | ) | ||||||||
Other Income (Expense): |
|||||||||||
Interest income |
717 | 776 | |||||||||
Other expense |
(224 | ) | (29 | ) | |||||||
Total other income, net |
493 | 747 | |||||||||
Income before income taxes |
922 | 636 | |||||||||
Provision for income taxes |
86 | 147 | |||||||||
Net income |
$ | 836 | $ | 489 | |||||||
Net income per common and potential common share: |
|||||||||||
Basic |
$ | 0.05 | $ | 0.03 | |||||||
Diluted |
$ | 0.05 | $ | 0.03 | |||||||
Weighted average common and potential common
shares outstanding: |
|||||||||||
Basic |
17,254,342 | 16,931,200 | |||||||||
Diluted |
17,448,566 | 18,025,665 | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
CONCORD COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
| Three Months Ended | ||||||||||||
| March 31, | March 31, | |||||||||||
| 2003 | 2002 | |||||||||||
Cash Flows from Operating Activities: |
||||||||||||
Net income |
$ | 836 | $ | 489 | ||||||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||||||
Depreciation and amortization |
1,410 | 1,515 | ||||||||||
Gain on sale of fixed assets |
— | (15 | ) | |||||||||
Stock-based compensation |
20 | 33 | ||||||||||
Changes in current assets and liabilities: |
||||||||||||
Accounts receivable |
(1,440 | ) | 199 | |||||||||
Prepaid expenses and other current assets |
381 | (347 | ) | |||||||||
Accounts payable |
(2,584 | ) | (42 | ) | ||||||||
Accrued expenses |
2,885 | 47 | ||||||||||
Deferred revenue |
2,374 | 1,738 | ||||||||||
Net cash provided by operating activities |
3,882 | 3,617 | ||||||||||
Cash Flows from Investing Activities: |
||||||||||||
Purchases of equipment and improvements |
(593 | ) | (830 | ) | ||||||||
Change in other assets |
(93 | ) | (22 | ) | ||||||||
Investments in marketable securities |
(4,475 | ) | (2,107 | ) | ||||||||
Proceeds from sales of marketable securities |
7,577 | 2,247 | ||||||||||
Payment from restricted cash |
150 | — | ||||||||||
Net cash provided by (used in) investing activities |
2,566 | (712 | ) | |||||||||
Cash Flows from Financing Activities: |
||||||||||||
Proceeds from issuance of common stock |
39 | 565 | ||||||||||
Net cash provided by financing activities |
39 | 565 | ||||||||||
Net increase in cash and cash equivalents |
6,487 | 3,470 | ||||||||||
Cash and cash equivalents, beginning of period |
10,362 | 9,011 | ||||||||||
Cash and cash equivalents, end of period |
$ | 16,849 | $ | 12,481 | ||||||||
Supplemental Disclosure of Cash Flow Information: |
||||||||||||
Cash paid for income taxes |
$ | 102 | $ | 97 | ||||||||
Supplemental Disclosure of Noncash Financing and
Investing Transactions: |
||||||||||||
Reversal of deferred compensation related to forfeitures
of stock options |
$ | — | $ | (35 | ) | |||||||
Unrealized loss on available-for-sale securities |
$ | (113 | ) | $ | (598 | ) | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
CONCORD COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FORM 10-Q, March 31, 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The accompanying unaudited consolidated financial statements have been presented by Concord Communications, Inc. (the “Company” or “Concord”) in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q and Regulation S-X pertaining to interim financial statements. Accordingly, these interim financial statements do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These financial statements reflect all adjustments and accruals of a normal recurring nature, which management considers necessary for a fair presentation of the Company’s financial position as of March 31, 2003 and December 31, 2002, and the Company’s results of operations for the three months ended March 31, 2003 and 2002. The results for the interim periods presented are not necessarily indicative of results to be expected for any future period. The financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company’s 2002 Annual Report on Form 10-K filed with the Securities and Exchange Commission in March 2003.
(b) 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. 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. No individual customer or reseller accounted for more than 10% of revenues for the three months ended March 31, 2003 or March 31, 2002. One customer, located in Europe, accounted for 10.9% of the Company’s accounts receivable at March 31, 2003. One other customer, a reseller in Europe, accounted for 11.0% of the Company’s accounts receivable at December 31, 2002. As of March 31, 2003, this customer represented less than 1.0% of accounts receivable.
(c) Derivative Financial Instruments
The Company 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. Gains and losses on forward contracts and foreign denominated receivables are included in other income (expense), net. The Company does not
6
enter into or hold derivatives for trading or speculative purposes and only enters into contracts with highly rated financial institutions. At March 31, 2003, the Company had no forward contracts outstanding.
(d) Stock-Based Compensation
The Company accounts for employee stock-based compensation arrangements under the provisions of Accounting Principles Board (“APB”) Opinion No. 25 and related interpretations. Statement of Financial Accounting Standards (“SFAS”) No. 123 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 SFAS No. 148, had been applied in measuring compensation expense for all periods presented.
| Three Months Ended March 31, | |||||||||
| 2003 | 2002 | ||||||||
| (In thousands, except per share data) | |||||||||
Net income: |
|||||||||
As reported |
$ | 836 | $ | 489 | |||||
Add: |
|||||||||
Stock-based employee compensation expense included in reported
net income, net of related taxes |
20 | 33 | |||||||
Less: |
|||||||||
Total stock-based employee compensation expense determined under
the fair value based method for all awards, net of related tax effects |
(2,512 | ) | (2,455 | ) | |||||
Pro forma net loss |
$ | (1,656 | ) | $ | (1,933 | ) | |||
Basic net income (loss) per share: |
|||||||||
As reported |
$ | 0.05 | $ | 0.03 | |||||
Pro forma |
$ | (0.10 | ) | $ | (0.11 | ) | |||
Diluted net income (loss) per share: |
|||||||||
As reported |
$ | 0.05 | $ | 0.03 | |||||
Pro forma |
$ | (0.10 | ) | $ | (0.11 | ) | |||
2. INDEMNIFICATIONS
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 Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s 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 that limits the Company’s exposure and enables it to recover a portion of any future amounts paid. 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 the life of the product. 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 our product or services warranties. As a result, the Company believes the estimated fair value on these agreements is minimal.
7
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 any time after execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is sometimes capped at a dollar figure, but is often unlimited. 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.
3. NET 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 three months ended March 31, 2003 and 2002, dilutive potential common shares consisted of outstanding stock options. The dilutive effect of outstanding stock options is computed using the treasury stock method.
Calculations of the basic and diluted net income per common share and potential common shares are as follows:
| Three Months Ended March 31, | ||||||||
| 2003 | 2002 | |||||||
| (Dollars in thousands | ||||||||
| except share and per share data) | ||||||||
Basic: |
||||||||
Net income applicable to common stockholders |
$ | 836 | $ | 489 | ||||
Weighted average common shares outstanding |
17,254,342 | 16,931,200 | ||||||
Net income per share |
$ | 0.05 | $ | 0.03 | ||||
Diluted: |
||||||||
Net income applicable to common stockholders |
$ | 836 | $ | 489 | ||||
Weighted average common shares outstanding |
17,254,342 | 16,931,200 | ||||||
Potential common shares pursuant to stock options |
194,224 | 1,094,465 | ||||||
Diluted weighted average shares |
17,448,566 | 18,025,665 | ||||||
Diluted net inco | ||||||||