UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 March 31, 2004
or
Transition Report Pursuant to Section 13 or 15(d) of
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the Securities Exchange Act of 1934
For the Transition Period from ____ to ____
Commission File No. 0-13150
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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 May 3, 2004 was 62,627,107.
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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenues:
Product
Real-time systems $ 4,964 $ 5,027 $ 14,955 $ 14,998
VOD systems 13,250 7,631 33,965 28,959
----------- ----------- ----------- -----------
Total product revenues 18,214 12,658 48,920 43,957
Service
Real-time systems 3,832 4,169 11,996 13,332
VOD systems 1,565 821 4,223 2,634
----------- ----------- ----------- -----------
Total service revenues 5,397 4,990 16,219 15,966
----------- ----------- ----------- -----------
Total revenues 23,611 17,648 65,139 59,923
Cost of sales:
Product
Real-time systems 1,909 1,926 5,893 5,990
VOD systems 7,734 4,308 16,875 14,485
----------- ----------- ----------- -----------
Total product cost of sales 9,643 6,234 22,768 20,475
Service
Real-time systems 2,076 2,725 6,493 7,835
VOD systems 996 754 2,613 2,216
----------- ----------- ----------- -----------
Total service cost of sales 3,072 3,479 9,106 10,051
----------- ----------- ----------- -----------
Total cost of sales 12,715 9,713 31,874 30,526
----------- ----------- ----------- -----------
Gross margin 10,896 7,935 33,265 29,397
Operating expenses:
Sales and marketing 4,259 4,287 12,768 13,449
Research and development 5,091 4,991 14,464 14,015
General and administrative 2,656 2,381 7,000 6,976
----------- ----------- ----------- -----------
Total operating expenses 12,006 11,659 34,232 34,440
----------- ----------- ----------- -----------
Operating loss (1,110) (3,724) (967) (5,043)
Recovery (impairment loss) of minority investment 289 (10,479) 3,047 (13,422)
Interest income - net 95 109 233 407
Other expense - net (37) (94) (191) (94)
----------- ----------- ----------- -----------
Income (loss) before income taxes (763) (14,188) 2,122 (18,152)
Provision (benefit) for income taxes (700) 72 360 153
----------- ----------- ----------- -----------
Net income (loss) $ (63) $ (14,260) $ 1,762 $ (18,305)
=========== =========== =========== ===========
Net income (loss) per share
Basic $ (0.00) $ (0.23) $ 0.03 $ (0.30)
=========== =========== =========== ===========
Diluted $ (0.00) $ (0.23) $ 0.03 $ (0.30)
=========== =========== =========== ===========
Weighted average shares outstanding - basic 62,565 61,975 62,318 61,899
=========== =========== =========== ===========
Weighted average shares outstanding - diluted 62,565 61,975 63,119 61,899
=========== =========== =========== ===========
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)
MARCH 31, JUNE 30,
2004 2003
----------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 25,706 $ 30,697
Accounts receivable - net 21,478 10,371
Inventories 8,342 7,174
Deferred tax asset 998 998
Prepaid expenses and other current assets 1,205 879
----------- ----------
Total current assets 57,729 50,119
Property, plant and equipment - net 11,580 11,862
Purchased developed computer software - net 1,061 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 1,701 1,609
----------- ----------
Total assets $ 85,117 $ 77,839
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 13,850 $ 14,644
Deferred revenue 8,294 5,295
----------- ----------
Total current liabilities 22,144 19,939
Long-term liabilities:
Deferred revenue 4,116 2,350
Deferred tax liability 1,981 2,107
Pension liability 11,201 9,617
Other 346 368
----------- ----------
Total liabilities 39,788 34,381
Stockholders' equity:
Common stock 630 623
Capital in excess of par value 174,468 174,396
Accumulated deficit (121,167) (122,929)
Treasury stock (58) (58)
Unearned Compensation (372) (576)
Accumulated other comprehensive loss (8,172) (7,998)
----------- ----------
Total stockholders' equity 45,329 43,458
----------- ----------
Total liabilities and stockholders' equity $ 85,117 $ 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)
NINE MONTHS ENDED
MARCH 31,
2004 2003
----------- -----------
OPERATING ACTIVITIES
Net income (loss) $ 1,762 $ (18,305)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Accrual of non-cash warrants (1,084) 295
Depreciation and amortization 3,986 3,535
Provision for inventory reserves 686 102
Provision for bad debts (601) 8
Non-cash income tax provision 99 -
Impairment loss (recovery) of minority investment (3,047) 13,422
Other non cash expenses 59 16
Changes in operating assets and liabilities:
Accounts receivable (10,506) 8,924
Inventories (1,854) (30)
Prepaid expenses and other current assets (326) (533)
Other long-term assets (93) (692)
Accounts payable and accrued expenses (794) (4,921)
Deferred revenue 4,765 3,888
Pension liability 1,584 648
Other long-term liabilities 47 194
----------- -----------
Total adjustments to net income (loss) (7,079) 24,856
----------- -----------
Net cash provided by (used in) operating activities (5,317) 6,551
INVESTING ACTIVITIES
Net additions to property, plant and equipment (3,458) (4,471)
Recovery of minority investment 3,047 -
Note receivable from minority owned company - (3,000)
Other - (29)
----------- -----------
Net cash used in investing activities (411) (7,500)
FINANCING ACTIVITIES
Net repayment of capital lease obligation (69) (63)
Proceeds from sale and issuance of common stock 1,182 546
----------- -----------
Net cash provided by financing activities 1,113 483
Effect of exchange rates on cash and cash equivalents (376) 174
----------- -----------
Decrease in cash and cash equivalents (4,991) (292)
Cash and cash equivalents at beginning of period 30,697 30,519
----------- -----------
Cash and cash equivalents at end of period $ 25,706 $ 30,227
=========== ===========
Cash paid during the period for:
Interest $ 7 $ 13
=========== ===========
Income taxes (net of refunds) $ 408 $ 290
=========== ===========
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 cable television
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 to 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 5,863,000 and 5,996,000 for the three
month periods ended March 31, 2004 and 2003, respectively, were excluded from
the calculation as their effect was antidilutive. Common share equivalents of
5,284,000 and 6,107,000 for the nine month periods ended March 31, 2004 and
2003, 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 NINE MONTHS ENDED
MARCH 31, 2004 MARCH 31, 2004
----------------------------- -----------------------------
BASIC DILUTED BASIC DILUTED
---------------- ----------- ---------------- -----------
Average outstanding shares 62,565 62,565 62,318 62,318
Dilutive effect of options and warrants - - - 801
---------------- ----------- ---------------- -----------
Equivalent shares 62,565 62,565 62,318 63,119
================ =========== ================ ===========
Net income (loss) $ (63) $ (63) $ 1,762 $ 1,762
================ =========== ================ ===========
Net income (loss) per share $ (0.00) $ (0.00) $ 0.03 $ 0.03
================ =========== ================ ===========
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2003
----------------------------- -----------------------------
BASIC DILUTED BASIC DILUTED
---------------- ----------- ---------------- -----------
Average outstanding shares 61,975 61,975 61,899 61,899
Dilutive effect of options and warrants - - - -
---------------- ----------- ---------------- -----------
Equivalent shares 61,975 61,975 61,899 61,899
================ =========== ================ ===========
Net loss $ (14,260) $ (14,260) $ (18,305) $ (18,305)
================ =========== ================ ===========
Net loss per share $ (0.23) $ (0.23) $ (0.30) $ (0.30)
================ =========== ================ ===========
3. STOCK-BASED COMPENSATION
At March 31, 2004, 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 nine months ended March 31, 2004, Concurrent recognized $19,000
and $85,000, 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 (loss) for the three and nine months periods
ended March 31, 2004. For the three and nine months ended March 31, 2003, there
was no stock-based employee compensation expense reflected in net income (loss).
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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income (loss) as reported $ (63) $ (14,260) $ 1,762 $ (18,305)
Deduct: Total stock-based employee
compensation expense determined under
the fair value method, net of related taxes (1,093) (1,480) (3,157) (5,017)
----------- ----------- ----------- -----------
Pro forma net loss $ (1,156) $ (15,740) $ (1,395) $ (23,322)
=========== =========== =========== ===========
Net income (loss) per share:
Basic-as reported $ (0.00) $ (0.23) $ 0.03 $ (0.30)
=========== =========== =========== ===========
Basic-pro forma $ (0.02) $ (0.25) $ (0.02) $ (0.38)
=========== =========== =========== ===========
Diluted-as reported $ (0.00) $ (0.23) $ 0.03 $ (0.30)
=========== =========== =========== ===========
Diluted-pro forma $ (0.02) $ (0.25) $ (0.02) $ (0.38)
=========== =========== =========== ===========
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)
MARCH 31, JUNE 30,
2004 2003
---------- ---------
Raw materials, net $ 7,030 $ 5,933
Work-in-process 832 1,024
Finished goods 480 217
---------- ---------
$ 8,342 $ 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 three quarters of fiscal 2004, Concurrent received, in the
aggregate, $3.0 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 March 31, 2004, Concurrent received an additional $56,000, 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
fourth quarter of fiscal 2004 in the line item "Recovery (impairment loss) of
minority investment" of the Condensed Consolidated Statements of Operations.
Concurrent does not anticipate any further cash proceeds related to the
liquidation of Thirdspace's remaining assets, and expects this to be one of the
final assets to be distributed as part of this liquidation.
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
March 31, 2004, 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 nine months ended March 31,
2004, Concurrent purchased $22,000 and $35,000 of contract development services,
respectively, from Everstream. During the three and nine months ended March 31,
2003, Concurrent purchased $225,000 and $863,000 of contract software
development services, respectively, from Everstream.
Concurrent's equity investment is 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 March 31,
2004 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 712 170 882
---------- ------------- ------
Restructuring accrual at March 31, 2004 $ 154 $ 53 $ 207
========== ============= ======
8
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The components of accounts payable and accrued expenses are as follows:
(DOLLARS IN THOUSANDS)
MARCH 31, JUNE 30,
2004 2003
---------- ----------
Accounts payable, trade $ 6,520 $ 4,138
Accrued payroll, vacation and
other employee expenses 3,929 4,760
Warranty accrual 665 2,131
Restructuring reserve 207 1,089
Other accrued expenses 2,529 2,526
---------- ----------
$ 13,850 $ 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 93
Deductions (1,559)
--------
Balance at March 31, 2004 $ 665
========
9. COMPREHENSIVE INCOME
Concurrent's total comprehensive income (loss) is as follows:
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income (loss) $ (63) $ (14,260) $ 1,762 $ (18,305)
Other comprehensive income (loss):
Foreign currency translation income (loss) (188) 327 (174) 271
----------- ----------- ----------- -----------
Total comprehensive income (loss) $ (251) $ (13,933) $ 1,588 $ (18,034)
=========== =========== =========== ===========
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 March 31, 2004 and March 31, 2003, respectively:
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, 2004(UNAUDITED)
---------------------------------------------------------
ISD VOD CORPORATE TOTAL
----------- ------------- ------------- --------------
Revenues:
Product $ 4,964 $ 13,250 $ - $ 18,214
Service 3,832 1,565 - 5,397
----------- ------------- ------------- --------------
Total 8,796 14,815 - 23,611
Cost of sales:
Product 1,909 7,734 - 9,643
Service 2,076 996 - 3,072
----------- ------------- ------------- --------------
Total 3,985 8,730 - 12,715
----------- ------------- ------------- --------------
Gross margin 4,811 6,085 - 10,896
Operating expenses:
Sales and marketing 1,976 2,170 113 4,259
Research and development 1,478 3,613 - 5,091
General and administrative 263 474 1,919 2,656
----------- ------------- ------------- --------------
Total operating expenses 3,717 6,257 2,032 12,006
----------- ------------- ------------- --------------
Operating income (loss) $ 1,094 $ (172) $ (2,032) $ (1,110)
=========== ============= ============= ==============
THREE MONTHS ENDED MARCH 31, 2003(UNAUDITED)
---------------------------------------------------------
ISD VOD CORPORATE TOTAL
----------- ------------- ------------- --------------
Revenues:
Product $ 5,027 $ 7,631 $ - $ 12,658
Service 4,169 821 - 4,990
----------- ------------- ------------- --------------
Total 9,196 8,452 - 17,648
Cost of sales:
Product 1,926 4,308 - 6,234
Service 2,725 754 - 3,479
----------- ------------- ------------- --------------
Total 4,651 5,062 - 9,713
----------- ------------- ------------- --------------
Gross margin 4,545 3,390 - 7,935
Operating expenses:
Sales and marketing 1,811 2,315 161 4,287
Research and development 1,371 3,620 - 4,991
General and administrative 441 494 1,446 2,381
----------- ------------- ------------- --------------
Total operating expenses 3,623 6,429 1,607 11,659
----------- ------------- ------------- --------------
Operating income (loss) $ 922 $ (3,039) $ (1,607) $ (3,724)
=========== ============= ============= ==============
10
The following summarizes the operating income (loss) by segment for the nine
month periods ended March 31, 2004 and March 31, 2003, respectively:
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED MARCH 31, 2004 (UNAUDITED)
------------------------------------------------------
ISD VOD CORPORATE TOTAL
------------ ------------ ------------ ------------
Revenues:
Product $ 14,955 $ 33,965 $ - $ 48,920
Service 11,996 4,223 - 16,219
------------ ------------ ------------ ------------
Total 26,951 38,188 - 65,139
Cost of sales:
Product 5,893 16,875 - 22,768
Service 6,493 2,613 - 9,106
------------ ------------ ------------ ------------
Total 12,386 19,488 - 31,874
------------ ------------ ------------ ------------
Gross margin 14,565 18,700 - 33,265
Operating expenses:
Sales and marketing 5,783 6,646 339 12,768
Research and development 4,351 10,113 - 14,464
General and administrative 1,047 855 5,098 7,000
------------ ------------ ------------ ------------
Total operating expenses 11,181 17,614 5,437 34,232
------------ ------------ ------------ ------------
Operating income (loss) $ 3,384 $ 1,086 $ (5,437) $ (967)
============ ============ ============ ============
NINE MONTHS ENDED MARCH 31, 2003 (UNAUDITED)
------------------------------------------------------
ISD VOD CORPORATE TOTAL
------------ ------------ ------------ ------------
Revenues:
Product $ 14,998 $ 28,959 $ - $ 43,957
Service 13,332 2,634 - 15,966
------------ ------------ ------------ ------------
Total 28,330 31,593 - 59,923
Cost of sales:
Product 5,990 14,485 - 20,475
Service 7,835 2,216 - 10,051
------------ ------------ ------------ ------------
Total 13,825 16,701 - 30,526
------------ ------------ ------------ ------------
Gross margin 14,505 14,892 - 29,397
Operating expenses:
Sales and marketing 5,579 7,401 469 13,449
Research and development 4,048 9,967 - 14,015
General and administrative 1,276 1,559 4,141 6,976
------------ ------------ ------------ ------------
Total operating expenses 10,903 18,927 4,610 34,440
------------ ------------ ------------ ------------
Operating income (loss) $ 3,602 $ (4,035) $ (4,610) $ (5,043)
============ ============ ============ ============
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 was 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 were measured by the
number of Comcast basic cable subscribers that had 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. Through March 31, 2004, these warrants are referred to as the
"Performance Warrants". Through March 31, 2004, Concurrent issued to Comcast
various performance warrants totaling 105,398 shares. These performance
warrants are exercisable over a four year term and have exercise prices between
$2.62 and $15.02. All of these warrants are outstanding as of March 31, 2004.
Concurrent may also issue additional warrants to purchase shares of its
Common Stock, if as of March 31, 2004 the 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 March 31, 2004 and
2003, respectively, were: expected dividend yield of 0% for both periods;
risk-free interest rate of 2.46% and 2.36%; 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.
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 months ended March 31, 2004, Concurrent recognized $194,000
as an increase in revenue for 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 March 31, 2004. For the nine
months ended March 31, 2004, Concurrent recognized $237,000 as a reduction in
revenue for the Performance Warrants and Cliff Warrants that have been earned
but unissued as of March 31, 2004. For the three and nine months ended March
31, 2003, Concurrent recognized $21,000 and $19,000, respectively, as a
reduction in revenue for the Performance Warrants and Cliff Warrants that have
been earned but unissued. The decreases in revenue during the nine months ended
March 31, 2004 and 2003 are due to the increase in the number of Comcast basic
cable subscribers that have the ability to utilize VOD services.
12
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 March 31, 2004.
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 nine month periods ended March 31, 2003, Concurrent recognized
$82,000 and $275,000, 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 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 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.
13
The following summarizes the components of net periodic pension cost for
the three month and nine month periods ended March 31, 2004 and March 31, 2003,
respectively:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
(DOLLARS IN THOUSANDS) 2004 2003 2004 2003
----------- ----------- ----------- -----------
Service cost $ 99 $ 76 $ 280 $ 227
Interest cost 312 259 881 777
Expected return on plan assets (215) (184) (608) (553)
Amortization of unrecognized net transition obligation (19) (17) (54) (51)
Amortization of unrecognized prior service benefit 7 6 19 18
Recognized actuarial loss 108 47 304 141
----------- ----------- ----------- -----------
Net periodic benefit cost $ 292 $ 187 $ 822 $ 559
=========== =========== =========== ===========
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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
2004 2003 2004 2003
----------- --------- ----------- ---------
(Unaudited) (Unaudited)
Revenues:
Product sales (% of total sales):
Real-time systems 21.0% 28.5% 23.0% 25.0%
VOD systems 56.1 43.2 52.1 48.3
----------- --------- ----------- ---------
Total product revenues 77.1 71.7 75.1 73.4
Service:
Real-time systems 16.2 23.6 18.4 22.2
VOD systems 6.7 4.7 6.5 4.4
----------- --------- ----------- ---------
Total service revenues 22.9 28.3 24.9 26.6
----------- --------- ----------- ---------
Total revenues 100.0 100.0 100.0 100.0
Cost of sales (% of respective sales category):
Product:
Real-time systems 38.5 38.3 39.4 39.9
VOD systems 58.4 56.5 49.7 50.0
----------- --------- ----------- ---------
Total product cost of sales 52.9 49.2 46.5 46.6
Service:
Real-time systems 54.2 65.4 54.1 58.8
VOD systems 63.6 91.8 61.9 84.1
----------- --------- ----------- ---------
Total service cost of sales 56.9 69.7 56.1 63.0
----------- --------- ----------- ---------
Total cost of sales 53.9 55.0 48.9 50.9
----------- --------- ----------- ---------
Gross margin 46.1 45.0 51.1 49.1
Operating expenses:
Sales and marketing 18.0 24.3 19.6 22.4
Research and development 21.6 28.3 22.3 23.4
General and administrative 11.2 13.5 10.7 11.6
----------- --------- ----------- ---------
Total operating expenses 50.8 66.1 52.6 57.5
----------- --------- ----------- ---------
Operating loss (4.7) (21.1) (1.5) (8.4)
Recovery (impairment loss) of minority investment 1.3 (59.4) 4.7 (22.4)
Interest income - net 0.4 0.6 0.4 0.7
Other income (expense) - net (0.2) (0.5) (0.3) (0.2)
----------- --------- ----------- ---------
Income (loss) before income taxes (3.2) (80.4) 3.3 (30.3)
Provision (benefit) for income taxes (2.9) 0.4 0.6 0.3
----------- --------- ----------- ---------
Net income (loss) (0.3)% (80.8)% 2.7% (30.5)%
=========== ========= =========== =========
15
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THE THREE MONTHS ENDED MARCH
31, 2003
Product Sales. Total product sales were $18.2 million for the three months
ended March 31, 2004, an increase of $5.5 million, or 43.9%, from $12.7 million
for the same period of the prior year. The increase in product sales resulted
primarily from the increase in VOD product sales of $5.6 million, or 73.6%, to
$13.2 million in the three month period ended March 31, 2004 from $7.6 million
for the same period of the prior year. The increase in VOD product sales for the
three months ended March 31, 2004 was due to an increase in volume of VOD server
sales due to both new VOD deployments and add-on stream and storage sales to the
existing customer base, as compared to the prior year period. Fluctuation in VOD
revenue is also often due to the fact that Concurrent has a small base of large
customers making periodic large purchases that account for a significant
percentage of quarterly revenue. The increase in volume of servers sold was
partially offset by a change in product mix and an overall reduction of product
price. Sales of real-time products were unchanged at $5.0 million for the three
month periods ended March 31, 2004 and 2003.
Service Revenue. Service revenue increased $0.4 million, or 8.2%, to $5.4
million for the three month period ended March 31, 2004, from $5.0 million for
the same period of the prior year. VOD service revenue increased $0.8 million,
or 90.6%, to $1.6 million in the three month period ended March 31, 2004 from
$0.8 million for the same period of the prior year, as the VOD division
continues 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 partially offset by a $0.4 million, or 8.1%, decrease in real-time service
revenue to $3.8 million for the three month period ended March 31, 2004 from
$4.2 million for the same period of the prior year. Real-time service revenue
continues to decline primarily due to the cancellation of maintenance contracts
as machines were removed from service and from customers purchasing our new
products that produce significantly less service revenue.
Product Gross Margin. Product gross margin increased $2.2 million, or
33.4%, to $8.6 million for the three months ended March 31, 2004 from $6.4
million for the same period of the prior year. The product gross margin as a
percentage of product sales decreased to 47.1% in the three month period ended
March 31, 2004 from 50.8% in the three month period ended March 31, 2003. VOD
product gross margin decreased to 41.6% of VOD product revenue in the three
month period ended March 31, 2004 from 43.5% of VOD product revenue in the same
period of the prior year due to less than optimal product configurations,
continued declines in average price per video stream, and product mix.
Real-time product gross margin remained at $3.1 million for each of the three
month periods ended March 31, 2004 and 2003, respectively, and decreased
slightly as a percentage of real-time product revenue to 61.5 % in the three
month period ended March 31, 2004 from 61.7% for the same period of the prior
year.
Service Gross Margin. The gross margin on service sales increased $0.8
million, or 53.9%, to $2.3 million, or 43.1% of service revenue for the three
month period ended March 31, 2004 from $1.5 million, or 30.3% of service revenue
for the same period of the prior year due to stronger VOD service margins. VOD
service margins increased to 36.4% of VOD service revenue compared to 8.2% in
the prior year period as the VOD division continues to build its VOD customer
base and the fixed costs associated with our customer support activities are
being spread over a larger revenue base. Although our VOD service gross margins
in the future will change quarter to quarter on a percentage basis, we do not
anticipate the percentage to fluctuate at the magnitude of the change in the
quarter ended March 31, 2004. Real-time service gross margin increased to 45.8%
of real-time service revenue for the three month period ended March 31, 2004
from 34.6% for the same period of the prior year. This increase is primarily
due to $0.1 million in severance paid in the prior year quarter and a reduction
in service personnel both during and following the prior year quarter, as the
ISD division scaled down the infrastructure that is necessary to fulfill
declining contractual obligations.
Sales and Marketing. Sales and marketing expenses decreased as a
percentage of sales to 18.0% for the three months ended March 31, 2004 from
24.3% for the same period of the prior year. These expenses
16
were $4.3 million during each of the three month periods ended March 31, 2004
and 2003. The ISD division's third quarter sales and marketing expenses
increased $0.2 million compared to the same period in the prior year primarily
due to an increase in bonus and commissions to international sales personnel.
The VOD division's sales and marketing expenses decreased $0.2 million primarily
due to a $0.1 million reduction of salaries and wages resulting from the
elimination of certain personnel costs both during and following the
restructuring in the fourth quarter of fiscal 2003. In addition, the VOD
division reduced trade show and other advertising costs during the three months
ended March 31, 2004 by $0.1 million compared to the same period of the prior
year.
Research and Development. Research and development expenses decreased as a
percentage of sales to 21.6% for the three months ended March 31, 2004 from
28.3% for the same period of the prior year. These expenses increased $0.1
million, or 2.0%, to $5.1 million during the three month period ended March 31,
2004 from $5.0 million during the same period of the prior year. The increase
in research and development expense is due to a $0.2 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
depreciation expense related to development and test equipment purchased by the
VOD division. These increasing expenses were partially offset by a $0.2 million
decrease in the VOD division's external software development and consulting
expenses, as compared to the same period of the prior year.
General and Administrative. General and administrative expenses decreased
as a percentage of sales to 11.2% for the three months ended March 31, 2004 from
13.5% for the same period of the prior year. These expenses increased $0.3
million, or 11.5%, to $2.7 million during the three months ended March 31, 2004
compared to $2.4 million in same period of the prior year due to a $0.4 million
increase in legal fees incurred as part of the successful defense of a lawsuit
brought by SeaChange International alleging defamation. This expense was
partially offset by $0.1 million decrease in incentive compensation in the three
months ended March 31, 2004 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 to a third party and placed into
liquidation. During the quarter ended March 31, 2004 Concurrent received an
additional $0.3 million in cash from continued monetization of Thirdspace assets
and settlement of its liabilities. Subsequent to March 31, 2004, Concurrent
received an additional $56,000, which is expected to be the final cash proceeds
related to the liquidation of Thirdspace's remaining assets, and one of the
final assets to be distributed as part of this 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 March 31, 2004 Condensed Consolidated Balance Sheets.
Provision (Benefit) for Income Taxes. An income tax benefit of $700,000
was recorded during the three months ended March 31, 2004. During the quarter,
the provision for United States federal income taxes previously recorded during
the first two quarters of the fiscal year was reversed due to an anticipated
loss for tax purposes in fiscal 2004 and foreign income and withholding taxes of
$64,000 was recorded during the quarter, resulting in a net benefit of $700,000
during the three months ended March 31, 2004. An income tax provision of
$72,000 was recorded during the three months ended March 31, 2003 based on
pre-tax net loss of $14.2 million. The tax provision for the three months ended
March 31, 2003 was attributable to foreign withholding taxes and income earned
in foreign locations, which cannot be offset by net operating loss
carryforwards.
Net Income (Loss). A net loss of $0.1 million or $0.00 per basic and
diluted share for the three months ended March 31, 2004 was recorded. A net
loss of $14.3 million or $0.23 per basic and diluted share for the three months
ended March 31, 2003 was recorded.
17
THE NINE MONTHS ENDED MARCH 31, 2004 COMPARED TO THE NINE MONTHS ENDED MARCH 31,
2003
Product Sales. Total product sales were $48.9 million for the nine months
ended March 31, 2004, an increase of $4.9 million, or 11.3%, from $44.0 million
for the same period of the prior year. The increase in product sales resulted
from the increase in VOD product sales of $5.0 million, or 17.3%, to $34.0
million in the nine month period ended March 31, 2004 from $29.0 million for
same period of the prior year. The increase in VOD product sales for the nine
months ended March 31, 2004 was due to an increase in volume of VOD server sales
due to both new VOD deployments and add-on stream and storage sales to the
existing customer base , as compared to the prior year period. The increase in
VOD product sales was also due to software sales of our newly released Real-Time
Media content ingestion product as compared to the prior year period. The
increase in volume of these VOD products sold was partially offset by change in
product mix, continued declines in the average price per video stream sold, and
an additional $0.2 million reduction of revenue resulting from additional
warrants earned by Comcast, as compared to the same period of the prior year.
Fluctuation in VOD revenue is often due to the fact that Concurrent has a small
base of large customers making periodic large purchases that account for a
significant percentage of revenue. Sales of real-time products were unchanged
at $15.0 million for the nine month periods ended March 31, 2004 and 2003.
Service Revenue. Service revenue increased $0.2 million, or 1.6%, to $16.2
million for the nine month period ended March 31, 2004, from $16.0 million for
the same period of the prior year. VOD service revenue increased $1.6 million,
or 60.3%, to $4.2 million in the nine month period ended March 31, 2004 from
$2.6 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 partially offset by a $1.3 million, or 10.0%, decrease in real-time service
revenue to $12.0 million for the nine month period ended March 31, 2004 from
$13.3 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 produce significantly less service revenue.
Product Gross Margin. Product gross margin increased $2.7 million, or
11.4%, to $26.2 million for the nine months ended March 31, 2004 from $23.5
million for the same period of the prior year. The product gross margin as a
percentage of sales was consistent with prior year's nine month product gross
margin, increasing to 53.5% in the nine month period ended March 31, 2004 from
53.4% in the nine month period ended March 31, 2003. VOD product gross margin
increased to 50.3% of VOD product revenue in the nine month period ended March
31, 2004 from 50.0% of VOD product revenue in the same period of the prior year.
The increase in VOD product gross margin is due to the $1.3 million reversal
from cost of sales of previously recognized SAI warrant expense in the nine
months ended March 31, 2004 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 changes in product mix and
continued declines in average price per video stream sold. Further offsetting
the favorable margin impact of VOD product cost reductions was approximately
$0.2 million of additional revenue reduction from the warrant accrual for
Comcast, as compared to the prior year period, due to an increase in the
Black-Scholes value of the warrants and increased sales to Comcast during the
nine months ended March 31, 2004. Real-time product gross margin increased to
60.6% of real-time product revenue in the nine month period ended March 31, 2004
from 60.1% of real-time product revenue for the same period of the prior year
due to a more favorable product mix, as compared to the same period of the prior
fiscal year.
Service Gross Margin. The gross margin on service sales increased $1.2
million, or 20.3%, to $7.1 million, or 43.9% of service revenue for the nine
month period ended March 31, 2004 from $5.9 million, or 37.0% of service revenue
for the same period of the prior year. VOD service margins increased to 38.1%
VOD service revenue compared to 15.9% in the prior year period as the VOD
division continues to build its VOD customer base and the fixed costs associated
with our customer support activities are being spread
18
over a larger revenue base. Although our VOD service gross margins in the future
will change quarter to quarter on a percentage basis, we do not anticipate the
percentage to fluctuate at the magnitude of the change in the nine months ended
March 31, 2004Real-time service gross margin increased to 45.9% of real-time
service revenue for the nine months ended March 31, 2004 from 41.2% for the same
period of the prior year due to reduced costs from the restructuring initiatives
implemented in the fourth quarter of fiscal 2003 and due to severance expense
paid in the third quarter of the prior year resulting from a reduction in
service personnel, as the ISD division scaled down the infrastructure that is
necessary to fulfill declining contractual obligations.
Sales and Marketing. Sales and marketing expenses decreased as a
percentage of sales to 19.6% for the nine months ended March 31, 2004 from 22.4%
for the same period of the prior year. These expenses decreased $0.7 million,
or 5.1%, to $12.8 million during the nine month period ended March 31, 2004 from
$13.5 million in the same period of the prior year. The ISD division's sales
and marketing expenses increased $0.2 million compared to the same period in the
prior year due to an increase in bonus and commission accruals to international
sales personnel. The VOD division's sales and marketing expenses decreased $0.8
million primarily due to $0.6 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 nine months ended March 31, 2004 by
$0.3 million compared to the same period of the prior year.
Research and Development. Research and development expenses decreased as a
percentage of sales to 22.3% for the nine months ended March 31, 2004 from 23.4%
for the same period of the prior year. These expenses increased $0.5 million, or
3.2%, to $14.5 million during the nine month period ended March 31, 2004 from
$14.0 million during the same period of the prior year. The $0.5 million
increase in research and development expense is due to a $0.3 million and $0.6
million increase in ISD and VOD salaries and related costs, respectively, as the
VOD and ISD divisions added new development staff since the same period of the
prior year. In addition the VOD division incurred an additional $0.3 million in
fixed asset depreciation expense, partially offset by a $0.8 million decrease in
external VOD software development and consulting expenses, compared to the same
period of the prior year.
General and Administrative. General and administrative expenses decreased
as a percentage of sales to 10.7% for the nine months ended March 31, 2004 from
11.6% for the same period of the prior year. These expenses remained at $7.0
million during each of the nine month periods ended March 31, 2004 and 2003.
Decreases in the bad debt reserve of $0.6 million and insurance expense of $0.1
million were offset by a $0.4 million increase in legal fees resulting from
successful defense of a lawsuit brought by SeaChange International alleging
defamation, and a $0.3 million increase in accounting and Sarbanes-Oxley
consulting fees and accounting salaries and benefits in the nine months ended
March 31, 2004, 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 an 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 to a third
party and placed into liquidation resulting in a recovery for Concurrent of $0.5
million prior to July 1, 2003. During the nine months ended March 31, 2004
Concurrent received an additional $3.0 million in cash from continued
monetization of the Thirdspace assets and settlement of its liabilities.
Subsequent to March 31, 2004, Concurrent received an additional $56,000, which
is expected to be the final cash proceeds related to the liquidation of
Thirdspace's remaining assets, and one of the final assets to be distributed as
part of this 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 March 31, 2004 Condensed
Consolidated Balance Sheets.
Provision (Benefit) for Income Taxes. Income tax expense of $0.4 million
was recorded for the nine month period ended March 31, 2004 based on pre-tax
income of $2.1 million, which includes $3.0
19
million of non-taxable income from the partial recovery of the previously
recognized impairment loss on the Thirdspace investment. Concurrent recorded
income tax expense of $0.2 million during the nine months ended March 31, 2003
based on pre-tax net loss of $18.2 million. The expense in both periods was
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 nine months ended March 31, 2004. A net loss
of $18.3 million or $0.30 per basic and diluted share was recorded for the nine
months ended March 31, 2003.
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:
- revenue growth from VOD systems and the pace at which cable companies
implement VOD technology;
- the actual versus anticipated decline in sales of real-time
proprietary systems and service maintenance revenue;
- revenues from real-time systems;
- 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 $5.3 million from operating activities during the nine
months ended March 31, 2004 compared to providing cash of $6.6 million during
the same period of the prior year. The decrease in cash from operations was
primarily due to changes in working capital, and particularly an increase in
accounts receivable, partially offset by improved operating results. Concurrent
has accumulated $11.8 million in cash from operations over the last eight
quarters; however, until Concurrent's VOD revenue increases and stabilizes, it
is likely that the Company will continue to use cash from operating activities.
We invested $3.5 million in property, plant and equipment during the nine
months ended March 31, 2004 compared to $4.5 million during the nine months
ended March 31, 2003. Capital additions during the first nine months of fiscal
2004 related primarily to product development and testing equipment and
demonstration equipment for our VOD division. Concurrent received an additional
$3.0 million from the continued liquidation of Thirdspace during the nine month
period ended March 31, 2004.
We received $1.2 million and $0.5 million from the issuance of common stock
to employees and directors who exercised stock options during the nine months
ended March 31, 2004 and 2003, respectively.
At March 31, 2004, we had working capital of $35.6 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 $4.8 million from $7.6 million at June 30, 2003
to $12.4 million at March 31, 2004. This increase is primarily due to the
growing base of cable customers with maintenance programs where the fees are
billed and collected in advance of the revenue recognition.
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 $15.3 million at March 31, 2004. 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 $1.1 million in fiscal 2004,
of which approximately $0.8 million was recognized in the nine months ended
March 31, 2004. 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. There have been no material changes to our
contractual obligations during the quarter ended March 31, 2004.
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 or other reliability issues in our products;
- 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;
- delays in testing and introductions of new products;
21
- reliance on a limited number of suppliers and the quality of products
supplied;
- 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;
- decisions by our customers to move to a competitor's platform at an
already deployed site;
- the pricing and availability of equipment, materials and inventories;
- the volatile operating history of our VOD segment;
- demand shifts from high-priced, proprietary real-time systems to
low-priced, open server systems;
- contractual obligations that could require the payment of liquidated
damages, heighten maintenance requirements and otherwise 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;
- increased turnover of skilled employees;
- 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 March 31, 2004, the end of the quarter to which this report
relates. This evaluation was carried out under the supervision and with the
22
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 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. The actual trial began January 26, 2004 and
concluded on March 2, 2004 with a jury verdict finding no defamation
by Concurrent or SeaChange.
- 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 appealed, and the appellate court ruled in
Concurrent's favor on February 20, 2004.
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.
23
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 Registrant's 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 Registrant's 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).
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 January 29, 2004, relating to
results of operations and financial condition as of and for the
quarter ended December 31, 2003.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this quarterly report for the quarter ended March 31,
2004, to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 10, 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)
25
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
Registrant's 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 Registrant's 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).
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
26