UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2005
or
[_] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Transition Period from to
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Commission File No. 0-13150
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CONCURRENT COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2735766
(State 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 April 27, 2005 was 63,670,885.
CONCURRENT COMPUTER CORPORATION
FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2005
TABLE OF CONTENTS
Page
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Part I - Financial Information
------------------------------
Item 1. Condensed Consolidated Financial Statements 2
Condensed Consolidated Balance Sheets (Unaudited)
Condensed Consolidated Statements of Operations (Unaudited)
Condensed Consolidated Statements of Cash Flows (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Controls and Procedures 25
Part II - Other Information
---------------------------
Item 1. Legal Proceedings 26
Item 6. Exhibits 26
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-32.2 SECTION 906 CERTIFICATION OF CFO
1
PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONCURRENT COMPUTER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS)
MARCH 31, JUNE 30,
2005 2004
----------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 19,828 $ 27,928
Accounts receivable, less allowance for doubtful
accounts of $200 at March 31, 2005 and June 30, 2004 18,349 10,192
Inventories - net 6,694 9,617
Deferred tax asset - net 575 517
Prepaid expenses and other current assets 1,505 861
----------- ----------
Total current assets 46,951 49,115
Property, plant and equipment - net 8,968 11,569
Purchased developed computer software - net 871 1,013
Goodwill 10,744 10,744
Investment in minority owned company 140 553
Other long-term assets - net 1,426 1,548
----------- ----------
Total assets $ 69,100 $ 74,542
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 14,398 $ 12,069
Notes payable to bank, current portion 934 -
Deferred revenue 6,825 10,668
----------- ----------
Total current liabilities 22,157 22,737
Long-term liabilities:
Deferred revenue 2,987 4,117
Deferred tax liability 310 278
Pension liability 1,580 1,372
Notes payable to bank, less current portion 1,828 -
Other 284 312
----------- ----------
Total liabilities 29,146 28,816
Stockholders' equity:
Common stock 637 628
Capital in excess of par value 175,806 174,338
Accumulated deficit (135,371) (128,712)
Treasury stock - (42)
Unearned compensation (1,574) (351)
Accumulated other comprehensive income (loss) 456 (135)
----------- ----------
Total stockholders' equity 39,954 45,726
----------- ----------
Total liabilities and stockholders' equity $ 69,100 $ 74,542
=========== ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
2
CONCURRENT COMPUTER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Revenues:
Product $ 14,391 $ 18,214 $ 40,699 $ 48,920
Service 5,458 5,397 16,504 16,219
----------- ----------- ----------- -----------
Total revenues 19,849 23,611 57,203 65,139
Cost of sales:
Product 5,747 9,643 19,294 22,768
Service 3,132 3,072 9,904 9,106
----------- ----------- ----------- -----------
Total cost of sales 8,879 12,715 29,198 31,874
----------- ----------- ----------- -----------
Gross margin 10,970 10,896 28,005 33,265
Operating expenses:
Sales and marketing 4,333 4,259 12,897 12,768
Research and development 4,447 5,091 14,299 14,464
General and administrative 2,363 2,656 7,144 7,000
----------- ----------- ----------- -----------
Total operating expenses 11,143 12,006 34,340 34,232
----------- ----------- ----------- -----------
Operating loss (173) (1,110) (6,335) (967)
Recovery (impairment loss) of minority investment - 289 (313) 3,047
Interest income 109 97 297 241
Interest expense (75) (2) (89) (8)
Other expense (36) (37) (137) (191)
----------- ----------- ----------- -----------
Income (loss) before income taxes (175) (763) (6,577) 2,122
Provision (benefit) for income taxes 2 (700) 68 360
----------- ----------- ----------- -----------
Net income (loss) $ (177) $ (63) $ (6,645) $ 1,762
=========== =========== =========== ===========
Net income (loss) per share
Basic $ (0.00) $ (0.00) $ (0.11) $ 0.03
=========== =========== =========== ===========
Diluted $ (0.00) $ (0.00) $ (0.11) $ 0.03
=========== =========== =========== ===========
Weighted average shares outstanding - basic 62,758 62,565 62,728 62,318
=========== =========== =========== ===========
Weighted average shares outstanding - diluted 62,758 62,565 62,728 63,259
=========== =========== =========== ===========
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)
NINE MONTHS ENDED
MARCH 31,
2005 2004
----------- -----------
OPERATING ACTIVITIES
Net income (loss) $ (6,645) $ 1,762
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Reduction in accrual of non-cash warrants, net - (1,084)
Depreciation and amortization 4,055 3,986
Provision for inventory reserves 31 686
Reversal of provision for bad debts - (601)
Non-cash income tax provision - 99
Impairment (recovery) of minority investments 313 (3,047)
Other non cash expenses 194 59
Changes in operating assets and liabilities:
Accounts receivable (8,157) (10,506)
Inventories 2,892 (1,854)
Prepaid expenses and other current assets (574) (326)
Other long-term assets 222 (93)
Accounts payable and accrued expenses 2,329 (794)
Deferred revenue (4,973) 4,765
Pension liability 118 1,584
Other long-term liabilities 21 47
----------- -----------
Total adjustments to net income (loss) (3,529) (7,079)
----------- -----------
Net cash used in operating activities (10,174) (5,317)
INVESTING ACTIVITIES
Net additions to property, plant and equipment (1,247) (3,458)
Repayment of note receivable from minority owned company - 3,047
----------- -----------
Net cash used in investing activities (1,247) (411)
FINANCING ACTIVITIES
Proceeds from note payable to bank, net of issuance expenses 2,930 -
Repayment of note payable to bank (238) -
Repayment of capital lease obligation (49) (69)
Proceeds from sale of treasury stock 28 -
Proceeds from sale and issuance of common stock 57 1,182
----------- -----------
Net cash provided by financing activities 2,728 1,113
Effect of exchange rates on cash and cash equivalents 593 (376)
----------- -----------
Decrease in cash and cash equivalents (8,100) (4,991)
Cash and cash equivalents at beginning of period 27,928 30,697
----------- -----------
Cash and cash equivalents at end of period $ 19,828 $ 25,706
=========== ===========
Cash paid during the period for:
Interest $ 54 $ 7
=========== ===========
Income taxes (net of refunds) $ 331 $ 408
=========== ===========
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. The computer systems
and software fall under two product lines: on-demand (formerly "VOD") and
real-time (formerly "Integrated Solutions")
Concurrent's on-demand product line provides on-demand 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 real-time product line 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".
Certain reclassifications have been made to prior year amounts to conform to the
current year presentation. The results reported in these condensed, consolidated
quarterly financial statements should not be regarded as necessarily indicative
of results that may be expected for the entire year.
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 in
connection with its products and services. As of March 31, 2005, there were
three customers that each accounted for 10% or more of trade receivables. One
customer accounted for $4,522,000, or 25% of trade receivables, a second
customer accounted for $2,426,000, or 13% of trade receivables, and a third
customer accounted for $1,835,000, or 10% of trade receivables. As of June 30,
2004, there were 2 customers that each accounted for 10% or more of trade
receivables. 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 November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
Amendment of ARB No. 43, Chapter 4". 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.
5
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share Based
Payment". 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 annual periods beginning after June
15, 2005. Concurrent is continuing to evaluate and determine the impact SFAS
123(R) will have on its fiscal 2006 interim and annual financial statements,
beginning with the first quarter of fiscal 2006.
In December 2004, the FASB issued FASB Staff Position ("FSP") 109-1,
"Application of FASB Statement No. 109", and "Accounting for Income Taxes, to
the Tax Deduction on Qualified Production Activities provided by the American
Jobs Creation Act of 2004" (the "Jobs Act"). FSP 109-1 requires that the
generation deduction be accounted for as a special tax deduction rather than as
a tax rate reduction. Concurrent is currently assessing the Jobs Act and this
pronouncement, as well as the related regulatory treatment, but currently does
not expect a material impact on Concurrent's consolidated financial statements.
In December 2004, the FASB issued FSP No.109-2, "Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004." FSP 109-2 provides guidance under SFAS 109 with
respect to recording the potential impact of the repatriation provisions of the
Jobs Act on enterprises' income tax expense and deferred tax liability. The Jobs
Act was enacted on October 22, 2004. FSP 109-2 states that an enterprise is
allowed time beyond the financial reporting period of enactment to evaluate the
effect of the Jobs Act on its plan for reinvestment or repatriation of foreign
earnings for purposes of applying SFAS 109. Concurrent has not yet completed its
evaluation of the impact of the repatriation provisions of the Jobs Act.
Accordingly, as provided for in FSP 109-2, Concurrent has not adjusted its
income tax provision or deferred tax liabilities to reflect the repatriation
provisions of the Jobs Act.
In December 2004, the FASB issued SFAS 153, "Exchange of Non-monetary
Assets." SFAS 153 addresses the measurement of exchanges of non-monetary assets.
The guidance in APB Opinion No. 29, "Accounting for Non-monetary Transactions"
is based on the principle that exchanges of non-monetary assets should be
measured based on the fair value of the assets exchanged. The guidance in APB
29, however, included certain exceptions to that principle. SFAS 153 amends APB
29 to eliminate the exception for non-monetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of non-monetary
assets that do not have commercial substance. A non-monetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. This Statement is effective
for financial statements for fiscal years beginning after June 15, 2005. The
adoption of this statement is not expected to have a material impact on
Concurrent's consolidated financial statements.
In March 2005, the FASB issued FASB Interpretation (FIN) No. 47,
"Accounting for Conditional Asset Retirement Obligations - An Interpretation of
FASB Statement No. 143". The FASB issued FIN 47 to address diverse accounting
practices that developed with respect to the timing of liability recognition for
legal obligations associated with the retirement of a tangible long-lived asset
when the timing and/or method of settlement of the obligation are conditional on
a future event. FIN 47 concludes that an entity must recognize a liability for
the fair value of a conditional asset retirement obligation when incurred if the
entity can reasonably estimate the liability's fair value. The adoption of this
Statement is not expected to have a material impact on Concurrent's financial
position or results of operations.
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 6,727,000 and 6,108,000 for the three
month
6
periods ended March 31, 2005 and 2004, respectively, were excluded from the
calculation as their effect was antidilutive. Common share equivalents of
6,418,000 and 5,406,000 for the nine month periods ended March 31, 2005 and
2004, 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 NINE MONTHS ENDED
EXCEPT PER SHARE AMOUNTS) MARCH 31, MARCH 31,
2005 2004 2005 2004
----------- ----------- ----------- ----------
Basic and diluted earnings per share (EPS) calculation:
Net income (loss) $ (177) $ (63) $ (6,645) $ 1,762
=========== =========== =========== ==========
Basic weighted average number of shares outstanding 62,758 62,565 62,728 62,318
Effect of dilutive securities:
Shares issued upon assumed exercise of stock options - - - 800
Shares issued upon assumed vesting of restricted stock - - - 141
----------- ----------- ----------- ----------
Diluted weighted average number of shares outstanding 62,758 62,565 62,728 63,259
=========== =========== =========== ==========
Basic EPS $ (0.00) $ (0.00) $ (0.11) $ 0.03
=========== =========== =========== ==========
Diluted EPS $ (0.00) $ (0.00) $ (0.11) $ 0.03
=========== =========== =========== ==========
3. STOCK-BASED COMPENSATION
At March 31, 2005, 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 APB Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. For the three and nine months ended
March 31, 2005, Concurrent recognized $78,000 and $197,000, respectively, of
stock compensation expense for the issuance of restricted stock awards. For the
three and nine months ended March 31, 2004, Concurrent recognized $19,000 and
$85,000, respectively, of stock compensation expense for the issuance of
restricted stock awards. There is no other expense for stock options in the
reported net income (loss) for the three and nine month periods ended March 31,
2005 and 2004. Concurrent issued 1,041,000 shares of restricted stock during the
nine months ended March 31, 2005 and initially recorded $1,946, 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. The changes in the
unearned compensation during the nine months ended March 31, 2005 were as
follows (in thousands):
Unearned compensation, June 30, 2004 $ (351)
Issuance of restricted stock (1,946)
Retirement of restricted stock 621
Amortization of unearned compensation 197
Revaluation of performance shares (95)
--------
Unearned compensation, March 31, 2005 $(1,574)
========
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:
7
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net income (loss) as reported $ (177) $ (63) $ (6,645) $ 1,762
Deduct: Total stock-based employee
compensation expense determined under
the fair value method, net of related taxes (805) (1,093) (2,584) (3,157)
----------- ----------- ----------- -----------
Pro forma net income (loss) $ (982) $ (1,156) $ (9,229) $ (1,395)
=========== =========== =========== ===========
Net income (loss) per share:
Basic- as reported $ (0.00) $ (0.00) $ (0.11) $ 0.03
=========== =========== =========== ===========
Basic-pro forma $ (0.02) $ (0.02) $ (0.15) $ (0.02)
=========== =========== =========== ===========
Diluted-as reported $ (0.00) $ (0.00) $ (0.11) $ 0.03
=========== =========== =========== ===========
Diluted-pro forma $ (0.02) $ (0.02) $ (0.15) $ (0.02)
=========== =========== =========== ===========
The weighted-average assumptions used for the three months ended March 31,
2005, and 2004 were: expected dividend yield of 0.0% for both periods; risk-free
interest rate of 4.3% and 3.1%, respectively; expected life of 6 years for both
periods; and an expected volatility of 92.0% and 110.6%, respectively. The
weighted-average assumptions used for the nine months ended March 31, 2005, and
2004 were: expected dividend yield of 0.0% for both periods; risk-free interest
rate of 3.9% and 3.3%, respectively; expected life of 6 years for both periods;
and an expected volatility of 97.5% and 111.2%, respectively.
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
On-demand and real-time 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 on-demand and real-time sales 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.
8
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):
MARCH 31, JUNE 30,
2005 2004
---------- ---------
Raw materials, net $ 5,255 $ 7,361
Work-in-process 938 1,229
Finished goods 501 1,027
---------- ---------
$ 6,694 $ 9,617
========== =========
At March 31, 2005 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 $2.0 million and $3.0 million which would reduce the value of
the inventory to its estimated net realizable value at March 31, 2005 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 nine months ended March 31, 2004, Concurrent received in the
aggregate, $3.0 million in proceeds as a result of the sale of certain assets of
Thirdspace. During the remainder of fiscal 2004, Concurrent received an
additional $56,000 in proceeds as a result of the sale of the majority of
Thirdspace's remaining assets. Thirdspace's only significant remaining asset 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 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 nine months ended March 31, 2005, 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.
9
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The components of accounts payable and accrued expenses are as follows (in
thousands):
MARCH 31, JUNE 30,
2005 2004
---------- ---------
Accounts payable, trade $ 6,674 $ 3,487
Accrued payroll, vacation, severance
and other employee expenses 4,344 5,420
Warranty accrual 755 1,122
Other accrued expenses 2,625 2,040
---------- ---------
$ 14,398 $ 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 nine months ended March 31, 2005 were as follows (in
thousands):
Balance at June 30, 2004 $1,122
Charged to costs and expenses 316
Deductions (683)
-------
Balance at March 31, 2005 $ 755
=======
8. COMPREHENSIVE INCOME
Concurrent's total comprehensive income (loss) is as follows (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net income (loss) $ (177) $ (63) $ (6,645) $ 1,762
Other comprehensive income:
Foreign currency translation income (loss) (335) (188) 591 (174)
----------- ----------- ----------- -----------
Total comprehensive income (loss) $ (512) $ (251) $ (6,054) $ 1,588
=========== =========== =========== ===========
10
9. PRODUCT LINE AND GEOGRAPHIC INFORMATION
During the three month period ended March 31, 2005, Concurrent changed its
management structure and reportable segments. Concurrent is now operating as a
united company by consolidating the real-time and on-demand operating divisions.
During the three months ended March 31, 2005, the divisional structure was
officially consolidated under a functional organization with real-time and
on-demand product lines. Effective March 31, 2005, Concurrent operates under one
segment, in accordance with SFAS 131, "Disclosure about Segments of an
Enterprise and Related Information." As a result of the change in reportable
segment, Concurrent has recast the following information to provide product line
and service information, as well as geographic information, for each applicable
period.
The following summarizes the revenues, costs of sales, and margins by
product line and service for the three and nine month periods ended March 31,
2005 and March 31, 2004, respectively (dollars in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Revenues:
Real-time systems $ 7,499 $ 4,964 $ 19,194 $ 14,955
On-demand systems 6,892 13,250 21,505 33,965
Service 5,458 5,397 16,504 16,219
----------- ----------- ----------- -----------
Total revenues $ 19,849 $ 23,611 $ 57,203 $ 65,139
Cost of sales:
Real-time systems $ 2,693 $ 1,909 $ 7,677 $ 5,893
On-demand systems 3,054 7,734 11,617 16,875
Service 3,132 3,072 9,904 9,106
----------- ----------- ----------- -----------
Total cost of sales $ 8,879 $ 12,715 $ 29,198 $ 31,874
Gross margin:
Real-time system margin $ 4,806 $ 3,055 $ 11,517 $ 9,062
On-demand system margin 3,838 5,516 9,888 17,090
Service margin 2,326 2,325 6,600 7,113
----------- ----------- ----------- -----------
Total margin $ 10,970 $ 10,896 $ 28,005 $ 33,265
Gross margin
Real-time system margin 64.1% 61.5% 60.0% 60.6%
On-demand system margin 55.7% 41.6% 46.0% 50.3%
Service margin 42.6% 43.1% 40.0% 43.9%
----------- ----------- ----------- -----------
Total gross margin 55.3% 46.1% 49.0% 51.1%
11
The following summarizes the revenues by geographic locations for the three and
nine month periods ended March 31, 2005 and March 31, 2004, respectively
(dollars in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2005 2004 2005 2004
---------- ---------- ---------- ----------
United States $ 12,725 $ 19,848 $ 40,860 $ 54,837
Japan 4,937 1,324 7,962 2,981
Other Asia Pacific countries 260 852 1,918 2,488
---------- ---------- ---------- ----------
Asia Pacific 5,197 2,176 9,880 5,469
Europe 1,880 1,461 6,157 4,461
Other foreign countries 47 126 306 372
---------- ---------- ---------- ----------
Total revenue $ 19,849 $ 23,611 $ 57,203 $ 65,139
========== ========== ========== ==========
The following summarizes revenues by significant customer where such revenue
exceeded 10% of total revenues for any one of the indicated periods:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2005 2004 2005 2004
---------- ---------- ---------- ----------
Customer A 20% 12% 18% 14%
Customer B 16% 0% 8% 0%
Customer C 12% 35% 15% 31%
Customer D 5% 17% 6% 9%
Customer E 3% 4% 3% 12%
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 on-demand products. 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 March 31, 2005.
Concurrent recognized the value of the warrants over the term of the
agreement as Comcast purchased additional on-demand 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 nine month periods ended March 31, 2005. For the
three and nine month periods ended March 31, 2004, Concurrent recognized
$194,000 and $237,000, respectively, as a reduction in revenue for the warrants
that were earned during those respective periods.
As of March 31, 2004, Concurrent determined the value of the warrants using
the Black-Scholes valuation model. The weighted-average assumptions used for the
three months ended March 31, 2004 were: expected dividend yield of 0.0%;
risk-free interest rate of 2.5%; expected life of 4 years; and an expected
volatility of 111.0%.
12
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 threshold on April 1, 2002,
exercisable at $7.106 per share over a four-year term, all of which are still
outstanding as of March 31, 2005. 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 nine months ended March
31, 2004, which had been previously accrued in anticipation of reaching the next
$30 million threshold. This reversal was recorded in on-demand 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 March 31, 2005, $3.9 million would
have been available to Concurrent under the Revolver. The Revolver and the Term
Loan expire on December 23, 2006, and December 23, 2007, respectively. Both
agreements can be terminated earlier upon a default, as defined in the Credit
Agreement. The Credit Agreement was filed on February 4, 2005 as Exhibit 10.1 to
our Form 10-Q. As of March 31, 2005, Concurrent had no amounts drawn under the
Revolver and the balance of the Term Loan was as follows:
MARCH 31, JUNE 30,
2005 2004
---------- ---------
Term note $ 2,762 $ -
Less current portion 934 -
---------- ---------
Total long-term debt $ 1,828 $ -
========== =========
Interest on all outstanding amounts under the Revolver is payable monthly
at the prime rate (5.75% at March 31, 2005) 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 March 31, 2005.
13
12. RETIREMENT PLANS
The following table provides a detail of the components of net periodic
benefit cost for the three and nine months ended March 31, 2005 and 2004 (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Service cost $ 7 $ 99 $ 20 $ 280
Interest cost 53 312 154 881
Expected return on plan assets (23) (215) (66) (608)
Amortization of unrecognized net transition obligation 8 (19) 24 (54)
Amortization of unrecognized prior service benefit - 7 - 19
Recognized actuarial loss 1 108 2 304
----------- ----------- ----------- -----------
Net periodic benefit cost $ 46 $ 292 $ 134 $ 822
=========== =========== =========== ===========
Concurrent contributed $21,000 and $60,000 to its German Subsidiary's
defined benefit plan during the three and nine months ended March 31, 2005,
respectively, and expects to make similar contributions during the fourth
quarter of fiscal 2005. Concurrent contributed $98,000 and $276,000 to its
German and UK Subsidiaries' defined benefit plans during the three and nine
months ended March 31, 2004, 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 March 31, 2005 and
2004, Concurrent contributed $156,000 and $266,000 to this plan, respectively.
During the nine months ended March 31, 2005 and 2004, Concurrent contributed
$670,000 and $762,000 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 March 31, 2005 and 2004, Concurrent contributed
$103,000 and $15,000 to the Stakeholder Plan, respectively. During the nine
months ended March 31, 2005 and 2004, Concurrent contributed $334,000 and
$24,000 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.
14. SUBSEQUENT EVENT
On May 4, 2005, the Board of Directors (the "Board") of Concurrent, upon
recommendation of the Board's Compensation and Audit Committees, approved the
accelerated vesting of certain unvested and "out-of-the-money" options held by
current employees and officers (the "Acceleration"). The Board did not
accelerate vesting of any options held by the Chief Executive Officer or any
directors. The accelerated options had been granted under the Company's 1991
Restated Stock Option Plan and the Company's 2001 Stock Option Plan
(collectively, the "Plans").
As a result of the Acceleration, the affected unvested options are those
which had exercise prices of greater than $2.10 per share. The closing sales
price of the Company's common stock on the NASDAQ National market on May 4,
2005, the effective date of the Acceleration, was $1.68. Pursuant to the
Acceleration, options granted under the Plans to purchase approximately 1.3
million shares of the Company's common stock that would otherwise have vested at
various times within the next four years became fully vested. The options have a
range of exercise prices of $2.12 to $14.85. As a result of the Board's decision
to approve the Acceleration, each agreement for options subject to the
Acceleration is deemed to be amended to reflect the Acceleration as of the
effective date, but all other terms and conditions of each such option agreement
remain in full force and effect.
The decision to initiate the Acceleration under the Plans, which the
Company believes to be in the best interest of the Company and its shareholders,
was made primarily to reduce compensation expense that might be recorded in
future periods following the Company's adoption on July 1, 2005 of Financial
Accounting Standards Board ("FASB") Statement No. 123, "Share-Based Payment
(revised 2004)" ("SFAS 123(R)"). The Company currently accounts for stock-based
compensation using the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," under which the Company has not
recognized any compensation expense for its stock option grants. SFAS 123(R)
will require the Company to record compensation expense equal to the fair value
of all equity-based compensation over the vesting period of each such award. As
a result of the Acceleration under the Plans, the Company expects to reduce its
aggregate compensation expense related to the Acceleration by a total of
approximately $2.7 million before taxes over the next four years (the vesting
period for the accelerated options). This estimate is subject to change and is
based on approximated value calculations using the Black-Scholes methodology.
The Company will disclose the pro forma effect of this compensation expense in
the pro forma footnote disclosure in its fiscal year 2005 annual report, as
permitted under the transition guidance provided by the FASB.
14
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 regarding Forward-Looking Statements,"
elsewhere herein and in other filings made with the Securities and Exchange
Commission.
OVERVIEW
During the nine months ended March 31, 2005, we used approximately $10.2
million in cash and cash equivalents from operations, and ended the quarter with
$19.8 million in cash and cash equivalents, after borrowing $3.0 million in the
form of a term loan. During the nine months ended March 31, 2004, we used $5.3
million in cash and cash equivalents from operations, and ended the quarter with
$25.7 million, after recovering $3.0 million in proceeds from the liquidation of
Thirdspace. The increased use of cash from operations during the nine months
ended March 31, 2005 compared to the nine months ended March 31, 2004 is
primarily due to changes in working capital and operating losses during the
year. Also, our cash usage increased due to 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 reducing our capital expenditures. For the three month period
ended March 31, 2005, we used $3.2 million of cash from operations due to timing
of inventory purchases and collection of receivables. See further discussions in
the "Liquidity and Capital Resources" section of this document. In recent
quarters, we have seen a shift in on-demand revenue from large, new North
American on-demand deployments to a healthy mix of new international
deployments, and expansions of streams, ingest, and storage with smaller, new
North American on-demand deployments.
In this fiscal year, we have recorded costs associated with Sarbanes-Oxley
Section 404 compliance. In this quarter we spent approximately $0.3 million and
invested significant man hours. In the upcoming quarter we expect to spend an
additional $0.2 million on 404 compliance work and we believe management and
other employees will continue to devote considerable time to this project.
We are now operating as a united company by consolidating the real-time and
on-demand operating divisions. During the three months ended March 31, 2005, the
divisional structure was officially consolidated under a functional organization
with real-time and on-demand product lines. Effective March 31, 2005, we operate
under one segment, in accordance with SFAS 131, "Disclosure about Segments of an
Enterprise and Related Information." As a result of the change in reportable
segments, the following Management's Discussion and Analysis of Financial
Condition will reflect this unified reporting structure.
On May 4, 2005, the Board of Directors of Concurrent, upon recommendation
of the Board's Compensation and Audit Committees, approved the accelerated
vesting of all unvested and "out-of-the-money" options priced above $2.10 held
by current employees and officers. The Board did not accelerate vesting of any
options held by the Chief Executive Officer or any directors. Pursuant to the
Acceleration, options granted under the Plans to purchase approximately 1.3
million shares of the Company's common stock that would otherwise have vested at
various times within the next four years became fully vested. The options have a
range of exercise prices of $2.12 to $14.85. See further discussions in Note 14
of the "Notes to Condensed Consolidated Financial Statements."
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.
15
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 nine months ended March
31, 2005, we issued restricted stock awards, a portion of which is 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.
SELECTED OPERATING DATA AS A PERCENTAGE OF TOTAL REVENUE
The following table sets forth selected operating data as a percentage of
total revenue, unless otherwise indicated, for certain items in our consolidated
statements of operations for the periods indicated.
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2005 2004 2005 2004
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
Revenues (% of total sales):
Product 72.5% 77.1% 71.1% 75.1%
Service 27.5 22.9 28.9 24.9
---------- ---------- ---------- ----------
Total revenues 100.0 100.0 100.0 100.0
Cost of sales (% of respective sales category):
Product 39.9 52.9 47.4 46.5
Service 57.4 56.9 60.0 56.1
---------- ---------- ---------- ----------
Total cost of sales 44.7 53.9 51.0 48.9
---------- ---------- ---------- ----------
Gross margin 55.3 46.1 49.0 51.1
Operating expenses:
Sales and marketing 21.8 18.0 22.5 19.6
Research and development 22.4 21.6 25.0 22.3
General and administrative 11.9 11.2 12.5 10.7
---------- ---------- ---------- ----------
Total operating expenses 56.1 50.8 60.0 52.6
---------- ---------- ---------- ----------
Operating loss (0.8) (4.7) (11.0) (1.5)
Recovery (loss) of minority investment - 1.3 (0.6) 4.7
Interest income - net 0.2 0.4 0.3 0.4
Other expense - net (0.3) (0.2) (0.2) (0.3)
---------- ---------- ---------- ----------
Income (loss) before income taxes (0.9) (3.2) (11.5) 3.3
Provision (benefit) for income taxes 0.0 (2.9) 0.1 0.6
---------- ---------- ---------- ----------
Net income (loss) (0.9)% (0.3)% (11.6)% 2.7%
========== ========== ========== ==========
16
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2004
THREE MONTHS ENDED
MARCH 31,
------------------------
(DOLLARS IN THOUSANDS) 2005 2004 $CHANGE % CHANGE
----------- ----------- ----------- ----------
Product revenues $ 14,391 $ 18,214 $ (3,823) (21.0)%
Service revenues 5,458 5,397 61 1.1%
----------- ----------- ----------- ----------
Total revenues 19,849 23,611 (3,762) (15.9)%
Product cost of sales 5,747 9,643 (3,896) (40.4)%
Service cost of sales 3,132 3,072 60 2.0%
----------- ----------- ----------- ----------
Total cost of sales 8,879 12,715 (3,836) (30.2)%
----------- ----------- ----------- ----------
Product gross margin 8,644 8,571 73 0.9%
Service gross margin 2,326 2,325 1 0.0%
----------- ----------- ----------- ----------
Total gross margin 10,970 10,896 74 0.7%
Operating expenses:
Sales and marketing 4,333 4,259 74 1.7%
Research and development 4,447 5,091 (644) (12.6)%
General and administrative 2,363 2,656 (293) (11.0)%
----------- ----------- ----------- ----------
Total operating expenses 11,143 12,006 (863) (7.2)%
----------- ----------- ----------- ----------
Operating loss (173) (1,110) 937 (84.4)%
Recovery of minority investment - 289 (289) NM
Interest income - net 34 95 (61) (64.2)%
Other expense (36) (37) 1 (2.7)%
----------- ----------- ----------- ----------
Income (loss) before income taxes (175) (763) 588 (77.1)%
Provision for income taxes 2 (700) 702 NM
----------- ----------- ----------- ----------
Net loss $ (177) $ (63) $ (114) 181.0%
=========== =========== =========== ==========
(1) NM denotes percentage is not meaningful
17
Product Sales. Total product sales for the three months ended March 31,
2005 were $14.4 million, a decrease of approximately $3.8 million, or 21.0%,
from $18.2 million for the three months ended March 31, 2004. The decrease in
product sales resulted from the $6.4 million, or 48.0%, decrease in total
on-demand product sales to $6.9 million in the quarter ended March 31, 2005 from
$13.3 million in the quarter ended March 31, 2004. The decrease in on-demand
product sales was primarily due to reduced roll-outs of new systems in North
America and the timing of certain orders during the quarter ended March 31,
2005, as compared to the same period of the prior year. This reduction in North
American domestic on-demand product revenue was partially offset by an increase
in international sales volume during the quarter ended March 31, 2005 that
resulted in a $3.6 million increase in on-demand product revenue, primarily in
Asia, compared to the third quarter of the prior fiscal year. Fluctuation in
on-demand 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. We believe that we will be able to maintain or increase
our share of the North American cable market and also capture a 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 on-demand product sales, real-time
product sales increased approximately $2.5 million, or 51.1%, to $7.5 million in
the quarter ended March 31, 2005 from $5.0 million in the quarter ended March
31, 2004. The increase in real-time product sales is primarily due to an
increase in revenue from domestic customers due to expanded product offerings
and increasing demand for our Linux based products. Over the past year, our
real-time segment 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 real-time markets and expect to capture market share in new
markets needing our system solutions.
Service Revenue. Service revenue increased $0.1 million, or 1.1%, to $5.5
million for the three months ended March 31, 2005 from $5.4 million for the
three months ended March 31, 2004. Service revenue associated with on-demand
products increased approximately $0.9 million, or 55.0%, to $2.4 million in the
quarter ended March 31, 2005 from $1.6 million in the quarter ended March 31,
2004, as the on-demand segment continues to recognize maintenance, installation,
and training revenue on our expanding base of on-demand market deployments. As
the warranty agreements that typically accompany the initial sale and
installation of our on-demand systems expire, we expect to sell new, long-term
maintenance agreements. Because of these anticipated new agreements, our
expanding deployment base and the increasing software component of our total
on-demand solution, we expect service sales related to on-demand products to
continue to increase.
The increase in service revenue associated with on-demand products was
partially offset by approximately a $0.8 million, or 20.9%, decrease in service
revenue associated with real-time products to $3.0 million in the quarter ended
March 31, 2005 from $3.8 million in the quarter ended March 31, 2004. Service
revenue associated with real-time products 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
service for real-time products to continue into the foreseeable future.
Product Gross Margin. Product gross margin was $8.6 million for both of the
three month periods ended March 31, 2005 and 2004. Product gross margin as a
percentage of product sales increased to 60.1% in the quarter ended March 31,
2005 from 47.1% in the quarter ended March 31, 2004 primarily because on-demand
product gross margin increased to 55.7% from 41.6% of on-demand product revenue
for the same respective periods. The increase in on-demand product gross margin
is due to a more favorable domestic product mix and strong margins on the
growing international on-demand revenue, as compared to the same period of the
prior fiscal year. The increase in product margins also results from the
increase in real-time product margins to 64.1% in the quarter ended March 31,
2005 from 61.5% in the quarter ended March 31, 2004. The increase in real-time
product margins is due to a more favorable product mix, as compared to the prior
year quarter.
Service Gross Margin. The gross margin on service sales remained at $2.3
million for each of the three months ended March 31, 2005 and 2004. Margin as
percentage of service sales declined to 42.6% in the three months ended March
31, 2005 from 43.1% of service revenue in the three months ended March 31, 2004.
The decline in service margins is primarily due to a current quarter severance
expense. Severance expense of $0.3
18
million recorded in the quarter ended March 31, 2005 resulted from a reduction
in international service personnel as we have scaled down our infrastructure
necessary to fulfill declining real-time 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. This increase in severance expense was partially offset by
a reduction in salaries, wages, and benefits resulting from scaling down our
service infrastructure. We will continue to scale down the real-time service
infrastructure in response to this trend of declining real-time contractual
service obligations.
Sales and Marketing. Sales and marketing expenses remained at $4.3 million
during each of the three months ended March 31, 2005 and 2004. During the three
months ended March 31, 2005, commission expense increased $0.2 million as
compared to the three months ended March 31, 2004 due to strong sales in the
Asia-Pacific market. This increase in commission expense was offset by $0.2
million in savings from scaling back our international presence specifically in
Spain and China over the previous twelve months.
Research and Development. Research and development expenses decreased $0.6
million, or 12.6% to $4.5 million in the three months ended March 31, 2005 from
$5.1 million in the three months ended March 31, 2004. During the three months
ended March 31, 2005, we spent $0.4 million less on development subcontractors
and engineers that had previously been used to meet 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 over the previous few years. In addition to
the decreasing personnel costs, we also spent $0.2 million less in product
certification costs during the quarter ended March 31, 2005, compared to the
same period of the prior year. We expect that 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 decreased
$0.3 million, or 11.0%, to $2.4 million in the three months ended March 31, 2005
from $2.7 million in same period of the prior year. This decrease is primarily
due to a $0.4 million decrease in legal fees resulting from the prior year
successful defense of a lawsuit brought by SeaChange International alleging
defamation. We also reduced administrative salaries, wage and benefits by $0.1
million in the current quarter as a result of the company-wide reduction in
force and cost savings initiative in the current fiscal year. These decreases in
general and administrative expenses were partially offset by a $0.3 million
increase in accounting services primarily attributable to the additional
internal and external audit work required for compliance with the Sarbanes-Oxley
Act of 2002, as compared to the three months ended March 31, 2004.
Recovery of Minority Investment. During the third quarter of the prior
fiscal year, we received $0.3 million in cash from the continued monetization of
the Thirdspace assets and settlement of its liabilities. We did not receive any
further proceeds during the three months ended March 31, 2005.
Provision for Income Taxes. We recorded no significant income tax expense
for our domestic and foreign subsidiaries in the quarter ended March 31, 2005.
For the quarter ended March 31, 2004, we recorded an income tax benefit of
$700,000. During the three months ended March 31, 2004, the provision for United
States federal income taxes previously recorded during the first two quarters of
the fiscal year was reversed due to an anticipated loss for tax purposes in
fiscal 2004 and foreign income and withholding taxes of $64,000 was recorded
during the quarter, resulting in a net benefit of $700,000 during the three
months ended March 31, 2004.
Net Loss. The net loss for the three months ended March 31, 2005 was $0.2
million or $0.00 per basic and diluted share compared to the net loss for the
three months ended March 31, 2004 of $0.1 million or $0.00 per basic and diluted
share.
19
THE NINE MONTHS ENDED MARCH 31, 2005 COMPARED TO THE NINE MONTHS ENDED MARCH 31, 2004
NINE MONTHS ENDED
MARCH 31,
------------------------
(DOLLARS IN THOUSANDS) 2005 2004 $CHANGE % CHANGE
----------- ----------- ----------- ----------
Product revenues $ 40,699 $ 48,920 $ (8,221) (16.8)%
Service revenues 16,504 16,219 285 1.8%
----------- ----------- ----------- ----------
Total revenues 57,203 65,139 (7,936) (12.2)%
Product cost of sales 19,294 22,768 (3,474) (15.3)%
Service cost of sales 9,904 9,106 798 8.8%
----------- ----------- ----------- ----------
Total cost of sales 29,198 31,874 (2,676) (8.4)%
----------- ----------- ----------- ----------
Product gross margin 21,405 26,152 (4,747) (18.2)%
Service gross margin 6,600 7,113 (513) (7.2)%
----------- ----------- ----------- ----------
Total gross margin 28,005 33,265 (5,260) (15.8)%
Operating expenses:
Sales and marketing 12,897 12,768 129 1.0%
Research and development 14,299 14,464 (165) (1.1)%
General and administrative 7,144 7,000 144 2.1%
----------- ----------- ----------- ----------
Total operating expenses 34,340 34,232 108 0.3%
----------- ----------- ----------- ----------
Operating loss (6,335) (967) (5,368) NM
Recovery (impairment loss) of minority investment (313) 3,047 (3,360) NM
Interest income - net 208 233 (25) (10.7)%
Other expense (137) (191) 54 (28.3)%
----------- ----------- ----------- ----------
Income (loss) before income taxes (6,577) 2,122 (8,699) NM
Provision for income taxes 68 360 (292) (81.1)%
----------- ----------- ----------- ----------
Net income (loss) $ (6,645) $ 1,762 $ (8,407) NM
=========== =========== =========== ==========
(1) NM denotes percentage is not meaningful
Product Sales. Total product sales for the nine months ended March 31, 2005
were $40.7 million, a decrease of approximately $8.2 million, or 16.8%, from
$48.9 million for the nine months ended March 31, 2004. The decrease in product
sales resulted from a $12.5 million, or 36.7%, decrease in on-demand product
sales to $21.5 million during the nine months ended March 31, 2005 from $34.0
million during the nine months ended March 31, 2004. The decrease in on-demand
product sales was due to fewer products sold in the North American market during
the nine months ended March 31, 2005, as compared to the same period of the
prior year. This reduction in domestic on-demand product revenue was partially
offset by an increase in international sales volume during the nine months ended
March 31, 2005 that resulted in a $6.3 million increase in international
on-demand product revenue, compared to the nine months ended March 31, 2004. We
believe that we will be able to maintain or increase our share of the North
American cable market and also capture a 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 decline in cost of goods
sold.
20
Partially offsetting the decrease in on-demand product sales, real-time
product sales increased approximately $4.2 million, or 28.3%, to $19.2 million
during the nine months ended March 31, 2005 from $15.0 million during the same
period of the prior year. The increase in real-time product sales is due to an
increase in product volume to both domestic and international customers. Over
the past year, we have integrated software applications from strategic
partnerships that we believe will enable us to expand beyond our traditional
customer base for real-time products. Based on this initiative, we expect to
maintain market share in our traditional real-time markets and expect to capture
market share in new markets needing our system solutions.
Service Revenue. Service revenue increased $0.3 million, or 1.8%, to $16.5
million for the nine months ended March 31, 2005 from $16.2 million for the nine
months ended March 31, 2004. Service revenue associated with on-demand products
increased approximately $2.6 million, or 62.2%, to $6.9 million during the nine
months ended March 31, 2005 from $4.2 million in the same period of the prior
fiscal year, as the on-demand segment continues to recognize maintenance,
installation, and training revenue on our expanding base of on-demand market
deployments. As the warranty agreements that typically accompany the initial
sale and installation of our on-demand systems expire, we expect to sell new,
long-term maintenance agreements. Because of these anticipated new agreements,
our expanding deployment base and increasing software component of our total
on-demand solution, we expect service sales related to on-demand products to
continue to increase.
The increase in service revenue associated with on-demand product was
partially offset by approximately a $2.3 million, or 19.5%, decrease in service
revenue associated with real-time product to $9.7 million during the nine months
ended March 31, 2005 from $12.0 million in the same period of the prior fiscal
year. Real-time related 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
real-time service revenue to continue into the foreseeable future.
Product Gross Margin. Product gross margin was $21.4 million for the nine
months ended March 31, 2005, a decrease of $4.8 million, or 18.2%, from $26.2
million for the nine months ended March 31, 2004. Product gross margin as a
percentage of product sales decreased to 52.6% in the nine months ended March
31, 2005 from 53.5% in the nine months ended March 31, 2004, primarily because
on-demand product gross margin decreased to 46.0% from 50.3% of on-demand
product revenue for the same respective periods. The decrease in on-demand
product gross margin is primarily due to the 3.9% favorable impact on prior year
margins resulting from a $1.3 million expense reversal for warrants previously
accrued for Scientific Atlanta, Inc. In addition, current year margins were
negatively impacted due to an incentive discount provided to one of our North
American cable customers who upgraded its older on-demand systems to our fourth
generation architecture and as well as changes in product mix. The gross margin
on sales of real-time product decreased to 60.0% in the nine months ended March
31, 2005 from 60.6% in the nine months ended March 31, 2004 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 7.2%, to $6.6 million, or 40.0% of service revenue in the nine
months ended March 31, 2005 from $7.1 million, or 43.9% of service revenue in
the nine months ended March 31, 2004. The decline in service margins is
primarily due to severance expense incurred in the current year. Severance
expense of $0.6 million recorded in the nine months ended March 31, 2005
resulted from a reduction in domestic and international service personnel as we
have scaled down our infrastructure necessary to fulfill declining real-time
contractual service obligations. The decline in contractual service obligations
results from the cancellation of maintenance contracts as legacy machines are
removed from service and replaced with machines that are simpler to maintain.
This increase in severance expense was partially offset by a reduction in
salaries, wages, and benefits resulting from scaling down our service
infrastructure. We will continue to scale down the real-time service
infrastructure in response to this trend of declining real-time contractual
service obligations. In addition, we expect to realize increased efficiencies
from the combination of our on-demand and real-time service groups.
Sales and Marketing. Sales and marketing expenses increased $0.1 million,
or 1.0%, to $12.9 million during the nine months ended March 31, 2005 from $12.8
million in the same period of the prior year, primarily due to an additional
$0.4 million of commissions resulting from sales growth in Europe and Asia. In
addition, we incurred $0.4 million of domestic and international severance
expense related to a reduction in force initiative during the current fiscal
year. The increase in severance and international commission expense were
partially
21
offset by a company-wide $0.4 million decrease in salaries, wages and benefits,
and $0.2 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 decreased $0.2
million, or 1.1%, to $14.3 million during the nine months ended March 31, 2005
from $14.5 million in the same period of the prior fiscal year. During the nine
months ended March 31, 2005, we incurred $0.3 million less cost from development
subcontractors and engineers that had previously been used to meet software
development requirements. In addition to the decreasing personnel costs, we also
incurred $0.2 million less in product certification costs during the nine months
ended March 31, 2005, compared to the same period of the prior year. These
decreasing costs were partially offset by $0.2 million of additional severance
expense associated with the reduction in development personnel. We expect that
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
$0.1 million, or 2.1%, to $7.1 million during the nine months ended March 31,
2005 from $7.0 million in same period of the prior fiscal year. This increase in
general and administrative expense is partly due to prior year non recurring
expense activity. During the nine-months ended March 31 of the prior fiscal
year, we reversed $0.6 million of bad debt reserve. This prior year expense
reversal was partially offset by $0.5 million in non-recurring prior year legal
fees resulting primarily from the successful defense of a lawsuit brought by
SeaChange International alleging defamation. In addition to this prior year
activity, during the nine months ended March 31, 2005, we incurred an additional
$0.4 million in accounting services. These services related to the additional
internal and external audit work required for compliance with the Sarbanes-Oxley
Act of 2002. Partially offsetting the increase in accounting fees, we reduced
administrative salaries, benefits, and incentive compensation by approximately
$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 nine months
ended March 31, 2005, 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 nine months ended March 31, 2004 we received $3.0 million in
cash from continued monetization of the Thirdspace assets and settlement of its
liabilities. An additional $0.1 million recovery of Thirdspace assets was
recognized in the nine months ended March 31, 2005, partially offsetting the
$413,000 Everstream impairment charge.
Provision for Income Taxes. We recorded income tax expense for our domestic
and foreign subsidiaries of $68,000 during the nine months ended March 31, 2005,
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 $0.4 million. 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 nine months ended March 31, 2005
was $6.6 million or $0.11 per basic and diluted share compared to net income for
the nine months ended March 31, 2004 of $1.8 million or $.03 per basic and
diluted share.
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:
22
- the rate of growth, if any, of new on-demand market deployments
and the pace at which domestic and international cable companies and
telephone companies implement on-demand technology;
- the rate of growth, if any, of expansions of previously deployed
on-demand systems;
- the actual versus anticipated decline in revenue from maintenance
of real-time proprietary systems;
- revenues from real-time systems;
- ongoing cost control actions and expenses, including for example,
research and development and capital expenditures;
- the margins on our on-demand and real-time 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 $10.2 million of cash from operating activities during the nine
months ended March 31, 2005 compared to using $5.3 million of cash during the
same period of the prior year. The increased use of cash from operations was
primarily due to changes in working capital and operating losses during the
current year.
We invested $1.2 million in property, plant and equipment during the nine
months ended March 31, 2005 compared to $3.5 million during the nine months
ended March 31, 2004. Capital additions during each of these periods related
primarily to product development and testing equipment, demonstration equipment
and equipment loans to our on-demand customers. We expect to continue at the
same level of capital additions during the remainder of this fiscal year.
In the prior fiscal year, we received $3.0 million from the continued
liquidation of Thirdspace during the nine month period ended March 31, 2004.
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
March 31, 2005, we had no amounts drawn under the Revolver and had drawn down
the entire $3.0 million, net of repayments, under the Term Loan. Interest on all
outstanding amounts under the Revolver is payable monthly at the prime rate
(5.75% at March 31, 2005) 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. As of March 31, 2005,
we were in compliance with these covenants. Based on the borrowing formula and
our financial position as of March 31, 2005, $3.9 million would have been
available to us under the Revolver.
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 $24.8 million at March 31, 2005, which
includes $3.0 million drawn under our new Credit
23
Agreement. If our on-demand 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
March 31, 2005, are as follows:
PAYMENTS DUE BY FISCAL YEAR
-------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
CONTRACTUAL OBLIGATIONS TOTAL 2005 2006-2007 2008-2009 THEREAFTER
--------------------------------- ------------- ------------- ------------- ------------- -------------
Note payable to bank $ 2,762 $ 226 $ 1,988 $ 548 $ -
Interest payments - note
payable to bank 329 55 261 13 -
Operating leases 8,466 676 4,585 2,474 731
------------- ------------- ------------- ------------- -------------
Total contractual obligations $ 11,557 $ 957 $ 6,834 $ 3,035 $ 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 on-demand and real-time products; 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.
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.
24
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 March 31, 2005, 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.
We are currently undergoing a comprehensive effort in preparation for
compliance with Section 404 of the Sarbanes-Oxley Act of 2002. This effort
includes the documentation, testing and review of our internal controls under
the direction of senior management. During the course of these activities, we
have identified certain internal control issues which senior management believes
need to be improved. As a result, we are evaluating and implementing
improvements to our internal controls over financial reporting and will continue
to do so. These improvements include further formalization of policies and
procedures, improved segregation of duties, improved reporting of financial and
contractual matters by our international subsidiaries, and improved information
technology system controls. Our financial reporting information systems require
a significant level of manual controls to ensure the accurate reporting of our
results of operations and financial position. Further, we cannot be certain as
to the timing of completion of our testing and our ongoing remediation efforts.
Accordingly, remediated controls may not be in place for a sufficient time
period over which to assess effectiveness, and our evaluation of internal
controls may not be completed in time for our external auditors to complete
their assessment on a timely basis. If we are not able to comply with the
requirements of Section 404 in a timely manner, the reliability of our internal
controls over financial reporting may be impacted.
25
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 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).
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.
- Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
32.1** Section 906 of the Sarbanes-Oxley Act of 2002.
- Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
32.2** Section 906 of the Sarbanes-Oxley Act of 2002.
* Data required by Statement of Financial Accounting Standards No.
128, "Earnings per Share," is provided in the Notes to the condensed
consolidated financial statements in this report.
** Filed herewith.
26
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: May 5, 2005 CONCURRENT COMPUTER CORPORATION
By: /s/ Greg Wilson
---------------------
Greg Wilson
Chief Financial Officer
(Principal Financial and Accounting Officer)
27
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.
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.
28