UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of
--- the Securities Exchange Act of 1934
For the Quarterly Period Ended December 31, 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-2 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 January 31, 2006 was 71,363,000.
CONCURRENT COMPUTER CORPORATION
FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2005
TABLE OF CONTENTS
PAGE
----
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 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 28
ITEM 4. CONTROLS AND PROCEDURES 28
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS 29
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS 29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 29
ITEM 6. EXHIBITS 29
EX-10.1 DESCRIPTION OF AMENDMENT TO EMPLOYMENT AGREEMENTS
WITH CERTAIN EXECUTIVE OFFICERS
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)
DECEMBER 31, JUNE 30,
ASSETS 2005 2005
-------------- --------------
Current assets:
Cash and cash equivalents $ 17,050 $ 19,880
Accounts receivable, less allowance for doubtful accounts
of $193 at December 31, 2005 and $200 at June 30, 2005 15,495 16,577
Inventories - net 6,640 5,071
Deferred tax asset - net 220 226
Prepaid expenses and other current assets 1,956 858
-------------- --------------
Total current assets 41,361 42,612
Property, plant and equipment - net 6,899 8,319
Intangible assets - net 9,331 823
Goodwill 15,590 10,744
Investment in minority owned company - 140
Other long-term assets - net 1,086 1,339
-------------- --------------
Total assets $ 74,267 $ 63,977
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 12,667 $ 12,055
Notes payable to bank, current portion 993 954
Deferred revenue 6,706 6,692
-------------- --------------
Total current liabilities 20,366 19,701
Long-term liabilities:
Deferred revenue 1,843 2,349
Notes payable to bank, less current portion 1,077 1,583
Pension liability 1,747 1,705
Other 299 286
-------------- --------------
Total liabilities 25,332 25,624
Commitments and contingencies (Note 14)
Stockholders' equity:
Shares of common stock, par value $.01; 100,000,000 authorized;
71,353,011 and 63,642,646 issued and outstanding at December
31, 2005 and June 30, 2005, respectively 714 637
Capital in excess of par value 188,879 175,769
Accumulated deficit (140,242) (136,455)
Treasury stock (34) -
Unearned compensation - (1,562)
Accumulated other comprehensive loss (382) (36)
-------------- --------------
Total stockholders' equity 48,935 38,353
-------------- --------------
Total liabilities and stockholders' equity $ 74,267 $ 63,977
============== ==============
<FN>
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 SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2005 2004 2005 2004
-------- -------- -------- --------
Revenues:
Product $12,750 $14,721 $23,693 $26,308
Service 6,106 5,303 11,370 11,046
-------- -------- -------- --------
Total revenues 18,856 20,024 35,063 37,354
Cost of sales:
Product 6,084 6,880 11,452 13,547
Service 2,855 3,248 5,600 6,772
-------- -------- -------- --------
Total cost of sales 8,939 10,128 17,052 20,319
-------- -------- -------- --------
Gross margin 9,917 9,896 18,011 17,035
Operating expenses:
Sales and marketing 4,234 4,087 8,362 8,564
Research and development 4,900 4,672 9,238 9,852
General and administrative 2,379 2,275 4,902 4,781
-------- -------- -------- --------
Total operating expenses 11,513 11,034 22,502 23,197
-------- -------- -------- --------
Operating loss (1,596) (1,138) (4,491) (6,162)
Impairment loss on minority investment - (313) - (313)
Interest income 105 94 219 187
Interest expense (69) (12) (131) (13)
Other income (expense) (18) (66) 689 (101)
-------- -------- -------- --------
Loss before income taxes (1,578) (1,435) (3,714) (6,402)
Provision for income taxes 26 12 73 66
-------- -------- -------- --------
Net loss $(1,604) $(1,447) $(3,787) $(6,468)
======== ======== ======== ========
Net loss per share
Basic $ (0.02) $ (0.02) $ (0.06) $ (0.10)
======== ======== ======== ========
Diluted $ (0.02) $ (0.02) $ (0.06) $ (0.10)
======== ======== ======== ========
<FN>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
CONCURRENT COMPUTER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
DECEMBER 31,
2005 2004
--------- --------
OPERATING ACTIVITIES
Net loss $ (3,787) $(6,468)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 2,404 2,819
Share-based compensation 371 118
Impairment loss on minority investment - 313
Other non-cash expenses 9 (17)
Changes in operating assets and liabilities:
Accounts receivable 1,881 (1,748)
Inventories (1,527) 5,043
Prepaid expenses and other current assets (1,226) (782)
Other long-term assets 254 240
Accounts payable and accrued expenses (313) (2,099)
Deferred revenue (671) (4,548)
Other long-term liabilities 55 256
--------- --------
Total adjustments to net loss 1,237 (405)
--------- --------
Net cash used in operating activities (2,550) (6,873)
INVESTING ACTIVITIES
Capital expenditures (635) (887)
Cash received from acquisition of Everstream 1,159 -
--------- --------
Net cash provided by (used in) investing activities 524 (887)
FINANCING ACTIVITIES
Repayment of note payable to bank (467) -
Proceeds from note payable to bank, net of issuance expenses - 2,930
Repayment of capital lease obligation - (49)
Sale (purchase) of treasury stock (34) 28
Proceeds from sale and issuance of common stock 1 57
--------- --------
Net cash provided by (used in) financing activities (500) 2,966
Effect of exchange rates on cash and cash equivalents (304) 787
--------- --------
Decrease in cash and cash equivalents (2,830) (4,007)
Cash and cash equivalents at beginning of period 19,880 27,928
--------- --------
Cash and cash equivalents at end of period $ 17,050 $23,921
========= ========
Cash paid during the period for:
Interest $ 111 $ 2
========= ========
Income taxes (net of refunds) $ 53 $ 212
========= ========
Non-cash investing activities:
Shares issued in acquisition of Everstream $ 14,377 $ -
========= ========
<FN>
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, software products that provide monitoring and
operations management for on-demand TV, and 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
operating systems and development tools to commercial and government customers
for use with 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 included 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.
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.
Software and Hardware Sales
------------------------------
On-demand and real-time product 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's standard contractual arrangements with its customers generally
include the delivery of a hardware and/or 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
5
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. Therefore, 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.
3. BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed in accordance with Statement
of Financial Accounting Standard ("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 7,683,000 and
6,790,000 for the three months ended December 31, 2005 and 2004, respectively,
were excluded from the calculation as their effect
was antidilutive. Common share equivalents of 7,762,000 and 6,843,000 for the
six months ended December 31, 2005 and 2004, respectively, were excluded from
the calculation as their effect was antidilutive. The following
6
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 SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Basic and diluted earnings per share (EPS) calculation:
Net loss $ (1,604) $ (1,447) $ (3,787) $ (6,468)
=========== =========== =========== ===========
Basic weighted average number of shares outstanding 70,385 62,747 66,578 62,714
Effect of dilutive securities:
Employee stock options - - - -
----------- ----------- ----------- -----------
Diluted weighted average number of shares outstanding 70,385 62,747 66,578 62,714
=========== =========== =========== ===========
Basic EPS $ (0.02) $ (0.02) $ (0.06) $ (0.10)
=========== =========== =========== ===========
Diluted EPS $ (0.02) $ (0.02) $ (0.06) $ (0.10)
=========== =========== =========== ===========
4. SHARE-BASED COMPENSATION
At December 31, 2005, Concurrent had share-based employee compensation
plans which are described in Note 13 of the consolidated financial statements
included in Concurrent's 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 losses for the three and six months ended December 31, 2005
are $121,000 and $172,000 greater, respectively, than if Concurrent had
continued to account for share-based compensation under APB 25 for the three and
six months ended December 31, 2005.
Concurrent recorded $218,000 and $371,000 of share-based compensation
related to vested stock options and restricted stock in the Statement of
Operations during the three and six months ended December 31, 2005,
respectively. For the three and six months ended December 31, 2004, Concurrent
recognized $102,000 and $118,000 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 (loss) and
earnings (loss) 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 SIX MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
2004 2004
-------------- --------------
Net loss as reported $ (1,447) $ (6,468)
Add: employee share-based compensation included 102 118
Less: employee share-based compensation (931) (1,948)
-------------- --------------
Pro forma net loss $ (2,276) $ (8,298)
============== ==============
Net loss per share:
Basic and diluted net loss per share - as reported $ (0.02) $ (0.10)
============== ==============
Basic and diluted net loss per share - pro forma $ (0.04) $ (0.13)
============== ==============
Concurrent uses the Black-Scholes valuation model to estimate the fair
value of each option award on the date of grant. During the six months ended
December 31, 2005, Concurrent issued 60,000 stock options with immediate vesting
and issued no restricted stock awards. The weighted-average grant-date fair
value of the options granted under the stock option plans during this period was
$1.58. The weighted-average assumptions used for the three months ended
December 31, 2005 were: expected dividend yield of 0.0%; risk-free interest rate
of 4.4%; expected life of 6 years; and an expected volatility of 83.3%.
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
granted prior to July 1, 2005. Concurrent has assumed a 0% forfeiture rate on
options granted during the six months ended December 31, 2005, as these options
vested immediately. 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.
8
A summary of option activity under the plans as of December 31, 2005, and
changes during the six 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 60,000 1.58
Exercised (700) 1.88
Forfeited or expired (153,438) 7.60
---------- ----------
Outstanding as of December 31, 2005 6,782,924 $ 4.59 5.98 $ 343,000
========== ========== =========== ==========
Vested and exercisable at December 31, 2005 6,226,924 $ 4.86 5.74 $ 154,000
========== ========== =========== ==========
Total compensation cost of options granted but not yet vested as of
December 31, 2005 is $536,000, which is expected to be recognized over the
weighted average period of 2.7 years.
Concurrent issued 1,041,000 shares of restricted stock during the six
months ended December 31, 2004. 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 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 December 31, 2005, and changes during the
six months ended December 31, 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 (125,374) 1.87
Forfeited (68,389) 1.87
---------- -----------
Non-vested at December 31, 2005 678,723 $ 1.88
========== ===========
Total compensation cost of restricted stock awards issued, but not yet
vested as of December 31, 2005 is $1,007,000, which is expected to be recognized
over the weighted average period of 2.8 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 remaining balance 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.
9
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 (in thousands):
DECEMBER 31, JUNE 30,
2005 2005
------------- -------------
Raw materials, net $ 5,385 $ 3,599
Work-in-process 770 864
Finished goods 485 608
------------- -------------
$ 6,640 $ 5,071
============= =============
At December 31, 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 December 31, 2005 and June
30, 2005.
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 $3.0 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) on 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. On January 9, 2006 the U.S. Court of Appeals for
the Federal Circuit affirmed the lower court's decision in favor of nCube. 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 $500,000 in Everstream Holdings,
Inc. ("Everstream") and incurred $53,000 in acquisition costs 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
accounted for its investment in the Series C Preferred stock of Everstream using
the cost method because Concurrent did not believe it exercised significant
influence over 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, "Impairment loss on minority
investment", and reduced its "Investment in minority owned company" to $140,000.
On August 19, 2005, Concurrent entered into an Agreement and Plan of Merger
with Stream Acquisition, Inc., Everstream, and certain selling stockholders of
Everstream, as amended on August 26, 2005 (the "Merger Agreement"). The
acquisition of Everstream pursuant to the Merger Agreement was completed on
October 11, 2005. At this time, Concurrent reduced the balance in its
"Investment in minority owned company" to $0, as Concurrent acquired 100% of the
voting equity interest of Everstream.
10
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. Refer to Note
12 for additional information on Concurrent's acquisition of Everstream.
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The components of accounts payable and accrued expenses are as follows (in
thousands):
DECEMBER 31, JUNE 30,
2005 2005
------------- -------------
Accounts payable, trade $ 6,496 $ 4,727
Accrued payroll, vacation, severance
and other employee expenses 3,914 4,143
Warranty accrual 577 702
Other accrued expenses 1,680 2,483
------------- -------------
$ 12,667 $ 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 six months ended December 31, 2005 were as follows (in
thousands):
Balance at June 30, 2005 $ 702
Charged to costs and expenses 130
Deductions (255)
------
Balance at December 31, 2005 $ 577
======
8. COMPREHENSIVE INCOME (LOSS)
Concurrent's total comprehensive loss is as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net loss $ (1,604) $ (1,447) $ (3,787) $ (6,468)
Other comprehensive income (loss):
Foreign currency translation income (loss) (318) 750 (346) 926
----------- ----------- ----------- -----------
Total comprehensive loss $ (1,922) $ (697) $ (4,133) $ (5,542)
=========== =========== =========== ===========
9. CONCENTRATION OF CREDIT RISK, SEGMENT, 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. As a result of these changes, Concurrent
no longer reports segment information for real-time and on-demand divisions.
Operating costs other than cost of revenue are not allocated to the product and
services segments. However, Concurrent still provides revenue and margin
information for products and services. 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.
11
The following summarizes the revenues by geographic locations for the three
and six months ended December 31, 2005 (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2005 2004 2005 2004
---------- ---------- ---------- ----------
United States $ 14,507 $ 14,444 $ 23,744 $ 27,214
Japan 829 2,090 2,125 3,025
Other Asia Pacific countries 809 911 1,455 1,659
---------- ---------- ---------- ----------
Asia Pacific 1,638 3,001 3,580 4,684
Europe 2,171 2,237 7,013 4,274
Other 540 342 726 1,182
---------- ---------- ---------- ----------
Total revenue $ 18,856 $ 20,024 $ 35,063 $ 37,354
========== ========== ========== ==========
In addition, 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 SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2005 2004 2005 2004
---------- ---------- ---------- ----------
Customer A 21% 4% 15% 3%
Customer B 15% 15% 13% 17%
Customer C 12% 22% 11% 16%
Customer D 0% 2% 0% 11%
Concurrent assesses credit risk through ongoing credit evaluations of
customers' financial condition and collateral is generally not required. One
customer accounted for $3,083,000 or 20% of trade receivables, a second customer
accounted for $2,178,000 or 14% of trade receivables and a third customer
accounted for $2,059,000 or 13% of trade receivables, at December 31, 2005. At
June 30, 2005, one customer accounted for $3,219,000 or 19% of trade receivables
and a second customer accounted for $1,974,000 or 12% of trade receivables. No
other customers accounted for 10% or more of trade receivables as of December
31, 2005 or 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 December 31, 2005, purchases from
each of two suppliers were in excess of 10% of Concurrent's total purchases.
These two suppliers accounted for 29% and 22% of Concurrent's purchases during
the three months ended December 31, 2005. Also, for the three months ended
December 31, 2004, purchases from two suppliers were in excess of 10% of
Concurrent's total purchases. These two suppliers accounted for 26% and 19% of
Concurrent's purchases during the three months ended December 31, 2004. For the
six months ended December 31, 2005, purchases from two suppliers were in excess
of 10% of Concurrent's total purchases. These two suppliers accounted for 23%
and 21% of Concurrent's purchases during the six months ended December 31, 2005.
Also, for the six months ended December 31, 2004, purchases from two suppliers
were in excess of 10% of Concurrent's total purchases. These two suppliers
accounted for 19% and 18% of Concurrent's purchases during the six months ended
December 31, 2004.
12
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 December 31, 2005, $8.4
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 December 31, 2005, Concurrent had no
amounts drawn under the Revolver and the balance of the Term Loan was as follows
(in thousands):
DECEMBER 31, JUNE 30,
2005 2005
------------- -------------
Term note $ 2,070 $ 2,537
Less current portion 993 954
------------- -------------
Total long-term debt $ 1,077 $ 1,583
============= =============
Interest on any outstanding amounts under the Revolver would be payable
monthly at the prime rate (7.25% at December 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 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 December 31, 2005.
11. RETIREMENT PLANS
The following table provides a detail of the components of net periodic
benefit cost for the three and six months ended December 31, 2005 and 2004 (in
thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Service cost $ 7 $ 7 $ 14 $ 13
Interest cost 47 55 94 104
Expected return on plan assets (15) (23) (30) (44)
Amortization of unrecognized net transition obligation 8 8 16 16
Recognized actuarial loss - 1 - 2
----------- ----------- ----------- -----------
Net periodic benefit cost $ 47 $ 48 $ 94 $ 91
=========== =========== =========== ===========
Concurrent contributed $17,000 and $34,000 to its German subsidiary's
defined benefit plan during the three and six months ended December 31, 2005,
and expects to make similar contributions during each of the remaining quarters
of fiscal 2006. Concurrent contributed $20,000 and $36,000 to its German
subsidiary's defined benefit plan during the three and six months ended December
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 December 31, 2005
and 2004, Concurrent contributed $149,000 and $243,000 to this plan,
respectively. During the six months ended December 31, 2005 and 2004,
Concurrent contributed $329,000 and $514,000 to this plan, respectively.
13
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 three to four years, contingent upon their continued employment
with Concurrent. During the three months ended December 31, 2005 and 2004,
Concurrent contributed $54,000 and $125,000 to the Stakeholder Plan,
respectively. During the six months ended December 31, 2005 and 2004,
Concurrent contributed $161,000 and $258,000 to this plan, respectively.
12. ACQUISITION OF EVERSTREAM
On August 19, 2005, Concurrent entered into the Merger Agreement with Stream
Acquisition, Inc., Everstream, and certain selling stockholders of Everstream,
as amended on August 26, 2005. The acquisition of Everstream pursuant to the
Merger Agreement was completed on October 11, 2005. Everstream is an
organization that provides comprehensive business analytics and advertising
solutions for cable and satellite operators. Everstream develops solutions that
enable its customers to evaluate and measure performance characteristics of
transactional services such as video-on-demand. Everstream is also developing
interactive and on-demand television applications to deliver impression based
and one-to-one interactive advertising. Concurrent purchased Everstream to
acquire its software and customer base and has included Everstream results in
its interim financial results for the period from October 11, 2005 through
December 31, 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.
The purchase price has been preliminarily allocated as follows (in
thousands):
Estimated fair value of Concurrent stock issued to Everstream $ 14,375
Estimated direct costs of acquisition 710
----------
Purchase price 15,085
Historical book values of Everstream assets and liabilities (2,531)
Estimated fair value of intangible assets acquired (7,848)
Carrying value of previous investment in Everstream 140
----------
Goodwill $ 4,846
==========
Concurrent allocated $8.8 million of the purchase price to the acquired
intangible assets. The estimated fair values reflected below were determined by
a third party appraiser and are based on the expected future cash flows over the
expected lives of the intangible assets. These fair values have not been
finalized and are therefore subject to further adjustment. Concurrent expects
to maintain usage of the Everstream trademark on existing products and introduce
new products in the future that will also display the trademark. Consequently,
the acquired Everstream trademark qualifies as an indefinite-lived asset in
accordance with the criteria set forth in SFAS No. 142, "Goodwill and Other
Intangible Assets." Identifiable intangible assets with finite useful lives are
amortized over their estimated useful lives under the purchase method of
accounting. Identifiable intangible assets with indefinite lives are not
amortized, but instead shall be tested for impairment at least annually. If the
carrying amount of either a finite- or indefinite-lived intangible asset is
subsequently determined to exceed its fair value, an impairment loss shall be
recognized in an amount equal to that excess.
14
The following table reflects the estimated fair values of the acquired
intangible assets and related estimates of useful lives (dollar amounts in
thousands):
ESTIMATED ESTIMATED
FAIR VALUE USEFUL LIFE
----------- ------------
Identifiable intangible assets:
Developed technologies $ 5,800 8 years
Customer relationships 1,900 11 years
Trademarks 1,100 Indefinite
-----------
Total $ 8,800
===========
The remaining excess purchase price of $4.8 million was determined to be
goodwill and will be periodically reviewed for potential impairment in
accordance with SFAS No. 142.
The following table reflects the unaudited pro forma combined results of
Concurrent and Everstream for the three and six months ended December 31, 2005
and 2004 as if the acquisition occurred on July 1, 2004 (in thousands, except
per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------ ------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Pro forma revenue $ 19,062 $ 20,348 $ 36,115 $ 37,880
Pro forma net income (loss) $ (1,543) $ (2,119) $ (4,691) $ (7,825)
Pro forma (loss) earnings per share:
Basic $ (0.02) $ (0.03) $ (0.07) $ (0.11)
Diluted $ (0.02) $ (0.03) $ (0.07) $ (0.11)
Weighted average shares outstanding:
Basic 71,305 71,204 71,266 71,171
Diluted 71,305 71,204 71,266 71,171
The pro forma information does not necessarily reflect the actual results
that would have occurred, nor is it necessarily indicative of future results of
the combined companies.
13. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill was $15,590,000 and $10,744,000 as of December 31, 2005 and June
30, 2005, respectively. Concurrent does not measure assets on a segment basis,
and therefore, does not allocate goodwill on a segment basis. Goodwill is
attributed to operations within the United States. During the six months ended
December 31, 2005, goodwill increased by $4,846,000 as a result of the
Everstream acquisition on October 11, 2005 (See Note 12). In accordance with
SFAS 142, Concurrent tests goodwill for impairment, at least annually.
Concurrent's annual goodwill impairment testing date is July 1.
15
Other intangible assets as of December 31, 2005 and June 30, 2005 consisted
of the following (in thousands):
December 31, June 30,
2005 2005
-------------- --------------
Cost of amortizable intangibles:
Purchased technology $ 7,700 $ 1,900
Customer relationships 1,900 -
-------------- --------------
Total cost of intangibles 9,600 1,900
Less accumulated amortization:
Purchased technology (1,331) (1,077)
Customer relationships (38) -
-------------- --------------
Total accumulated amortization (1,369) (1,077)
Trademark 1,100 -
-------------- --------------
Total intangible assets, net $ 9,331 $ 823
============== ==============
Amortization expense for the three months ended December 31, 2005 and 2004
was $246,000 and $47,000, respectively. Amortization expense for the six months
ended December 31, 2005 and 2004 was $293,000 and $95,000, respectively. The
estimated amortization expense related to intangible assets for the next five
fiscal years is (in thousands):
Fiscal year:
2007 $1,088
2008 1,088
2009 1,088
2010 961
2011 898
------
$5,123
======
14. 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 has entered into an agreement with a vendor in which the vendor
will perform nonrecurring customization services. Concurrent may be obligated to
pay as much as $750,000 for the completion of these services. Concurrent had
made payments to this vendor totaling $429,000 as of December 31, 2005, and
totaling $175,000 as of June 30, 2005. These amounts are recorded in the line
item "Prepaid expenses and other current assets" at December 31, 2005 and June
30, 2005. This asset will be amortized over the estimated life of the new
product.
Concurrent enters into agreements in the ordinary course of business with
customers, resellers, distributors, integrators and suppliers that often 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. 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
16
customer agreement. 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. 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.
17
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 six months ended December 31, 2005, we used approximately $2.6
million in cash and cash equivalents from operations, and ended the quarter with
$17.1 million in cash and cash equivalents. (Our cash balance benefited from
the addition of $1.2 million from the acquisition of Everstream during the
quarter.) The use of cash from operations during the six months ended December
31, 2005 was primarily due to operating losses, inventory purchases, and
insurance prepayments in the six months ended December 31, 2005. 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.
A recent trend has been a shift in on-demand revenue from large, new North
American on-demand deployments to a mix of new international deployments;
expansions of streams, ingest, and storage at previously deployed systems; and
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 August 19, 2005, Concurrent entered into an Agreement and Plan of Merger
with Stream Acquisition, Inc., Everstream, and certain selling stockholders of
Everstream, as amended on August 26, 2005. The acquisition of Everstream
pursuant to Merger Agreement was completed on October 11, 2005.
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. As part of this purchase, we allocated
approximately $4.8 million to goodwill and $8.8 million to intangibles,
including developed technologies, customer relationships, and trademark.
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.
18
SELECTED OPERATING DATA AS A PERCENTAGE OF TOTAL REVENUE
The following table sets forth selected operating data as a percentage of
total revenue, unless otherwise indicated, for certain items in our consolidated
statements of operations for the periods indicated.
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2005 2004 2005 2004
---------------------- ----------------------
(Unaudited) (Unaudited)
Revenues:
Product 67.6 % 73.5 % 67.6 % 70.4 %
Service 32.4 26.5 32.4 29.6
---------- ---------- ---------- ----------
Total revenues 100.0 100.0 100.0 100.0
Cost of sales (% of respective sales category):
Product 47.7 46.7 48.3 51.5
Service 46.8 61.2 49.3 61.3
---------- ---------- ---------- ----------
Total cost of sales 47.4 50.6 48.6 54.4
Gross margin 52.6 49.4 51.4 45.6
Operating expenses:
Sales and marketing 22.5 20.4 23.9 22.9
Research and development 26.0 23.3 26.3 26.4
General and administrative 12.6 11.3 14.0 12.8
---------- ---------- ---------- ----------
Total operating expenses 61.1 55.0 64.2 62.1
---------- ---------- ---------- ----------
Operating loss (8.5) (5.6) (12.8) (16.5)
Impairment loss on minority investment - (1.6) - (0.8)
Interest income - net 0.2 0.4 0.3 0.5
Other income (expense) - net (0.1) (0.3) 1.9 (0.3)
---------- ---------- ---------- ----------
Loss before income taxes (8.4) (7.1) (10.6) (17.1)
Provision for income taxes 0.1 0.1 0.2 0.2
---------- ---------- ---------- ----------
Net loss (8.5)% (7.2)% (10.8)% (17.3)%
========== ========== ========== ==========
19
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED DECEMBER 31, 2005 COMPARED TO THE THREE MONTHS ENDED
DECEMBER 31, 2004
THREE MONTHS ENDED
DECEMBER 31,
------------------------
(DOLLARS IN THOUSANDS) 2005 2004 $ CHANGE % CHANGE
----------- ----------- ----------- ----------
Product revenues $ 12,750 $ 14,721 $ (1,971) (13.4%)
Service revenues 6,106 5,303 803 15.1%
----------- ----------- ----------- ----------
Total revenues 18,856 20,024 (1,168) (5.8%)
Product cost of sales 6,084 6,880 (796) (11.6%)
Service cost of sales 2,855 3,248 (393) (12.1%)
----------- ----------- ----------- ----------
Total cost of sales 8,939 10,128 (1,189) (11.7%)
----------- ----------- ----------- ----------
Product gross margin 6,666 7,841 (1,175) (15.0%)
Service gross margin 3,251 2,055 1,196 58.2%
----------- ----------- ----------- ----------
Total gross margin 9,917 9,896 21 0.2%
Operating expenses:
Sales and marketing 4,234 4,087 147 3.6%
Research and development 4,900 4,672 228 4.9%
General and administrative 2,379 2,275 104 4.6%
----------- ----------- ----------- ----------
Total operating expenses 11,513 11,034 479 4.3%
----------- ----------- ----------- ----------
Operating loss (1,596) (1,138) (458) 40.2%
Impairment loss on minority investment - (313) 313 NM (1)
Interest income - net 36 82 (46) (56.1%)
Other expense - net (18) (66) 48 NM (1)
----------- ----------- ----------- ----------
Loss before income taxes (1,578) (1,435) (143) 10.0%
Provision for income taxes 26 12 14 116.7%
----------- ----------- ----------- ----------
Net loss $ (1,604) $ (1,447) $ (157) 10.9%
=========== =========== =========== ==========
(1) NM denotes percentage is not meaningful
Product Sales. Total product sales for the three months ended December 31,
2005 were $12.7 million, a decrease of approximately $2.0 million, or 13.4%,
from $14.7 million for the three months ended December 31, 2004. The decrease in
product sales resulted from the $2.4 million, or 27.7%, decrease in on-demand
product sales to $6.2 million in the quarter ended December 31, 2005 from $8.6
million in the quarter ended December 31, 2004. This decrease in on-demand
product revenue was net of the additional revenue from Everstream products sold
subsequent to the acquisition of Everstream. The decrease in on-demand product
sales during the quarter ended December 31, 2005, as compared to the same period
of the prior year was due to fewer international deployments, primarily in the
Asia-Pacific region, that resulted in a $1.3 million reduction in on-demand
product revenue and due to fewer new markets in North America, resulting in a
$1.1 million reduction in on-demand product revenue. 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 $0.4 million, or 6.5%, to $6.6 million in
the quarter ended December 31, 2005 from $6.2 million in the quarter ended
December 31, 2004. The increase in real-time product sales was primarily due to
an increase in revenue from international and domestic customers due to growing
demand for our Linux based products in addition to sales 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.
20
Service Revenue. Service revenue increased $0.8 million, or 15.1%, to $6.1
million for the three months ended December 31, 2005 from $5.3 million for the
three months ended December 31, 2004. The increase in service revenue is
attributable to a $1.6 million, or 83.4% increase in service revenue associated
with on-demand products. Service revenue associated with on-demand products
increased partly due to the addition of Everstream service revenue in the
current period. Everstream service revenue was primarily attributable to
maintenance service on software products and integration and service performed
after Concurrent's acquisition of Everstream. Furthermore, 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 anticipate selling new maintenance agreements to
our customers.
The increase in on-demand service revenues was partially offset by a $0.8
million, or 24.8%, decrease in service revenue related to 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.
Product Gross Margin. Product gross margin was $6.7 million for the three
months ended December 31, 2005, a decrease of approximately $1.2 million, or
15.0%, from $7.8 million for the three months ended December 31, 2004. Product
gross margin as a percentage of product sales decreased to 52.3% in the three
months ended December 31, 2005 from 53.3% in the three months ended December 31,
2004, primarily due to $0.2 million of additional amortization expense incurred
during the current quarter related to acquired Everstream technology.
Service Gross Margin. The gross margin on service revenue increased $1.2
million, or 58.2%, to $3.3 million, or 53.2% of service revenue in the three
months ended December 31, 2005 from $2.1 million, or 38.8% of service revenue in
the three months ended December 31, 2004. Increasing service margins are
primarily due to service revenues generated by Everstream subsequent to the
acquisition of Everstream. This new source of revenue provides higher service
margins than we have traditionally experienced and we expect this revenue source
to continue to have a favorable impact on service margins going forward,
although we cannot be assured that they will continue at the same level achieved
during the three months ended December 31, 2005. Service margins also increased
during the three months ended December 31, 2005, as compared to the three months
ended December 31, 2004, due to cost savings generated by our cost reduction
initiative during the prior fiscal year. Service cost of sales decreased $0.4
million due to fewer service personnel in the current year, which resulted in a
$0.3 million reduction in service related salaries, wages and benefits, and
related prior period severance costs of $0.1 million. Severance expense
recorded in the three months ended December 31, 2004 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 less costly to maintain.
Sales and Marketing. Sales and marketing expenses increased approximately
$0.1 million, or 3.6% to $4.2 million in the three months ended December 31,
2005 from $4.1 million in the three months ended December 31, 2004. This
increase is primarily due to a $0.3 million increase in commission expense
resulting from the structure of commission agreements in the current year. Also
during the quarter, we began including expenses from Everstream's sales force
and amortization of Everstream's customer base, resulting in an additional $0.1
million of expense during the three months ended December 31, 2005, as compared
to the same period in the prior year. These additional costs were partially
offset by a $0.2 million reduction in salaries, wages and benefits resulting
from the cost savings initiative implemented during the first half of the prior
fiscal year.
Research and Development. Research and development expenses increased $0.2
million, or 4.9% to $4.9 million in the three months ended December 31, 2005
from $4.7 million in the three months ended December 31, 2004. This increase is
primarily because we began including expenses from Everstream's research and
development group during the three months ended December 31, 2005. This
resulted in an additional $0.8 million of research and development related
salaries, wages, benefits, travel and facilities costs. These additional
expenses were partially offset by a $0.5 million decrease in development
subcontractors and engineering costs incurred in the three months ended December
31, 2004 that were no longer necessary to meet software
21
development requirements for customers' business management functionality,
resource management and client system monitoring.
General and Administrative. General and administrative expenses increased
$0.1 million, or 4.6% to $2.4 million in the three months ended December 31,
2005 from $2.3 million in the three months ended December 31, 2004. During the
three months ended December 31, 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 $0.1 million, as
compared to the three months ended December 31, 2004. Furthermore, share-based
compensation expense resulting from adoption of SFAS 123(R) increased by $0.1
million during the three months ended December 31, 2005, as compared to the same
period of the prior year. These additional costs were partially offset by a
$0.1 million reduction in salaries, wages and benefits resulting from the cost
savings initiative implemented during the first half of the prior fiscal year.
Impairment Loss on Minority Investment. During the quarter ended December
31, 2004, we became aware of circumstances that provided evidence of an "other
than temporary" impairment of our then minority ownership investment in
Everstream. Based upon an evaluation of the investment during this period, we
recorded an impairment charge of $0.4 million in the Statement of Operations,
and reduced our "Investment in minority owned company" to $140,000. Also during
the three months ended December 31, 2004, an additional $0.1 million recovery of
previously impaired Thirdspace assets was recognized, partially offsetting the
$0.4 million impairment charge taken during the quarter.
Provision for Income Taxes. We recorded income tax expense for our
domestic and foreign subsidiaries of $26,000 in the quarter ended December 31,
2005, compared to $12,000 during the quarter ended December 31, 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 December 31, 2005 was
$1.6 million or $0.02 per basic and diluted share compared to a net loss for the
three months ended December 31, 2004 of $1.4 million or $0.02 per basic and
diluted share.
22
THE SIX MONTHS ENDED DECEMBER 31, 2005 COMPARED TO THE SIX MONTHS ENDED DECEMBER
31, 2004
SIX MONTHS ENDED
DECEMBER 31,
--------------------
(DOLLARS IN THOUSANDS) 2005 2004 $ CHANGE % CHANGE
--------- --------- --------- ---------
Product revenues $ 23,693 $ 26,308 $ (2,615) (9.9%)
Service revenues 11,370 11,046 324 2.9%
--------- --------- --------- ---------
Total revenues 35,063 37,354 (2,291) (6.1%)
Product cost of sales 11,452 13,547 (2,095) (15.5%)
Service cost of sales 5,600 6,772 (1,172) (17.3%)
--------- --------- --------- ---------
Total cost of sales 17,052 20,319 (3,267) (16.1%)
--------- --------- --------- ---------
Product gross margin 12,241 12,761 (520) (4.1%)
Service gross margin 5,770 4,274 1,496 35.0%
--------- --------- --------- ---------
Total gross margin 18,011 17,035 976 5.7%
Operating expenses:
Sales and marketing 8,362 8,564 (202) (2.4%)
Research and development 9,238 9,852 (614) (6.2%)
General and administrative 4,902 4,781 121 2.5%
--------- --------- --------- ---------
Total operating expenses 22,502 23,197 (695) (3.0%)
--------- --------- --------- ---------
Operating loss (4,491) (6,162) 1,671 NM (1)
Impairment loss on minority investment - (313) 313 NM (1)
Interest income - net 88 174 (86) (49.4%)
Other income (expense) - net 689 (101) 790 NM (1)
--------- --------- --------- ---------
Loss before income taxes (3,714) (6,402) 2,688 NM (1)
Provision for income taxes 73 66 7 10.6%
--------- --------- --------- ---------
Net loss $ (3,787) $ (6,468) $ 2,681 (41.5%)
========= ========= ========= =========
(1) NM denotes percentage is not meaningful
Product Sales. Total product sales for the six months ended December 31,
2005 were $23.7 million, a decrease of approximately $2.6 million, or 9.9%, from
$26.3 million for the six months ended December 31, 2004. The decrease in
product sales resulted from the $3.7 million, or 25.3%, decrease in on-demand
product sales to $10.9 million in the six months ended December 31, 2005 from
$14.6 million in the six months ended December 31, 2004. This decrease in
on-demand product revenue was net of the additional revenue from Everstream
products sold subsequent to the acquisition of Everstream. The decrease in
on-demand product sales was primarily due to lower overall expansion of existing
markets in North America during the six months ended December 31, 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 six months ended December 31, 2005 that
resulted in a $0.4 million increase in international on-demand product revenue,
primarily in Europe, compared to the six months ended December 31, 2004.
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 $1.1 million, or 9.3%, to $12.8 million
during the six months ended December 31, 2005 from $11.7 million during the same
period of the prior year. The increase in real-time product sales is primarily
due to growing demand for our Linux based products in addition to sales 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.
23
Service Revenue. Service revenue increased $0.3 million, or 2.9%, to $11.4
million for the six months ended December 31, 2005 from $11.0 million for the
six months ended December 31, 2004. The increase in service revenue is
attributable to a $1.7 million, or 39.3%, increase in service revenue associated
with on-demand products. Service revenue associated with on-demand products
increased partly due to the addition of Everstream service revenue in the
current period. Everstream service revenue was primarily attributable to
maintenance service on software products and integration and service performed
after Concurrent's acquisition of Everstream. Furthermore, 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 anticipate selling new maintenance agreements to
our customers.
The increase in on-demand service revenues was partially offset by a $1.4
million, or 21.3%, decrease in service revenue related to 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.
Product Gross Margin. Product gross margin was $12.2 million for the six
months ended December 31, 2005, a decrease of approximately $0.5 million, or
4.1%, from $12.8 million for the six months ended December 31, 2004. Product
gross margin as a percentage of product sales increased to 51.7% in the six
months ended December 31, 2005 from 48.5% in the six months ended December 31,
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 $1.5
million, or 35.0%, to $5.8 million, or 50.7% of service revenue in the six
months ended December 31, 2005 from $4.3 million, or 38.7% of service revenue in
the six months ended December 31, 2004. Increasing service margins are
primarily due to service revenues generated by Everstream subsequent to the
acquisition of Everstream. This new source of revenue provides higher service
margins than we have traditionally experienced and we expect this revenue source
to continue to have a favorable impact on service margins going forward,
although we cannot be assured that they will continue at the same level achieved
during the six months ended December 31, 2005. Service margins also increased
during the six months ended December 31, 2005, as compared to the six months
ended December 31, 2004, due to cost savings generated by our cost reduction
initiative during the prior fiscal year. Service cost of sales decreased $1.2
million due to fewer service personnel in the current year, which resulted in a
$1.1 million reduction in service related salaries, wages and benefits, and
related prior period severance costs of $0.1 million. Severance expense
recorded in the six months ended December 31, 2004 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 less costly to maintain.
Sales and Marketing. Sales and marketing expenses decreased approximately
$0.2 million, or 2.4% to $8.4 million in the six months ended December 31, 2005
from $8.6 million in the six months ended December 31, 2004. This decrease is
primarily due to a $0.3 million reduction in salaries, wages and benefits
resulting from the cost savings initiative implemented during the six months
ended December 31, 2004, and non-recurring severance of $0.2 million in the
prior year. In addition, we reduced depreciation expense associated with
demonstration equipment by $0.3 million during the six months ended December 31,
2005, as compared to the same period of the prior year, by exercising greater
discipline over expenditures on such equipment. Partially offsetting these
decreases, commission expense increased $0.5 million during the six months ended
December 31, 2005, as compared to the same period of the prior year, due to the
structure of commission agreements in the current year. Also during the six
months ended December 31, 2005, we began including expenses from Everstream's
sales force and amortization of Everstream's customer base, resulting in an
additional $0.1 million of expense during the six months ended December 31,
2005.
Research and Development. Research and development expenses decreased $0.6
million, or 6.2% to $9.2 million in the six months ended December 31, 2005 from
$9.9 million in the six months ended December 31, 2004. During the six months
ended December 31, 2005, we incurred $1.3 million less on development
24
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 incurred $0.1 million less in severance
costs as compared to the six months ended December 31, 2004. These decreasing
costs from Concurrent's traditional research and development group were
partially offset by the fact that we began including expenses from Everstream's
research and development group during the six months ended December 31, 2005.
This resulted in an additional $0.8 million of research and development related
salaries, wages, benefits, travel and facilities costs.
General and Administrative. General and administrative expenses increased
$0.1 million or 2.5% to $4.9 million in the six months ended December 31, 2005
from $4.8 million in the six months ended December 31, 2004. During the six
months ended December 31, 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 $0.3 million, as compared to the six
months ended December 31, 2004. Furthermore, share-based compensation expense
resulting from adoption of SFAS 123(R) increased by $0.2 million during the six
months ended December 31, 2005, as compared to the same period of the prior
year. Offsetting these increasing costs, salaries wages and benefits decreased
by $0.4 million and severance expense decreased by $0.1 million during the six
months ended December 31, 2005, primarily due to the cost savings initiative
during the first half of the prior year.
Impairment Loss on Minority Investment. During the six months ended
December 31, 2004, we became aware of circumstances that provided evidence of an
"other than temporary" impairment of our then minority ownership investment in
Everstream. Based upon an evaluation of the investment during this period, we
recorded an impairment charge of $0.4 million in the Statement of Operations,
and reduced our "Investment in minority owned company" to $140,000. Also during
the three months ended December 31, 2004, an additional $0.1 million recovery of
previously impaired Thirdspace assets was recognized, partially offsetting the
$0.4 million impairment charge taken during the quarter.
Other Income (Expense). During the six months ended December 31, 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 income (expense)" within our
Consolidated Statement of Operations; therefore, we have recorded the refund to
"other income (expense)" within our Consolidated Statement of Operations.
Provision for Income Taxes. We recorded income tax expense for our
domestic and foreign subsidiaries of $73,000 in the six months ended December
31, 2005, compared to $66,000 during the six months ended December 31, 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 six months ended December 31, 2005 was $3.8
million or $0.06 per basic and diluted share compared to a net loss for the six
months ended December 31, 2004 of $6.5 million or $0.10 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;
25
- 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 $2.6 million of cash from operating activities during the six
months ended December 31, 2005 compared to using $6.9 million of cash during the
same period of the prior year. The use of cash from operations was primarily
due to operating losses, inventory purchases, and insurance prepayments in the
six months ended December 31, 2005. Prior period cash usage resulted from both
operating losses and changes in working capital.
We invested $0.6 million in property, plant and equipment during the six
months ended December 31, 2005 compared to $0.9 million during the six months
ended December 31, 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. Also, we received $1.2 million of cash during the six months ended
December 31, 2005 from our acquisition of Everstream on October 11, 2005.
During the quarter ended December 31, 2004, we executed a Loan and Credit
Agreement with Silicon Valley Bank. The Credit Agreement provides for a two year
$10 million revolving credit line and a three year $3 million term loan. As of
December 31, 2005, we had no amounts drawn under the Revolver and had drawn down
the entire $3.0 million, of which $467,000 has been repaid during the six months
ended December 31, 2005, under the Term Loan. Interest on all outstanding
amounts under the Revolver would be payable monthly at the prime rate (7.25% at
December 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 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 December 31,
2005, we were in compliance with these covenants. Based on the borrowing
formula and our financial position as of December 31, 2005, $8.4 million would
have been available to us under the Revolver.
At December 31, 2005, we had working capital of $21.0 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 twelve 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 reduced our breakeven point, but the acquisition of
Everstream is expected to increase our quarterly operating expenses by
approximately $1 million. 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.
26
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table summarizes our significant contractual obligations and
commitments, by fiscal year, as of December 31, 2005:
PAYMENTS DUE BY FISCAL YEAR
---------------------------------------------------
(DOLLARS IN THOUSANDS)
CONTRACTUAL OBLIGATIONS TOTAL 2006 2007-2008 2009-2010 THEREAFTER
- ----------------------------------------------- ------ ---------- ---------- -----------
Operating leases $2,117 $ 730 $ 1,294 $ 93 $ -
Term note obligation 2,070 487 1,583 - -
Interest payments related to term note 180 76 104 - -
Pension plan 2,004 79 393 438 1,094
Non-binding purchase commitment (a) 321 321 - - -
------ ------ ---------- ---------- -----------
TOTAL $6,692 $1,693 $ 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 quarterly
report may constitute "forward-looking statements" within the meaning of the
federal securities laws. Statements regarding future events and developments
and our future performance, as well as our expectations, beliefs, plans,
estimates, or projections relating to the future, are forward-looking statements
within the meaning of these laws. Examples of forward looking statements in
this quarterly report include, without limitation, our expectation with regard
to future revenues and revenue growth, anticipated growth in the markets for our
on-demand and real-time products, anticipated positive results, and the
performance of our products. All forward-looking statements are subject to
certain risks and uncertainties that could cause actual events to differ
materially from those projected.
Such risks and uncertainties include our ability to realize expected
synergies, achieve revenue goals, and win new opportunities. In addition, 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
change; delays in testing and introductions of new products; rapid technology
changes; system errors or failures; reliance on a limited number of 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; the availability of Linux software in light of issues raised
by SCO Group, the success of our relationship with Alcatel; capital spending
patterns by a limited customer base; the integration of Everstream; and
contractual 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, 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.
27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates and foreign
currency exchange rates. We are exposed to the impact of interest rate changes
on our short-term cash investments, which are backed by U.S. government
obligations, and other investments in respect of institutions with the highest
credit ratings, all of which have maturities of three months or less. These
short-term investments carry a degree of interest rate risk. We believe that
the impact of a 10% increase or decline in interest rates would not be material
to our investment income. We are also exposed to fluctuations in interest rates
as we seek debt to sustain our operations. At December 31, 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.
28
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 14 to the Condensed
Consolidated Financial Statements for the three and six months ended December
31, 2005.
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
On October 11, 2005, we issued an aggregate of 8,456,777 shares of our
common stock in connection with the acquisition of Everstream Holdings, Inc.
The offer and sale of these securities were effected without registration in
reliance on the exemption afforded by Section 3(a) (10) of the Securities Act of
1933, as amended. The issuance was approved, after a hearing of the terms and
conditions of the transaction, by the Division of Securities of the State of
Ohio under authority to grant such approval as expressly authorized by the laws
of the State of Ohio.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Concurrent's Annual Meeting of Stockholders was held on October 18, 2005.
The results of the voting were as follows:
- The following persons were elected as directors to serve until the
next annual meeting of stockholders: Alex B. Best (56,935,583 votes
for, 3,055,032 votes withheld), Charles Blackmon (54,043,538 votes
for, 5,947,083 votes withheld), Larry L. Enterline (58,975,842 votes
for, 1,014,779 votes withheld), C. Shelton James (58,749,063 votes
for, 1,241,558 votes withheld), Steve G. Nussrallah (58,313,479 votes
for, 1,677,142 votes withheld), and T. Gary Trimm (59,009,387 votes
for, 981,234 votes withheld).
- The selection by the Audit Committee of Deloitte & Touch LLP as
Concurrent's independent auditors for the fiscal year ending June 30,
2006 was ratified (59,621,795 votes for, 293,856 votes against, 74,938
votes abstained).
ITEM 6. EXHIBITS
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).
29
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** --Description of Amendment to Employment Agreements with certain Executive Officers.
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.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 6, 2006 CONCURRENT COMPUTER CORPORATION
By: /s/ Gregory S. Wilson
--------------------------
Gregory S. Wilson
Chief Financial Officer
(Principal Financial and Accounting Officer)
31
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** --Description of Amendment to Employment Agreements with certain Executive Officers.
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.
32