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, 2004
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 or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4375 River Green Parkway, Suite 100, Duluth, GA 30096
(Address of principal executive offices) (Zip Code)
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 31, 2005 was 63,801,357.
CONCURRENT COMPUTER CORPORATION
FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2004
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 2
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 26
ITEM 4. CONTROLS AND PROCEDURES 26
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 26
ITEM 6. EXHIBITS 27
EX-10.1 LOAN AND SECURITY AGREEMENT
EX-10.2 SCHEDULE OF OFFICERS ENTERING FORM INDEMNIFICATION
EX-10.3 EMPLOYMENT AGREEMENT - GREG WILSON
EX-10.4 PROTECTIVE AGREEMENT - GREG WILSON
EX-10.5 EMPLOYMENT AGREEMENT - JOHN WELCH
EX-10.6 PROTECTIVE AGREEMENT - JOHN WELCH
EX-10.7 EMPLOYMENT AGREEMENT - GARY BRUST
EX-10.8 PROTECTIVE AGREEMENT - GARY BRUST
EX-31.1 SECTION 302 CERTIFICATION OF CEO
EX-31.2 SECTION 302 CERTIFIACTION OF CFO
EX-32.1 SECTION 906 CERTIFICATION OF CEO
EX-32.1 SECTION 906 CERTIFICATION OF CFO
1
PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED 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,
2004 2003 2004 2003
-------- -------- -------- --------
Revenues:
Product
ISD systems $ 6,162 $ 5,597 $11,695 $ 9,991
VOD systems 8,559 11,568 14,613 20,715
-------- -------- -------- --------
Total product revenues 14,721 17,165 26,308 30,706
Service
ISD systems 3,347 4,018 6,621 8,164
VOD systems 1,956 1,443 4,425 2,658
-------- -------- -------- --------
Total service revenues 5,303 5,461 11,046 10,822
-------- -------- -------- --------
Total revenues 20,024 22,626 37,354 41,528
Cost of sales:
Product
ISD systems 2,527 2,628 4,984 3,984
VOD systems 4,353 5,484 8,563 9,141
-------- -------- -------- --------
Total product cost of sales 6,880 8,112 13,547 13,125
Service
ISD systems 2,060 2,233 4,063 4,417
VOD systems 1,188 862 2,709 1,617
-------- -------- -------- --------
Total service cost of sales 3,248 3,095 6,772 6,034
-------- -------- -------- --------
Total cost of sales 10,128 11,207 20,319 19,159
-------- -------- -------- --------
Gross margin 9,896 11,419 17,035 22,369
Operating expenses:
Sales and marketing 4,087 4,429 8,564 8,509
Research and development 4,672 4,705 9,852 9,373
General and administrative 2,275 2,175 4,781 4,344
-------- -------- -------- --------
Total operating expenses 11,034 11,309 23,197 22,226
-------- -------- -------- --------
Operating income (loss) (1,138) 110 (6,162) 143
Recovery (impairment loss) of minority investment (313) 1,698 (313) 2,758
Interest income - net 82 78 174 138
Other expense (66) (20) (101) (154)
-------- -------- -------- --------
Income (loss) before income taxes (1,435) 1,866 (6,402) 2,885
Provision for income taxes 12 653 66 1,060
-------- -------- -------- --------
Net income (loss) $(1,447) $ 1,213 $(6,468) $ 1,825
======== ======== ======== ========
Net income (loss) per share
Basic $ (0.02) $ 0.02 $ (0.10) $ 0.03
======== ======== ======== ========
Diluted $ (0.02) $ 0.02 $ (0.10) $ 0.03
======== ======== ======== ========
Weighted average shares outstanding - basic 62,747 62,308 62,714 62,197
======== ======== ======== ========
Weighted average shares outstanding - diluted 62,747 63,461 62,714 63,251
======== ======== ======== ========
The accompanying notes are an integral part of the condensed consolidated financial statements.
2
CONCURRENT COMPUTER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS)
DECEMBER 31, JUNE 30,
2004 2004
-------------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 23,921 $ 27,928
Accounts receivable, less allowance for doubtful
accounts of $200 at December 31, 2004 and June 30, 2004 11,940 10,192
Inventories - net 4,562 9,617
Deferred tax asset - net 580 517
Prepaid expenses and other current assets 1,714 861
-------------- ----------
Total current assets 42,717 49,115
Property, plant and equipment - net 9,871 11,569
Purchased developed computer software - net 918 1,013
Goodwill 10,744 10,744
Investment in minority owned company 140 553
Other long-term assets - net 1,408 1,548
-------------- ----------
Total assets $ 65,798 $ 74,542
============== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 9,970 $ 12,069
Notes payable to bank, current portion 930 -
Deferred revenue 6,567 10,668
-------------- ----------
Total current liabilities 17,467 22,737
Long-term liabilities:
Deferred revenue 3,670 4,117
Deferred tax liability 313 278
Pension liability 1,603 1,372
Notes payable to bank, less current portion 2,070 -
Other 288 312
-------------- ----------
Total liabilities 25,411 28,816
Stockholders' equity:
Common stock 638 628
Capital in excess of par value 176,376 174,338
Accumulated deficit (135,194) (128,712)
Treasury stock - (42)
Unearned compensation (2,224) (351)
Accumulated other comprehensive income (loss) 791 (135)
-------------- ----------
Total stockholders' equity 40,387 45,726
-------------- ----------
Total liabilities and stockholders' equity $ 65,798 $ 74,542
============== ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
CONCURRENT COMPUTER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
DECEMBER 31,
2004 2003
---------- ----------
OPERATING ACTIVITIES
Net income (loss) $ (6,468) $ 1,825
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Reduction in accrual of non-cash warrants, net - (891)
Depreciation and amortization 2,819 2,618
Provision for inventory reserves 12 670
Reversal of provision for bad debts - (600)
Non-cash income tax provision - 728
Impairment (recovery) of minority investments 313 (2,758)
Other non cash expenses 89 34
Changes in operating assets and liabilities:
Accounts receivable (1,748) (9,020)
Inventories 5,043 (1,551)
Prepaid expenses and other current assets (782)) (608)
Other long-term assets 240 (97)
Accounts payable and accrued expenses (2,099) (798)
Deferred revenue (4,548) 4,442
Pension liability 231 1,131
Other long-term liabilities 25 42
---------- ----------
Total adjustments to net income (loss) (405) (6,658)
---------- ----------
Net cash used in operating activities (6,873) (4,833)
INVESTING ACTIVITIES
Net additions to property, plant and equipment (887) (2,053)
Repayment of note receivable from minority owned company - 2,758
---------- ----------
Net cash provided by (used in) investing activities (887) 705
FINANCING ACTIVITIES
Proceeds from notes payable to bank, net of issuance expenses 2,930 -
Repayment of capital lease obligation (49) (45)
Proceeds from sale of treasury stock 28 -
Proceeds from sale and issuance of common stock 57 1,134
---------- ----------
Net cash provided by financing activities 2,966 1,089
Effect of exchange rates on cash and cash equivalents 787 (162)
---------- ----------
Decrease in cash and cash equivalents (4,007) (3,201)
Cash and cash equivalents at beginning of period 27,928 30,697
---------- ----------
Cash and cash equivalents at end of period $ 23,921 $ 27,496
========== ==========
Cash paid during the period for:
Interest $ 2 $ 6
========== ==========
Income taxes (net of refunds) $ 212 $ 191
========== ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
CONCURRENT COMPUTER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. OVERVIEW OF BUSINESS AND BASIS OF PRESENTATION
Concurrent Computer Corporation ("Concurrent") is a leading supplier of
high-performance computer systems, software, and services and operates in two
divisions, the Video-On-Demand ("VOD") division, located in Duluth, Georgia, and
the Integrated Solutions Division ("ISD"), located in Pompano Beach, Florida.
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 Integrated Solutions Division provides high-performance,
real-time computer systems to commercial and government customers for use in
applications such as simulation and data acquisition.
Concurrent provides sales and support from offices and subsidiaries
throughout North America, Europe, Asia, and Australia.
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, 2004. There have been no changes to
Concurrent's Significant Accounting Policies as disclosed in the Annual Report
on Form 10-K for the year ended June 30, 2004, except as noted under
"Application of Critical Accounting Policies" in Item 2, "Management's
Discussion and Analysis of Financial Condition and Results of Operations". 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.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Concentration of Credit Risk
Concurrent assesses credit risk through ongoing credit evaluations of
customers' financial condition and collateral is generally not required. As of
both December 31, 2004 and June 30, 2004, there were two customers that each
accounted for more than 10% of trade receivables. At December 31, 2004, one
customer accounted for $1,870,000, or 16% of trade receivables and the other
accounted for $1,560,000, or 13% of trade receivables. At June 30, 2004, one
customer accounted for $2,715,000 or 26% of trade receivables and the other
accounted for $1,089,000 or 10% of trade receivables.
Recently Issued Accounting Pronouncements
In March 2004, the Emerging Issues Task Force (EITF) ratified its consensus
related to the application guidance within EITF Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments."
EITF Issue No. 03-1 applies to investments in debt and equity securities within
the scope of SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," and equity securities that are not subject to the scope of
SFAS No. 115 and not accounted for under the equity method under Accounting
Principles Board Opinion 18, "The Equity Method of Accounting for Investments in
Common Stock" and related interpretations. In September 2004, the Financial
Accounting Standards Board ("FASB") issued FASB Staff Position EITF 03-1-1,
which delayed the effective date of paragraphs 10-20 of EITF Issue No. 03-1.
Paragraphs 10-20 of EITF Issue No. 03-1 give guidance on how to evaluate and
recognize impairment loss that is "other than temporary." EITF Issue No. 03-1
requires that a three-step model be applied in determining when an investment
5
is considered impaired, whether that impairment is other than temporary and the
measurement of an impairment loss. The required recognition and measurement
guidance within EITF Issue No. 03-1 has been applied by Concurrent to
other-than-temporary impairment evaluations beginning July 1, 2004. See Note 6
for discussion on the impact of adoption of EITF Issue No. 03-1 on Concurrent's
financial position and results of operations.
In November 2004, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 151, "Inventory Costs - an Amendment of ARB No. 43,
Chapter 4 ("SFAS 151"). SFAS 151 amends ARB 43, Chapter 4, to clarify that
abnormal amounts of idle facility expense, freight, handling costs, and wasted
materials (spoilage) should be recognized as current period expenses. In
addition, SFAS 151 requires that allocation of fixed production overhead to the
costs of conversion be based upon the normal capacity of the production
facilities. The provisions of SFAS 151 are effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. The adoption of
this Statement is not expected to have a material impact on Concurrent's
financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share Based
Payment" ("SFAS 123(R)"). SFAS 123(R) applies to all share-based payment
transactions in which an entity acquires goods and services by issuing its
shares, share options, or other equity instruments or by incurring liabilities
to an employee or other supplier (a) in amounts based, at least in part, on the
price of the entity's shares or other equity instruments or (b) that require
settlement by the issuing entity's equity shares or other equity instruments.
SFAS 123(R) requires that the cost resulting from all share-based payment
transactions be recognized in the financial statements and requires all entities
to apply a fair-value-based measurement method in accounting for share-based
payment transactions with employees. SFAS 123(R) will be effective for any
interim or annual period beginning after June 15, 2005. Concurrent is
evaluating the impact SFAS 123(R) will have on its fiscal 2006 interim and
annual financial statements, beginning with the first quarter of fiscal 2006.
2. BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed in accordance with SFAS No.
128, "Earnings Per Share," 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. Diluted earnings per
common share assumes exercise of outstanding stock options and vesting of time
and performance based restricted stock when the effects of such assumptions are
dilutive. Common share equivalents of 6,790,000 and 5,235,000 for the three
month periods ended December 31, 2004 and 2003, respectively, were excluded from
the calculation as their effect was antidilutive. Common share equivalents of
6,843,000 and 5,406,000 for the six month periods ended December 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:
(DOLLARS AND SHARE DATA IN THOUSANDS, THREE MONTHS ENDED SIX MONTHS ENDED
EXCEPT PER SHARE AMOUNTS) DECEMBER 31, DECEMBER 31,
2004 2003 2004 2003
----------- ---------- --------- ----------
Basic and diluted earnings per share (EPS) calcuation:
Net income (loss) $ (1,447) $ 1,213 $ (6,468) $ 1,825
=========== ========== ========= ==========
Basic weighted average number of shares outstanding 62,747 62,308 62,714 62,197
Effect of dilutive securities:
Shares issued upon assumed exercise of stock options - 894 - 795
Shares issued upon assumed vesting of restricted stock - 259 - 259
----------- ---------- --------- ----------
Diluted weighted average number of shares outstanding 62,747 63,461 62,714 63,251
=========== ========== ========= ==========
Basic EPS $ (0.02) $ 0.02 $ (0.10) $ 0.03
=========== ========== ========= ==========
Diluted EPS $ (0.02) $ 0.02 $ (0.10) $ 0.03
=========== ========== ========= ==========
6
3. STOCK-BASED COMPENSATION
At December 31, 2004, Concurrent had stock-based employee compensation
plans which are described in Note 14 to the annual report on Form 10-K for the
year ended June 30, 2004. Concurrent 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, 2004, Concurrent recognized
$102,000 and $118,000, respectively, of stock compensation expense for the
issuance of restricted stock awards. 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 expense for stock options in the reported net income (loss) for the
three and six month periods ended December 31, 2004 and 2003. Concurrent issued
1,041,000 shares of restricted stock during the quarter and recorded $2,311,000
of unearned compensation as a contra-equity account, which will be amortized
over the vesting period. A portion of the restricted stock vests over time and
a portion vests based upon performance criteria. Because a portion of this
restricted stock plan is performance based, that portion must be accounted for
using variable accounting, requiring interim estimates of compensation expense.
Interim measures of compensation expense are based on a combination of the
fair-value of the stock as of the end of the reporting period and an assessment
of whether the performance criteria will ultimately be met.
In accordance with 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 Concurrent had applied the fair value recognition provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based employee
compensation:
(DOLLARS IN THOUSANDS, EXCEPT PER THREE MONTHS ENDED SIX MONTHS ENDED
SHARE AMOUNTS) DECEMBER 31, DECEMBER 31,
2004 2003 2004 2003
----------- ----------- --------- -----------
Net income (loss) as reported $ (1,447) $ 1,213 $ (6,468) $ 1,825
Deduct: Total stock-based employee compensation
expense determined under the fair value method,
net of related taxes (829) (1,088) (1,830) (2,126)
----------- ----------- --------- -----------
Pro forma net income (loss) $ (2,276) $ 125 $ (8,298) $ (301)
=========== =========== ========= ===========
Net income (loss) per share:
Basic-as reported $ (0.02) $ 0.02 $ (0.10) $ 0.03
=========== =========== ========= ===========
Basic-pro forma $ (0.04) $ - $ (0.13) $ -
=========== =========== ========= ===========
Diluted-as reported $ (0.02) $ 0.02 $ (0.10) $ 0.03
=========== =========== ========= ===========
Diluted-pro forma $ (0.04) $ - $ (0.13) $ -
=========== =========== ========= ===========
The weighted-average assumptions used for the three months ended December
31, 2004, and 2003 were: expected dividend yield of 0.0% for both periods;
risk-free interest rate of 3.8% and 3.5%, respectively; expected life of 6 years
for both periods; and an expected volatility of 95.9% and 111.0%, respectively.
The weighted-average assumptions used for the six months ended December 31,
2004, and 2003 were: expected dividend yield of 0.0% for both periods; risk-free
interest rate of 3.7% and 3.3%, respectively; expected life of 6 years for both
periods; and an expected volatility of 100.3% and 111.5%, respectively.
7
Because additional option grants are expected to be made in the future and
options vest over several periods, the above pro forma disclosures are not
representative of pro forma effects on reported net income (loss) for future
periods.
4. REVENUE RECOGNITION AND RELATED MATTERS
VOD and ISD system revenues are recognized based on the guidance in
American Institute of Certified Public Accountants Statement of Position ("SOP")
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 ISD 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 element
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.
5. INVENTORIES
Inventories are stated at the lower of cost or market, with cost being
determined by using the first-in, first-out method. Concurrent establishes
excess and obsolete inventory reserves based upon historical and anticipated
usage. The components of inventories are as follows (dollars in thousands):
DECEMBER 31, JUNE 30,
2004 2004
------------- ---------
Raw materials, net $ 2,948 $ 7,361
Work-in-process 1,117 1,229
Finished goods 497 1,027
------------- ---------
$ 4,562 $ 9,617
============= =========
At December 31, 2004 and June 30, 2004, some portion of Concurrent's
inventory was in excess of the current requirements based upon the planned level
of sales for future years. Accordingly, Concurrent had inventory valuation
allowances for raw materials of $2.1 million and $3.0 million which would reduce
the value of the inventory to its estimated net realizable value at December 31,
2004 and June 30, 2004, respectively.
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"). Concurrent invested $4.0 million in
cash and the equivalent of $3.0 million in its common stock in exchange for
1,220,601 series C shares of Thirdspace. In addition to the equity investment,
Concurrent also loaned Thirdspace $6.0 million in exchange for two $3 million
long-term notes receivable. In fiscal year 2003, Concurrent recorded a $13.0
million net impairment charge due to an "other-than-temporary" decline in the
market value of the investment in 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 proceeds in fiscal 2004 that were recorded
as a reduction to the impairment loss in the line item "Recovery (impairment
loss) of minority investment."
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 certain assets of
Thirdspace. During the remainder of fiscal 2004, Concurrent received an
additional $300,000 in proceeds as a result of the sale of the majority of
Thirdspace's remaining assets. In the quarter ended December 31, 2004,
Concurrent recognized an additional $100,000 related to distributions from this
sale. Thirdspace's only significant remaining asset after the sale is a right to
40% of amounts recovered by nCube Corporation, now part of C-Cor, Incorporated
("nCube"), if any, from the lawsuit brought by nCube against SeaChange
International, Inc., alleging patent infringement. The likelihood of collecting
this asset, and the amount and timing of such collection, is uncertain and as a
result Concurrent has not
8
recorded the gain contingency. Pursuant to the sale of the assets of Thirdspace
to Alcatel, Concurrent believes that it has the right to the first approximately
$3.0 million of such recovery, if any. Beyond any such recovery, Concurrent
does not anticipate further cash proceeds related to the liquidation of
Thirdspace's remaining assets.
In April 2002, Concurrent invested cash of $553,000 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. During the quarter ended December 31, 2004, Concurrent became aware
of circumstances that provide evidence of an "other than temporary" impairment
of Concurrent's investment in Everstream, in accordance with EITF 03-01. Based
upon an evaluation of the investment in Everstream during this period,
Concurrent recorded an impairment charge of $413,000 in the Statement of
Operations, under the line item, "Recovery (impairment loss) of minority
investment", and reduced its "Investment in minority owned company" to $140,000.
Should there be evidence of further impairment in the future, Concurrent will
record additional impairment charges related to this investment.
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The components of accounts payable and accrued expenses are as follows (in
thousands):
DECEMBER 31, JUNE 30,
2004 2004
------------- ---------
Accounts payable, trade $ 2,610 $ 3,487
Accrued payroll, vacation, severance
and other employee expenses 4,149 5,420
Warranty accrual 921 1,122
Other accrued expenses 2,290 2,040
------------- ---------
$ 9,970 $ 12,069
============= =========
Concurrent's estimate of warranty obligations is based on historical
experience and expectation of future conditions. The changes in the warranty
accrual during the six months ended December 31, 2004 were as follows (in
thousands):
Balance at June 30, 2004 $1,122
Charged to costs and expenses 266
Deductions (467)
-------
Balance at December 31, 2004 $ 921
=======
8. COMPREHENSIVE INCOME
Concurrent's total comprehensive income (loss) is as follows (in
thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2004 2003 2004 2003
---------- ------------ --------- ----------
Net income (loss) $ (1,447) $ 1,213 $ (6,468) $ 1,825
Other comprehensive income:
Foreign currency translation
income (loss) 750 (71) 926 14
---------- ------------ --------- ----------
Total comprehensive income (loss) $ (697) $ 1,142 $ (5,542) $ 1,839
=========== =========== ========= ==========
9
9. SEGMENT INFORMATION
Concurrent operates its business in two divisions: ISD and VOD, in
accordance with SFAS 131, "Disclosure about Segments of an Enterprise and
Related Information." Concurrent's Integrated Solutions 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 digital video server 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, Accounting and other
administrative costs including annual audit and tax fees, board of director fees
and similar costs.
10
The following summarizes the operating income (loss) by segment for the
three month periods ended December 31, 2004 and December 31, 2003, respectively
(dollars in thousands):
THREE MONTHS ENDED DECEMBER 31, 2004 (UNAUDITED)
-----------------------------------------------------------
INTEGRATED
SOLUTIONS VOD CORPORATE TOTAL
------------- ----------- -------------- ---------------
Revenues:
Product $ 6,162 $ 8,559 $ - $ 14,721
Service 3,347 1,956 - 5,303
------------- ----------- -------------- ---------------
Total 9,509 10,515 - 20,024
Cost of sales:
Product 2,527 4,353 - 6,880
Service 2,060 1,188 - 3,248
------------- ----------- -------------- ---------------
Total 4,587 5,541 - 10,128
------------- ----------- -------------- ---------------
Gross margin 4,922 4,974 - 9,896
Operating expenses:
Sales and marketing 1,765 2,208 114 4,087
Research and development 1,320 3,352 - 4,672
General and administrative 472 440 1,363 2,275
------------- ----------- -------------- ---------------
Total operating expenses 3,557 6,000 1,477 11,034
------------- ----------- -------------- ---------------
Operating income (loss) $ 1,365 $ (1,026) $ (1,477) $ (1,138)
============= =========== ============== ===============
THREE MONTHS ENDED DECEMBER 31, 2003 (UNAUDITED)
-----------------------------------------------------------
INTEGRATED
SOLUTIONS 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
============= =========== ============== ===============
11
The following summarizes the operating income (loss) by segment for the six
month periods ended December 31, 2004 and December 31, 2003, respectively
(dollars in thousands):
SIX MONTHS ENDED DECEMBER 31, 2004 (UNAUDITED)
----------------------------------------------
INTEGRATED
SOLUTIONS VOD CORPORATE TOTAL
----------- -------- ----------- --------
Revenues:
Product $ 11,695 $14,613 $ - $26,308
Service 6,621 4,425 - 11,046
----------- -------- ----------- --------
Total 18,316 19,038 - 37,354
Cost of sales:
Product 4,984 8,563 - 13,547
Service 4,063 2,709 - 6,772
----------- -------- ----------- --------
Total 9,047 11,272 - 20,319
----------- -------- ----------- --------
-
Gross margin 9,269 7,766 - 17,035
Operating expenses:
Sales and marketing 3,700 4,637 227 8,564
Research and development 2,895 6,957 - 9,852
General and administrative 836 839 3,106 4,781
----------- -------- ----------- --------
Total operating expenses 7,431 12,433 3,333 23,197
----------- -------- ----------- --------
Operating income (loss) $ 1,838 $(4,667) $ (3,333) $(6,162)
=========== ======== =========== ========
SIX MONTHS ENDED DECEMBER 31, 2004 (UNAUDITED)
----------------------------------------------
INTEGRATED
SOLUTIONS 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
=========== ======== =========== ========
12
The following summarizes the revenues by geographic locations for the three
and six month periods ended December 31, 2004 and December 31, 2003,
respectively (dollars in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2004 2003 2004 2003
---------- ---------- -------- ----------
United States $ 14,650 $ 18,713 $ 28,137 $ 34,740
Japan 2,090 1,113 3,025 1,658
Other Asia Pacific countries 911 784 1,659 1,634
---------- ---------- -------- ----------
Asia Pacific 3,001 1,897 4,684 3,292
---------- ---------- -------- ----------
Europe 2,237 1,888 4,274 2,999
Other foreign countries 136 128 259 497
---------- ---------- -------- ----------
$ 20,024 $ 22,626 $ 37,354 $ 41,528
========== ========== ======== ==========
10. ISSUANCE AND ACCRUAL OF NON-CASH WARRANTS
Comcast Cable Communications Inc. Warrants
On March 29, 2001, Concurrent entered into a definitive purchase agreement
with Comcast Cable, providing for the purchase of VOD equipment. As part of
that agreement Concurrent agreed to issue warrants to purchase shares of its
common stock based upon the volume of purchases of Concurrent's products.
Through March 31, 2004, the expiration date of the agreement, Comcast
earned a total of 268,543 warrants, which have all been issued and expire at
various dates through June 4, 2008. These warrants are exercisable over a four
year term and have exercise prices between $2.62 and $15.02. All of these
warrants were outstanding as of December 31, 2004.
Concurrent recognized the value of the warrants over the term of the
agreement as Comcast purchased additional VOD servers from Concurrent and made
the service available to its customers. As this agreement expired during fiscal
2004, Concurrent did not recognize any increase in, or reduction to, revenue
during the three and six month periods ended December 31, 2004. For the three
and six month periods ended December 31, 2003, Concurrent recognized $80,000 and
$431,000, respectively, as a reduction in revenue for the warrants that were
earned during those respective periods.
As of December 31, 2003, Concurrent determined the value of the warrants
using the Black-Scholes valuation model. The weighted-average assumptions used
for the three months ended December 31, 2003 were: expected dividend yield of
0.0%; risk-free interest rate of 2.8%; expected life of 4 years; and an expected
volatility of 111.0%.
The exercise prices of the warrants are subject to adjustment for stock
splits, combinations, stock dividends, mergers, and other similar
recapitalization events. The exercise prices are 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. The exercise prices of
the warrants issued to Comcast equaled 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. As the agreement with
Comcast expired on March 31, 2004, Concurrent is no longer obligated to issue
any additional warrants to Comcast. The warrants issued to Comcast did not
exceed 1% of Concurrent's outstanding shares of common stock.
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. 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
13
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, 2004. These warrants
expire on April 1, 2006.
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 warrants under the agreement regarding the second $30 million threshold,
and accordingly, reversed $1.3 million of expense in the six months ended
December 31, 2003, which had been previously accrued in anticipation of reaching
the next $30 million threshold. This reversal was recorded in VOD product cost
of sales.
11. TERM LOAN AND REVOLVING CREDIT FACILITY
On December 23, 2004, Concurrent executed a Loan and Security Agreement
("Credit Agreement") with Silicon Valley Bank ("SVB"). The Credit Agreement
provides for a two year maximum of $10,000,000 revolving credit line
("Revolver") and a three year $3,000,000 term loan ("Term Loan") and is secured
by substantially all of the assets of Concurrent. Based on the borrowing formula
and Concurrent's financial position as of December 31, 2004, $4.7 million would
have been available to Concurrent under the Revolver. The Revolver expires on
December 23, 2006, unless terminated earlier in accordance with its terms, and
the Term Loan expires on December 23, 2007, unless terminated earlier in
accordance with its terms. As of December 31, 2004, Concurrent had no amounts
drawn under the Revolver and had drawn down the entire $3,000,000 under the Term
Loan.
DECEMBER 31, JUNE 30,
2004 2004
------------------------
Notes payable to bank $ 3,000 $ -
------------- ---------
Less current portion 930 -
------------- ---------
Long-term notes payable to bank $ 2,070 $ -
============= =========
Interest on all outstanding amounts under the Revolver is payable monthly
at the prime rate (5.25% at December 31, 2004) plus 3.25% per annum, and
interest on all outstanding amounts under the Term Loan is payable monthly at a
rate of 8.0% per annum. The Term Loan is repayable in 36 equal monthly principal
and interest installments of $94,000 and the outstanding principal of the
Revolver is due on December 23, 2006, unless the Revolver is terminated earlier
in accordance with its terms.
In addition, the Credit Agreement contains certain financial covenants,
including required financial ratios and a minimum tangible net worth, and
customary restrictive covenants concerning Concurrent's operations. Concurrent
was in compliance with these covenants at December 31, 2004.
14
12. RETIREMENT PLANS
The following table provides a detail of the components of net periodic
benefit cost for the three and six months ended December 31, 2004 and 2003 (in
thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2004 2003 2004 2003
------------ ---------- --------- -----------
Service cost $ 7 $ 88 $ 13 $ 176
Interest cost 55 278 104 556
Expected return on plan assets (23) (191) (44) (384)
Amortization of unrecognized net transition obligation 8 (16) 16 (32)
Amortization of unrecognized prior service benefit - 6 - 12
Recognized actuarial loss 1 94 2 188
------------ ---------- --------- -----------
Net periodic benefit cost $ 48 $ 259 $ 91 $ 516
============ ========== ========= ===========
Concurrent contributed $20,000 and $36,000 to its defined benefit plan
during the three and six months ended December 31, 2004, respectively, and
expects to make similar contributions during the remaining periods of fiscal
2005. Concurrent contributed $147,000 and $277,000 to its defined benefit plans
during the three and six months ended December 31, 2003, respectively.
Concurrent maintains a retirement savings plan, available to U.S.
employees, which qualifies as a defined contribution plan under Section 401(k)
of the Internal Revenue Code. During the three months ended December 31, 2004
and 2003, Concurrent contributed $243,000 and $255,000 to this plan,
respectively. During the six months ended December 31, 2004 and 2003, Concurrent
contributed $514,000 and $497,000 to this plan, respectively.
Concurrent also maintains a defined contribution plan ("Stakeholder Plan")
for its U.K. based employees. Concurrent has agreements with certain of its U.K.
based employees to make supplementary contributions to the Stakeholder Plan over
the next five years, contingent upon their continued employment with Concurrent.
During the three months ended December 31, 2004 and 2003, Concurrent contributed
$125,000 and $5,000 to the Stakeholder Plan, respectively. During the six months
ended December 31, 2004 and 2003, Concurrent contributed $258,000 and $9,000 to
this plan, respectively.
13. COMMITMENTS AND 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 its results of operations or financial
condition.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with the Condensed
Consolidated Financial Statements and the related Notes thereto which appear
elsewhere herein. Except for the historical financial information, many of the
matters discussed in this Item 2 may be considered "forward-looking" statements
that reflect our plans, estimates and beliefs. Actual results could differ
materially from those discussed in the forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in the "Cautionary Note to Forward-Looking Statements,"
elsewhere herein and in other filings made with the Securities and Exchange
Commission.
OVERVIEW
During the six months ended December 31, 2004, we used approximately $6.9
million in cash and cash equivalents from operations, and ended the quarter with
$23.9 million in cash and cash equivalents, after borrowing $3.0 million in the
form of a term loan. The increased net cash usage during the six months ended
December 31, 2004 compared to the six months ended December 31, 2003 is the
result of the increased net loss and the recognition of revenue during the
period on shipments for which the cash was received in the prior fiscal year.
In an attempt to reduce the cash used in operating activities and reduce our
breakeven point, we undertook actions during this fiscal year to reduce
operating expenses that included the termination of approximately 12% of our
workforce and employing greater discipline in our capital expenditures. For the
three month period ended December 31, 2004, we generated $1.8 million of
positive cash flow from operations due to increased revenues and the benefits of
the actions undertaken in the quarter ended September 30, 2004. See further
discussions in the "Liquidity and Capital Resources" section of this document.
Also, during the six month period ended December 31, 2004, we have begun
the process of enabling Concurrent to operate more effectively as a united
company by consolidating the ISD and VOD operating divisions. Over the next few
months, the divisional structure will be consolidated under a functional
organization with ISD and VOD product lines.
Other trends in our business are detailed in our latest Form 10-K filed
September 7, 2004.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The SEC defines "critical accounting policies" as those that require
application of management's most difficult, subjective or complex judgments,
often as a result of the need to make estimates about the effect of matters that
are inherently uncertain and may change in subsequent periods.
For a complete description of our critical accounting policies, please
refer to the "Application of Critical Accounting Policies" in our most recent
Form 10-K, filed on September 7, 2004. The following details an update to the
critical accounting policies since the filing of our most recent Form 10-K.
Stock-Based Compensation Costs
We have stock-based employee compensation plans and account for these plans
using Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees", and related interpretations. During the quarter ended December
31, 2004, we issued restricted stock awards, a portion of which are part of a
multi-year restricted stock performance plan. Because a portion of this
restricted stock plan is performance based, that portion must be accounted for
using variable accounting, requiring interim estimates of compensation. Interim
measures of compensation are based on a combination of the fair-value of the
stock as of the end of the reporting period and an assessment of whether the
performance criteria will ultimately be met. To the extent that the fair value
of our stock fluctuates and our assessments of achieving the performance
criteria change, cost of sales and operating expenses may be positively or
negatively impacted.
16
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,
2004 2003 2004 2003
---------- ---------- -------- ----------
Revenues:
Product
ISD systems 30.8% 24.8% 31.3 % 24.0 %
VOD systems 42.7 51.1 39.1 49.9
---------- ---------- -------- ----------
Total product revenues 73.5 75.9 70.4 73.9
Service
ISD systems 16.7 17.7 17.8 19.7
VOD systems 9.8 6.4 11.8 6.4
---------- ---------- -------- ----------
Total service revenues 26.5 24.1 29.6 26.1
---------- ---------- -------- ----------
Total revenues 100.0 100.0 100.0 100.0
Cost of sales (% of respective sales category):
Product
ISD systems 41.0 47.0 42.6 39.9
VOD systems 50.9 47.4 58.6 44.1
---------- ---------- -------- ----------
Total product cost of sales 46.7 47.3 51.5 42.7
Service
ISD systems 61.5 55.6 61.4 54.1
VOD systems 60.7 59.7 61.2 60.8
---------- ---------- -------- ----------
Total service cost of sales 61.2 56.7 61.3 55.8
---------- ---------- -------- ----------
Total cost of sales 50.6 49.5 54.4 46.1
---------- ---------- -------- ----------
Gross margin 49.4 50.5 45.6 53.9
Operating expenses:
Sales and marketing 20.4 19.6 22.9 20.5
Research and development 23.3 20.8 26.4 22.6
General and administrative 11.3 9.6 12.8 10.5
---------- ---------- -------- ----------
Total operating expenses 55.0 50.0 62.1 53.6
---------- ---------- -------- ----------
Operating income (loss) (5.6) 0.5 (16.5) 0.3
Recovery (impairment loss) of minority investment (1.6) 7.5 (0.8) 6.7
Interest income - net 0.4 0.3 0.5 0.3
Other expense - net (0.3) (0.1) (0.3) (0.4)
---------- ---------- -------- ----------
Income (loss) before income taxes (7.1) 8.2 (17.1) 6.9
Provision for income taxes 0.1 2.8 0.2 2.5
---------- ---------- -------- ----------
Net income (loss) (7.2)% 5.4% (17.3)% 4.4%
========== ========== ======== ==========
17
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED DECEMBER 31, 2004 COMPARED TO THE THREE MONTHS ENDED
DECEMBER 31, 2003
Three Months ended
December 31,
-----------------------
(Dollars in Thousands) 2004 2003 $ Change % Change
---------- ------------ -------- ---------
Product revenues $ 14,721 $ 17,165 $(2,444) -14.2%
Service revenues 5,303 5,461 (158) -2.9%
---------- ------------ -------- ---------
Total revenues 20,024 22,626 (2,602) -11.5%
Product cost of sales 6,880 8,112 (1,232) -15.2%
Service cost of sales 3,248 3,095 153 4.9%
---------- ------------ -------- ---------
Total cost of sales 10,128 11,207 (1,079) -9.6%
---------- ------------ -------- ---------
Product gross margin 7,841 9,053 (1,212) -13.4%
Service gross margin 2,055 2,366 (311) -13.1%
---------- ------------ -------- ---------
Total gross margin 9,896 11,419 (1,523) -13.3%
Operating expenses:
Sales and marketing 4,087 4,429 (342) -7.7%
Research and development 4,672 4,705 (33) -0.7%
General and administrative 2,275 2,175 100 4.6%
---------- ------------ -------- ---------
Total operating expenses 11,034 11,309 (275) -2.4%
---------- ------------ -------- ---------
Operating income (loss) (1,138) 110 (1,248) NM
Recovery (loss) of minority investment (313) 1,698 (2,011) NM
Interest income - net 82 78 4 5.1%
Other expense (66) (20) (46) NM
---------- ------------ -------- ---------
Income (loss) before income taxes (1,435) 1,866 (3,301) NM
Provision for income taxes 12 653 (641) -98.2%
---------- ------------ -------- ---------
Net income (loss) $ (1,447) $ 1,213 (2,660) NM
========== ============ ======== =========
(1) NM denotes percentage is not meaningful
Product Sales. Total product sales for the three months ended December 31,
2004 were $14.7 million, a decrease of approximately $2.5 million, or 14.2%,
from $17.2 million for the three months ended December 31, 2003. The decrease
in product sales resulted from the $3.0 million, or 26.0%, decrease in VOD
product sales to $8.6 million in the quarter ended December 31, 2004 from $11.6
million in the quarter ended December 31, 2003. The decrease in VOD product
sales was due to fewer product sales in the North American market during the
quarter ended December 31, 2004, as compared to the same period of the prior
year. This reduction in North American domestic VOD product revenue was
partially offset by an increase in international sales volume during the quarter
ended December 31, 2004 that resulted in a $2.0 million increase in VOD product
revenue in Asia and Europe, compared to the second quarter of the prior fiscal
year. Fluctuation in VOD revenue is often due to the fact that we have a small
base of large customers making periodic large purchases that account for a
significant percentage of revenue. Although we have lost market share with
certain customers over the past year, we believe that we will be able to
maintain or increase our share of the North American cable market and also
capture a meaningful share of the video-over-DSL market in both the United
States and internationally in part through our partnership with Alcatel. We
also anticipate that the erosion of the price per stream that has occurred over
the past 5 years will not exceed the declining cost of goods sold.
Partially offsetting the decrease in VOD product sales, ISD product sales
increased approximately $0.6 million, or 10.1%, to $6.2 million in the quarter
ended December 31, 2004 from $5.6 million in the quarter ended
18
December 31, 2003. The increase in ISD product sales is primarily due to an
increase in revenue from domestic customers. Over the past year, our Integrated
Solutions Division has integrated software applications from strategic
partnerships that we believe will enable it to expand beyond its traditional
customer base. Based on this initiative, we expect to maintain market share in
our traditional ISD markets and expect to capture market share in new markets
needing ISD solutions.
Service Revenue. Service revenue decreased $0.2 million, or 2.9%, to $5.3
million for the three months ended December 31, 2004 from $5.5 million for the
three months ended December 31, 2003. VOD service revenue increased
approximately $0.6 million, or 35.6%, to $2.0 million in the quarter ended
December 31, 2004 from $1.4 million in the quarter ended December 31, 2003, as
the VOD division continues to recognize maintenance, installation, and training
revenue on our expanding base of VOD market deployments. As the warranty and
maintenance agreements that typically accompany the initial sale and
installation of our VOD systems expire, we expect to sell new, long-term service
and support agreements. Because of these anticipated new agreements, our
expanding deployment base and the increasing software component of our total VOD
solution, we expect sales of these VOD services to continue to increase.
The increase in VOD service revenue was partially offset by approximately a
$0.7 million, or 16.7%, decrease in ISD service revenue to $3.3 million in the
quarter ended December 31, 2004 from $4.0 million in the quarter ended December
31, 2003. ISD service revenue continued to decline primarily due to the
cancellation of maintenance contracts as legacy machines were removed from
service and, to a lesser extent, from customers purchasing our new products that
produce significantly less service revenue. We expect this trend of declining
ISD service revenue to continue into the foreseeable future.
Product Gross Margin. Product gross margin was $7.8 million for the three
months ended December 31, 2004, a decrease of approximately $1.2 million, or
13.4%, from $9.1 million for the three months ended December 31, 2003. This
decrease was due to fewer product shipments during the current quarter. Product
gross margin as a percentage of product sales increased to 53.3% in the quarter
ended December 31, 2004 from 52.7% in the quarter ended December 31, 2003
primarily because the ISD division's product gross margin increased to 59.0%
from 53.0% of ISD product revenue for the same respective periods. The increase
in ISD product gross margin is due to a more favorable product mix, as compared
to the same period of the prior fiscal year. The gross margin on sales of VOD
product decreased to 49.1% of VOD product revenue in the quarter ended December
31, 2004 from 52.6% of VOD product revenue in the quarter ended December 31,
2003, primarily due to $0.2 million of additional warranty reserves in the
current quarter resulting from faulty parts provided to us by a third party. VOD
product margins also declined due to product mix, compared to the prior year
quarter.
Service Gross Margin. The gross margin on service sales decreased $0.3
million, or 13.1%, to $2.1 million, or 38.8% of service revenue in the three
months ended December 31, 2004 from $2.4 million, or 43.3% of service revenue in
the three months ended December 31, 2003. The decrease in overall service
margins is due to the decrease in ISD service margins to 38.5% of ISD service
revenues in the quarter ended December 31, 2004 from 44.4% of service revenues
during the quarter ended December 31, 2003. Declining ISD margins are primarily
due to declining service revenues from contractual maintenance obligations and
due to an increase in severance expense during the quarter. Severance expense
of $0.1 million recorded in the quarter ended December 31, 2004 resulted from a
reduction in service personnel as ISD scaled down the infrastructure necessary
to fulfill declining contractual obligations. The decline in contractual
obligations results from the cancellation of maintenance contracts as legacy
machines are removed from service and replaced with machines that are simpler to
maintain. We will continue to scale down the ISD service infrastructure in
response to this trend of declining ISD contractual service obligations.
The gross margin on sales of VOD service remained relatively stable,
decreasing slightly to 39.3% of VOD service revenue in the quarter ended
December 31, 2004 from 40.3% of VOD service revenue in the quarter ended
December 31, 2003. Although our VOD service revenue continues to increase, our
VOD customer service and support costs have also increased 37.8% over the prior
year, as required to provide the necessary services.
Sales and Marketing. Sales and marketing expenses increased as a percentage
of sales to 20.4% in the three months ended December 31, 2004 from 19.6% in the
three months ended December 31, 2003. These expenses decreased $0.3 million, or
7.7%, to $4.1 million during the three months ended December 31, 2004 from $4.4
million in the same period of the prior year, primarily due to lower salaries,
wages, benefits and
19
incentive compensation resulting from the company-wide reduction in force and
cost savings initiative during the current fiscal year.
Research and Development. Research and development expenses increased as a
percentage of sales to 23.3% in the three months ended December 31, 2004 from
20.8% in the three months ended December 31, 2003. These expenses remained flat
at $4.7 million in the second quarters of both fiscal years 2005 and 2004. The
VOD division incurred an additional $0.1 million from development subcontractors
to meet the increasing software development requirements for customers' business
management functionality, resource management and client system monitoring as a
result of increases in both our customer base and deployment base. In addition
to the increase in subcontractor costs, the VOD division incurred an additional
$0.1 million in fixed asset depreciation expense related to purchases of product
development and testing equipment, compared to the same period of the prior
year. These additional costs to the VOD division were offset by lower incentive
compensation and product certification costs during the quarter ended December
31, 2004, compared to the same period of the prior year. We expect that VOD
software development costs will continue to stabilize and flatten over the next
few years, as we reduce our number of software platforms and improve the
stability of our software in the field.
General and Administrative. General and administrative expenses increased
as a percentage of sales to 11.4% in the three months ended December 31, 2004
from 9.6% in the three months ended December 31, 2003. These expenses increased
$0.1 million, or 4.6%, to $2.3 million in the three months ended December 31,
2004 from $2.2 million in same period of the prior year. This increase in
general and administrative expense is primarily due to a prior year $0.3 million
VOD bad debt expense reversal that did not recur in the current quarter.
Partially offsetting the effects of this non-recurring prior year bad debt
reversal, we reduced administrative salaries, benefits, and incentive
compensation by $0.2 million in the current quarter as a result of the
company-wide reduction in force and cost savings initiative in the current
fiscal year.
Recovery (Impairment Loss) of Minority Investment. During the quarter
ended December 31, 2004, we became aware of circumstances that provide evidence
of an other than temporary impairment of our investment in Everstream. Based
upon an evaluation of the investment in Everstream during this period, we
recorded an impairment charge of $413,000 in the Statement of Operations, and
reduced our "Investment in minority owned company" to $140,000. Should there be
evidence of further impairment in the future, we will record additional
impairment charges related to this investment.
During the second quarter of the prior fiscal year, we received $1.7
million in cash from continued monetization of the Thirdspace assets and
settlement of its liabilities for which we recorded a gain in the Statement of
Operations. An additional $0.1 million recovery of Thirdspace assets was
recognized in the quarter ended December 31, 2004, partially offsetting the
$413,000 Everstream impairment charge.
Provision for Income Taxes. We recorded income tax expense for our domestic
and foreign subsidiaries of $12,000 in the quarter ended December 31, 2004,
which is related primarily to foreign withholding taxes and income earned in
foreign locations, which cannot be offset by net operating loss carryforwards.
For the quarter ended December 31, 2003, we recorded income tax expense for our
domestic and foreign subsidiaries of $653,000. This expense was primarily
attributable to U.S. federal income tax that was 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.
Net Income (Loss). The net loss for the three months ended December 31,
2004 was $1.4 million or $0.02 per basic and diluted share compared to net
income for the three months ended December 31, 2003 of $1.2 million or $0.02 per
basic and diluted share.
20
THE SIX MONTHS ENDED DECEMBER 31, 2004 COMPARED TO THE SIX MONTHS ENDED DECEMBER
31, 2003
SIX MONTHS ENDED
DECEMBER 31,
----------------------
(DOLLARS IN THOUSANDS) 2004 2003 $ CHANGE % CHANGE
--------- ----------- -------- ---------
Product revenues $ 26,308 $ 30,706 $(4,398) -14.3%
Service revenues 11,046 10,822 224 2.1%
--------- ----------- -------- ---------
Total revenues 37,354 41,528 (4,174) -10.1%
Product cost of sales 13,547 13,125 422 3.2%
Service cost of sales 6,772 6,034 738 12.2%
--------- ----------- -------- ---------
Total cost of sales 20,319 19,159 1,160 6.1%
--------- ----------- -------- ---------
Product gross margin 12,761 17,581 (4,820) -27.4%
Service gross margin 4,274 4,788 (514) -10.7%
--------- ----------- -------- ---------
Total gross margin 17,035 22,369 (5,334) -23.8%
Operating expenses:
Sales and marketing 8,564 8,509 55 0.6%
Research and development 9,852 9,373 479 5.1%
General and administrative 4,781 4,344 437 10.1%
--------- ----------- -------- ---------
Total operating expenses 23,197 22,226 971 4.4%
--------- ----------- -------- ---------
Operating income (loss) (6,162) 143 (6,305) NM
Recovery (loss) of minority investment (313) 2,758 (3,071) NM
Interest income - net 174 138 36 26.1%
Other expense (101) (154) 53 NM
--------- ----------- -------- ---------
Income (loss) before income taxes (6,402) 2,885 (9,287) NM
Provision for income taxes 66 1,060 (994) -93.8%
--------- ----------- -------- ---------
Net income (loss) $ (6,468) $ 1,825 $(8,293) NM
========= =========== ======== =========
Product Sales. Total product sales for the six months ended December 31,
2004 were $26.3 million, a decrease of approximately $4.4 million, or 14.3%,
from $30.7 million for the six months ended December 31, 2003. The decrease in
product sales resulted from a $6.1 million, or 29.5%, decrease in VOD product
sales to $14.6 million during the six months ended December 31, 2004 from $20.7
million during the six months ended December 31, 2003. The decrease in VOD
product sales was due to fewer products sold in the North American market during
the six months ended December 31, 2004, as compared to the same period of the
prior year. This reduction in domestic VOD product revenue was partially offset
by an increase in international sales volume during the six months ended
December 31, 2004 that resulted in a $2.7 million increase in VOD product
revenue in Asia and Europe, compared to the six months ended December 31, 2003.
Fluctuation in VOD revenue is often due to the fact that we have a small base of
large customers making periodic large purchases that account for a significant
percentage of revenue. Although we have lost market share with certain customers
over the past year, we believe that we will be able to maintain or increase our
share of the North American cable market and also capture a meaningful share of
the video-over-DSL market in both the United States and internationally in part
through our partnership with Alcatel. We also anticipate that the erosion of the
price per stream that has occurred over the past 5 years will not be as
significant going forward.
Partially offsetting the decrease in VOD product sales, ISD product sales
increased approximately $1.7 million, or 17.1%, to $11.7 million during the six
months ended December 31, 2004 from $10.0 million during the same period of the
prior year. The increase in ISD product sales is due to an increase in revenue
from both domestic and international customers. Over the past year, our
Integrated Solutions Division has integrated software applications from
strategic partnerships that we believe will enable it to expand beyond its
traditional
21
customer base. Based on this initiative, we expect to maintain market share in
our traditional ISD markets and expect to capture market share in new markets
needing ISD solutions.
Service Revenue. Service revenue increased $0.2 million, or 2.1%, to $11.0
million for the six months ended December 31, 2004 from $10.8 million for the
six months ended December 31, 2003. VOD service revenue increased approximately
$1.7 million, or 66.5%, to $4.4 million during the six months ended December 31,
2004 from $2.7 million in the same period of the prior fiscal year, as the VOD
division continues to recognize maintenance, installation, and training revenue
on our expanding base of VOD market deployments. As the warranty and maintenance
agreements that typically accompany the initial sale and installation of our VOD
systems expire, we expect to sell new, long-term service and support agreements.
Because of these anticipated new agreements, our expanding deployment base and
increasing software component of our total VOD solution, we expect sales of
these VOD services to continue to increase.
The increase in VOD service revenue was partially offset by approximately a
$1.6 million, or 18.9%, decrease in ISD service revenue to $6.6 million during
the six months ended December 31, 2004 from $8.2 million in the same period of
the prior fiscal year. ISD service revenue continued to decline primarily due
to the cancellation of maintenance contracts as legacy machines were removed
from service and, to a lesser extent, from customers purchasing our new products
that produce significantly less service revenue. We expect this trend of
declining ISD service revenue to continue into the foreseeable future.
Product Gross Margin. Product gross margin was $12.8 million for the six
months ended December 31, 2004, a decrease of $4.8 million, or 27.4%, from $17.6
million for the six months ended December 31, 2003. Product gross margin as a
percentage of product sales decreased to 48.5% in the six months ended December
31, 2004 from 57.3% in the six months ended December 31, 2003, primarily because
the VOD division's product gross margin decreased to 41.4% from 55.9% of VOD
product revenue for the same respective periods. The decrease in VOD product
gross margin is due to an incentive discount provided to one of our North
American cable customers who upgraded its older VOD systems to our fourth
generation architecture and changes in product mix. In addition, prior year VOD
margins were favorably affected by approximately 9.0% due to the Scientific
Atlanta, Inc. warrant expense reversal of $1.3 million.
The gross margin on sales of ISD product decreased to 57.4% of ISD product
revenue in the six months ended December 31, 2004 from 60.1% of ISD product
revenue in the six months ended December 31, 2003 due to a less favorable
product mix, as compared to the same period of the prior fiscal year.
Service Gross Margin. The gross margin on service sales decreased $0.5
million, or 10.7%, to $4.3 million, or 38.7% of service revenue in the six
months ended December 31, 2004 from $4.8 million, or 44.2% of service revenue in
the six months ended December 31, 2003. The decrease in overall service margins
is due to the decrease in ISD service margins to 38.6% of ISD service revenues
in the six months ended December 31, 2004 from 45.9% of service revenues during
the same period of the prior fiscal year. Declining ISD margins are primarily
due to declining service revenues from contractual maintenance obligations and
an increase in severance expense during the period. Severance expense of $0.2
million recorded in the six months ended December 31, 2004 resulted from a
reduction in service personnel as ISD scaled down the infrastructure necessary
to fulfill declining contractual obligations. The decline in contractual
obligations results from the cancellation of maintenance contracts as legacy
machines are removed from service and replaced with machines that are simpler to
maintain. We will continue to scale down our service infrastructure in response
to this trend of declining ISD contractual service obligations.
VOD service margins remained flat at approximately 39.0% of VOD service
revenues for both the six months ended December 31, 2004 and 2003. Although our
VOD service revenue continues to increase, our VOD customer service and support
costs have also increased 67.5% compared to the prior year six month period, as
required to provide the necessary services.
Sales and Marketing. Sales and marketing expenses increased as a percentage
of sales to 22.9% in the six months ended December 31, 2004 from 20.5% in the
six months ended December 31, 2003. These expenses increased $0.1 million, or
0.6%, to $8.6 million during the six months ended December 31, 2004 from $8.5
million in the same period of the prior year, primarily due to an additional
$0.3 million of commissions resulting from sales growth by both divisions in
Europe and Asia. In addition, we incurred $0.2 million of domestic and
international severance expense related to a reduction in force initiative
during the current fiscal year. The
22
increase in severance and international commission expense were partially offset
by a company-wide $0.3 million decrease in salaries, wages and benefits and $0.1
million decrease in travel, both due to the reduction in force and cost savings
initiative in the current fiscal year.
Research and Development. Research and development expenses increased as a
percentage of sales to 26.4% in the six months ended December 31, 2004 from
22.6% in the six months ended December 31, 2003. These expenses increased $0.5
million, or 5.1%, to $9.9 million during the six months ended December 31, 2004
from $9.4 million in the same period of the prior fiscal year. The increase in
research and development expense is due to a $0.4 million increase in VOD
salaries and related costs resulting from new software development staff over
the past year. The VOD division added development staff and subcontractors to
meet the increasing software development requirements for customers' business
management functionality, resource management and client system monitoring as a
result of increases in both our customer base and deployment base. In addition
to the increase in personnel costs, the VOD division incurred an additional $0.2
million in fixed asset depreciation expense related to purchases of product
development and testing equipment, compared to the same period of the prior
year. We expect that VOD software development costs will begin to stabilize and
flatten over the next few years, as we reduce our number of software platforms
and as we stabilize our software in the field.
General and Administrative. General and administrative expenses increased
as a percentage of sales to 12.8% in the six months ended December 31, 2004 from
10.5% in the six months ended December 31, 2003. These expenses increased $0.4
million, or 10.1%, to $4.8 million during the six months ended December 31, 2004
from $4.3 million in same period of the prior fiscal year. This increase in
general and administrative expense is due to prior year VOD bad debt reserve
reversals of $0.6 million that did not recur in the current fiscal year.
Partially offsetting the effects of this prior year bad debt reversal, we
reduced administrative salaries, benefits, and incentive compensation by $0.2
million in the current quarter as a result of the company-wide reduction in
force and cost savings initiative in the current fiscal year.
Recovery (Impairment Loss) of Minority Investment. During the six months
ended December 31, 2004, we became aware of circumstances that provide evidence
of an other than temporary impairment of our investment in Everstream. Based
upon an evaluation of the investment in Everstream during this period, we
recorded an impairment charge of $413,000 and reduced our "Investment in
minority owned company" to $140,000. Should there be evidence of further
impairment in the future, we will record additional impairment charges related
to this investment.
During the six months ended December 31, 2003 we received $2.8 million in
cash from continued monetization of the Thirdspace assets and settlement of its
liabilities for which we recorded a gain in the Statement of Operations. An
additional $0.1 million recovery of Thirdspace assets was recognized in the six
months ended December 31, 2004, partially offsetting the $413,000 Everstream
impairment charge.
Provision for Income Taxes. We recorded income tax expense for our
domestic and foreign subsidiaries of $66,000 during the six months ended
December 31, 2004, which is related primarily to foreign withholding taxes and
income earned in foreign locations, which cannot be offset by net operating loss
carryforwards. For the same period of the prior fiscal year, we recorded income
tax expense for our domestic and foreign subsidiaries of $1,060,000. This
expense was primarily attributable to U.S. federal income tax that was 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.
Net Income (Loss). The net loss for the six months ended December 31, 2004
was $6.5 million or $0.10 per basic and diluted share compared to net income for
the six months ended December 31, 2003 of $1.8 million or $0.03 per basic and
diluted share.
23
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 rate of growth, if any, of new VOD market deployments and the pace
at which domestic and international cable companies and telephone
companies implement VOD technology;
- the rate of growth, if any, of expansions of previously deployed VOD
systems;
- the actual versus anticipated decline in revenue from maintenance of
ISD proprietary systems;
- revenues from ISD systems;
- ongoing cost control actions and expenses, including for example,
research and development and capital expenditures;
- the margins on our VOD and ISD businesses;
- our ability to raise additional capital, if necessary;
- our ability to obtain additional bank financing, if necessary;
- our ability to meet the covenants contained in our Credit Agreement;
- 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; and
- 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.
We used $6.9 million of cash from operating activities during the six
months ended December 31, 2004 compared to using $4.8 million of cash during the
same period of the prior year. The decrease in cash from operations was
primarily due to changes in working capital and operating losses during the
current year.
We invested $0.9 million in property, plant and equipment during the six
months ended December 31, 2004 compared to $2.1 million during the six months
ended December 31, 2003. Capital additions during each of these periods related
primarily to product development and testing equipment, demonstration equipment
and equipment loans to our customers for our VOD division. We expect a similar
mix of capital additions during the remainder of this fiscal year.
In the prior fiscal year, we received $2.8 million from the continued
liquidation of Thirdspace during the six months ended December 31, 2003.
During the quarter ended December 31, 2004, we executed a Loan and Credit
Agreement with Silicon Valley Bank. The Credit Agreement provides for a two year
$10 million revolving credit line and a three year $3 million term loan. As of
December 31, 2004, we had no amounts drawn under the Revolver and had drawn down
the entire $3.0 million under the Term Loan.
Interest on all outstanding amounts under the Revolver is payable monthly
at the prime rate (5.25% at December 31, 2004) plus 3.25% per annum, and
interest on all outstanding amounts under the Term Loan is payable monthly at a
rate of 8.0% per annum. The Term Loan is repayable in 36 equal monthly principal
and interest installments of $94,000 and the outstanding principal of the
Revolver is due on December 23, 2006, unless the Revolver is terminated earlier
in accordance with its terms.
In addition, the Credit Agreement contains certain financial covenants,
including required financial ratios and a minimum tangible net worth, and
customary restrictive covenants concerning our operations. We were in
compliance with these covenants at December 31, 2004. The Credit Agreement is
attached as Exhibit 10.1.
24
As part of our cost reduction initiative implemented during the current
fiscal year, we anticipate reducing our breakeven point. If revenues do not
reach these breakeven levels or our cost reduction efforts are not as successful
as planned, then we will continue to use cash. Our working capital has declined
from $43.5 million at June 30, 2002 to $25.2 million at December 31, 2004, which
includes amounts drawn under our new Credit Agreement. If our VOD revenue does
not increase and stabilize in future periods, we will continue to use cash in
operating activities, which will cause working capital to further decline. If
this situation continues, we may need to raise additional funds through an
offering of stock or debt, in addition to our Credit Agreement with the bank.
We cannot be certain that we will be able to obtain additional financing on
favorable terms, if at all.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Our only significant contractual obligations and commitments relate to
repayment of a three year Term Loan that was funded during the quarter ended
December 31, 2004 and certain operating leases for sales, service and
manufacturing facilities in the United States, Europe and Asia. The future
payments required under our Term Loan and operating lease obligations, as of
December 31, 2004, are as follows:
PAYMENTS DUE BY FISCAL YEAR
-----------------------------------------------------
(DOLLARS IN THOUSANDS)
CONTRACTUAL OBLIGATIONS TOTAL 2005 2006-2007 2008-2009 THEREAFTER
- ---------------------------------------- ------- ------ ---------- ---------- ------------
Note payable to bank $ 3,000 $ 463 $ 1,988 $ 549 $ -
Interest payments - note payable to bank 373 99 261 13 -
Operating leases 9,141 1,351 4,585 2,474 731
------- ------ ---------- ---------- ------------
Total contractual obligations $12,514 $1,913 $ 6,834 $ 3,036 $ 731
======= ====== ========== ========== ============
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements made or incorporated by reference in this release may
constitute "forward-looking statements" within the meaning of the federal
securities laws. When used or incorporated by reference in this release, the
words "believes," "expects," "estimates," "anticipates," and similar
expressions, are intended to identify forward-looking statements. Statements
regarding future events and developments, our future performance, market share,
and new market growth, as well as our expectations, beliefs, plans, estimates,
or projections relating to the future, are forward-looking statements within the
meaning of these laws. Examples of our forward-looking statements in this
quarterly report include, but are not limited to, our pricing trends, our
expected cash position, our expectations of market share and growth, and our
international opportunities with Alcatel. 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: our ability to keep our customers satisfied; availability of
video-on-demand content; delays or cancellations of customer orders; changes in
product demand; economic conditions; various inventory risks due to changes in
market conditions; uncertainties relating to the development and ownership of
intellectual property; 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 concentration of our
customers; failure to effectively manage growth; delays in testing and
introductions of new products; rapid technology changes; system errors or
failures; reliance on a limited number of suppliers and failure of components
provided by those suppliers; uncertainties associated with international
business activities, including foreign regulations, trade controls, taxes, and
currency fluctuations; 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; the
success of new products in both the VOD and ISD divisions; financing for working
capital needs; the availability of Linux software in light of issues raised by
SCO Group; capital spending patterns by a limited customer base; and customer
obligations that could impact revenue recognition.
Other important risk factors are discussed in our Annual Report on Form
10-K for the fiscal year ended June 30, 2004.
25
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 DISCLOSURES 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 our investment income. We are also exposed to fluctuations in interest rates
as we seek debt to sustain our operations. At December 31, 2004, 100% of our
debt was in fixed-rate instruments, as our variable rate revolving credit
facility was unfunded. We consider the fair value of all financial instruments
not to be materially different from their carrying value at quarter end.
We conduct business in the United States and around the world. Our most
significant foreign currency transaction exposure relates 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 the end of the period covered by this report. 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 controls and procedures are effective.
There were no significant changes to our internal control 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.
Disclosure controls and procedures are our controls and other 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 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 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 are involved in various other legal proceedings.
We believe that any liability that may arise as a result of these proceedings
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 20, 2004.
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 (57,640,576 votes
for, 1,972,529 votes withheld), Charles Blackmon (57,677,760 votes
for, 1,935,345 votes withheld), Michael A. Brunner (56,915,020 votes
for, 2,698,085 votes withheld), C. Shelton James (57,483,412 votes
for, 2,129,693 votes withheld),
26
Steve G. Nussrallah (56,495,206 votes for, 3,117,899 votes withheld),
and T. Gary Trimm (57,612,216 votes for, 2,000,889 votes withheld).
- The selection by the Audit Committee of Deloitte & Touch LLP as
Concurrent's independent auditors for the fiscal year ending June 30,
2005 was ratified (59,169,863 votes for, 221,042 votes against,
222,200 votes abstained).
- The approval of an amendment to the Concurrent Computer Corporation
2001 Stock Option Plan to increase the number of shares authorized by
4,000,000 (20,572,488 votes for, 6,240,500 votes against, 611,063
votes abstained).
ITEM 6. 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 (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).
10.1**- Loan and Security Agreement.
10.2**- Schedule of Officers who have entered into the Form Indemnification Agreement
(Incorporated by reference to the Registrant's Quarterly report on Form 10-Q for the
quarter ended September 30, 2003).
10.3**- Employment Agreement dated as of February 1, 2005 between the Registrant and Greg Wilson.
10.4**- Protective Agreement dated as of February 1, 2005 between the Registrant and Greg Wilson.
10.5**- Employment Agreement dated as of February 4, 2005 between the Registrant and John Welch.
10.6**- Protective Agreement dated as of February 4, 2005 between the Registrant and John Welch.
10.7**- Employment Agreement dated as of February 4, 2005 between the Registrant and Gary Brust.
10.8**- Protective Agreement dated as of February 4, 2005 between the Registrant and Gary Brust.
11.1* - Statement Regarding Computation of Per Share Earnings.
31.1**- Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
31.2**- Certification of Chief Financial Officer, 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
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 4, 2005 CONCURRENT COMPUTER CORPORATION
By: /s/ Greg Wilson
---------------------
Greg Wilson
Chief Financial Officer
(Principal Financial and Accounting Officer)
28
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 (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.
10.1**- Loan and Security Agreement.
10.2**- Schedule of Officers who have entered into the Form Indemnification Agreement (Incorporated by
reference to the Registrant's Quarterly report on Form 10-Q for the quarter ended September 30, 2003).
10.3**- Employment Agreement dated as of February 1, 2005 between the Registrant and Greg Wilson.
10.4**- Protective Agreement dated as of February 1, 2005 between the Registrant and Greg Wilson.
10.5**- Employment Agreement dated as of February 4, 2005 between the Registrant and John Welch.
10.6**- Protective Agreement dated as of February 4, 2005 between the Registrant and John Welch.
10.7**- Employment Agreement dated as of February 4, 2005 between the Registrant and Gary Brust.
10.8**- Protective Agreement dated as of February 4, 2005 between the Registrant and Gary Brust.
31.1**- Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2**- Certification of Chief Financial Officer, 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.
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