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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the
--- Securities Exchange Act of 1934
For the Quarterly Period Ended December 31, 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 No. 0-13150
_____________
CONCURRENT COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2735766
(State of Incorporation) (I.R.S. Employer Identification No.)
4375 River Green Parkway, Suite 100, Duluth, GA 30096
(Address of principal executive offices)
Telephone: (678) 258-4000
(Registrant's telephone number, including area code)
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 X No
--- ---
Indicate by a check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
--- ---
Number of shares of the Registrant's Common Stock, par value $0.01 per share,
outstanding as of January 29, 2004 was 62,535,788.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONCURRENT COMPUTER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2003 2002 2003 2002
-------- -------- -------- --------
Revenues:
Product
Real-time systems $ 5,597 $ 5,879 $ 9,991 $ 9,971
VOD systems 11,568 8,879 20,715 21,328
-------- -------- -------- --------
Total product revenues 17,165 14,758 30,706 31,299
Service
Real-time systems 4,018 4,485 8,164 9,163
VOD systems 1,443 891 2,658 1,813
-------- -------- -------- --------
Total service revenues 5,461 5,376 10,822 10,976
-------- -------- -------- --------
Total revenues 22,626 20,134 41,528 42,275
Cost of sales:
Product
Real-time systems 2,628 2,288 3,984 4,064
VOD systems 5,484 4,936 9,141 10,177
-------- -------- -------- --------
Total product cost of sales 8,112 7,224 13,125 14,241
Service
Real-time systems 2,233 2,503 4,417 5,110
VOD systems 862 802 1,617 1,462
-------- -------- -------- --------
Total service cost of sales 3,095 3,305 6,034 6,572
-------- -------- -------- --------
Total cost of sales 11,207 10,529 19,159 20,813
-------- -------- -------- --------
Gross margin 11,419 9,605 22,369 21,462
Operating expenses:
Sales and marketing 4,429 4,758 8,509 9,162
Research and development 4,705 4,577 9,373 9,024
General and administrative 2,175 2,267 4,344 4,595
-------- -------- -------- --------
Total operating expenses 11,309 11,602 22,226 22,781
-------- -------- -------- --------
Operating income (loss) 110 (1,997) 143 (1,319)
Recovery (impairment loss) of minority investment 1,698 (2,943) 2,758 (2,943)
Interest income - net 78 102 138 298
Other income (expense) - net (20) 47 (154) -
-------- -------- -------- --------
Income (loss) before income taxes 1,866 (4,791) 2,885 (3,964)
Provision (benefit) for income taxes 653 (126) 1,060 81
-------- -------- -------- --------
Net income (loss) $ 1,213 $(4,665) $ 1,825 $(4,045)
======== ======== ======== ========
Net income (loss) per share
Basic $ 0.02 $ (0.08) $ 0.03 $ (0.07)
======== ======== ======== ========
Diluted $ 0.02 $ (0.08) $ 0.03 $ (0.07)
======== ======== ======== ========
Weighted average shares outstanding - basic 62,308 61,863 62,197 61,862
======== ======== ======== ========
Weighted average shares outstanding - diluted 63,202 61,863 62,991 61,862
======== ======== ======== ========
The accompanying notes are an integral part of the condensed consolidated financial
statements.
1
CONCURRENT COMPUTER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS)
DECEMBER 31, JUNE 30,
2003 2003
-------------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 27,496 $ 30,697
Accounts receivable - net 19,991 10,371
Inventories 8,055 7,174
Deferred tax asset 998 998
Prepaid expenses and other current assets 1,487 879
-------------- ----------
Total current assets 58,027 50,119
Property, plant and equipment - net 11,472 11,862
Purchased developed computer software - net 1,108 1,203
Goodwill 10,744 10,744
Investment in minority owned companies 553 553
Deferred tax asset 1,749 1,749
Other long-term assets - net 1,706 1,609
-------------- ----------
Total assets $ 85,359 $ 77,839
============== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 13,846 $ 14,644
Deferred revenue 9,445 5,433
-------------- ----------
Total current liabilities 23,291 20,077
Long-term liabilities:
Deferred revenue 2,642 2,212
Deferred tax liability 1,978 2,107
Pension liability 10,748 9,617
Other 365 368
-------------- ----------
Total liabilities 39,024 34,381
Stockholders' equity:
Common stock 627 623
Capital in excess of par value 175,311 174,396
Accumulated deficit (121,104) (122,929)
Treasury stock (58) (58)
Unearned compensation (457) (576)
Accumulated other comprehensive loss (7,984) (7,998)
-------------- ----------
Total stockholders' equity 46,335 43,458
-------------- ----------
Total liabilities and stockholders' equity $ 85,359 $ 77,839
============== ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
2
CONCURRENT COMPUTER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
DECEMBER 31,
2003 2002
-------- --------
OPERATING ACTIVITIES
Net income (loss) $ 1,825 $(4,045)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Accrual of non-cash warrants (891) 192
Depreciation and amortization 2,618 2,324
Provision for inventory reserves 670 78
Provision for bad debts (600) 6
Non-cash income tax provision 728 -
Impairment loss (recovery) of minority investment (2,758) 2,943
Other non cash expenses 34 -
Changes in operating assets and liabilities:
Accounts receivable (9,020) 5,982
Inventories (1,551) (354)
Prepaid expenses and other current assets (608) (790)
Other long-term assets (97) (4)
Accounts payable and accrued expenses (798) (3,413)
Deferred revenue 4,442 1,494
Pension liability 1,131 563
Other long-term liabilities 42 144
-------- --------
Total adjustments to net income (loss) (6,658) 9,165
-------- --------
Net cash provided by (used in) operating activities (4,833) 5,120
INVESTING ACTIVITIES
Net additions to property, plant and equipment (2,053) (2,988)
Recovery of minority investment 2,758 -
Note receivable from minority owned company - (3,000)
Other - (29)
-------- --------
Net cash used in investing activities 705 (6,017)
FINANCING ACTIVITIES
Net repayment of capital lease obligation (45) (42)
Proceeds from sale and issuance of common stock 1,134 8
-------- --------
Net cash provided by (used in) financing activities 1,089 (34)
Effect of exchange rates on cash and cash equivalents (162) (119)
-------- --------
Decrease in cash and cash equivalents (3,201) (1,050)
Cash and cash equivalents at beginning of period 30,697 30,519
-------- --------
Cash and cash equivalents at end of period $27,496 $29,469
======== ========
Cash paid during the period for:
Interest $ 6 $ 9
======== ========
Income taxes (net of refunds) $ 191 $ 249
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
CONCURRENT COMPUTER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. OVERVIEW OF BUSINESS AND BASIS OF PRESENTATION
Concurrent Computer Corporation ("Concurrent" or the "Company") is a
leading supplier of high-performance computer systems, software, and services
and operates in two segments, the Video-On-Demand ("VOD") division (formerly
"Xstreme"), located in Duluth, Georgia, and the Integrated Solutions ("ISD")
division located in Fort Lauderdale, Florida. Concurrent also provides sales and
support from offices and subsidiaries throughout North America, Europe, Asia and
Australia.
Concurrent's VOD division provides VOD systems consisting of hardware and
software as well as integration services, primarily to residential cable
companies that have upgraded their networks to support interactive, digital
services. Concurrent's ISD division provides high-performance, real-time
computer systems to commercial and government customers for use in applications
such as simulation and data acquisition.
The condensed, consolidated interim financial statements of Concurrent are
unaudited and reflect all adjustments (consisting of only normal recurring
adjustments) necessary for a fair statement of Concurrent's financial position,
results of operations and cash flows at the dates and for the periods indicated.
These financial statements should be read in conjunction with the Annual Report
on Form 10-K for the year ended June 30, 2003. There have been no significant
changes to Concurrent's Accounting Policies as disclosed in the Annual Report on
Form 10-K for the year ended June 30, 2003. Certain reclassifications have been
made to prior year amounts to conform with the current year presentation. The
results reported in these condensed, consolidated quarterly financial statements
should not be regarded as necessarily indicative of results that may be expected
for the entire year.
2. BASIC AND DILUTED NET INCOME PER SHARE
Basic net income (loss) per share is computed by dividing net income (loss)
by the weighted average number of common shares outstanding during each period.
Diluted net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of shares including dilutive common share
equivalents. Under the treasury stock method, incremental shares representing
the number of additional common shares that would have been outstanding if the
dilutive potential common shares had been issued are included in the
computation. Common share equivalents of 5,235,000 and 6,200,000 for the three
month periods ended December 31, 2003 and 2002, respectively, were excluded from
the calculation as their effect was antidilutive. Common share equivalents of
5,406,000 and 6,164,000 for the six month periods ended December 31, 2003 and
2002, respectively, were excluded from the calculation as their effect was
antidilutive. The following table presents a reconciliation of the numerators
and denominators of basic and diluted net income (loss) per share for the
periods indicated:
4
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 2003 DECEMBER 31, 2003
----------------- -----------------
BASIC DILUTED BASIC DILUTED
------- -------- ------- --------
Average outstanding shares 62,308 62,308 62,197 62,197
Dilutive effect of options and warrants - 894 - 794
------- -------- ------- --------
Equivalent shares 62,308 63,202 62,197 62,991
======= ======== ======= ========
Net income $ 1,213 $ 1,213 $ 1,825 $ 1,825
======= ======== ======= ========
Net income per share $ 0.02 $ 0.02 $ 0.03 $ 0.03
======= ======== ======= ========
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 2002 DECEMBER 31, 2002
------------------- -------------------
BASIC DILUTED BASIC DILUTED
-------- --------- -------- ---------
Average outstanding shares 61,863 61,863 61,862 61,862
Dilutive effect of options and warrants - - - -
-------- --------- -------- ---------
Equivalent shares 61,863 61,863 61,862 61,862
======== ========= ======== =========
Net loss $(4,665) $ (4,665) $(4,045) $ (4,045)
======== ========= ======== =========
Net loss per share $ (0.08) $ (0.08) $ (0.07) $ (0.07)
======== ========= ======== =========
3. STOCK-BASED COMPENSATION
At December 31, 2003, Concurrent had stock-based employee compensation
plans which are described in Note 15 in our annual report on Form 10-K for the
year ended June 30, 2003. The Company accounts for these plans under the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
For the three and six months ended December 31, 2003, Concurrent recognized
$34,000 and $66,000, respectively, of stock compensation expense for the
issuance of restricted stock awards. There is no other stock-based employee
compensation expense reflected in net income for the three and six months
periods ended December 31, 2003. For the three and six months ended December
31, 2002, there was no stock-based employee compensation expense reflected in
net income.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
148, "Accounting for Stock Based Compensation - Transition and Disclosure - An
Amendment of FASB Statement No. 123," the following table illustrates the effect
on net income (loss) and earnings (loss) per share if the Company had applied
the fair value recognition provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," to stock-based employee compensation:
5
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ ------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income (loss) as reported $ 1,213 $(4,665) $ 1,825 $(4,045)
Deduct: Total stock-based employee
compensation expense determined under
the fair value method, net of related taxes (1,088) (1,595) (2,126) (3,514)
-------- -------- -------- --------
Pro forma net income (loss) $ 125 $(6,260) $ (301) $(7,559)
======== ======== ======== ========
Net income (loss) per share:
Basic-as reported $ 0.02 $ (0.08) $ 0.03 $ (0.07)
======== ======== ======== ========
Basic-pro forma $ 0.00 $ (0.10) $ 0.00 $ (0.12)
======== ======== ======== ========
Diluted-as reported $ 0.02 $ (0.08) $ 0.03 $ (0.07)
======== ======== ======== ========
Diluted-pro forma $ 0.00 $ (0.10) $ 0.00 $ (0.12)
======== ======== ======== ========
4. REVENUE RECOGNITION AND RELATED MATTERS
VOD and real-time system revenues are recognized based on the guidance in
American Institute of Certified Public Accountants Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2") and related amendments, SOP 98-4,
"Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue
Recognition" and SOP 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions." Concurrent recognizes
revenue from VOD and real-time systems when persuasive evidence of an
arrangement exists, the system has been shipped, the fee is fixed or
determinable and collectibility of the fee is probable. Under multiple element
arrangements, Concurrent allocates revenue to the various elements based on
vendor-specific objective evidence ("VSOE") of fair value. Concurrent's VSOE of
fair value is determined based on the price charged when the same element is
sold separately. If evidence of fair value does not exist for all elements in a
multiple arrangement, Concurrent recognizes revenue using the residual method.
Under the residual method, the fair value of the undelivered elements is
deferred and the remaining portion of the arrangement is recognized as revenue.
6
5. INVENTORIES
Inventories are valued at the lower of cost or market, with cost being
determined by using the first-in, first-out method. The components of
inventories are as follows:
(DOLLARS IN THOUSANDS)
DECEMBER 31, JUNE 30,
2003 2003
--------- ---------
Raw materials, net $ 6,488 $ 5,933
Work-in-process 1,211 1,024
Finished goods 356 217
--------- ---------
$ 8,055 $ 7,174
========= =========
6. INVESTMENTS IN AND RECEIVABLE FROM MINORITY OWNED COMPANIES
In March 2002, Concurrent purchased a 14.4% equity ownership interest in
Thirdspace Living Limited ("Thirdspace"). Thirdspace is a closely held United
Kingdom global software services corporation that offered interactive and
on-demand television solutions for digital subscriber line ("DSL") and other
broadband networks. Concurrent invested cash of $4 million and issued 291,461
shares of its common stock (valued at $10.29 per share) in exchange for
1,220,601 series C shares of Thirdspace, giving Concurrent a 14.4% ownership
interest in all shares outstanding as of the investment date. As part of this
transaction, Concurrent capitalized approximately $300,000 in various
transaction costs and as a result, the total equity investment in Thirdspace was
$7.3 million. This investment was accounted for under the cost method of
accounting.
In addition to the equity investment, Concurrent also loaned Thirdspace
$6.0 million in exchange for two $3.0 million long-term convertible notes
receivable.
In the second and third quarters of fiscal 2003, Concurrent recorded, in
the aggregate, a $13.0 million net impairment charge due to an other than
temporary decline in the market value of the investment in Thirdspace, which
included a $6.1 million charge for the write-off of the two $3.0 million notes
receivable and related accrued interest. The impairment of the investment and
write-off of the related notes receivable and accrued interest was based upon
Thirdspace's deteriorating financial condition and actual performance relative
to expected performance, the status of Thirdspace's capital raising initiatives,
the market conditions of the telecommunications sector, the uncertainty of the
collectibility of the notes, the state of the overall economy and the reduced
market value of Thirdspace. In May 2003, Thirdspace sold the majority of its
assets to Alcatel Telecom Ltd. As a result of the sale of these certain assets,
Concurrent received $471,000 in proceeds, net of legal costs of $75,000. In
return for these proceeds and a perpetual, royalty-free license to the patents
and patent applications previously owned by Thirdspace, Concurrent relinquished
its security interest in certain intellectual property of Thirdspace; however,
Concurrent retained a security interest in all other assets of Thirdspace.
In the first and second quarters of fiscal 2004, Concurrent received, in
the aggregate, $2.8 million in proceeds as a result of the sale of the majority
of Thirdspace's remaining assets. The proceeds received from the sale of these
assets are recorded in the line item "Recovery (impairment loss) of minority
investment" in the Condensed Consolidated Statements of Operations. Subsequent
to December 31, 2003, Concurrent received approximately $300,000, which is
expected to be the final proceeds related to the liquidation of Thirdspace's
remaining assets. The income related to these proceeds will be recognized during
the third quarter of fiscal 2004 in the line item "Recovery (impairment loss) of
minority investment" of the Condensed Consolidated Statements of Operations.
7
In April 2002, Concurrent invested cash of $500,000 in Everstream Holdings,
Inc. ("Everstream") in exchange for 480,770 shares of Series C Preferred stock
giving Concurrent a 4.9% ownership interest. Everstream is a privately held
company specializing in broadband advertising systems, operations and data
warehousing software and related integration services. Concurrent is accounting
for its investment in the Series C Preferred stock of Everstream using the cost
method because Concurrent does not believe it exercises significant influence on
Everstream. This investment is reviewed quarterly for impairment, and as of
December 31, 2003, there has been no evidence of permanent impairment of the
Everstream investment.
In the ordinary course of business, Concurrent purchases consulting
services from Everstream. During the three and six months ended December 31,
2003, Concurrent purchased $5,000 and $13,000 of contract development services,
respectively, from Everstream. During the three and six months ended December
31, 2002, Concurrent purchased $403,000 and $638,000 of contract software
development services, respectively, from Everstream.
All of Concurrent's equity investments and related notes receivable are
reviewed for impairment on a quarterly basis in accordance with Accounting
Principles Board Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock" and SFAS 115, "Accounting for Certain Investments
in Debt and Equity Securities," respectively.
7. RESTRUCTURING ACTIVITIES
During the fourth quarter of fiscal 2003, Concurrent implemented a
restructuring plan to realign resources to focus on more strategic and immediate
growth opportunities and to align the Company's cost structure with revenue
projections. As part of the restructuring plan, Concurrent terminated
approximately 7% of its global workforce and reduced office space in certain
international locations. The restructuring plan was accounted for in accordance
with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." The activities related to this restructuring plan as of December
31, 2003 are as follows:
(DOLLARS IN THOUSANDS)
LEASE
WORKFORCE TERMINATIONS
REDUCTION AND OTHER TOTAL
---------- ------------- ------
Restructuring accrual at June 30, 2003 $ 866 $ 223 $1,089
Cash payments 578 160 738
---------- ------------- ------
Restructuring accrual at December 31, 2003 $ 288 $ 63 $ 351
========== ============= ======
8
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The components of accounts payable and accrued expenses are as follows:
(DOLLARS IN THOUSANDS)
DECEMBER 31, JUNE 30,
2003 2003
---------- ----------
Accounts payable, trade $ 5,128 $ 4,138
Accrued payroll, vacation and
other employee expenses 4,848 4,760
Warranty accrual 932 2,131
Restructuring Reserve 351 1,089
Other accrued expenses 2,587 2,526
---------- ----------
$ 13,846 $ 14,644
========== ==========
Our estimate of warranty obligations is based on historical experience and
expectation of future conditions. The changes in the warranty accrual during
fiscal 2004 consist of the following (in thousands):
Balance at June 30, 2003 $ 2,131
Charged to costs and expenses 145
Deductions (1,344)
--------
Balance at December 31, 2003 $ 932
========
9. COMPREHENSIVE INCOME
Concurrent's total comprehensive income (loss) is as follows:
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2003 2002 2003 2002
------- -------- ------ --------
Net income (loss) $1,213 $(4,665) $1,825 $(4,045)
Other comprehensive income (loss):
Foreign currency translation income (loss) (71) 162 14 (56)
------- -------- ------ --------
Total comprehensive income (loss) $1,142 $(4,503) $1,839 $(4,101)
======= ======== ====== ========
10. SEGMENT INFORMATION
Concurrent operates its business in two segments: ISD and VOD.
Concurrent's ISD division is a leading provider of high-performance, real-time
computer systems, solutions and software for commercial and government markets
focusing on strategic market areas that include hardware-in-the-loop and
man-in-the-loop simulation, data acquisition, industrial systems, and software
and embedded applications. Concurrent's VOD division is a leading supplier of
interactive digital video streaming systems primarily to the broadband cable
television market. Shared expenses are primarily allocated based on either
revenues or headcount. Corporate costs include costs related to the offices of
the Chief Executive Officer, Chief Financial Officer, General Counsel, Investor
Relations, Human Resources and other administrative costs including annual audit
and tax fees, legal fees, Board of Directors fees and similar costs.
9
The following summarizes the operating income (loss) by segment for the three
month periods ended December 31, 2003 and December 31, 2002, respectively:
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED DECEMBER 31, 2003 (UNAUDITED)
--------------------------------------------------
ISD VOD CORPORATE TOTAL
---------- --------- -------------- -----------
Revenues:
Product $ 5,597 $ 11,568 $ - $ 17,165
Service 4,018 1,443 - 5,461
---------- --------- -------------- -----------
Total 9,615 13,011 - 22,626
Cost of sales:
Product 2,628 5,484 - 8,112
Service 2,233 862 - 3,095
---------- --------- -------------- -----------
Total 4,861 6,346 - 11,207
---------- --------- -------------- -----------
Gross margin 4,754 6,665 - 11,419
Operating expenses:
Sales and marketing 2,000 2,320 109 4,429
Research and development 1,391 3,314 - 4,705
General and administrative 365 208 1,602 2,175
---------- --------- -------------- -----------
Total operating expenses 3,756 5,842 1,711 11,309
---------- --------- -------------- -----------
Operating income (loss) $ 998 $ 823 $ (1,711) $ 110
========== ========= ============== ===========
THREE MONTHS ENDED DECEMBER 31, 2002 (UNAUDITED)
--------------------------------------------------
ISD VOD CORPORATE TOTAL
---------- --------- -------------- -----------
Revenues:
Product $ 5,879 $ 8,879 $ - $ 14,758
Service 4,485 891 - 5,376
---------- ---------- -------------- ------------
Total 10,364 9,770 - 20,134
Cost of sales:
Product 2,288 4,936 - 7,224
Service 2,503 802 - 3,305
---------- ---------- -------------- ------------
Total 4,791 5,738 - 10,529
---------- ---------- -------------- ------------
Gross margin 5,573 4,032 - 9,605
Operating expenses:
Sales and marketing 1,924 2,682 152 4,758
Research and development 1,278 3,299 - 4,577
General and administrative 406 502 1,359 2,267
---------- ---------- -------------- ------------
Total operating expenses 3,608 6,483 1,511 11,602
---------- ---------- -------------- ------------
Operating income (loss) $ 1,965 $ (2,451) $ (1,511) $ (1,997)
========== ========== ============== ============
10
The following summarizes the operating income (loss) by segment for the six
month periods ended December 31, 2003 and December 31, 2002, respectively:
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED DECEMBER 31, 2003 (UNAUDITED)
--------------------------------------------------
ISD VOD CORPORATE TOTAL
---------- --------- -------------- -----------
Revenues:
Product $ 9,991 $ 20,715 $ - $ 30,706
Service 8,164 2,658 - 10,822
---------- --------- -------------- -----------
Total 18,155 23,373 - 41,528
Cost of sales:
Product 3,984 9,141 - 13,125
Service 4,417 1,617 - 6,034
---------- --------- -------------- -----------
Total 8,401 10,758 - 19,159
---------- --------- -------------- -----------
Gross margin 9,754 12,615 - 22,369
Operating expenses:
Sales and marketing 3,807 4,476 226 8,509
Research and development 2,873 6,500 - 9,373
General and administrative 784 381 3,179 4,344
---------- --------- -------------- -----------
Total operating expenses 7,464 11,357 3,405 22,226
---------- --------- -------------- -----------
Operating income (loss) $ 2,290 $ 1,258 $ (3,405) $ 143
========== ========= ============== ===========
SIX MONTHS ENDED DECEMBER 31, 2002 (UNAUDITED)
--------------------------------------------------
ISD VOD CORPORATE TOTAL
---------- ---------- -------------- ------------
Revenues:
Product $ 9,971 $ 21,328 $ - $ 31,299
Service 9,163 1,813 - 10,976
---------- ---------- -------------- ------------
Total 19,134 23,141 - 42,275
Cost of sales:
Product 4,064 10,177 - 14,241
Service 5,110 1,462 - 6,572
---------- ---------- -------------- ------------
Total 9,174 11,639 - 20,813
---------- ---------- -------------- ------------
Gross margin 9,960 11,502 - 21,462
Operating expenses:
Sales and marketing 3,768 5,086 308 9,162
Research and development 2,677 6,347 - 9,024
General and administrative 835 1,065 2,695 4,595
---------- ---------- -------------- ------------
Total operating expenses 7,280 12,498 3,003 22,781
---------- ---------- -------------- ------------
Operating income (loss) $ 2,680 $ (996) $ (3,003) $ (1,319)
========== ========== ============== ============
11
11. ISSUANCE AND ACCRUAL OF NON-CASH WARRANTS
Comcast Cable Communications, Inc. Warrants
On March 29, 2001, Concurrent entered into a three-year definitive purchase
agreement with Comcast Cable Communications, Inc. ("Comcast"), providing for the
purchase of VOD equipment. As part of that agreement, Concurrent agreed to issue
three different types of warrants.
Concurrent issued a warrant to purchase 50,000 shares of its Common Stock
on March 29, 2001, exercisable at $5.196 per share over a four-year term. This
warrant is referred to as the "Initial Warrant."
Concurrent is also generally obligated to issue new warrants to purchase
shares of its Common Stock to Comcast at the end of each quarter through March
31, 2004, based upon specified performance goals which are measured by the
number of Comcast basic cable subscribers that have the ability to utilize the
VOD service. The incremental number of subscribers that have access to VOD at
each quarter end as compared to the prior quarter end multiplied by a specified
percentage is the number of additional warrants that were earned during the
quarter. These warrants are referred to as the "Performance Warrants".
Concurrent issued to Comcast a performance warrant for 4,431 shares on October
9, 2001, exercisable at $6.251 per share over a four-year term, a performance
warrant for 52,511 shares on January 15, 2002, exercisable at $15.019 per share
over a four year term, and a performance warrant for 1,502 shares on August 10,
2002, exercisable at $5.707 per share over a four year term. No warrants were
issued during the three and six month periods ended December 31, 2003.
Concurrent will also issue additional warrants to purchase shares of its
Common Stock, if at the end of any quarter the then total number of Comcast
basic cable subscribers with the ability to utilize the VOD services exceeds
specified threshold levels. These warrants are referred to as the "Cliff
Warrants".
Concurrent is recognizing the value of the Performance Warrants and the
Cliff Warrants over the term of the agreement as Comcast purchases additional
VOD equipment from Concurrent and makes the service available to its customers.
The value of the warrants is determined using the Black-Scholes valuation model.
The weighted-average assumptions used for the quarters ended December 31, 2003
and 2002, respectively, were: expected dividend yield of 0% for both periods;
risk-free interest rate of 2.83% and 2.39%; expected life of 4 years for both
periods; and an expected volatility of 111% and 120%. Concurrent will adjust
the value of the earned but unissued warrants on a quarterly basis using the
Black-Scholes valuation model until the warrants are actually issued. The value
of the new warrants earned and any adjustments in value for warrants previously
earned will be determined using the Black-Scholes valuation model and recognized
as part of revenue on a quarterly basis.
The exercise price of the warrants is subject to adjustments for stock
splits, combinations, stock dividends, mergers, and other similar
recapitalization events. The exercise price is also subject to adjustment for
issuance of additional equity securities at a purchase price less than the then
current fair market value of Concurrent's Common Stock. Based on the
information that is currently available, Concurrent does not expect the warrants
to be issued to Comcast to exceed 1% of its outstanding shares of Common Stock
over the term of the agreement. The exercise price of the warrants to be issued
to Comcast will equal the average closing price of Concurrent's Common Stock for
the 30 trading days prior to the applicable warrant issuance date and will be
exercisable over a four year term.
For the three and six months ended December 31, 2003, Concurrent recognized
$80,000 and $431,000, respectively, as a reduction in revenue for the
Performance Warrants and Cliff Warrants that have been earned but unissued as of
December 31, 2003. The decrease in revenue during the three and six months ended
December 31, 2003 is due to the increase in the number of Comcast basic cable
subscribers that have the ability to utilize VOD services and the increase in
the Black-Scholes value of the warrants earned but unissued. For the three
months ended December 31, 2002, Concurrent recognized $56,000 as a decrease in
revenue for the Performance Warrants and Cliff Warrants that have been earned
but unissued. For the six months ended December 31, 2002, Concurrent recognized
$2,000 as an increase in revenue for
12
the Performance Warrants and Cliff Warrants that have been earned but unissued
due primarily to a decrease in the Black-Scholes value of the warrants earned
but unissued as of December 31, 2002.
Scientific Atlanta, Inc. Warrants
In accordance with a five year definitive agreement with Scientific
Atlanta, Inc. ("SAI") executed in August of 1998, Concurrent agreed to issue
warrants to SAI upon achievement of pre-determined revenue targets. The value
of these warrants could not exceed 5% of applicable revenue and the number of
shares of Concurrent common stock related to the warrants was determined using
the Black-Scholes valuation model and could not exceed 888,888 shares for every
$30 million of revenue from the sale of VOD servers using the SAI platform. The
Black-Scholes value of these warrants could not impact gross margin by more than
$1.5 million per $30 million of applicable revenue. Concurrent accrued for this
cost as a part of cost of sales at the time of recognition of applicable
revenue. Concurrent issued warrants to purchase 261,164 of its common stock to
SAI upon reaching the first $30 million threshold on April 1, 2002, exercisable
at $7.106 per share over a four-year term, all of which are still outstanding as
of December 31, 2003.
The five year definitive agreement with SAI expired on August 17, 2003, and
at that time Concurrent had not reached the second $30 million threshold of
revenue using the SAI platform. As a result, Concurrent was not obligated to
issue a warrant under the agreement regarding the second $30 million threshold,
and accordingly, reversed $1.3 million of expense in the first quarter of fiscal
2004, which had been previously accrued in anticipation of reaching the next $30
million threshold. This reversal was recorded in VOD product cost of sales. For
the three and six month periods ended December 31, 2002, Concurrent recognized
$190,000 and $193,000, respectively, as part of VOD product cost of sales for
the SAI warrants that had been earned but unissued.
12. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the FASB issued Interpretation No. ("FIN") 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," which provides for additional
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations and requires, under certain circumstances, a
guarantor to recognize at the inception of a guarantee a liability for the fair
value of the obligation undertaken in issuing the guarantee. Concurrent adopted
the disclosure requirements for fiscal year ended June 30, 2003. The adoption
of FIN 45 has not had a material impact on Concurrent's consolidated financial
statements.
In May 2003, FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
clarifies the definition of a liability as currently defined in FASB Concepts
Statement No. 6, "Elements of Financial Statements," as well as other planned
revisions. This statement requires a financial instrument that embodies an
obligation of an issuer to be classified as a liability. In addition, the
statement establishes standards for the initial and subsequent measurement of
these financial instruments and disclosure requirements. SFAS No. 150 became
effective for Concurrent on July 1, 2003. The adoption of this standard did not
have a material impact on Concurrent's consolidated financial statements.
In December 2003, the FASB issued FIN 46(R), "Consolidation of Variable
Interest Entities" FIN 46(R) replaced FIN 46, "Consolidation of Variable
Interest Entities" (issued in January 2003), and expands and clarifies FIN 46,
as well as updates the effective date and transition guidance. This
interpretation clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," in determining whether a reporting entity
should consolidate certain legal entities, including partnerships, limited
liability companies, or trusts, among others, collectively defined as variable
interest entities. This interpretation applies to variable interest entities
created or obtained after January 31, 2003, and as of July 1, 2003, to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. The FASB subsequently issued FASB Staff
Position FIN 46-6, which defers the effective date for applying the provisions
of FIN 46 to financial statements for (1) interests held by
13
public entities in variable interest entities or potential variable interest
entities created before February 1, 2003 and (2) non-registered investment
companies. Concurrent does not have any variable interest entities; therefore,
management believes this statement will not have a material impact on
Concurrent's consolidated financial statements.
In December 2003, the FASB issued SFAS 132(R) "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This Statement revises employers'
disclosures about pension plans and other postretirement benefit plans. The
provisions of this Statement do not change the measurement and recognition
provisions of FASB Statements No. 87, Employers' Accounting for Pensions, No.
88, Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits, and No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions. Statement 132(R) replaces FASB
Statement No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits, and adds additional disclosures. It requires additional
disclosures to those in the original Statement 132 about assets, obligations,
cash flows, and net periodic benefit cost of defined benefit pension plans and
other defined benefit postretirement plans. The required information should be
provided separately for pension plans and for other postretirement benefit
plans. Concurrent will provide interim-period disclosures as required by this
Statement beginning in the three and nine month periods ending March 31, 2004.
13. CONTINGENCIES
Concurrent, from time to time, is involved in litigation incidental to the
conduct of its business. Concurrent believes that such pending litigation will
not have a material adverse effect on Concurrent's results of operations or
financial condition.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SELECTED OPERATING DATA AS A PERCENTAGE OF TOTAL REVENUE
The following table sets forth selected operating data as a percentage of
total revenue, unless otherwise indicated, for certain items in our consolidated
statements of operations for the periods indicated.
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2003 2002 2003 2002
-------------- --------------
Revenues:
Product
Real-time systems 24.8% 29.2% 24.0% 23.6%
VOD systems 51.1 44.1 49.9 50.5
------ ------ ------ ------
Total product revenues 75.9 73.3 73.9 74.0
Service
Real-time systems 17.7 22.3 19.7 21.7
VOD systems 6.4 4.4 6.4 4.3
------ ------ ------ ------
Total service revenues 24.1 26.7 26.1 26.0
------ ------ ------ ------
Total revenues 100.0 100.0 100.0 100.0
Cost of sales (% of respective sales category):
Product
Real-time systems 47.0 38.9 39.9 40.8
VOD systems 47.4 55.6 44.1 47.7
------ ------ ------ ------
Total product cost of sales 47.3 48.9 42.7 45.5
Service
Real-time systems 55.6 55.8 54.1 55.8
VOD systems 59.7 90.0 60.8 80.6
------ ------ ------ ------
Total service cost of sales 56.7 61.5 55.8 59.9
------ ------ ------ ------
Total cost of sales 49.5 52.3 46.1 49.2
------ ------ ------ ------
Gross margin 50.5 47.7 53.9 50.8
Operating expenses:
Sales and marketing 19.6 23.6 20.5 21.7
Research and development 20.8 22.7 22.6 21.3
General and administrative 9.6 11.3 10.5 10.9
------ ------ ------ ------
Total operating expenses 50.0 57.6 53.6 53.9
------ ------ ------ ------
Operating income (loss) 0.5 (9.9) 0.3 (3.1)
Recovery (impairment loss) of minority investment 7.5 (14.6) 6.7 (7.0)
Interest income - net 0.3 0.5 0.3 0.7
Other income (expense) - net (0.1) 0.2 (0.4) -
------ ------ ------ ------
Income (loss) before income taxes 8.2 (23.8) 6.9 (9.4)
Provision (benefit) for income taxes 2.8 (0.6) 2.5 0.2
------ ------ ------ ------
Net income (loss) 5.4% (23.2)% 4.4% (9.6)%
====== ====== ====== ======
15
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED DECEMBER 31, 2003 COMPARED TO THE THREE MONTHS ENDED
DECEMBER 31, 2002
Product Sales. Total product sales were $17.2 million for the three months
ended December 31, 2003, an increase of $2.4 million, or 16.3%, from $14.8
million for the same period of the prior year. The increase in product sales
resulted primarily from the increase in VOD product sales of $2.7 million, or
30.3%, to $11.6 million in the three month period ended December 31, 2003 from
$8.9 million for the same period of the prior year. The increase in VOD product
sales for the three months ended December 31, 2003 was due primarily to
increased volume of VOD server sales and a different mix of customers and
products in the three months as compared to the prior year period. This
increase in volume of video streams shipped was partially offset by a reduction
in the amount of content storage sold and reduced price per stream sold.
Sales of real-time products decreased $0.3 million, or 4.8%, to $5.6
million for the three month period ended December 31, 2003 from $5.9 million for
the same period of the prior year. The decrease in real-time product revenue
was due to $1.2 million of revenue in the second quarter of the prior year
related to product shipped for the C-130 program which did not recur in the
second quarter of the current year. This decrease in domestic revenue was
offset by a $0.9 million increase in international revenue in Europe and Asia.
Service Revenue. Service revenue increased $0.1 million, or 1.6%, to $5.5
million for the three month period ended December 31, 2003, from $5.4 million
for the same period of the prior year. VOD service revenue increased $0.6
million, or 62.0%, to $1.5 million in the three month period ended December 31,
2003 from $0.9 million for the same period of the prior year, as the VOD
division continued to recognize deferred maintenance revenue and expand its VOD
customer base requiring additional installation, training, technical support,
and software and hardware maintenance services. The increase in VOD service
revenue was offset by a $0.5 million, or 10.4%, decrease in real-time service
revenue to $4.0 million for the three month period ended December 31, 2003 from
$4.5 million for the same period of the prior year. Real-time service revenue
continued to decline primarily due to the cancellation of maintenance contracts
as machines were removed from service and from customers purchasing our new
products that are less expensive to maintain.
Product Gross Margin. Product gross margin increased $1.5 million, or
20.2%, to $9.0 million for the three months ended December 31, 2003 from $7.5
million for the same period of the prior year. The product gross margin as a
percentage of sales increased to 52.7% in the three month period ended December
31, 2003 from 51.1% in the three month period ended December 31, 2002. VOD
product gross margin increased to 52.6% in the three month period ended December
31, 2003 from 44.4% in the same period of the prior year due to the lower cost
of the MediaHawk 4000 video server solution sold during the current quarter
versus the previous generation MediaHawk 3000 video server solution sold during
the same period of the prior year, and also the mix of product sold. In
addition, during the prior year period, the VOD division accrued approximately
$0.2 million of warrant expense from sales to customers using the SAI platform.
The agreement with SAI requiring accrual of this cost expired during the first
quarter of fiscal 2004. Real-time product gross margin decreased to 53.0% in
the three month period ended December 31, 2003 from 61.1% for the same period of
the prior year due to a less favorable product mix, particularly related to
higher margin software sales to one specific customer in the prior year quarter,
as compared to the current year quarter.
Service Gross Margin. The gross margin on service sales increased to 43.3%
for the three month period ended December 31, 2003 from 38.5% for the same
period of the prior year. VOD service margins increased to 40.3% compared to
10.0% in the prior year period as the VOD division continues to build its VOD
customer base and revenue at a faster rate than the costs required to provide
these services. Real-time service gross margin increased slightly to 44.4% for
the three month period ended from 44.2% for the same period of the prior year.
16
Sales and Marketing. Sales and marketing expenses decreased as a percentage
of sales to 19.6% for the three months ended December 31, 2003 from 23.6% for
the same period of the prior year. These expenses decreased $0.3 million, or
6.9%, to $4.5 million during the three month period ended December 31, 2003 from
$4.8 million in the same period of the prior year. The ISD division's second
quarter sales and marketing expenses increased $0.1 million compared to the same
period in the prior year primarily due to an increase in personnel to focus on
domestic opportunities. The VOD division's sales and marketing expenses
decreased $0.4 million primarily due to reduced salaries and wages of $0.3
million as a result of non-recurring European severance that occurred during the
same period of the prior year and the elimination of certain personnel costs in
the fourth quarter of fiscal 2003. In addition, the VOD division reduced trade
show and other advertising costs during the three months ended December 31, 2003
by $0.2 million compared to the same period of the prior year.
Research and Development. Research and development expenses decreased as a
percentage of sales to 20.8% for the three months ended December 31, 2003 from
22.7% for the same period of the prior year. These expenses increased $0.1
million, or 2.8%, to $4.7 million during the three month period ended December
31, 2003 from $4.6 million during the same period of the prior year. The $0.1
million increase in research and development expense is due to a $0.4 million
increase in salaries and related costs as the VOD and ISD divisions added new
development staff since the same period of the prior year and a $0.1 million
increase in fixed asset depreciation expense in the VOD division, offset by a
$0.4 million decrease in external software development and consulting expenses
in the VOD division as compared to the same period of the prior year.
General and Administrative. General and administrative expenses decreased
as a percentage of sales to 9.6% for the three months ended December 31, 2003
from 11.3% for the same period of the prior year. These expenses decreased $0.1
million, or 4.1%, to $2.2 million during the three months ended December 31,
2003 compared to $2.3 million in same period of the prior year due primarily to
a reduction in the bad debt reserve of $0.3 million, partially offset by a $0.1
million increase in consulting and legal costs, and a $0.1 million increase in
accounting salaries and wages in the three months ended December 31, 2003 as
compared to the same period of the prior year.
Recovery (Impairment Loss) of Minority Investment. In the second and third
quarters of fiscal 2003, in the aggregate, a net impairment charge of $13.0
million was recorded due to an other-than-temporary decline in the market value
of the equity investment in Thirdspace, which included a $6.1 million charge for
the write off of two $3.0 million notes receivable and related accrued interest.
At the end of fiscal 2003, Thirdspace was sold and placed into liquidation
resulting in a recovery for Concurrent of $1.5 million prior to September 30,
2003. Additionally, in the quarter ended December 31, 2003 Concurrent received
an additional $1.7 million out of the liquidation. The income recognized related
to these proceeds is recorded in the line item "Recovery (impairment loss) of
minority investment" in the Condensed Consolidated Statements of Operations and
the value of the investment and notes receivables remain at zero on our December
31, 2003 Condensed Consolidated Balance Sheets. Subsequent to December 31, 2003,
Concurrent received approximately $300,000, which is expected to be
substantially all of the remaining anticipated proceeds related to the
liquidation of Thirdspace's remaining assets. The income related to these
proceeds will be recognized during the third quarter of fiscal 2004 in the line
item "Recovery (impairment loss) of minority investment" in the Condensed
Consolidated Statements of Operations.
Provision (Benefit) for Income Taxes. Income tax expense for our domestic
and foreign subsidiaries of $0.7 million was recorded during the three months
ended December 31, 2003 based on a pre-tax income of $1.9 million resulting in
an effective tax rate for the quarter of 35%. This expense is primarily
attributable to U.S. federal income tax that is offset by net operating losses
originating prior to the quasi-reorganization in November 1991. For accounting
purposes, the benefit from the utilization of the pre quasi-reorganization net
operating losses must be recognized directly in equity rather than through the
income statement. An income tax benefit of $126,000 was recorded during the
three months ended December 31, 2002 based on pre-tax net loss of $4.8 million.
17
Net Income (Loss). Net income was $1.2 million or $0.02 per basic and
diluted share for the three months ended December 31, 2003. A net loss of $4.7
million or $0.08 per basic and diluted share for the three months ended December
31, 2002 was recorded.
THE SIX MONTHS ENDED DECEMBER 31, 2003 COMPARED TO THE SIX MONTHS ENDED DECEMBER
31, 2002
Product Sales. Total product sales were $30.7 million for the six months
ended December 31, 2003, a decrease of $0.6 million, or 1.9%, from $31.3 million
for the same period of the prior year. The decrease in product sales resulted
from the decrease in VOD product sales of $0.6 million, or 2.9%, to $20.7
million in the six month period ended December 31, 2003 from $21.3 million for
same period of the prior year. The decrease in VOD product sales for the six
months ended December 31, 2003 was due primarily to a different mix of customers
and products, including decreased sales of internal QAMs and Upconverters and a
decrease in prices of certain system components in the six months ended December
31, 2003 as compared to the prior year period. The decrease in VOD product
sales was also due to an increase of approximately $0.4 million in revenue
reductions resulting from additional warrants being earned by Comcast as
compared to the same period of the prior year. The decrease in VOD product sales
was partially offset by software sales of our newly released Real-Time Media
content ingestion product as compared to the prior year period.
Sales of real-time products were unchanged at $10.0 million for the six
month periods ended December 31, 2003 and 2002.
Service Revenue. Service revenue decreased $0.2 million, or 1.4%, to $10.8
million for the six month period ended December 31, 2003, from $11.0 million for
the same period of the prior year. VOD service revenue increased $0.8 million,
or 46.6%, to $2.6 million in the six month period ended December 31, 2003 from
$1.8 million for the same period of the prior year, as the VOD division
continued to recognize deferred maintenance revenue and expand its VOD customer
base requiring additional installation, training, technical support, and
software and hardware maintenance services. The increase in VOD service revenue
was offset by a $1.0 million, or 10.9%, decrease in real-time service revenue to
$8.2 million for the six month period ended December 31, 2003 from $9.2 million
for the same period of the prior year. Real-time service revenue continued to
decline primarily due to the cancellation of maintenance contracts as machines
were removed from service and, to a lesser extent, from customers purchasing our
new products that are less expensive to maintain.
Product Gross Margin. Product gross margin increased $0.5 million, or
3.1%, to $17.6 million for the six months ended December 31, 2003 from $17.1
million for the same period of the prior year. The product gross margin as a
percentage of sales increased to 57.3% in the six month period ended December
31, 2003 from 54.5% in the six month period ended December 31, 2002. VOD
product gross margin increased to 55.9% in the six month period ended December
31, 2003 from 52.3% in the same period of the prior year. The increase in VOD
margin is due to the $1.3 million reversal from cost of sales of previously
recognized warrant expense in the six months ended December 31, 2003 and also
due to the lower cost of the MediaHawk 4000 video server solution predominantly
sold during the current period versus the previous generation MediaHawk 3000
server solution sold during the same period of the prior year. The favorable
impact from the SAI warrant expense reversal and lower production costs was
partially offset by an increase in the revenue reduction from the warrant
accrual for Comcast of approximately $0.4 million over the prior year period due
to an increase in the Black-Scholes value of the warrants and increased sales to
Comcast during the six months ended December 31, 2003. Real-time product gross
margin increased to 60.1% in the six month period ended December 31, 2003 from
59.2% for the same period of the prior year due to a more favorable product mix,
particularly related to higher margin software sales in first quarter of fiscal
2004, as compared to the same period of the prior fiscal year.
Service Gross Margin. The gross margin on service sales increased to 44.2%
for the six month period ended December 31, 2003 from 40.1% for the same period
of the prior year. VOD service margins increased to 39.2% compared to 19.4% in
the prior year period as the VOD division continues to build its VOD customer
base and revenue at a faster rate than the costs required to provide these
services. Real-time
18
service gross margin increased to 45.9% from 44.2% due primarily to reduced
costs from the restructuring initiatives implemented in the fourth quarter of
fiscal 2003.
Sales and Marketing. Sales and marketing expenses decreased as a percentage
of sales to 20.5% for the six months ended December 31, 2003 from 21.7% for the
same period of the prior year. These expenses decreased $0.7 million, or 7.1%,
to $8.5 million during the six month period ended December 31, 2003 from $9.2
million in the same period of the prior year. The ISD division's sales and
marketing expenses remained relatively constant as compared to the same period
of the prior year as $0.1 million of additional trade show and marketing expense
was offset by a $0.1 million decrease in commissions. The VOD division's sales
and marketing expenses decreased $0.7 million primarily due to $0.7 million less
severance expense and reduced salaries and wages as a result of the elimination
of certain personnel costs in the fourth quarter of fiscal 2003. In addition,
the VOD division reduced trade show and other advertising costs during the six
months ended December 31, 2003 by $0.2 million compared to the same period of
the prior year.
Research and Development. Research and development expenses increased as a
percentage of sales to 22.6% for the six months ended December 31, 2003 from
21.3% for the same period of the prior year. These expenses increased $0.4
million, or 3.9%, to $9.4 million during the six month period ended December 31,
2003 from $9.0 million during the same period of the prior year. The $0.4
million increase in research and development expense is due to a $0.8 increase
in salaries and related costs as the VOD and ISD divisions added new development
staff since the same period of the prior year and a $0.2 million increase in
fixed asset depreciation expense in the VOD division, partially offset by a $0.6
million decrease in external software development and consulting expenses in the
VOD division as compared to the same period of the prior year.
General and Administrative. General and administrative expenses decreased
as a percentage of sales to 10.5% for the six months ended December 31, 2003
from 10.9% for the same period of the prior year. These expenses decreased $0.3
million, or 5.5%, to $4.3 million during the six months ended December 31, 2003
compared to $4.6 million in same period of the prior year due primarily to a
reduction in the bad debt reserve of $0.6 million and insurance expense of $0.1
million. These reduced costs were partially offset by a $0.1 million increase in
legal costs and a $0.3 million increase in accounting salaries, wages and
consulting fees in the six months ended December 31, 2003 as compared to the
same period of the prior year.
Recovery (Impairment Loss) of Minority Investment. In the second and
third quarters of fiscal 2003, in the aggregate, a net impairment charge of
$13.0 million was recorded due to an other-than-temporary decline in the market
value of our equity investment in Thirdspace, which included a $6.1 million
charge for the write off of two $3.0 million notes receivable and related
accrued interest. At the end of fiscal 2003, Thirdspace was sold and placed
into liquidation resulting in a recovery for Concurrent of $0.5 million prior to
July 1, 2003. Additionally, in the six months ended December 31, 2003
Concurrent received an additional $2.8 million out of the liquidation. The
income recognized related to these proceeds is recorded in the line item
"Recovery (impairment loss) of minority investment" in the Condensed
Consolidated Statements of Operations and the value of the investment and notes
receivables remain at zero on our December 31, 2003 Condensed Consolidated
Balance Sheets. Subsequent to December 31, 2003, Concurrent received
approximately $300,000, which is expected to be substantially all of the
remaining anticipated proceeds related to the liquidation of Thirdspace's
remaining assets. The income related to these proceeds will be recognized during
the third quarter of fiscal 2004 in the line item "Recovery (impairment loss) of
minority investment" in the Condensed Consolidated Statements of Operations.
Provision (Benefit) for Income Taxes. Income tax expense for our domestic
and foreign subsidiaries of $1.1 million was recorded for the six month period
ended December 31, 2003 based on pre-tax income of $2.9 million resulting in an
effective tax rate for the period of 36.7%. This expense is primarily
attributable to U.S. federal income tax that is offset by net operating losses
originating prior to our quasi-reorganization in November 1991. For accounting
purposes, the benefit from the utilization of the pre quasi-reorganization net
operating losses must be recognized directly in equity rather than through the
income statement. We recorded income tax expense of $0.1 million during the six
months ended December
19
31, 2002 based on pre-tax net loss of $4.0 million. This expense was primarily
attributable to foreign withholding taxes and income earned in foreign
locations, which cannot be offset by net operating loss carryforwards.
Net Income (Loss). Net income of $1.8 million or $0.03 per basic and
diluted share was recorded for the six months ended December 31, 2003. A net
loss of $4.0 million or $0.07 per basic and diluted share for the six months
ended December 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity is dependent on many factors, including sales volume,
operating profit and the efficiency of asset use and turnover. Our future
liquidity will be affected by, among other things:
- the actual versus anticipated decline in sales of real-time
proprietary systems and service maintenance revenue;
- revenues from real-time systems;
- revenue growth from VOD systems and the pace at which cable companies
implement VOD technology;
- ongoing cost control actions and expenses, including for example,
research and development and capital expenditures;
- the margins on the VOD and real-time businesses;
- our ability to raise additional capital, if necessary;
- our ability to obtain bank financing, if necessary;
- timing of product shipments which occur primarily during the last
month of the quarter;
- the percentage of sales derived from outside the United States where
there are generally longer accounts receivable collection cycles;
- the number of countries in which we operate, which may require
maintenance of minimum cash levels in each country and, in certain
cases, may restrict the repatriation of cash, such as cash held on
deposit to secure office leases; and
- the success of the fourth generation VOD platform and our real time
Linux products.
We used cash of $4.8 million from operating activities during the six
months ended December 31, 2003 compared to providing cash of $5.1 million during
the same period of the prior year. The decrease in cash from operations was
primarily due to timing differences between payments for inventory purchased,
processed and sold during the year and collections of receivables generated from
these sales, partially offset by net income in the six months ended December 31,
2003 compared to a net loss in the six months ended December 31, 2002.
We invested $2.1 million in property, plant and equipment during the six
months ended December 31, 2003 compared to $3.0 million during the six months
ended December 31, 2002. Capital additions during the first six months of fiscal
2004 related primarily to product development and testing equipment and
demonstration equipment for our VOD division. Concurrent received an additional
$2.8 million from the continued liquidation of Thirdspace during the six month
period ended December 31, 2003. Subsequent to December 31, 2003, Concurrent
received approximately $300,000, which is expected to be substantially all of
the remaining anticipated proceeds related to the liquidation of Thirdspace's
remaining assets.
We received $1.1 million and $8,000 from the issuance of common stock to
employees and directors who exercised stock options during the six months ended
December 31, 2003 and 2002, respectively.
At December 31, 2003, we had working capital of $34.7 million and had no
material commitments for capital expenditures. We believe that the existing
cash balances and funds generated by operations will be sufficient to meet the
anticipated working capital and capital expenditure requirements for the next 12
months.
20
Deferred revenues increased $4.5 million from $7.6 million at June 30, 2003
to $12.1 million at December 31, 2003. This increase is primarily due to
billings to a North America cable operator in advance of our ability to
recognize revenue under SOP 97-2 and due to the growing base of cable customers
with maintenance programs where the revenue is recognized ratably over the
maintenance period.
We maintain pension plans for certain employees and former employees in the
United Kingdom and Germany. The projected benefit obligation for the benefit
plans at June 30, 2003 and June 30, 2002 as determined in accordance with SFAS
No. 87, "Employers Accounting for Pensions", was $21.5 million and $17.0
million, respectively, and the value of the plans assets was $12.9 million and
$12.0 million, respectively. As a result, the plans were underfunded by $8.6
million at June 30, 2003 and by $5.0 million at June 30, 2002. The value of
plan assets was $14.8 million at December 31, 2003. It is likely that the
amount of our contribution to the plans will increase from the $394,000 of
contributions made in fiscal 2003. In addition, management expects the pension
cost to be recognized in the financial statements will increase from the
$747,000 recognized in fiscal 2003 to approximately $1,060,000 in fiscal 2004,
of which approximately $530,000 was recognized in the six months ended December
31, 2003. The expense to be recognized in future periods could increase further,
depending upon the amount of the change in the fair market value of the plan
assets and the change in the projected benefit obligation.
The funding deficiency of $8.6 million at June 30, 2003 may increase
further or decrease in the future depending primarily upon the actual investment
performance of the pension assets as compared to the assumed rate of return on
plan assets and the amount of contributions to the plan by the Company. The
Company is currently in the process of completing its valuation to determine the
amount of contributions to the plan that the Company will be required to make
for the next 3 years. We also recorded a reduction to stockholders' equity as of
June 30, 2003 and 2002, amounting to $3.0 million and $1.6 million,
respectively, due to the decrease in the discount rate used to calculate the
accumulated benefit obligation and the less than anticipated investment returns.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Our only significant contractual obligations and commitments relate to
certain operating leases for sales, service and manufacturing facilities in the
United States, Europe and Asia.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements made or incorporated by reference in this report on Form
10-Q may constitute "forward-looking statements" within the meaning of the
federal securities laws. When used or incorporated by reference in this
prospectus, the words "believes," "expects," "estimates", "anticipates" and
similar expressions are intended to identify forward-looking statements.
Statements regarding future events and developments and our future performance,
as well as our expectations, beliefs, plans, estimates or projections relating
to the future, are forward-looking statements within the meaning of these laws.
All forward-looking statements are subject to certain risks and uncertainties
that could cause actual events to differ materially from those projected. The
risks and uncertainties which could affect our financial condition or results of
operations include, without limitation:
- the concentration of our customers;
- capital spending patterns by a limited customer base;
- system errors or failures;
- the success of new products in both the VOD and ISD divisions;
- our ability to keep our customers satisfied;
- failure to effectively manage growth;
- availability of VOD content;
- changes in product demand;
21
- delays in testing and introductions of new products;
- reliance on a limited number of suppliers;
- the highly competitive environment in which we operate and predatory
pricing pressures;
- failure to effectively service the installed base;
- the entry of new well-capitalized competitors into our markets;
- uncertainties relating to the development and ownership of
intellectual property;
- rapid technology changes;
- economic conditions;
- uncertainties relating to our ability and the ability of other
companies to enforce their intellectual property rights;
- the pricing and availability of equipment, materials and inventories;
- the limited operating history of our VOD segment;
- demand shifts from high-priced, proprietary real-time systems to
low-priced, open server systems;
- contract obligations that could impact revenue recognition;
- delays or cancellations of customer orders;
- various inventory risks due to changes in market conditions;
- the availability of Linux software in light of issues raised by the
SCO Group;
- the success of our new initiative in our Concurrent Federal Systems
(CFSI) subsidiary to penetrate opportunities with the U.S. government;
- uncertainties associated with international business activities,
including foreign regulations, trade controls, taxes and currency
fluctuations; and
- the valuation of equity investments and collectibility of notes
receivable.
Other important risk factors are discussed in our Annual Report on Form
10-K for the fiscal year ended June 30, 2003.
Our forward-looking statements are based on current expectations and speak
only as of the date of such statements. We undertake no obligation to publicly
update or revise any forward-looking statement, whether as a result of future
events, new information or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates and foreign
currency exchange rates. We are exposed to the impact of interest rate changes
on our short-term cash investments, which are backed by U.S. government
obligations, and other investments in respect of institutions with the highest
credit ratings, all of which have maturities of three months or less. These
short-term investments carry a degree of interest rate risk. We believe that
the impact of a 10% increase or decline in interest rates would not be material
to the financial statements.
We conduct business in the United States and around the world. The most
significant foreign currency transaction exposures relate to the United Kingdom,
those Western European countries that use the Euro as a common currency,
Australia, and Japan. We do not hedge against fluctuations in exchange rates and
believe that a hypothetical 10% upward or downward fluctuation in foreign
currency exchange rates relative to the United States dollar would not have a
material impact on future earnings, fair values, or cash flows.
ITEM 4. CONTROLS AND PROCEDURES
As required by Securities and Exchange Commission rules, we have evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures as of December 31, 2003, the end of the quarter to which this report
relates. This evaluation was carried out under the supervision and with the
participation of our management, including our principal executive officer and
principal financial officer. Based on this evaluation, these officers have
concluded that the design and operation of our disclosure
22
controls and procedures are effective. There were no changes to our internal
controls over financial reporting during the period covered by this report that
materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting subsequent to the date of their evaluation.
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Securities Exchange Act of 1934, as
amended, are recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by us in
the reports that we file or submit under the Exchange Act are accumulated and
communicated to our management, including our principal executive officer and
principal financial officer, as appropriate, to allow timely decisions regarding
required disclosure.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our ordinary course of business. We are not presently involved
in any material litigation, but have the following matters pending:
- SeaChange International, Inc. v. Putterman, et al, Arkansas Court of
---------------------------------------------------
Appeals, Case No. CA 01-1126. The suit was filed on June 14, 1999
alleging that we defamed SeaChange International, Inc. ("SeaChange").
On June 14, 2000, we counterclaimed against SeaChange alleging that
SeaChange defamed us. On January 4, 2001, the court granted our motion
to dismiss all claims against us. SeaChange subsequently and
successfully appealed and the actual trial began January 26, 2004.
- Eason v. Concurrent Computer Corp, et al., Superior Court of New
-----------------------------------------------
Jersey, Appellate Division, Docket No. A-003181-02T2. This suit arose
out of a personal injury claim filed in 1994 wherein plaintiff alleged
that he was injured when a lamp post fell in our parking lot. The case
against us was dismissed in 1995, but in 2000 the plaintiff amended
the cause of action and refiled against us alleging spoliation of
evidence. The plaintiff obtained a default judgment for $119,800 in
December 2001 that was vacated in August 2002. Plaintiff subsequently
refiled and in February 2003 the court granted our motion to dismiss
all claims. Plaintiff has appealed, and the matter has been briefed. A
decision by the appellate court is expected this fiscal year.
We are involved in various other legal proceedings. We believe that any
liability which may arise as a result of these proceedings, including the
proceedings specifically discussed above, will not have a material adverse
effect on our financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Concurrent's Annual Meeting of Stockholders was held on October 21, 2003.
The results of the voting were as follows:
- The following persons were elected as directors to serve until the
next annual meeting of stockholders: Alex B. Best (56,041,065 votes
for, 493,058 votes withheld), Charles Blackmon (54,697,430 votes for,
1,836,693 votes withheld), Michael A. Brunner (54,607,721 votes for,
1,926,402 votes withheld), Jack A. Bryant (55,860,076 votes for,
674,047 votes withheld), Bruce N. Hawthorne (48,736,123 votes for,
7,798,000 votes withheld), C. Shelton James (54,614,155 votes for,
1,919,968 votes withheld) and Steve G. Nussrallah (55,074,429 votes
for, 1,459,694 votes withheld).
23
- The selection by the Audit Committee of Deloitte & Touch LLP as
Concurrent's independent auditors for the fiscal year ending June 30,
2004 was ratified (53,959,589 votes for, 2,489,125 votes against,
85,409 votes abstained).
ITEM 5. OTHER INFORMATION
Our Vice President of Worldwide Sales and Marketing for our ISD division,
Robert T. Menzel, informed the Company of his plans to retire from Concurrent
effective February 13, 2004. Mr. Menzel's retirement comes after over 25 years
of service in the computer and simulation business and after 12 years of service
at Concurrent.
Our Vice President of Sales for our VOD division, David M. Nicholas,
announced his resignation. David began his employment with Concurrent in March
of 1999. Mr. Nicholas will be pursuing other interests.
24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 - Restated Certificate of Incorporation of the Registrant
(incorporated by reference to the Registrant's Registration
Statement on Form S-2 (No. 33-62440)).
3.2 - Amended and Restated Bylaws of the Registrant Certificate
(incorporated by reference to the Registrants Quarterly report on
Form 10-Q for the quarter ended March 31, 2003).
3.3 - Certificate of Correction to Restated Certificate of
Incorporation of the Registrant (incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 2002).
3.4 - Amended Certificate of Designations of Series A Participating
Cumulative Preferred Stock (incorporated by reference to the Form
8-A/A, dated August 9, 2002).
3.5 - Amendment to Amended Certificate of Designations of Series A
Participating Cumulative Preferred Stock (incorporated by
reference to the Form 8-A/A, dated August 9, 2002).
4.1 - Form of Common Stock Certificate (incorporated by reference to
the Registrants Quarterly report on Form 10-Q for the quarter
ended March 31, 2003).
4.2 - Form of Rights Certificate (incorporated by reference to the
Registrant's Current Report on Form 8-K/A filed August 12, 2002).
4.3 - Amended and Restated Rights Agreement dated as of August 7,
2002 between the Registrant and American Stock Transfer & Trust
Company, as Rights Agent (incorporated by reference to the
Registrant's Current Report on Form 8-K/A filed on August 12,
2002).
10.1 - Form Indemnification Agreement and Schedule of Directors who
have entered into such agreement (incorporated by reference to
the Registrants Quarterly Report on Form 10-Q for the quarter
ended September 30, 2003).
10.2** - Schedule of officers who have entered into the Form
Indemnification Agreement, referenced in Exhibit 10.1.
10.3** - Indemnification Agreement between the Registrant and Robert E.
Chism, dated June 27, 1996.
11.1* - Statement Regarding Computation of Per Share Earnings.
31.1** - Certification of Chief Executive Officer, pursuant to Rule
13a-14 (a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2** - Certification of Chief Financial Officer, pursuant to Rule
13a-14 (a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1** - Certification of Chief Executive Officer, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2** - Certification of Chief Financial Officer, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Data required by Statement of Financial Accounting Standards No. 128,
"Earnings per Share," is provided in the Notes to the condensed
consolidated financial statements in this report.
** Filed herewith.
(b) Reports on Form 8-K.
The following reports on Form 8-K were filed during the period covered by
this report:
- Current Report on Form 8-K furnished on October 23, 2003,
relating to results of operations and financial condition as of
and for the quarter ended September 30, 2003.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this quarterly report for the quarter ended December
31, 2003, to be signed on its behalf by the undersigned thereunto duly
authorized.
Date: February 12, 2004 CONCURRENT COMPUTER CORPORATION
By: /s/ Steven R. Norton
---------------------------------
Steven R. Norton
Executive Vice President, Chief Financial Officer
and Secretary
(Principal Financial and Accounting Officer,
Authorized Officer)
26
EXHIBIT INDEX
-------------
3.1 - Restated Certificate of Incorporation of the Registrant
(incorporated by reference to the Registrant's Registration
Statement on Form S-2 (No. 33-62440)).
3.2 - Amended and Restated Bylaws of the Registrant Certificate
(incorporated by reference to the Registrants Quarterly report on
Form 10-Q for the quarter ended March 31, 2003).
3.3 - Certificate of Correction to Restated Certificate of
Incorporation of the Registrant (incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 2002).
3.4 - Amended Certificate of Designations of Series A Participating
Cumulative Preferred Stock (incorporated by reference to the Form
8-A/A, dated August 9, 2002).
3.5 - Amendment to Amended Certificate of Designations of Series A
Participating Cumulative Preferred Stock (incorporated by
reference to the Form 8-A/A, dated August 9, 2002).
4.1 - Form of Common Stock Certificate (incorporated by reference to
the Registrants Quarterly report on Form 10-Q for the quarter
ended March 31, 2003).
4.2 - Form of Rights Certificate (incorporated by reference to the
Registrant's Current Report on Form 8-K/A filed August 12, 2002).
4.3 - Amended and Restated Rights Agreement dated as of August 7,
2002 between the Registrant and American Stock Transfer & Trust
Company, as Rights Agent (incorporated by reference to the
Registrant's Current Report on Form 8-K/A filed on August 12,
2002).
10.1 - Form Indemnification Agreement and Schedule of Directors who
have entered into such agreement (incorporated by reference to
the Registrants Quarterly Report on Form 10-Q for the quarter
ended September 30, 2003).
10.2** - Schedule of officers who have entered into the Form
Indemnification Agreement, referenced in Exhibit 10.1.
10.3** - Indemnification Agreement between the Registrant and Robert E.
Chism, dated June 27, 1996.
11.1* - Statement Regarding Computation of Per Share Earnings.
31.1** - Certification of Chief Executive Officer, pursuant to Rule
13a-14 (a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2** - Certification of Chief Financial Officer, pursuant to Rule
13a-14 (a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1** - Certification of Chief Executive Officer, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2** - Certification of Chief Financial Officer, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Data required by Statement of Financial Accounting Standards No. 128,
"Earnings per Share," is provided in the Notes to the condensed
consolidated financial statements in this report.
** Filed herewith.
27