1
Exhibit 99.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Concord Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Concord
Communications, Inc. (a Massachusetts corporation) as of December 31, 1999 and
December 31, 1998, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the 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 includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Concord Communications, Inc. as
of December 31, 1999 and December 31, 1998, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in United
States.
Arthur Andersen LLP
Boston, Massachusetts
January 17, 2000
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CONCORD COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
ASSETS
Current Assets:
Cash, cash equivalents and marketable securities ..... $ 62,044,141 $51,248,773
Accounts receivable, net of allowance of approximately
$930,000 and $450,000 in 1999 and 1998, respectively 13,465,999 5,391,723
Prepaid expenses and other current assets ............ 1,286,070 509,805
------------ ------------
Total current assets ............................. 76,796,210 57,150,301
------------ ------------
Equipment and Improvements, at cost:
Equipment ............................................ 7,897,533 3,792,080
Leasehold improvements ............................... 3,005,915 388,894
------------ ------------
10,903,448 4,180,974
Less-- Accumulated depreciation and amortization ..... 3,294,551 1,407,430
------------ ------------
7,608,897 2,773,544
------------ ------------
$ 84,405,107 $59,923,845
============ ============
LIABILITIES
AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ..................................... $ 4,542,644 $ 3,599,636
Accrued expenses ..................................... 6,885,827 5,087,984
Deferred revenue ..................................... 9,925,297 5,485,585
------------ ------------
Total current liabilities......................... 21,353,768 14,173,205
------------ ------------
Commitments and Contingencies (Note 8)
Stockholders' Equity
Preferred Stock, $.01 par value --
Authorized -- 1,000,000 shares
Issued and outstanding-- None -- --
Common stock, $.01 par value--
Authorized -- 50,000,000 shares
Issued and outstanding -- 14,406,192
and 13,040,374 shares, in 1999 and 1998,
respectively ........................................ 144,062 130,405
Additional paid-in capital ........................... 77,799,827 69,998,035
Deferred compensation ................................ (53,221) (101,189)
Accumulated other comprehensive income................ (1,386,125) 149,606
Accumulated deficit .................................. (13,453,204) (24,426,217)
------------ ------------
Total stockholders' equity ....................... 63,051,339 45,750,640
------------ ------------
$ 84,405,107 $ 59,923,845
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
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CONCORD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED
-----------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
----------- ----------- ------------
Revenues:
License revenues ............................ $52,707,905 $34,597,958 $18,454,613
Service revenues ............................ 14,635,150 6,859,394 2,225,287
----------- ----------- -----------
Total revenues ......................... 67,343,055 41,457,352 20,679,900
Cost of Revenues ................................. 8,085,987 4,676,335 2,925,169
----------- ----------- -----------
Gross profit ........................... 59,257,068 36,781,017 17,754,731
----------- ----------- -----------
Operating Expenses:
Research and development .................... 11,409,464 7,386,706 5,068,489
Sales and marketing ......................... 25,687,262 17,522,653 10,173,182
General and administrative .................. 3,678,544 2,802,023 2,058,402
Stock-based compensation (Note 3)............ 2,549,000 1,001,000 --
Acquisition-related charges (Note 3)......... 550,601 -- --
----------- ----------- -----------
Total operating expenses .................... 43,874,871 28,712,382 17,300,073
----------- ----------- -----------
Operating income ....................... 15,382,197 8,068,635 454,658
----------- ----------- -----------
Other Income (Expense):
Interest income ............................. 3,136,026 2,355,816 428,253
Interest expense ............................ -- (514) (126,836)
Other ....................................... (19,268) (65,251) 4,248
----------- ----------- -----------
Total other income, net ................ 3,116,758 2,290,051 305,665
----------- ----------- -----------
Income before income taxes ............. 18,498,955 10,358,686 760,323
Provision for income taxes ....................... 5,592,703 532,600 --
----------- ----------- -----------
Net income ....................................... $12,906,252 $ 9,826,086 $ 760,323
=========== =========== ===========
Pro forma provision for income taxes on
Subchapter S-Corporation income (unaudited) ...... 146,325 41,400 --
----------- ----------- -----------
Pro forma net income (unaudited) ................. $12,759,927 $ 9,784,686 $ 760,323
=========== =========== ===========
Net income per common and potential
common share:
Basic .......................................... $ 0.91 $ 0.73 $ 0.20
=========== =========== ===========
Diluted ........................................ $ 0.85 $ 0.66 $ 0.06
=========== =========== ===========
Pro forma diluted (unaudited) .................. $ 0.85 $ 0.66 $ 0.06
=========== =========== ===========
Weighted average common and potential
common shares outstanding:
Basic .......................................... 14,160,755 13,457,495 3,884,915
============ =========== ===========
Diluted ........................................ 15,139,325 14,892,238 12,134,727
============ =========== ===========
Pro forma diluted (unaudited) .................. 15,139,325 14,892,238 12,134,727
============ =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
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CONCORD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK UNREALIZED
--------------------- ADDITIONAL GAIN ON
NUMBER $.01 PAR PAID-IN DEFERRED MARKETABLE
OF SHARES VALUE CAPITAL COMPENSATION SECURITIES
---------- -------- ----------- ------------ -----------
BALANCE, DECEMBER 28, 1996...... 844,482 $ 8,445 $18,156,951 -- --
Issuance of common stock,
net of issuance costs of
$955,359........................ 2,735,000 27,350 34,626,991 -- --
Accretion of dividends on
preferred stock................. -- -- -- -- --
Conversion of redeemable
convertible preferred stock
to common stock................. 8,108,258 81,083 14,838,203 -- --
Exercise of stock options........ 331,448 3,315 188,594 -- --
Deferred compensation
related to grants of stock
options......................... -- -- 191,875 (191,875) --
Amortization of deferred
compensation related to
grants of stock options......... -- -- -- 42,718 --
Unrealized gains on
available-for-sale
securities...................... -- -- -- -- 19,750
Distribution to shareholders..... -- -- -- -- --
Net income...................... -- -- -- -- --
---------- -------- ----------- --------- -----------
Comprehensive Income -- -- -- -- --
BALANCE, DECEMBER 31, 1997....... 12,019,188 120,193 68,002,614 (149,157) 19,750
Shares issued in connection
with employee stock plans....... 1,021,186 10,212 1,495,421 -- --
Tax benefit associated with
employee stock options.......... -- -- 500,000 -- --
Amortization of deferred
compensation related to
grants of stock options......... -- -- -- 47,968 --
Unrealized gains on
available-for-sale
securities...................... -- -- -- -- 129,856
Distribution to shareholders..... -- -- -- -- --
Net income...................... -- -- -- -- --
---------- -------- ----------- --------- -----------
Comprehensive Income -- -- -- -- --
BALANCE, DECEMBER 31, 1998....... 13,040,374 130,405 69,998,035 (101,189) 149,606
Shares issued in connection
with employee stock plan........ 1,365,818 13,657 2,901,792 -- --
Tax benefit associated with
employee stock options.......... -- -- 4,900,000 -- --
Amortization of deferred
compensation related to
grants of stock options......... -- -- -- 47,968 --
Unrealized gains on
available-for-sale
securities...................... -- -- -- -- (1,535,731)
Distribution to shareholders..... -- -- -- -- --
Net income...................... -- -- -- -- --
---------- -------- ----------- --------- -----------
Comprehensive Income -- -- -- -- --
BALANCE, DECEMBER 31, 1999....... 14,406,192 $144,062 $77,799,827 $ (53,221) $(1,386,125)
========== ======== =========== ========= ===========
ACCUMULATED
OTHER
ACCUMULATED COMPREHENSIVE COMPREHENSIVE
DEFICIT INCOME TOTAL INCOME
------------- ------------- ------------- -------------
BALANCE, DECEMBER 28, 1996....... $(32,943,433) -- $(14,778,037) --
Issuance of common stock,
net of issuance costs of
$955,359........................ -- -- 34,654,341 --
Accretion of dividends on
preferred stock................. (441,557) -- (441,557) --
Conversion of redeemable
convertible preferred stock
to common stock................. -- -- 14,919,286 --
Exercise of stock options........ -- -- 191,909 --
Deferred compensation
related to grants of stock
options......................... -- -- -- --
Amortization of deferred
compensation related to
grants of stock options......... -- -- 42,718 --
Unrealized gains on
available-for-sale
securities...................... -- 19,750 19,750 19,750
Distribution to shareholders..... (119,698) -- (119,698) --
Net income...................... 760,323 -- 760,323 760,323
------------ ----------- ------------ -----------
Comprehensive Income -- 19,750 -- 780,073
BALANCE, DECEMBER 31, 1997....... (32,744,365) -- 35,249,035 --
Shares issued in connection
with employee stock plans....... -- -- 1,505,633 --
Tax benefit associated with
employee stock options.......... -- -- 500,000 --
Amortization of deferred
compensation related to
grants of stock options......... -- -- 47,968 --
Unrealized gains on
available-for-sale
securities...................... -- 129,856 129,856
Distribution to shareholders..... (1,507,938) -- (1,507,938) --
Net income...................... 9,826,086 -- 9,826,086 --
------------ ----------- ------------ -----------
Comprehensive Income -- 149,606 -- 9,955,942
BALANCE, DECEMBER 31, 1998....... (24,426,217) -- 45,750,640 --
------------ ----------- ------------ -----------
Shares issued in connection
with employee stock plan........ -- -- 2,915,449 --
Tax benefit associated with
employee stock options.......... -- -- 4,900,000 --
Amortization of deferred
compensation related to
grants of stock options......... -- -- 47,968 --
Unrealized gains on
available-for-sale
securities...................... -- (1,535,731) (1,535,731) (1,535,731)
Distribution to shareholders..... (1,933,239) -- (1,933,239) --
Net income...................... 12,906,252 -- 12,906,252 12,906,252
------------ ----------- ------------ -----------
Comprehensive Income -- $(1,386,125) -- $11,372,521
BALANCE, DECEMBER 31, 1999....... $(13,453,204) -- $ 63,051,339 --
============ =========== ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
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CONCORD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED
----------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ------------- -------------
Cash Flows from Operating Activities:
Net income ....................................... $ 12,906,252 $ 9,826,026 $760,323
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................. 1,935,089 756,669 591,798
Unrealized (loss) gain on available-for-sale
securities ................................... (1,535,731) 129,856 19,750
Changes in current assets and liabilities:
Accounts receivable ......................... (8,074,276) (1,640,779) (1,423,916)
Prepaid expenses and other current assets ... (776,265) (227,495) (132,769)
Accounts payable ............................ 943,008 1,787,061 207,536
Accrued expenses ............................ 6,697,843 2,351,472 1,306,493
Deferred revenue ............................ 4,439,712 3,132,156 1,001,678
------------- ------------- -------------
Net cash provided by operating activities . 16,535,632 16,114,966 2,330,893
------------- ------------- -------------
Cash Flows from Investing Activities:
Purchases of equipment and improvements ............ (6,722,474) (1,891,606) (1,119,863)
Purchases of investments in marketable securities .. (252,350,710) (53,139,637) (116,402,905)
Sales of investments in marketable securities ...... 238,648,717 42,712,930 87,741,538
------------- ------------ -------------
Net cash used in investing activities ..... (20,424,467) (12,318,313) (29,781,230)
------------- ------------ -------------
Cash Flows from Financing Activities:
Proceeds from bank borrowings ...................... -- -- 583,707
Repayments of bank borrowings ...................... -- -- (1,508,209)
Distribution to shareholders ...................... (1,933,239) (1,507,938) (119,698)
Proceeds from issuance of common stock ............. -- -- 34,654,341
Proceeds from shares issued in connection with
employee stock plans ............................. 2,915,449 1,505,633 191,909
------------- ------------- -------------
Net cash provided by (used in) financing
activities .............................. 982,210 (2,305) 33,802,050
------------- ------------- -------------
Net (Decrease) Increase in Cash and Cash Equivalents . (2,906,625) 3,794,348 6,351,713
Cash and Cash Equivalents, beginning of year ......... 12,011,093 8,216,745 1,865,032
------------- ------------- -------------
Cash and Cash Equivalents, end of year ............... $ 9,104,468 $ 12,011,093 $ 8,216,745
============= ============= =============
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest ............................. $ -- $ -- $ 126,836
============= ============= =============
Cash paid for taxes ................................ $ 341,837 $ 46,159 $ 1,539
============= ============= =============
Supplemental Disclosure of Noncash Transactions:
Accretion of dividends on preferred stock .......... $ -- $ -- $ 441,557
============= ============= =============
Deferred compensation related to grants of stock
options .......................................... $ -- -- $ 191,875
============= ============= =============
Conversion of redeemable convertible preferred stock
to common stock .................................. $ -- $ -- $ 14,919,286
============= ============= =============
Unrealized (loss) gain on available-for-sale
securities ....................................... $ (1,535,731) $ 129,856 $ 19,750
============= ============= =============
Tax benefit associated with employee stock options . $ 4,900,000 $ 500,000 $ --
============= ============= =============
Retirement of fully depreciated fixed assets ....... $ -- $ 4,330,000 $ --
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
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CONCORD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Concord Communications, Inc. (the Company or Concord) is primarily
engaged in the development and sale of next-generation performance management
solutions to companies principally in the United States and Europe.
The Company is subject to the risks associated with emerging,
technology-oriented companies. Primary among these risks are competition from
substitute products and the ability to successfully develop and market the
Company's current and future products.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and all 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 cash equivalents and marketable
securities as available-for-sale and recorded them at fair value, with the
unrealized gains and losses reported as a separate component of stockholders'
equity. The Company considers cash and highly liquid investments, purchased with
an original maturity of 90 days or less, to be cash and cash equivalents. Cash
and cash equivalents are $9,104,468 and $12,011,093 at December 31, 1999 and
December 31, 1998, respectively.
(c) Revenue Recognition
The Company's revenues consist of software license revenues and service
revenues. Software license revenues are recognized in accordance with the
American Institute of Certified Public Accountants' Statement of Position
("SOP") No. 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 upon execution of a
contract and delivery of software, provided that the license fee is fixed and
determinable, no significant production, modification or
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customization of the software is required and collection is considered probable
by management. Service revenues are recognized as the services are performed.
Maintenance revenues are derived from customer support agreements generally
entered into in connection with initial license sales and subsequent renewals.
Maintenance revenues are recognized ratably over the term of the maintenance
period. Payments for maintenance fees are generally made in advance.
(d) 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 to five years for all assets except leasehold
improvements, which are amortized over the life of the lease.
(e) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(f) Concentration of Credit Risk and Significant Customers
SFAS No. 105, Disclosure of Information about Financial Instruments
with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of
Credit Risk, requires disclosure of any significant off-balance-sheet and credit
risk concentrations. The Company has no significant off-balance-sheet
concentration of credit risk such as foreign exchange contracts, option
contracts or other foreign hedging arrangements. The Company maintains its cash,
cash equivalent and marketable securities with established financial
institutions. The Company does not believe it has accounts receivable collection
risk in excess of existing reserves. For the years ended December 31, 1999,
December 31, 1998 and December 31, 1997, no individual customer accounted for
more than 10% of revenue or accounts receivable.
(g) 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 at December 31, 1999 or
December 31, 1998.
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(h) Net Income per Share
The Company computes earnings per share following the provisions of
SFAS No. 128, Earnings per Share. SFAS No. 128 establishes standards for
computing and presenting earnings per share and applies to entities with
publicly held common stock or potential common stock. The dilutive effect of
potential common shares in 1999 and 1998 consisting of outstanding stock options
and in 1997 consisting of outstanding stock options and redeemable convertible
preferred stock, is determined using the treasury method and the if-converted
method, respectively, in accordance with SFAS No. 128. Pro forma diluted net
income per common and potential common share assumes earnings from Empire
Technologies, Inc., an acquired Subchapter S-Corporation accounted for as a
pooling-of-interests (Note 3), were taxed at the Company's effective tax rate.
Calculations of basic, diluted and pro forma diluted net income per common share
and potential common share are as follows:
1999 1998 1997
---- ---- ----
Net income ....................................... $12,906,252 $ 9,826,086 $ 760,323
----------- ----------- -----------
Pro forma provision for income taxes on
Subchapter S-Corporation income (unaudited) 146,325 41,400 --
----------- ----------- -----------
Pro forma net income (unaudited) ................. $12,759,927 $ 9,784,686 $ 760,323
=========== =========== ===========
Weighted average common shares
outstanding ................................... 14,160,755 13,457,495 3,884,915
Potential common shares pursuant
to stock options .............................. 978,570 1,434,743 1,830,774
Potential common shares pursuant to conversion of
redeemable convertible preferred stock ........ -- -- 6,419,038
----------- ----------- -----------
Diluted weighted average shares ................. 15,139,325 14,892,238 12,134,727
=========== =========== ===========
Basic net income per common share ................ $ 0.91 $ 0.73 $ 0.20
=========== =========== ===========
Diluted net income per common
and potential common share .................... $ 0.85 $ 0.66 $ 0.06
=========== =========== ===========
Pro forma diluted net income per
common and potential common share ............. $ 0.85 $ 0.66 $ 0.06
=========== =========== ===========
Diluted weighted average shares outstanding do not include 722,572,
4,003 and 44,818 common equivalent shares for the years ended December 31, 1999,
1998 and 1997, respectively, as their effect would have been antidilutive.
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(2) MARKETABLE SECURITIES
It is the Company's 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.
The amortized cost, unrealized gains (losses) and fair value of
marketable securities available-for-sale as of December 31, 1999 with maturity
dates from January 1, 2000 through April 20, 2004, are as follows:
AMORTIZED COST UNREALIZED GAINS (LOSSES) FAIR VALUE
-------------- ------------------------- -----------
US government obligations $18,121,819 $ (699,459) $17,422,360
Corporate bonds and notes 39,164,353 (686,666) 38,477,687
----------- ----------- -----------
57,286,172 (1,386,125) 55,900,047
Less: Amounts classified as
cash equivalents 2,960,374 -- 2,960,374
----------- ----------- -----------
Available-for-sale
marketable securities $54,325,798 $(1,386,125) $52,939,673
=========== =========== ===========
The amortized cost, unrealized gains (losses) and fair value of
marketable securities available-for-sale as of December 31, 1998 with maturity
dates from January 1, 1999 through September 15, 2003, are as follows:
AMORTIZED COST UNREALIZED GAINS (LOSSES) FAIR VALUE
-------------- ------------------------- -----------
US government obligations $ 9,423,374 $ 11,559 $ 9,434,933
Corporate bonds and notes 31,949,720 138,047 32,087,767
----------- -------- -----------
41,373,094 149,606 41,522,700
Less: Amounts classified as
cash equivalents 2,285,020 -- 2,285,020
----------- -------- -----------
Available-for-sale
marketable securities $39,088,074 $149,606 $39,237,680
=========== ======== ===========
(3) ACQUISITION OF EMPIRE TECHNOLOGIES, INC.
On October 29, 1999, the Company issued 815,248 shares of common stock
for all of the issued and outstanding shares of Empire Technologies, Inc.
("Empire") in a transaction accounted for as a pooling-of-interests.
Accordingly, all prior-period financial statements presented have been restated
as required by Accounting Principles Board Opinion No. 16, Accounting for
Business Combinations. All intercompany transactions have been eliminated as a
part of the restatement.
As a part of the transaction, the Company incurred direct,
acquisition-related charges of approximately $551,000. All of such costs have
been expensed. Also, as part of the transaction, the Company assumed an
obligation related to Empire's existing stock appreciation rights plan. Pursuant
to the terms of the only grant under this plan, the Company settled this
obligation in cash within 30 days of closing. The expense relating to the grant
was recognized from the date of grant through the date of settlement.
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Separate and combined results of Concord and Empire during the periods
preceding the merger were as follows:
CONCORD EMPIRE ELIMINATIONS COMBINED
----------- ---------- ------------ -----------
1999 (Through 10/29/1999)
Net Revenues $49,616,491 $2,713,962 (133,160) $52,197,293
Net Income 7,519,519 471,655 7,991,174
1998
Net Revenues $39,481,330 $1,976,022 $41,457,352
Net Income 9,078,471 747,615 9,826,086
1997
Net Revenues $19,569,594 $1,110,306 $20,679,900
Net Income 130,755 629,568 760,323
(4) STOCK OPTION PLANS
In 1995, the Company's Board of Directors (the Board) approved the 1995
Stock Plan, which provides for the granting of incentive stock options (ISOs)
and nonqualified stock options. Prior to the adoption of the 1995 Stock Plan,
the Board granted options under the 1982 Employee Incentive Stock Option Plan,
the 1986 Nonqualified Stock Option Plan and the 1986 Stock Plan. Following the
completion of the IPO, the Company adopted the 1997 Stock Plan, the 1997
Employee Stock Purchase Plan and the 1997 Nonemployee Director Stock Option
Plan. As amended, these plans allow for issuances of up to 2,500,000, 375,000
and 95,000 shares of common stock, respectively; the Company has reserved such
shares for future issuance.
Under the 1995 and 1997 Stock Plans (the Plans), the Company may issue
options to purchase up to 2,963,798 shares of common stock, of which 137,658
options are available for grant as of December 31, 1999. ISOs may be granted at
an exercise price not less than the fair market value per share of common stock
on the date of grant, as determined by the Board. The price per share relating
to each nonqualified option granted under the Plans shall not be less than the
lesser of (i) the book value per share of common stock as of the end of the
Company's fiscal year immediately preceding the date of grant or (ii) 50% of the
fair market value per share of common stock on the date of grant. Vesting of the
options is determined by the Board, and the options expire 8 years from the date
of grant. An employee may convert his or her unexercised ISOs into nonqualified
options at any time prior to the expiration of such ISOs.
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In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, Accounting for Stock-Based Compensation, which requires the measurement
of the fair value of stock options or warrants to be included in the statement
of operations or disclosed in the notes to the financial statements. As
permitted by SFAS No. 123, the Company will continue to account for stock-based
compensation for employees under Accounting Principles Board Opinion No. 25 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 weighted average fair value per share of options granted during 1999, 1998
and 1997 was $45.27, $31.08 and $5.64, respectively. The weighted average
assumptions are as follows:
1999 1998 1997
------------- ------------- ------------
Risk-free interest rate......... 6.0% 6.0% 5.1 - 6.0%
Expected dividend yield......... -- -- --
Expected lives.................. 7 years 7 years 7 years
Expected volatility............. 82% 80% 80%
Had compensation cost for these plans been determined consistent with
SFAS No. 123, the Company's net income (loss) and basic, diluted and pro forma
diluted net income (loss) per common and potential common share would have been
as follows:
1999 1998 1997
------------- ------------ ---------
Net income, as reported................................ $12,906,252 $9,826,086 $760,323
=========== ========== ========
Net (loss) income, pro forma........................... $ (302,081) 7,007,947 308,939
=========== ========== ========
Net income per share, as reported
Basic................................................. $ 0.91 $ 0.73 $ 0.20
=========== ========== ========
Diluted............................................... $ 0.85 $ 0.66 $ 0.06
=========== ========== ========
Pro forma diluted..................................... $ 0.85 $ 0.66 $ 0.06
=========== ========== ========
Net (loss) income per share, pro forma
Basic................................................. $ (0.02) $ 0.52 $ .08
=========== ========== ========
Diluted............................................... $ (0.02) $ 0.47 $ .03
=========== ========== ========
Pro forma diluted..................................... $ (0.02) $ 0.47 $ .03
=========== ========== ========
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
may not be representative of that to be expected in future years.
The following table summarizes information about options outstanding at
December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- -------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING EXERCISE PRICE NUMBER EXERCISE PRICE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE PER SHARE OUTSTANDING PER SHARE
-------------- ----------- ---------------- ---------------- ----------- ----------------
$ .10 - 1.90 322,395 4.60 $ .93 127,168 $.91
4.10 - 17.38 290,735 5.68 10.87 93,761 10.46
18.38 - 23.50 347,205 6.13 21.73 121,146 21.71
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23.88 - 33.38 62,957 6.44 27.94 19,601 27.41
34.88 - 36.91 901,801 7.64 36.85 6,237 35.11
37.25 - 52.38 239,300 7.42 45.17 6,355 44.23
52.63 - 64.25 661,747 7.25 55.00 625 56.75
--------- -------
2,826,140 374,893
========= =======
The following schedule summarizes the activity under the stock option
plans for the three-year period ended December 31, 1999:
WEIGHTED
AVERAGE
NUMBER OF PRICE PER PRICE
SHARE SHARE PER SHARE
---------- -------------- -----------
Outstanding at December 28, 1996 1,704,342 $ .10 - 1.90 $ .23
Granted................... 784,700 1.90 - 21.88 7.29
Exercised................. (331,448) .10 - 1.90 .58
Terminated................ (26,494) .10 - 8.50 2.56
--------- -------------- -----
Outstanding at December 31, 1997 2,131,100 .10 - 21.88 2.76
Granted................... 563,750 17.06 - 56.75 23.71
Exercised................. (984,473) .10 - 21.38 .98
Terminated................ (36,588) .10 - 41.00 6.73
--------- -------------- ---------
Outstanding at December 31, 1998 1,673,789 $ .10 - 56.75 $10.79
Granted................... 1,781,555 17.06 - 64.25 43.90
Exercised................. (532,684) .10 - 44.38 3.81
Terminated................ (96,520) .10 - 58.25 27.94
--------- -------------- ---------
Outstanding at December 31, 1999 2,826,140 $ .10 - 64.25 $32.53
========= ============== =========
Exercisable at December 31, 1999 374,893 $ .10 - 64.25 $12.80
========= ============== =========
Exercisable at December 31, 1998 164,957 $ .10 - 21.38 $ 4.73
========= ============== =========
Exercisable at December 31, 1997 517,816 $ .10 - 1.90 $ .19
========= ============== =========
In 1997, the Company granted one officer and one director options to
purchase in total 143,750 shares of common stock at an exercise price of $1.90
per share. At the date of grant, the estimated fair value per share of the
Company's common stock exceeded the exercise price of the options, and
accordingly, the Company has recorded deferred compensation of $191,875 related
to this difference at the date of grant. For the years ended December 31, 1999
and 1998, the Company has recorded compensation expense of $47,968 and $47,968,
respectively, related to these options grants.
The exercise price of all other options outstanding represents the fair
market value per share of common stock as of the date of grant.
(5) INCOME TAXES
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.
The approximate income tax effects of these temporary differences are
as follows:
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DECEMBER 31, DECEMBER 31,
1999 1998
------------- -------------
Net operating loss and federal tax credit carryforwards. $ 8,073,000 $ 12,719,000
Accruals not yet deductible for tax purposes............ 2,102,000 1,027,000
Depreciation............................................ 62,000 92,000
Deferred revenue........................................ 1,695,000 1,373,000
Capitalized research and development expenses........... 1,939,000 2,088,000
Valuation allowance..................................... (13,871,000) (17,299,000)
------------ ------------
$ -- $ --
============ ============
The Company has available net operating loss carryforwards of
approximately $14,300,000 and federal research and development tax credit
carryforwards of approximately $2,225,000 as of December 31, 1999 to reduce
future income tax liabilities. These carryforwards are subject to review and
possible adjustment by the appropriate taxing authorities and expire from 1999
through 2013 as follows:
RESEARCH AND
NET OPERATING LOSS DEVELOPMENT TAX
FISCAL YEAR CARRYFORWARDS CREDIT CARRYFORWARDS
- ----------- ------------------ --------------------
2000............................ $ 3,659,000 --
2001............................ 2,870,000 $1,252,000
2002-2006....................... 1,369,000 150,000
2007-2013....................... 6,367,000 823,000
----------- ----------
$14,265,000 $2,225,000
=========== ==========
Pursuant to the Tax Reform Act of 1986, the utilization of net
operating loss carryforwards for tax purposes may be subject to an annual
limitation if a cumulative change of ownership of more than 50% occurs over a
three-year period. As a result of the Company's 1995 preferred stock financings,
such a change in ownership has occurred. As a result of this ownership change,
the use of the net operating loss carryforwards will be limited. The Company has
determined that its initial public offering did not cause another ownership
change. The Company has deferred tax assets of approximately $13.9 million
comprised primarily of net operating loss carryforwards and research and
development credits. The Company has fully reserved for these deferred tax
assets by recording a valuation allowance of $13.9 million, as the Company
believes that it is more likely than not that it will not be able to realize
this asset.
Pursuant to paragraphs 20 to 25 of Statement of Financial Accounting
Standards No. 109, the Company considered both positive and negative evidence in
assessing the need for a valuation allowance at December 31, 1998 and 1999. The
factors that weighed most heavily on the Company's decision to record a full
valuation allowance were (i) the substantial restrictions on the use of its
existing net operation loss (NOL) carryforwards and (ii) the uncertainty of
future profitability.
As a result of the ownership change described above, the future use of
approximately $10.9 million of the Company's NOL carryforwards are limited to
only $330,000 per year; the substantial majority of such NOL carryforwards will
expire before they can be used. Pursuant to the provisions of SFAS No. 109, the
Company used all of its remaining unrestricted NOL and credit carryforwards in
computing the 1998 tax provision. The
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Company is also subject to rapid technological change, competition from
substantially larger competitors, a limited family of products and other related
risks, as more thoroughly described in the "Risk Factors" section of the
Company's Form 10-K, for the fiscal year ended December 31, 1999. The Company's
dependence on a single product family in an emerging market makes the prediction
of future results difficult, if not impossible, especially in the highly
competitive software industry. As a result, the Company found the evidence
described above to be the most reliable objective evidence available in
determining that a full valuation allowance against its tax assets would be
necessary.
The Company's net operating loss deferred tax asset includes
approximately $3.4 million pertaining to the benefit associated with the
exercise and subsequent disqualifying disposition of incentive stock options by
the Company's employees. When and if the Company realizes this asset, the
resulting change in the valuation allowance will be credited directly to
additional paid-in capital, pursuant to the provisions of SFAS No. 109.
The Company received a tax benefit of approximately $4.9 million and
$500,000 in 1999 and 1998, respectively, pursuant to the exercise of employee
stock options. The Company recorded this benefit as a component of additional
paid-in capital.
The difference between the expected combined federal and state tax rate
and the Company's effective tax rate in 1999 relates primarily to the use of
currently-generated tax credits and tax assets acquired as a part of the Empire
acquisition (Note 3). The difference in 1998 and 1997 relates primarily to the
use of substantially all of the Company's unrestricted NOL carryforwards.
(6) COMMITMENTS AND CONTINGENCIES
(a) Leases
In March, 1999 the Company signed a 7 year operating lease for its
principal operating facilities. Following the abandonment of the Company's
former office space, the Company recorded a third quarter charge of $700,000,
representing the remaining lease commitment, less expected sublease income. The
approximate future minimum rental payments under both leases are as follows:
AMOUNT
------------
2000.......................................... 1,773,000
2001.......................................... 2,321,000
2002.......................................... 2,327,000
2003.......................................... 2,036,000
2004.......................................... 2,073,000
Thereafter.................................... 3,218,000
------------
$ 13,749,000
============
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Rent expense was approximately $2.4 million, $464,000 and $346,000 for
the years ended December 31, 1999, December 31, 1998 and December 31, 1997,
respectively.
(b) Royalties
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
is obligated to make minimum quarterly royalty payments from 1995 through 1999.
The minimum payments are noncancelable and nonrefundable, but any minimum
payments in excess of amounts due for actual license sales in any quarter may be
used as a credit against future royalty fees in excess of the specified minimum
payments. The minimum royalty payments were paid in full in 1999. Royalty
expense under royalty agreements was approximately $1.0 million, $665,000 and
$903,000 for fiscal 1999, 1998 and 1997, respectively.
(c) Legal Proceedings
From time to time, the Company may be exposed to litigation relating to
its products and operations. The Company is not engaged in any legal proceedings
that are expected, individually or in the aggregate, to have a material adverse
effect on the Company's financial conditions or results of operations.
(7) ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
Payroll and payroll-related............. $1,932,735 $2,269,845
Royalties............................... 569,656 412,656
Outside commissions..................... 286,854 568,450
Customer deposits....................... 142,224 254,340
Deferred rent........................... 456,957 --
Loss on lease abandonment............... 700,000 --
Other................................... 2,797,401 1,582,693
---------- ----------
$6,885,827 $5,087,984
========== ==========
(8) EMPLOYEE BENEFIT PLAN
The Company maintains an employee benefit 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 15% of pretax
compensation. While the Company has the discretion to make contributions to the
plan, no such contributions were made in 1999, 1998 or 1997.
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(9) VALUATION AND QUALIFYING ACCOUNTS
The following table sets forth activity in the Company's accounts
receivable reserve account:
BALANCE AT BALANCE AT
BEGINNING CHARGES TO END OF
OF YEAR EXPENSES DEDUCTIONS YEAR
---------- ---------- ---------- ------------
1997......... $210,116 $ 70,000 $ -- $280,116
1998......... $280,116 $169,884 $ -- $450,000
1999......... $450,000 $480,000 $ -- $930,000
(10) SEGMENT REPORTING AND INTERNATIONAL INFORMATION
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information in the fiscal year ended December 31, 1998.
SFAS 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 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 how to allocate resources and assess
performance. The Company's chief decision making group, as defined under SFAS
131, is the Executive Management Committee. To date, the Executive Management
Committee has viewed the Company's operations as principally one segment,
software sales and associated services. As a result, the financial information
disclosed herein, materially represents all of the financial information related
to the Company's principal operating segment. Revenues from international
locations were $16.3 million, $7.3 million and $2.4 million in 1999, 1998 and
1997, respectively. The Company's revenues from international locations were
primarily generated from customers located in Europe. Revenues from customers
located in Europe accounted for 13.1%, 12.6% and 10.3% of total revenues in
1999, 1998 and 1997, respectively. No one country accounts for greater than 10%
of total revenues. Substantially all of the Company's assets are located in the
United States.
(11) SUBSEQUENT EVENT
On February 4, 2000 the Company completed a merger with privately-held
FirstSense Software. FirstSense is a provider of application and service
response management solutions. The Company has reserved for issuance in
connection with the merger, 1,940,000 shares of Concord's common stock. The
transaction is being accounted for as a pooling-of-interests.
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