UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of
--- the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2005
or
Transition Report Pursuant to Section 13 or 15(d) of
--- the Securities Exchange Act of 1934
For the Transition Period from to
---- ----
Commission File No. 0-13150
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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 check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
--- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-7 of the Exchange Act).
Yes No X
--- ---
Number of shares of the Registrant's Common Stock, par value $0.01 per share,
outstanding as of October 28, 2005 was 66,667,068. (This amount does not include
5,411,461 shares remaining to be issued to former Everstream shareholders as a
result of the Registrant's acquisition of Everstream on October 11, 2005.)
CONCURRENT COMPUTER CORPORATION
FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 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 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 20
ITEM 4. CONTROLS AND PROCEDURES 20
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS 21
ITEM 6. EXHIBITS 21
EX-31.1 SECTION 302 CERTIFICATION OF CEO
EX-31.2 SECTION 302 CERTIFICATION 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)
SEPTEMBER 30, JUNE 30,
2005 2005
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 17,435 $ 19,880
Accounts receivable, less allowance for doubtful accounts
of $194 at September 30, 2005 and $200 at June 30, 2005 14,422 16,577
Inventories - net 5,436 5,071
Deferred tax asset - net 230 226
Prepaid expenses and other current assets 1,946 858
--------------- ---------------
Total current assets 39,469 42,612
Property, plant and equipment - net 7,471 8,319
Purchased developed computer software - net 776 823
Goodwill 10,744 10,744
Investment in minority owned company 140 140
Other long-term assets - net 1,193 1,339
--------------- ---------------
Total assets $ 59,793 $ 63,977
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 10,501 $ 12,055
Notes payable to bank, current portion 973 954
Deferred revenue 6,593 6,692
--------------- ---------------
Total current liabilities 18,067 19,701
Long-term liabilities:
Deferred revenue 2,059 2,349
Notes payable to bank, less current portion 1,333 1,583
Pension liability 1,739 1,705
Other 299 286
--------------- ---------------
Total liabilities 23,497 25,624
Commitments and contingencies (Note 12)
Stockholders' equity:
Common stock 628 637
Capital in excess of par value 174,370 175,769
Accumulated deficit (138,638) (136,455)
Unearned compensation - (1,562)
Accumulated other comprehensive loss (64) (36)
--------------- ---------------
Total stockholders' equity 36,296 38,353
--------------- ---------------
Total liabilities and stockholders' equity $ 59,793 $ 63,977
=============== ===============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
2
CONCURRENT COMPUTER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
SEPTEMBER 30,
2005 2004
------------ ------------
Revenues:
Product $ 10,943 $ 11,587
Service 5,264 5,743
------------ ------------
Total revenues 16,207 17,330
Cost of sales:
Product 5,368 6,667
Service 2,745 3,524
------------ ------------
Total cost of sales 8,113 10,191
------------ ------------
Gross margin 8,094 7,139
Operating expenses:
Sales and marketing 4,128 4,477
Research and development 4,338 5,180
General and administrative 2,523 2,506
------------ ------------
Total operating expenses 10,989 12,163
------------ ------------
Operating loss (2,895) (5,024)
Interest income 114 94
Interest expense (62) (2)
Other income (expense) 707 (35)
------------ ------------
Loss before income taxes (2,136) (4,967)
Provision for income taxes 47 54
------------ ------------
Net loss $ (2,183) $ (5,021)
============ ============
Net loss per share
Basic $ (0.03) $ (0.08)
============ ============
Diluted $ (0.03) $ (0.08)
============ ============
Weighted average shares outstanding - basic 62,770 62,852
============ ============
Weighted average shares outstanding - diluted 62,770 62,852
============ ============
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)
THREE MONTHS ENDED
SEPTEMBER 30,
2005 2004
------------ ------------
OPERATING ACTIVITIES
Net loss $ (2,183) $ (5,021)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,112 1,421
Share-based compensation 153 16
Other non-cash expenses 5 (19)
Changes in operating assets and liabilities:
Accounts receivable 2,155 (1,229)
Inventories (374) 2,249
Prepaid expenses and other current assets (1,088) (1,052)
Other long-term assets 148 97
Accounts payable and accrued expenses (1,554) (1,065)
Deferred revenue (389) (4,192)
Other long-term liabilities 47 83
------------ ------------
Total adjustments to net loss 215 (3,691)
------------ ------------
Net cash used in operating activities (1,968) (8,712)
INVESTING ACTIVITIES
Capital expenditures (238) (650)
--------------------------
Net cash used in investing activities (238) (650)
FINANCING ACTIVITIES
Repayment of note payable to bank (231) -
Repayment of capital lease obligation - (24)
Proceeds from sale of treasury stock - 28
Proceeds from sale and issuance of common stock 1 38
------------ ------------
Net cash provided by (used in) financing activities (230) 42
Effect of exchange rates on cash and cash equivalents (9) 171
------------ ------------
Decrease in cash and cash equivalents (2,445) (9,149)
Cash and cash equivalents at beginning of period 19,880 27,928
------------ ------------
Cash and cash equivalents at end of period $ 17,435 $ 18,779
============ ============
Cash paid during the period for:
Interest $ 52 $ 2
============ ============
Income taxes (net of refunds) $ 20 $ 134
============ ============
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 and real-time.
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, 2005. There have been no changes to
Concurrent's Significant Accounting Policies as disclosed in Note 2 of the
consolidated financial statements in Concurrent's Annual Report on Form 10-K for
the year ended June 30, 2005. 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.
Recently Issued Accounting Pronouncements
On August 31, 2005, the Financial Accounting Standards Board ("FASB")
issued FASB Staff Position ("FSP") No. FAS 123(R)-1, "Classification and
Measurement of Freestanding Financial Instruments Originally Issued in Exchange
for Employee Services under FASB Statement ("SFAS") No. 123(R)." This FSP was
issued to defer at this time the requirement of SFAS 123(R), "Share-Based
Payment", that a freestanding financial instrument originally subject to SFAS
123(R) becomes subject to the recognition and measurement requirements of other
applicable generally accepted accounting principles (GAAP) when the rights
conveyed by the instrument to the holder are no longer dependent on the holder
being an employee of the entity. The guidance in this FSP supersedes FSP EITF
00-19-1, "Application of EITF Issue No. 00-19 to Freestanding Financial
Instruments Originally Issued as Employee Compensation," and amends paragraph
11(b) of SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities," and SFAS 133 Implementation Issue No. C3, "Scope Exceptions:
Exception Related to Share-Based Payment Arrangements." The guidance in this FSP
was applied upon initial adoption of SFAS 123(R) on July 1, 2005. The adoption
of this FSP did not have a material impact on Concurrent's consolidated
financial statements.
2. REVENUE RECOGNITION AND RELATED MATTERS
Concurrent recognizes revenue 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.
5
Software and Hardware Sales
------------------------------
On-demand and real-time product revenues are recognized based on the
guidance in American Institute of Certified Public Accounts 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's standard contractual arrangements with its customers generally
include the delivery of a hardware and software system, certain professional
services that typically involve installation and training, and ongoing software
and hardware maintenance. The software component of the arrangement is
considered to be essential to the functionality of the hardware. Therefore, in
accordance with Emerging Issues Task Force No. 03-5, "Applicability of AICPA
Statement of Position 97-2 to Non-Software Deliverables in an Arrangement
Containing More-Than-Incidental Software", the hardware and the hardware
maintenance components are considered software related and the provisions of SOP
97-2 apply to all elements of the arrangement. 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 VSOE 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.
Professional Services
----------------------
Professional services revenue is primarily generated from integration of
third party software interfaces, training, and hardware installation. These
services are typically completed within 90 days from the receipt of the order.
Under multiple element arrangements, Concurrent allocates revenue to the various
elements based on VSOE of fair value. Concurrent determines VSOE of fair value
for the services based on the standard rate per hour or fixed fee used when
similar services are sold separately. Revenues from these services are
recognized when the services are performed.
In certain instances, Concurrent's customers require significant
customization of both the software and hardware products. In these situations,
the services are considered essential to the functionality of the software and,
therefore, the revenue from the arrangement, with the exception of maintenance,
is recognized in conformity with Accounting Research Bulletin ("ARB") No. 45,
"Long Term Construction Type Contracts" and SOP 81-1, "Accounting for
Performance of Construction-Type and Certain Production-Type Contracts".
Concurrent records the value of the entire arrangement (excluding maintenance)
as the project progresses based on actual costs incurred compared to the total
costs expected to be incurred through completion.
Hardware and Software Maintenance
------------------------------------
Concurrent recognizes revenue from maintenance services in accordance with
SOP 97-2. Depending upon the specific terms of the customer agreement,
Concurrent may include warranty as part of the purchase price. In accordance
with SOP 97-2 and, depending upon the specific terms of the customer agreement,
Concurrent either accrues the estimated costs to be incurred in performing
maintenance services at the time of revenue recognition and shipment of product,
or Concurrent defers revenue associated with the maintenance services to be
provided during the warranty period based upon the value for which Concurrent
has sold such services separately when they are renewed by existing customers.
For those arrangements in which the warranty period is less than or equal to one
year, Concurrent accrues the estimated costs to be incurred in providing
services. In accordance with paragraph 59 of SOP 97-2, Concurrent has determined
that the warranty fee is part of the initial license fee, the warranty period is
for one year or less, the estimated cost of providing the services are
immaterial, and upgrades and enhancements offered during maintenance
arrangements historically have been and are expected to continue to be minimal
and infrequent. Actual costs are then charged against the warranty accrual as
they are incurred. For those arrangements in which the warranty period is
greater than one year, Concurrent defers revenue based upon the value for which
Concurrent has sold such services separately. This revenue is then recognized on
a straight line basis over the warranty period.
6
3. 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
restricted stock when the effects of such assumptions are dilutive. Common
share equivalents of 8,194,000 and 5,851,000 for the three month periods ended
September 30, 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, except per-share
amounts):
THREE MONTHS ENDED
SEPTEMBER 30,
2005 2004
------------ ------------
Basic and diluted earnings per share (EPS) calculation:
Net loss $ (2,183) $ (5,021)
============ ============
Basic weighted average number of shares outstanding 62,770 62,852
Effect of dilutive securities:
Employee stock options - -
------------ ------------
Diluted weighted average number of shares outstanding 62,770 62,852
============ ============
Basic EPS $ (0.03) $ (0.08)
============ ============
Diluted EPS $ (0.03) $ (0.08)
============ ============
4. SHARE-BASED COMPENSATION
At September 30, 2005, Concurrent had share-based employee compensation
plans which are described in Note 13 to the Annual Report on Form 10-K for the
year ended June 30, 2005. Option awards are granted with an exercise price
equal to the market price of Concurrent's stock at the date of grant. Effective
July 1, 2005, Concurrent adopted Statement of Financial Accounting Standards No.
123 (revised 2004), "Share-Based Payment," ("SFAS 123R"). SFAS 123R requires the
recognition of the fair value of stock compensation in the Statement of
Operations. Concurrent recognizes stock compensation expense over the requisite
service period of the individual grantees, which generally equals the vesting
period. All of Concurrent's stock compensation is accounted for as equity
instruments. Prior to July 1, 2005, Concurrent accounted for these plans under
the recognition and measurement principles of APB Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"), and related interpretations.
Concurrent has elected the modified prospective transition method for
adopting SFAS 123R. Under this method, the provisions of SFAS 123R apply to all
awards granted or modified after the date of adoption. Unrecognized expense of
awards not yet vested at the date of adoption shall be recognized in the
Statement of Operations in the periods after the date of adoption using the same
valuation method (i.e. Black-Scholes) and assumptions determined under the
original provisions of SFAS 123, "Accounting for Stock-Based Compensation," as
disclosed in Concurrent's previous filings. As a result of adopting SFAS 123R,
Concurrent's net loss are $51,000 lower than if Concurrent had continued to
account for share-based compensation under APB 25 for the three months ended
September 30, 2005.
In accordance with SFAS 123R, Concurrent recorded $153,000 of share-based
compensation in the Statement of Operations during the three months ended
September 30, 2005. For the three months ended September 30, 2004, Concurrent
recognized $16,000 of share-based compensation expense under APB 25 in the
Statement of Operations related to the issuance of restricted stock awards.
7
The following table illustrates the effect on net income and earnings per
share if Concurrent had applied the fair value recognition provisions of SFAS
123 to stock-based employee compensation to the prior-year period (dollars in
thousands, except per-share data).
THREE MONTHS ENDED
SEPTEMBER 30,
2004
--------------------
Net loss as reported $ (5,021)
Add: employee share-based compensation included in reported net loss 16
Less: employee share-based compensation under SFAS No. 123 (1,063)
--------------------
Pro forma net loss $ (6,068)
====================
Net loss per share:
Basic and diluted net loss per share - as reported $ (0.08)
====================
Basic and diluted net loss per share - pro forma $ (0.10)
====================
Concurrent uses the Black-Scholes valuation model to estimate the fair
value of each option award on the date of grant. No stock options were granted
and no restricted stock awards or other form of share-based compensation were
issued during the three months ended September 30, 2005. The weighted-average
grant-date fair value of the options granted under the stock option plans for
the three months ended September 30, 2004 was $1.17. The weighted-average
assumptions used for the three months ended September 30, 2004 were: expected
dividend yield of 0.0%; risk-free interest rate of 3.6%; expected life of 6
years; and an expected volatility of 104.7%.
The dividend yield of zero is based on the fact that Concurrent has never
paid cash dividends and has no present intention to pay cash dividends. Expected
volatility is based on historical volatility of Concurrent's common stock over
the period commensurate with the expected life of the options. The risk-free
interest rate is derived from the average U.S. Treasury rate for the period,
which approximates the rate in effect at the time of grant. The expected life
calculation is based on the observed and expected time to post-vesting exercise
and forfeitures of options by Concurrent's employees.
Based on historical experience of option pre-vesting cancellations,
Concurrent has assumed an annualized forfeiture rate of 10% for unvested
options. Under the true-up provisions of SFAS 123R, Concurrent will record
additional expense if the actual forfeiture rate is lower than estimated, and
will record a recovery of prior expense if the actual forfeiture is higher than
estimated.
A summary of option activity under the plans as of September 30, 2005, and
changes during the three months then ended is presented below:
WEIGHTED-
WEIGHTED- AVERAGE
AVERAGE REMAINING AGGREGATE
EXERCISE CONTRACTUAL INTRINSIC
OPTIONS SHARES PRICE TERM VALUE
- -------------------------------------------- ---------- ---------- ----------- ----------
Outstanding as of July 1, 2005 6,877,062 $ 4.68
Granted - -
Exercised (700) 1.88
Forfeited or expired (34,089) 5.80
---------- ----------
Outstanding as of September 30, 2005 6,842,273 $ 4.67 6.19 $ 598,000
========== ========== =========== ==========
Vested and exercisable at September 30, 2005 6,273,773 $ 4.95 5.94 $ 286,000
========== ========== =========== ==========
8
Total compensation cost of options granted but not yet vested as of
September 30, 2005 is $588,000, which is expected to be recognized over the
weighted average period of 2.9 years.
Concurrent issued 1,041,000 shares of restricted stock during fiscal year
2005. A portion of the restricted stock vests over time (four years) and a
portion vests based upon performance criteria. Because a portion of this
restricted stock plan is performance based, that portion was accounted for using
variable accounting, requiring interim estimates of compensation expense, prior
to adoption of SFAS 123R. Effective July 1, 2005, Concurrent records expense
for remaining unvested performance-based restricted stock awards, based upon the
grant date fair-value and an assessment of whether the performance criteria will
ultimately be met. A summary of the status of Concurrent's non-vested shares as
of September 30, 2005, and changes during the three months ended September 30,
2005, is presented below:
WEIGHTED-
AVERAGE
GRANT-DATE
NON-VESTED SHARES SHARES FAIR-VALUE
------------------------------- ----------- -----------
Non-vested at July 1, 2005 872,486 $ 1.87
Granted - -
Vested - -
Forfeited (21,594) 1.87
----------- -----------
Nonvested at September 30, 2005 850,892 $ 1.87
=========== ===========
Total compensation cost of restricted stock awards issued, but not yet
vested as of September 30, 2005 is $1,178,000, which is expected to be
recognized over the weighted average period of 3.0 years.
Unearned Compensation
Prior to adoption of SFAS 123R, Concurrent recorded a grant of non-vested
restricted stock in capital with an offsetting contra-equity account, unearned
compensation, which was amortized to expense over the vesting period. Upon
adoption of SFAS 123R, any such balances of unearned compensation as of July 1,
2005 was reversed (i.e., netted against additional paid-in capital). Effective
July 1, 2005, Concurrent reversed $1,562,000 of unearned compensation associated
with remaining unvested restricted stock by reducing additional paid-in capital
by $1,553,000 and par value of common stock by $9,000. As restrictions lapse
over the vesting period, Concurrent will record share-based compensation to
income (loss) from operations and additional paid-in capital.
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):
SEPTEMBER 30, JUNE 30,
2005 2005
-------------- --------------
Raw materials, net $ 3,619 $ 3,599
Work-in-process 1,299 864
Finished goods 518 608
-------------- --------------
$ 5,436 $ 5,071
============== ==============
At September 30, 2005 and June 30, 2005, 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 which would reduce the value of the
inventory to its estimated net realizable value at September 30, 2005 and June
30, 2005.
9
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 years 2004 and 2005 that
were recorded as a reduction to the impairment loss in the line item "Recovery
(impairment loss) of minority investment."
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 specializes in broadband
advertising systems, operations and data warehousing software and related
integration services. Concurrent accounts 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 fiscal year
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, "The Meaning of 'Other-Than-Temporary Impairment'
and Its Application to Certain Investments". 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. See Note 13, "Subsequent Event", for
further information about Everstream.
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The components of accounts payable and accrued expenses are as follows (in
thousands):
SEPTEMBER 30, JUNE 30,
2005 2005
-------------- --------------
Accounts payable, trade $ 3,946 $ 4,727
Accrued payroll, vacation, severance
and other employee expenses 4,164 4,143
Warranty accrual 624 702
Other accrued expenses 1,767 2,483
-------------- --------------
$ 10,501 $ 12,055
============== ==============
Concurrent's estimate of warranty obligations is based on historical
experience and expectation of future conditions. The changes in the warranty
accrual during the three months ended September 30, 2005 were as follows (in
thousands):
Balance at June 30, 2005 $ 702
Charged to costs and expenses 30
Deductions (108)
------
Balance at September 30, 2005 $ 624
======
10
8. COMPREHENSIVE INCOME (LOSS)
Concurrent's total comprehensive loss is as follows (in thousands):
THREE MONTHS ENDED
SEPTEMBER 30,
2005 2004
------------ ------------
Net loss $ (2,183) $ (5,021)
Other comprehensive income (loss)
Foreign currency translation income (loss) (28) 176
------------ ------------
Total comprehensive loss $ (2,211) $ (4,845)
============ ============
9. CONCENTRATION OF CREDIT RISK AND GEOGRAPHIC INFORMATION
During fiscal year 2005, Concurrent changed its management structure by
consolidating the real-time and on-demand operating divisions. The divisional
structure was officially consolidated under a functional organization with
real-time and on-demand product lines. In accordance with SFAS 131, "Disclosure
about Segments of an Enterprise and Related Information", effective July 1,
2005, Concurrent operates in two segments, products and services, as disclosed
within the statements of operations.
The following summarizes the revenues by geographic locations for the three
months ended September 30, 2005 (dollars in thousands):
THREE MONTHS ENDED
SEPTEMBER 30,
2005 2004
----------- -----------
United States $ 9,156 $ 12,746
Asia Pacific 1,941 1,684
United Kingdom 2,267 508
Other European countries 2,574 1,533
----------- -----------
Europe 4,841 2,041
Other 269 859
----------- -----------
Total revenue $ 16,207 $ 17,330
=========== ===========
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
SEPTEMBER 30,
2005 2004
----------- -----------
Customer A 14% 3%
Customer B 10% 19%
Customer C 9% 10%
Customer D 0% 22%
Concurrent assesses credit risk through ongoing credit evaluations of
customers' financial condition and collateral is generally not required. There
were two customers that accounted for $2,225,000 or 15% of trade receivables and
$1,434,000 or 10% of trade
11
receivables, at September 30, 2005. There were two customers that accounted for
$3,219,000 or 19% of trade receivables and $1,974,054 or 12% of trade
receivables, at June 30, 2005.
Concurrent sometimes purchases product components from a single supplier in
order to obtain the required technology and the most favorable price and
delivery terms. For the three months ended September 30, 2005, purchases from
two suppliers were in excess of 10% of Concurrent's total purchases. These two
suppliers accounted for 25% and 10% of Concurrent's purchases during the first
three months of fiscal 2006. Also, for the three months ended September 30,
2004, purchases from three suppliers were in excess of 10% of Concurrent's total
purchases. These three suppliers accounted for 19%, 12% and 12% of Concurrent's
purchases during the first quarter of fiscal 2005.
10. 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 September 30, 2005, $4.1
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. As of September 30, 2005, Concurrent had no
amounts drawn under the Revolver and the balance of the Term Loan was as
follows:
SEPTEMBER 30, JUNE 30,
2005 2005
-------------- --------------
Term note $ 2,306 $ 2,537
Less current portion 973 954
-------------- --------------
Total long-term debt $ 1,333 $ 1,583
============== ==============
Interest on any outstanding amounts under the Revolver would be payable
monthly at the prime rate (6.75% at September 30, 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 would be due on December 23, 2006, unless the Revolver was
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 September 30, 2005.
11. RETIREMENT PLANS
The following table provides a detail of the components of net periodic
benefit cost for the three months ended September 30, 2005 and 2004 (in
thousands):
THREE MONTHS ENDED
SEPTEMBER 30,
2005 2004
------------ ------------
Service cost $ 7 $ 6
Interest cost 47 49
Expected return on plan assets (15) (21)
Amortization of unrecognized net transition obligation 8 8
Recognized actuarial loss - 1
------------ ------------
Net periodic benefit cost $ 47 $ 43
============ ============
12
Concurrent contributed $18,000 to its German subsidiary's defined benefit
plan during the three months ended September 30, 2005, and expects to make
similar contributions during each of the remaining quarters of fiscal 2006.
Concurrent contributed $19,000 to its German subsidiary's defined benefit plan
during the three months ended September 30, 2004.
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 September 30, 2005
and 2004, Concurrent contributed $181,000 and $271,000 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 September 30, 2005 and 2004, Concurrent
contributed $107,000 and $133,000 to the Stakeholder Plan, respectively.
12. 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.
Concurrent enters into agreements in the ordinary course of business with
customers, resellers, distributors, integrators and suppliers. Most of these
agreements require Concurrent to defend and/or indemnify the other party against
intellectual property infringement claims brought by a third party with respect
to Concurrent's products. From time to time, Concurrent also indemnifies
customers and business partners for damages, losses and liabilities they may
suffer or incur relating to personal injury, personal property damage, product
liability, and environmental claims relating to the use of Concurrent's products
and services or resulting from the acts or omissions of Concurrent, its
employees, authorized agents or subcontractors. For example, Concurrent was
notified that certain of its customers were served with a complaint by Acacia
Media Technologies, Corp. (U.S. District Court, Northern District of California)
for allegedly infringing U.S. Patent Nos. 5,132,992; 5,253,275; 5,550,863;
6,002,720; and 6,144,702 by providing broadcast video and video-on-demand
services to end user customers. Some of these customers have requested
indemnification under their customer agreement. Concurrent continues to review
its potential obligations under its indemnification agreements with these
customers, in view of the claims by Acacia, and the indemnity obligations to
these customers from other vendors that also provided systems and services to
these customers.
13. SUBSEQUENT EVENT
On October 11, 2005, Concurrent completed the acquisition of Everstream
pursuant to the Agreement and Plan of Merger, dated August 19, 2005, by and
among Concurrent, Stream Acquisition, Inc., Everstream, and certain selling
stockholders of Everstream, as amended on August 26, 2005.
Pursuant to the Merger Agreement, Concurrent issued 8,456,777 shares of
Concurrent stock equal to approximately $14.375 million for the Everstream stock
it did not already own (Concurrent's existing Everstream stock was valued in the
transaction at approximately $0.5 million), determined by dividing $14.375
million by $1.70, the average trading price of Concurrent stock for the 30
calendar days ending on the third calendar day prior to closing.
13
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 three months ended September 30, 2005, we used approximately
$2.0 million in cash and cash equivalents from operations, and ended the quarter
with $17.4 million in cash and cash equivalents. The use of cash from operations
during the three months ended September 30, 2005 is primarily due to operating
losses and changes in prepaid expenses during the quarter. We believe that
existing cash balances will be sufficient to meet our anticipated working
capital and capital expenditure requirements for the next twelve months.
However, until our revenue increases and stabilizes, it is likely we will
continue to use cash from operating activities. 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 mix of new international
deployments, and expansions of streams, ingest, and storage with smaller, new
North American on-demand deployments.
Other trends in our business are detailed in our latest Form 10-K filed
September 2, 2005.
RECENT EVENTS
On October 11, 2005, we completed the acquisition of Everstream. The
Agreement and Plan of Merger, dated August 19, 2005, by and among Concurrent,
Stream Acquisition, Inc., Everstream, and certain selling stockholders of
Everstream, as amended on August 26, 2005 (the "Merger Agreement").
Pursuant to the Merger Agreement, we issued 8,456,777 shares of our stock
equal to approximately $14.375 million for the Everstream stock we did not
already own (our existing Everstream stock was valued in the transaction at
approximately $0.5 million), determined by dividing $14.375 million by $1.70,
the average trading price of our stock for the 30 calendar days ending on the
third calendar day prior to closing.
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 2, 2005.
14
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
SEPTEMBER 30,
2005 2004
------------------------
(Unaudited)
Revenues:
Product 67.5% 66.9%
Service 32.5 33.1
----------- -----------
Total revenues 100.0 100.0
Cost of sales (% of respective sales category):
Product 49.1 57.5
Service 52.1 61.4
----------- -----------
Total cost of sales 50.1 58.8
----------- -----------
Gross margin 49.9 41.2
Operating expenses:
Sales and marketing 25.5 25.8
Research and development 26.8 29.9
General and administrative 15.5 14.5
----------- -----------
Total operating expenses 67.8 70.2
----------- -----------
Operating loss (17.9) (29.0)
Interest income - net 0.3 0.5
Other income (expense) - net 4.4 (0.2)
----------- -----------
Loss before income taxes (13.2) (28.7)
Provision for income taxes 0.3 0.3
----------- -----------
Net loss (13.5)% (29.0)%
=========== ===========
15
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2004
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
(DOLLARS IN THOUSANDS) 2005 2004 $CHANGE % CHANGE
------------ ------------ ------------ -----------
Product revenues $ 10,943 $ 11,587 $ (644) (5.6%)
Service revenues 5,264 5,743 (479) (8.3%)
------------ ------------ ------------ -----------
Total revenues 16,207 17,330 (1,123) (6.5%)
Product cost of sales 5,368 6,667 (1,299) (19.5%)
Service cost of sales 2,745 3,524 (779) (22.1%)
------------ ------------ ------------ -----------
Total cost of sales 8,113 10,191 (2,078) (20.4%)
------------ ------------ ------------ -----------
Product gross margin 5,575 4,920 655 13.3%
Service gross margin 2,519 2,219 300 13.5%
------------ ------------ ------------ -----------
Total gross margin 8,094 7,139 955 13.4%
Operating expenses:
Sales and marketing 4,128 4,477 (349) (7.8%)
Research and development 4,338 5,180 (842) (16.3%)
General and administrative 2,523 2,506 17 0.7%
------------ ------------ ------------ -----------
Total operating expenses 10,989 12,163 (1,174) (9.7%)
------------ ------------ ------------ -----------
Operating loss (2,895) (5,024) 2,129 (42.4%)
Interest income - net 52 92 (40) (43.5%)
Other income (expense ) - net 707 (35) 742 NM (1)
------------ ------------ ------------ -----------
Loss before income taxes (2,136) (4,967) 2,831 (57.0%)
Provision for income taxes 47 54 (7) (13.0%)
------------ ------------ ------------ -----------
Net loss $ (2,183) $ (5,021) $ 2,838 (56.5%)
============ ============ ============ ===========
(1) NM denotes percentage is not meaningful
Product Sales. Total product sales for the three months ended September
30, 2005 were $10.9 million, a decrease of approximately $0.7 million, or 5.6%,
from $11.6 million for the three months ended September 30, 2004. The decrease
in product sales resulted from the $1.3 million, or 21.9%, decrease in on-demand
product sales to $4.7 million in the quarter ended September 30, 2005 from $6.1
million in the quarter ended September 30, 2004. The decrease in on-demand
product sales was primarily due to lower overall expansion of existing markets
in North America during the quarter ended September 30, 2005, as compared to the
same period of the prior year. The reduction in North American domestic
on-demand product revenue was partially offset by an increase in international
sales volume during the quarter ended September 30, 2005 that resulted in a $1.7
million increase in international on-demand product revenue, primarily in
Europe, compared to the first 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.
Partially offsetting the decrease in on-demand product sales, real-time
product sales increased approximately $0.7 million, or 12.0%, to $6.2 million in
the quarter ended September 30, 2005 from $5.5 million in the quarter ended
September 30, 2004. The increase in real-time product sales is primarily due to
an increase in revenue from international customers due to growing demand for
our Linux based products in addition to sales
16
of our traditional product lines. We expect to maintain market share in our
traditional real-time markets and expect to capture market share in new markets
with our system solutions.
Service Revenue. Service revenue decreased $0.5 million, or 8.3%, to $5.3
million for the three months ended September 30, 2005 from $5.7 million for the
three months ended September 30, 2004. The decrease in service revenue is
attributable to a $0.6 million, or 17.9%, decrease in service revenue associated
with real-time products. Service revenue associated with real-time products
continued to decline primarily due to the expiration 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. The decrease in real-time related service
revenues was partially offset by a $0.1 million, or 4.3%, increase in service
revenue related to on-demand products, as the on-demand business 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 maintenance agreements.
Product Gross Margin. Product gross margin was $5.6 million for the three
months ended September 30, 2005, an increase of approximately $0.7 million, or
13.3%, from $4.9 million for the three months ended September 30, 2004. Product
gross margin as a percentage of product sales increased to 50.9% in the quarter
ended September 30, 2005 from 42.6% in the quarter ended September 30, 2004. The
increase in product margins is primarily due to a more favorable mix of software
and hardware products within the domestic market in the current year and a prior
year incentive discount provided to one of our North American cable customers
who upgraded its older systems to our fourth generation architecture.
Service Gross Margin. The gross margin on service revenue increased $0.3
million, or 13.5%, to $2.5 million, or 47.9% of service revenue in the three
months ended September 30, 2005 from $2.2 million, or 38.6% of service revenue
in the three months ended September 30, 2004. Increasing service margins are
primarily due to cost savings generated by our cost reduction initiative during
the prior fiscal year. Service cost of sales decreased $0.8 million due to
non-recurring prior year severance costs of $0.2 million and lower headcount.
Severance expense recorded in the first quarter of fiscal 2005 resulted from a
reduction in service personnel as we scaled down the infrastructure that is
necessary to fulfill declining real-time product related contractual
obligations. The decline in contractual obligations results from the expiration
of maintenance contracts as legacy machines are removed from service and
replaced with machines that are simpler to maintain.
Sales and Marketing. Sales and marketing expenses decreased approximately
$0.4 million, or 7.8% to $4.1 million in the three months ended September 30,
2005 from $4.5 million in the three months ended September 30, 2004. This
decrease is primarily due to a $0.3 million reduction in severance and salaries,
wages and benefits resulting from the cost savings initiative implemented during
the first quarter of the prior fiscal year.
Research and Development. Research and development expenses decreased $0.8
million, or 16.3% to $4.3 million in the three months ended September 30, 2005
from $5.2 million in the three months ended September 30, 2004. During the three
months ended September 30, 2005, we spent $0.6 million less on development
subcontractors and engineers because they were no longer necessary to meet
software development requirements for customers' business management
functionality, resource management and client system monitoring. In addition to
the decreasing personnel costs, we also spent $0.1 million less in severance
costs as compared to the first quarter of the prior fiscal 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 remained
flat at $2.5 million during each of the three months ended September 30, 2005
and 2004. During the three months ended September 30, 2005, accounting
services, primarily attributable to the additional internal and external audit
work required for compliance with the Sarbanes-Oxley Act of 2002, increased by
$0.2 million, as compared to the three months ended September 30, 2004.
Furthermore, share-based compensation expense resulting from adoption of SFAS
123(R) increased by $0.1 million during the three months ended September 30,
2005, as compared to the same period of the prior year. Offsetting these
increasing costs, salaries wages and benefits decreased by $0.3 million and
severance expense decreased by $0.1 million during the three months ended
September 30, 2005, primarily due to the cost savings initiative during the
first quarter of the prior year.
17
Other income. During the three months ended September 30, 2005, we
received a $0.7 million refund from the Australian Tax Authority. This refund
related to previous withholding tax payments, over many years, on intercompany
charges with our Australian subsidiary. Expense associated with previous
payments was originally recorded to "other expense" within our Consolidated
Statement of Operations; therefore, we have recorded the refund to "other
income" within our Consolidated Statement of Operations.
Provision for Income Taxes. We recorded income tax expense for our
domestic and foreign subsidiaries of $47,000 in the quarter ended September 30,
2005, compared to $54,000 during the quarter ended September 30, 2004. Income
tax expense during both periods is primarily attributable to income earned in
foreign locations that cannot be offset by net operating loss carryforwards.
Net Loss. The net loss for the three months ended September 30, 2005 was
$2.2 million or $0.03 per basic and diluted share compared to a net loss for the
three months ended September 30, 2004 of $5.0 million or $0.08 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:
- the rate of growth, if any, of on-demand market expansions and the
pace at which domestic and international cable companies and telephone
companies implement on-demand technology;
- the rate of growth, if any, of deployment of our real-time operating
systems and tools;
- the actual versus anticipated decline in revenue from maintenance of
real-time proprietary 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.
Uses and sources of cash
We used $2.0 million of cash from operating activities during the three
months ended September 30, 2005 compared to using $8.7 million of cash during
the same period of the prior year. The use of cash from operations was primarily
due to operating losses and changes in prepaid expenses in the current quarter.
Prior period cash usage resulted from both operating losses and changes in
working capital.
We invested $0.2 million in property, plant and equipment during the three
months ended September 30, 2005 compared to $0.6 million during the three months
ended September 30, 2004. Capital additions during each of these periods
related primarily to product development and testing equipment. We expect to
continue at a slightly higher level of capital additions during the remainder of
this fiscal year.
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
18
million term loan. As of September 30, 2005, we had no amounts drawn under the
Revolver and had drawn down the entire $3.0 million, of which $694,000 has been
repaid, under the Term Loan. Interest on all outstanding amounts under the
Revolver would be payable monthly at the prime rate (6.75% at September 30,
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 would be due on December 23, 2006,
unless the Revolver was 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 September 30,
2005, we were in compliance with these covenants. Based on the borrowing
formula and our financial position as of September 30, 2005, $4.1 million would
have been available to us under the Revolver.
At September 30, 2005, we had working capital of $21.4 million and had no
material commitments for capital expenditures compared to working capital of
$22.9 million at June 30, 2005. We believe that existing cash balances will be
sufficient to meet our anticipated working capital and capital expenditure
requirements for the next 12 months; however, until our revenue increases and
stabilizes, it is likely that we will continue to use cash from operating
activities. As part of our cost reduction initiative implemented during the
prior fiscal year, we have reduced our breakeven point. However, if revenues do
not reach these breakeven levels, we will continue to use cash. If this
situation continues, we may need to raise additional funds through an offering
of stock or debt, in addition to our Credit Agreement. We cannot be certain
that we will be able to obtain additional financing on favorable terms, if at
all.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table summarizes our significant contractual obligations and
commitments, by fiscal year, as of September 30, 2005:
PAYMENTS DUE BY FISCAL YEAR
---------------------------------------------------------------
(DOLLARS IN THOUSANDS)
CONTRACTUAL OBLIGATIONS TOTAL 2006 2007-2008 2009-2010 THEREAFTER
- ---------------------------------------------------- ----------- ----------- ----------- -----------
Operating leases $ 2,481 $ 1,094 $ 1,294 $ 93 $ -
Term note obligation 2,306 723 1,583 - -
Interest payments related to term note 225 121 104 - -
Pension plan 2,044 119 393 438 1,094
Non-binding purchase commitment (a) 425 425 - - -
----------- ----------- ----------- ----------- -----------
TOTAL $ 7,481 $ 2,482 $ 3,374 $ 531 $ 1,094
=========== =========== =========== =========== ===========
(a) This is a purchase commitment with a supplier for Concurrent to pay
for nonrecurring customization costs. If Concurrent does not purchase
a specified number of products from the supplier, then Concurrent is
not obligated to pay the entire amount.
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, and our software development costs.
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
19
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 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; customer obligations that could
impact revenue recognition; interruptions in operations due to severe weather
interrupting us, our suppliers, or our customers; and our ability to
successfully integrate Everstream into our business.
Other important risk factors are discussed in our Annual Report on Form
10-K for the fiscal year ended June 30, 2005.
Our forward-looking statements are based on current expectations and speak
only as of the date of such statements. We undertake no obligation to publicly
update or revise any forward-looking statement, whether as a result of future
events, new information or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates and foreign
currency exchange rates. We are exposed to the impact of interest rate changes
on our short-term cash investments, which are backed by U.S. government
obligations, and other investments in respect of institutions with the highest
credit ratings, all of which have maturities of three months or less. These
short-term investments carry a degree of interest rate risk. We believe that
the impact of a 10% increase or decline in interest rates would not be material
to our investment income. We are also exposed to fluctuations in interest rates
as we seek debt to sustain our operations. At September 30, 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.
20
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. Other matters pending are disclosed in our Form
10-K for the year ended June 30, 2005 and in Note 12 to the Condensed
Consolidated Financial Statements for the three months ended September 30, 2005.
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 period 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 period 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 on August 12, 2002).
4.3 --Amended and Restated Rights Agreement dated as of August 7, 2002 between the Registrant
and American Stock Transfer & Trust Company, as Rights Agent (incorporated by reference to
the Registrant's Current Report on Form 8-K/A filed on August 12, 2002).
10.1 --Agreement and Plan of Merger, dated August 19, 2005, by and among Concurrent Computer
Corporation, Stream Acquisition, Inc., Everstream Holdings, Inc. and certain selling stockholders
Of Everstream Holdings, Inc.
10.2 --First Amendment to Agreement and Plan of Merger, dated August 26, 2005, by and among
Concurrent Computer Corporation, Stream Acquisition, Inc., Everstream Holdings, Inc. and
Certain selling stockholders of Everstream Holdings, Inc.
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.
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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: November 7, 2005 CONCURRENT COMPUTER CORPORATION
By: /s/ Gregory S. Wilson
-------------------------
Gregory S. Wilson
Chief Financial Officer
(Principal Financial and Accounting Officer)
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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 period 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 period 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 on August 12, 2002).
4.3 --Amended and Restated Rights Agreement dated as of August 7, 2002 between the Registrant
and American Stock Transfer & Trust Company, as Rights Agent (incorporated by reference to
the Registrant's Current Report on Form 8-K/A filed on August 12, 2002).
10.1 --Agreement and Plan of Merger, dated August 19, 2005, by and among Concurrent Computer
Corporation, Stream Acquisition, Inc., Everstream Holdings, Inc. and certain selling stockholders
Of Everstream Holdings, Inc.
10.2 --First Amendment to Agreement and Plan of Merger, dated August 26, 2005, by and among
Concurrent Computer Corporation, Stream Acquisition, Inc., Everstream Holdings, Inc. and
Certain selling stockholders of Everstream Holdings, Inc.
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.
23