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 September 30, 2003. |
OR
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE | |
| SECURITIES EXCHANGE ACT OF 1934. | ||
| For the transition period from ____________to ____________ |
Commission File Number 0-23067
CONCORD COMMUNICATIONS, INC.
| Massachusetts | 04-2710876 | |
| (State of incorporation) | (IRS Employer Identification Number) |
600 Nickerson Road
Marlboro, Massachusetts 01752
(508) 460-4646
(Address and telephone of principal executive offices)
Indicate by check mark whether registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (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.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
17,974,023 shares of the registrant’s Common stock, $0.01 par value, were outstanding as of November 5, 2003.
THIS DOCUMENT CONTAINS 49 PAGES.
THE EXHIBIT INDEX IS ON PAGES 48 & 49.
CONCORD COMMUNICATIONS, INC.
FORM 10-Q, September 30, 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: |
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September 30, 2003 and December 31, 2002 |
3 | ||||
Condensed Consolidated Statements of Operations: |
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Three and nine months ended September 30, 2003 and
September 30, 2002 |
4 | ||||
Condensed Consolidated Statements of Cash Flows: |
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Nine months ended September 30, 2003 and September 30, 2002 |
5 | ||||
Notes to Condensed Consolidated Financial Statements |
6-14 | ||||
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
15-42 | ||||
Item 3. Quantitative and Qualitative Disclosures about Market Risk |
43 | ||||
Item 4. Controls and Procedures |
44 | ||||
PART II: OTHER INFORMATION |
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Item 1. Legal Proceedings |
45 | ||||
Item 2. Changes in Securities and Use of Proceeds |
45 | ||||
Item 3. Defaults Upon Senior Securities |
45 | ||||
Item 4. Submission of Matters to a Vote of Security Holders |
45 | ||||
Item 5. Other Information |
45 | ||||
Item 6. Exhibits and Reports on Form 8-K |
45-46 | ||||
SIGNATURE |
47 | ||||
EXHIBIT INDEX |
48-49 | ||||
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)
| September 30, | December 31, | ||||||||||
| 2003 | 2002 | ||||||||||
ASSETS |
|||||||||||
Current Assets: |
|||||||||||
Cash and cash equivalents |
$ | 8,150 | $ | 10,362 | |||||||
Marketable securities |
67,394 | 62,469 | |||||||||
Restricted cash |
389 | 839 | |||||||||
Accounts receivable, net of allowance of $1,123 and $1,480
at September 30, 2003 and December 31, 2002, respectively |
19,801 | 17,417 | |||||||||
Prepaid expenses and other current assets |
2,292 | 2,882 | |||||||||
Total current assets |
98,026 | 93,969 | |||||||||
Equipment and improvements, at cost: |
|||||||||||
Equipment |
25,381 | 22,987 | |||||||||
Leasehold improvements |
6,204 | 6,111 | |||||||||
| 31,585 | 29,098 | ||||||||||
Less — accumulated depreciation and amortization |
24,616 | 20,853 | |||||||||
| 6,969 | 8,245 | ||||||||||
Goodwill |
6,212 | — | |||||||||
Other intangible assets, net |
3,207 | — | |||||||||
| 9,419 | — | ||||||||||
Deferred tax assets |
4,250 | 3,500 | |||||||||
Other long-term assets |
336 | 216 | |||||||||
| 4,586 | 3,716 | ||||||||||
Total assets |
$ | 119,000 | $ | 105,930 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current Liabilities: |
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Accounts payable |
$ | 3,097 | $ | 3,584 | |||||||
Accrued expenses (including customer deposits of $1,023 and
$180 at September 30, 2003 and December 31, 2002, respectively) |
11,884 | 10,062 | |||||||||
Deferred revenue |
26,438 | 23,348 | |||||||||
Total current liabilities |
41,419 | 36,994 | |||||||||
Commitments and Contingencies (Note 5) |
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Stockholders’ Equity: |
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Common stock, $0.01 par value: |
|||||||||||
Authorized — 50,000,000 shares
|
|||||||||||
Issued and outstanding — 17,844,567 and 17,246,005 shares
at September 30, 2003 and December 31, 2002, respectively |
178 | 172 | |||||||||
Additional paid-in capital |
105,595 | 98,893 | |||||||||
Deferred compensation |
(12 | ) | (60 | ) | |||||||
Accumulated other comprehensive income |
1,782 | 2,408 | |||||||||
Accumulated deficit |
(29,962 | ) | (32,477 | ) | |||||||
Total stockholders’ equity |
77,581 | 68,936 | |||||||||
Total liabilities and stockholders’ equity |
$ | 119,000 | $ | 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 | Nine Months Ended | ||||||||||||||||||
| September 30, | September 30, | September 30, | September 30, | ||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||||
Revenues: |
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License revenues |
$ | 13,683 | $ | 12,202 | $ | 39,746 | $ | 38,520 | |||||||||||
Service revenues |
12,877 | 10,852 | 36,546 | 31,722 | |||||||||||||||
Total revenues |
26,560 | 23,054 | 76,292 | 70,242 | |||||||||||||||
Cost of Revenues: |
|||||||||||||||||||
Cost of license revenues |
826 | 469 | 2,098 | 1,430 | |||||||||||||||
Cost of service revenues |
4,085 | 3,782 | 12,172 | 11,322 | |||||||||||||||
Total cost of revenues |
4,911 | 4,251 | 14,270 | 12,752 | |||||||||||||||
Gross profit |
21,649 | 18,803 | 62,022 | 57,490 | |||||||||||||||
Operating Expenses: |
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Research and development (excluding stock-based
compensation of $14, $25, $48 and $85, respectively) |
5,897 | 5,259 | 16,746 | 16,445 | |||||||||||||||
Sales and marketing |
12,490 | 11,818 | 36,434 | 35,843 | |||||||||||||||
General and administrative |
2,156 | 1,742 | 6,462 | 5,569 | |||||||||||||||
Stock-based compensation |
14 | 25 | 48 | 85 | |||||||||||||||
Acquisition-related charges |
40 | — | 40 | — | |||||||||||||||
In-process research & development |
994 | — | 994 | — | |||||||||||||||
Total operating expenses |
21,591 | 18,844 | 60,724 | 57,942 | |||||||||||||||
Operating income (loss) |
58 | (41 | ) | 1,298 | (452 | ) | |||||||||||||
Other Income (Expense): |
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Interest income |
684 | 817 | 2,110 | 2,396 | |||||||||||||||
Other expense |
(168 | ) | (76 | ) | (538 | ) | (121 | ) | |||||||||||
Total other income, net |
516 | 741 | 1,572 | 2,275 | |||||||||||||||
Income before income taxes |
574 | 700 | 2,870 | 1,823 | |||||||||||||||
Provision for income taxes |
93 | 136 | 355 | 375 | |||||||||||||||
Net income |
$ | 481 | $ | 564 | $ | 2,515 | $ | 1,448 | |||||||||||
Net income per common and potential common share: |
|||||||||||||||||||
Basic |
$ | 0.03 | $ | 0.03 | $ | 0.14 | $ | 0.09 | |||||||||||
Diluted |
$ | 0.03 | $ | 0.03 | $ | 0.14 | $ | 0.08 | |||||||||||
Weighted average common and potential common
shares outstanding: |
|||||||||||||||||||
Basic |
17,500,200 | 17,104,224 | 17,375,680 | 17,017,611 | |||||||||||||||
Diluted |
18,238,417 | 17,275,667 | 17,916,872 | 17,749,296 | |||||||||||||||
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)
| Nine Months Ended | |||||||||||
| September 30, | September 30, | ||||||||||
| 2003 | 2002 | ||||||||||
Cash Flows from Operating Activities: |
|||||||||||
Net income |
$ | 2,515 | $ | 1,448 | |||||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
|||||||||||
Depreciation and amortization |
3,966 | 4,543 | |||||||||
Stock-based compensation |
48 | 85 | |||||||||
Changes in current assets and liabilities: |
|||||||||||
Accounts receivable |
(2,080 | ) | (2,160 | ) | |||||||
Prepaid expenses and other current assets |
667 | 407 | |||||||||
Accounts payable |
(530 | ) | (794 | ) | |||||||
Accrued expenses |
1,549 | (1,418 | ) | ||||||||
Deferred revenue |
2,499 | 2,504 | |||||||||
Net cash provided by operating activities |
8,634 | 4,615 | |||||||||
Cash Flows from Investing Activities: |
|||||||||||
Purchases of equipment and improvements |
(2,435 | ) | (2,889 | ) | |||||||
Change in other assets |
(82 | ) | 6 | ||||||||
Investments in marketable securities |
(27,092 | ) | (9,777 | ) | |||||||
Proceeds from sales of marketable securities |
21,541 | 6,888 | |||||||||
Deposit of restricted cash |
— | (938 | ) | ||||||||
Release of restricted cash |
450 | — | |||||||||
Acquisition of business - net of cash acquired |
(4,968 | ) | — | ||||||||
Net cash used in investing activities |
(12,586 | ) | (6,710 | ) | |||||||
Cash Flows from Financing Activities: |
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Proceeds from issuance of common stock |
1,740 | 1,765 | |||||||||
Net cash provided by financing activities |
1,740 | 1,765 | |||||||||
Net increase in cash and cash equivalents |
(2,212 | ) | (330 | ) | |||||||
Cash and cash equivalents, beginning of period |
10,362 | 9,011 | |||||||||
Cash and cash equivalents, end of period |
$ | 8,150 | $ | 8,681 | |||||||
Supplemental Disclosure of Cash Flow Information: |
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Cash paid for income taxes |
$ | 352 | $ | 186 | |||||||
Supplemental Disclosure of Noncash Financing and Investing Transactions: |
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Reversal of deferred compensation related to forfeitures
of stock options |
$ | — | $ | (65 | ) | ||||||
Unrealized gain/(loss) on available-for-sale securities |
$ | (626 | ) | $ | 588 | ||||||
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, September 30, 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared 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 September 30, 2003 and December 31, 2002, and the Company’s results of operations for the three and nine months ended September 30, 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 and nine months ended September 30, 2003 or September 30, 2002. One customer, a reseller in Europe, accounted for 13% of the Company’s accounts receivable at September 30, 2003. One customer, another reseller in Europe, accounted for 11% of the Company’s accounts receivable at December 31, 2002. As of September 30, 2003, this customer represented less than 1% 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
6
contracts and foreign denominated receivables are included in other income (expense), net. The Company does not enter into or hold derivatives for trading or speculative purposes and only enters into contracts with highly rated financial institutions.
At September 30, 2003, the Company had two forward contracts outstanding, which are presented in the table below. The notional exchange rate is quoted using market conventions where the currency is expressed in currency units per U.S. dollar.
| Notional | Notional | Fair Market Value as | ||||||||||||||
| Currency | ||||||||||||||||