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 March 31, 2007
or
Transition Report Pursuant to Section 13 or 15(d) of
---
the Securities Exchange Act of 1934
For the Transition Period from to
---- ----
Commission File No. 0-13150
-------------
CONCURRENT COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2735766
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer Accelerated Filer X Non-Accelerated Filer
--- --- ---
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 May 1, 2007 was 71,659,433.
CONCURRENT COMPUTER CORPORATION
FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2007
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)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 26
ITEM 4. CONTROLS AND PROCEDURES 26
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS 26
ITEM 1A. RISK FACTORS 26
ITEM 6. EXHIBITS 27
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
(DOLLARS IN THOUSANDS)
MARCH 31, JUNE 30,
2007 2006
(UNAUDITED)
------------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 8,750 $ 14,423
Accounts receivable, less allowance for doubtful accounts
of $215 at March 31, 2007 and $380 at June 30, 2006 14,427 15,111
Inventories 4,587 6,164
Prepaid expenses and other current assets 1,921 1,578
------------- ----------
Total current assets 29,685 37,276
Property, plant and equipment - net 4,893 6,015
Intangible assets - net 7,971 8,787
Goodwill 15,560 15,560
Other long-term assets 908 1,120
------------- ----------
Total assets $ 59,017 $ 68,758
============= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 12,873 $ 11,581
Revolving bank line of credit 1,077 -
Notes payable to bank, current portion - 1,034
Short term note payable 71 -
Deferred revenue 7,708 7,277
------------- ----------
Total current liabilities 21,729 19,892
Long-term liabilities:
Deferred revenue 911 1,602
Notes payable to bank, less current portion - 549
Pension liability 2,530 2,290
Other 654 651
------------- ----------
Total liabilities 25,824 24,984
Commitments and contingencies (Note 12)
Stockholders' equity:
Shares of common stock, par value $.01; 100,000,000 authorized;
71,659,433 and 71,530,763 issued and outstanding at
March 31, 2007 and June 30, 2006, respectively 717 716
Capital in excess of par value 190,091 189,409
Accumulated deficit (157,259) (145,800)
Treasury stock, at cost; -0- and 3,971 shares at
March 31, 2007 and June 30, 2006, respectively - (13)
Accumulated other comprehensive loss (356) (538)
------------- ----------
Total stockholders' equity 33,193 43,774
------------- ----------
Total liabilities and stockholders' equity $ 59,017 $ 68,758
============= ==========
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
2
CONCURRENT COMPUTER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------ -----------------------
2007 2006 2007 2006
---------- ------------ --------- ------------
Revenues:
Product $ 10,492 $ 15,133 $ 31,509 $ 38,826
Service 5,656 5,500 16,554 16,870
---------- ------------ --------- ------------
Total revenues 16,148 20,633 48,063 55,696
Cost of sales:
Product 5,788 7,456 17,974 18,908
Service 2,487 2,944 7,847 8,544
---------- ------------ --------- ------------
Total cost of sales 8,275 10,400 25,821 27,452
---------- ------------ --------- ------------
Gross margin 7,873 10,233 22,242 28,244
Operating expenses:
Sales and marketing 3,539 4,053 11,985 12,415
Research and development 4,587 4,852 13,346 14,090
General and administrative 2,506 2,395 7,751 7,297
---------- ------------ --------- ------------
Total operating expenses 10,632 11,300 33,082 33,802
---------- ------------ --------- ------------
Operating loss (2,759) (1,067) (10,840) (5,558)
Interest income 81 116 274 335
Interest expense (54) (67) (305) (198)
Other income (expense) (34) (16) (127) 673
---------- ------------ --------- ------------
Loss before income taxes (2,766) (1,034) (10,998) (4,748)
Provision for income taxes 310 14 461 87
---------- ------------ --------- ------------
Net loss $ (3,076) $ (1,048) $(11,459) $ (4,835)
========== ============ ========= ============
Net loss per share
Basic $ (0.04) $ (0.01) $ (0.16) $ (0.07)
========== ============ ========= ============
Diluted $ (0.04) $ (0.01) $ (0.16) $ (0.07)
========== ============ ========= ============
Weighted average shares outstanding - basic 71,646 71,373 71,593 68,153
========== ============ ========= ============
Weighted average shares outstanding - diluted 71,646 71,373 71,593 68,153
========== ============ ========= ============
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
3
CONCURRENT COMPUTER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
MARCH 31,
-----------------------
2007 2006
---------- -----------
OPERATING ACTIVITIES
Net loss $ (11,459) $ (4,835)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 4,103 3,733
Share-based compensation 675 404
Other non-cash expenses (6) 15
Changes in operating assets and liabilities:
Accounts receivable 849 (2,602)
Inventories 1,422 (130)
Prepaid expenses and other current assets (329) (1,085)
Other long-term assets 212 234
Accounts payable and accrued expenses 1,292 (389)
Deferred revenue (260) 438
Other long-term liabilities 243 117
---------- -----------
Total adjustments to net loss 8,201 735
---------- -----------
Net cash used in operating activities (3,258) (4,100)
INVESTING ACTIVITIES
Capital expenditures (2,111) (1,360)
Cash received from acquisition of Everstream - 1,159
---------- -----------
Net cash used in investing activities (2,111) (201)
FINANCING ACTIVITIES
Proceeds from revolving bank line of credit 1,077 -
Repayment of note payable to bank (1,583) (709)
Proceeds from short-term note payable 690 -
Repayment of short term note payable (619) -
Sale (purchase) of treasury stock - net 13 (25)
Proceeds from sale and issuance of common stock 8 251
---------- -----------
Net cash used in financing activities (414) (483)
Effect of exchange rates on cash and cash equivalents 110 (285)
---------- -----------
Decrease in cash and cash equivalents (5,673) (5,069)
Cash and cash equivalents at beginning of period 14,423 19,880
---------- -----------
Cash and cash equivalents at end of period $ 8,750 $ 14,811
========== ===========
Cash paid during the period for:
Interest $ 136 $ 184
========== ===========
Income taxes (net of refunds) $ 114 $ 18
========== ===========
Non-cash investing activities:
Shares issued in acquisition of Everstream $ - $ 14,375
========== ===========
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
4
CONCURRENT COMPUTER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. OVERVIEW OF BUSINESS AND BASIS OF PRESENTATION
Concurrent Computer Corporation ("Concurrent") is a 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 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 a wide range of applications that benefit from guaranteed,
instantaneous response and repeatability.
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 Concurrent's
Annual Report on Form 10-K for the year ended June 30, 2006. 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, 2006. The results reported in these
condensed, consolidated quarterly financial statements should not be regarded as
necessarily indicative of results that may be expected for the entire year.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Recently Issued Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value
Measurement" ("SFAS No. 157"). This standard provides guidance for using fair
value to measure assets and liabilities. SFAS No. 157 applies whenever other
standards require (or permit) assets or liabilities to be measured at fair value
but does not expand the use of fair value in any new circumstances. Prior to
SFAS No. 157, the methods for measuring fair value were diverse and
inconsistent, especially for items that are not actively traded. The standard
clarifies that for items that are not actively traded, such as certain kinds of
derivatives, fair value should reflect the price in a transaction with a market
participant, including an adjustment for risk, not just the company's
mark-to-model value. SFAS No. 157 also requires expanded disclosure of the
effect on earnings for items measured using unobservable data. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. Concurrent is
currently evaluating the impact of this statement on its financial statements,
but does not believe that such impact will be material. Concurrent expects to
adopt SFAS No.157 on July 1, 2008 or the beginning of Concurrent's fiscal year
2009.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans -- An Amendment of FASB
Statements No. 87, 88, 106, and 132R." This standard requires an employer to:
(a) recognize in its statement of financial position an asset for a plan's over
funded status or a liability for a plan's under funded status; (b) measure a
plan's assets and its obligations that determine its funded status as of the end
of the employer's fiscal year (with limited exceptions); and (c) recognize
changes in the funded status of a defined benefit postretirement plan in the
year in which the changes occur.
5
Those changes will be reported in comprehensive income. The requirement to
recognize the funded status of a benefit plan and the disclosure requirements
are effective as of the end of the fiscal year ending after December 15, 2006 or
as of June 30, 2007 for Concurrent. The requirement to measure plan assets and
benefit obligations as of the date of the employer's fiscal year-end statement
of financial position is effective for fiscal years ending after December 15,
2008 or for Concurrent's fiscal year ending June 30, 2009. Concurrent is
evaluating the impact of this statement on its financial statements and believes
that such impact may be material.
In September 2006, the SEC staff revised Staff Accounting Bulletin (SAB)
Topic 1N, "Financial Statements - Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" ("SAB 108"). SAB 108 addresses how a registrant should evaluate
whether an error in its financial statements is material. The guidance in SAB
108 is effective for fiscal years ending after November 15, 2006. The adoption
of SAB 108 is not expected to have a material impact on Concurrent's
consolidated financial statements.
In July 2006, the FASB issued FIN No. 48, "Accounting for Uncertainty in
Income Taxes - An Interpretation of FASB Statement No. 109". FIN 48 clarifies
the accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with FASB Statement No. 109, "Accounting for
Income Taxes". FIN 48 also prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The new FASB standard
also provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. The
provisions of FIN 48 are effective for fiscal years beginning after December 15,
2006. Earlier application is permitted as long as the enterprise has not yet
issued financial statements, including interim financial statements, in the
period of adoption. The provisions of FIN 48 are to be applied to all tax
positions upon initial adoption of this standard. Only tax positions that meet
the more-likely-than-not recognition threshold at the effective date may be
recognized or continue to be recognized upon adoption of FIN 48. We are
currently evaluating the impact of this interpretation on its financial
statements but do not believe that it will have a material impact to our
financial position. We expect to adopt FIN 48 no later than its fiscal year
beginning July 1, 2007.
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 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.
In certain instances, Concurrent's customers require significant
customization of both the software and hardware products. In these situations,
the design and development is considered essential to the functionality of the
software and, therefore the revenue from these arrangements, with the exception
of maintenance, is recognized in conformity with Accounting Research Bulletin
("ARB") No. 45, "Long Term Construction Type
6
Contracts" and SOP 81-1, "Accounting for Performance of Construction-Type and
Certain Production-Type Contracts." For long-term contracts, revenue is
recognized using the percentage-of-completion method of accounting based on
costs incurred on the project compared to the total costs expected to be
incurred through completion.
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.
Hardware and Software Maintenance
---------------------------------
Concurrent recognizes revenue from maintenance services in accordance with
SOP 97-2. Depending upon the specific terms of the customer agreement,
Concurrent may include warranty as part of the purchase price. In accordance
with SOP 97-2 and, depending upon the specific terms of the customer agreement,
Concurrent either accrues the estimated costs to be incurred in performing
maintenance services at the time of revenue recognition and shipment of product
or Concurrent defers revenue associated with the maintenance services to be
provided during the warranty period based upon the value for which Concurrent
has sold such services separately when they are renewed by existing customers.
For those arrangements in which the warranty period is less than or equal to one
year, Concurrent accrues the estimated costs to be incurred in providing
services, in accordance with paragraph 59 of SOP 97-2, because 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 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 and for contingently issuable shares, 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 7,506,000 and
7,677,000 for the three months ended March 31, 2007 and 2006, respectively, were
excluded from the calculation as their effect was antidilutive. Common share
equivalents of 7,793,000 and 7,894,000 for the nine months ended March 31, 2007
and 2006, respectively, were excluded from the calculation as their effect was
antidilutive. Also, as discussed further in Note 4, no contingently issuable
shares under Concurrent's bonus plan would have been issuable as of March 31,
2007 if this were the end of the contingency period, resulting in no additional
dilution.
7
The following table presents a reconciliation of the numerators and denominators
of basic and diluted net income (loss) per share for the periods indicated
(dollars and share data in thousands, except per-share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------ -----------------------
2007 2006 2007 2006
---------- ------------ --------- ------------
Basic and diluted earnings per share (EPS) calculation:
Net loss $ (3,076) $ (1,048) $(11,459) $ (4,835)
========== ============ ========= ============
Basic weighted average number of shares outstanding 71,646 71,373 71,593 68,153
Effect of dilutive securities:
Employee stock options - - - -
---------- ------------ --------- ------------
Diluted weighted average number of shares outstanding 71,646 71,373 71,593 68,153
========== ============ ========= ============
Basic EPS $ (0.04) $ (0.01) $ (0.16) $ (0.07)
========== ============ ========= ============
Diluted EPS $ (0.04) $ (0.01) $ (0.16) $ (0.07)
========== ============ ========= ============
4. SHARE-BASED COMPENSATION
At March 31, 2007, Concurrent had share-based employee compensation plans
which are described in Note 14 of the consolidated financial statements included
in Concurrent's Annual Report on Form 10-K for the year ended June 30, 2006.
Option awards are granted with an exercise price equal to the market price of
Concurrent's stock at the date of grant. Concurrent recognizes stock
compensation expense over the requisite service period of the individual
grantees, which generally equals the vesting period. Concurrent recorded
$193,000 and $675,000 of share-based compensation related to stock options and
restricted stock in the statement of operations during the three and nine months
ended March 31, 2007, respectively. Concurrent recorded $33,000 and $404,000 of
share-based compensation related to stock options and restricted stock in the
statement of operations during the three and nine months ended March 31, 2006,
respectively.
Concurrent uses the Black-Scholes valuation model to estimate the fair
value of each option award on the date of grant. During the nine months ended
March 31, 2007, Concurrent granted approximately 1,834,000 stock options that
vest over zero to four years. The weighted-average grant-date fair value of the
options granted under the stock option plans during this period was $1.06. The
weighted-average assumptions used were: expected dividend yield of 0.0%;
risk-free interest rate of 4.6%; expected life of 6 years; and an expected
volatility of 90.9%.
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
during the nine months ended March 31, 2007. Under the true-up provisions of
SFAS 123R, "Share-Based Payment," 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 March 31, 2007, and
changes during the nine 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, 2006 6,127,624 $ 4.78
Granted 1,834,442 1.37
Exercised (33,924) 0.37
Forfeited or expired (1,524,117) 2.89
----------- ----------
Outstanding as of March 31, 2007 6,404,025 $ 4.27 6.03 $ 358,000
=========== ========== =========== ==========
Vested and exercisable at March 31, 2007 4,676,793 $ 5.33 4.92 $ 43,000
=========== ========== =========== ==========
Total compensation cost of options granted but not yet vested as of March
31, 2007, including estimated forfeitures, is $1,426,000, which is expected to
be recognized over the remaining requisite service period of approximately 3.3
years, on a weighted average basis.
Concurrent has historically provided annual cash bonuses to certain of its
employees under its Annual Incentive Plan ("AIP"). In accordance with the terms
of the AIP, the amount that is ultimately paid in bonuses is determined based on
company and individual performance relative to pre-established performance
targets. AIP targets are typically established in the first few months of each
fiscal year, and any bonuses earned have historically been paid fully in cash
the first or second month following the end of the fiscal year. For fiscal 2007
Concurrent's compensation committee decided that any fiscal 2007 bonus would
consist of Concurrent stock and, in some cases, cash. During the nine months
ended March 31, 2007, Concurrent issued approximately 519,000 shares of
restricted stock of which some or all may be used to settle AIP bonuses. In
accordance with the terms of the fiscal 2007 AIP, the number of shares of
Concurrent stock to be paid in settlement of these bonuses in July 2007 is
determined based on the actual AIP bonus earned as well as the fair market value
of Concurrent stock on June 30, 2007. Once the final AIP bonus amount is
determined, any shortfall between the final AIP bonus amount for an individual
employee and the fair market value of the shares of Concurrent stock at the date
the bonus is settled will be paid in cash. In no event will an individual
employee receive shares of Concurrent stock that have an aggregate fair market
value on the date of settlement in excess of that individual employee's final
AIP bonus amount. Due to the unknown settlement structure of this bonus program
and the fact that the value of the eligible employees' final bonus will not be
positively or negatively affected by a change in Concurrent's stock price,
Concurrent, as in prior fiscal years, is accounting for its fiscal 2007 AIP as a
liability plan. The liability is based on the aggregate payment amount that
Concurrent believes is probable for fiscal 2007 based on expected performance
relative to established targets. As of March 31, 2007, Concurrent believes it is
probable that the aggregate fiscal 2007 AIP bonus payment will be $417,000,
which is being recognized as compensation expense rateably over the one-year
service period ending June 30, 2007. As of March 31, 2007, approximately
$302,000 of this amount has been accrued and is presented within accounts
payable and accrued expenses in the condensed consolidated balance sheet. Upon
settlement of the fiscal 2007 AIP bonus, the portion of the recorded bonus
accrual settled with issuance of Concurrent stock will be reclassified to
stockholders' equity at June 30, 2007. In accordance with SFAS 128,"Earnings per
Share," none of the contingently issuable shares under this plan would have been
issuable as of March 31, 2007, if this were end of the contingency period.
Total compensation cost of restricted stock awards issued, but not yet
vested as of March 31, 2007 is $391,000, which is expected to be recognized over
the weighted average period of 1.4 years.
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. The components of
inventories are as follows (in thousands):
MARCH 31, JUNE 30,
2007 2006
---------- ---------
Raw materials $ 3,145 $ 4,405
Work-in-process 1,055 852
Finished goods 387 907
---------- ---------
$ 4,587 $ 6,164
========== =========
At March 31, 2007 and June 30, 2006, 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 has reduced its gross raw materials
inventory by $1,748,000 at March 31, 2007 and $1,593,000 at June 30, 2006 to its
estimated net realizable value.
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill was $15,560,000 as of both March 31, 2007 and June 30, 2006. In
accordance with SFAS 142, Concurrent tests goodwill and trademark for
impairment, at least annually. Concurrent's annual goodwill and trademark
impairment testing date is July 1.
Other intangible assets as of March 31, 2007 and June 30, 2006 consisted of
the following (in thousands):
MARCH 31, JUNE 30,
2007 2006
----------- ----------
Cost of amortizable intangibles:
Purchased technology $ 7,700 $ 7,700
Customer relationships 1,900 1,900
----------- ----------
Total cost of intangibles 9,600 9,600
Less accumulated amortization:
Purchased technology (2,475) (1,789)
Customer relationships (254) (124)
----------- ----------
Total accumulated amortization (2,729) (1,913)
Trademark - indefinite lived 1,100 1,100
----------- ----------
Total intangible assets, net $ 7,971 $ 8,787
=========== ==========
Amortization expense for the nine months ended March 31, 2007 and 2006 was
$816,000 and $565,000, respectively.
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The components of accounts payable and accrued expenses are as follows (in
thousands):
MARCH 31, JUNE 30,
2007 2006
---------- ---------
Accounts payable, trade $ 5,034 $ 5,400
Accrued payroll, vacation, severance
and other employee expenses 4,642 4,015
Warranty accrual 407 376
Other accrued expenses 2,790 1,790
---------- ---------
$ 12,873 $ 11,581
========== =========
10
Concurrent's estimate of warranty obligations is based on historical
experience and expectation of future conditions. The changes in the warranty
accrual during the nine months ended March 31, 2007 were as follows (in
thousands):
Balance at June 30, 2006 $ 376
Charged to costs and expenses, net 185
Deductions (154)
------
Balance at March 31, 2007 $ 407
======
8. COMPREHENSIVE LOSS
Concurrent's total comprehensive loss is as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------ -----------------------
2007 2006 2007 2006
----------- ----------- ---------- -----------
Net loss $ (3,076) $ (1,048) $ (11,459) $ (4,835)
Other comprehensive loss:
Foreign currency translation gain/(loss) 95 20 182 (326)
----------- ----------- ---------- -----------
Total comprehensive loss $ (2,981) $ (1,028) $ (11,277) $ (5,161)
=========== =========== ========== ===========
9. CONCENTRATION OF CREDIT RISK, SEGMENT AND GEOGRAPHIC INFORMATION
In accordance with SFAS 131, "Disclosure about Segments of an Enterprise
and Related Information," Concurrent operates in two segments, products and
services, as disclosed within the statements of operations.
The following summarizes the revenues by geographic locations for the three
and nine months ended March 31, 2007 (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ---------------------
2007 2006 2007 2006
--------- ----------- -------- -----------
North America $ 11,376 $ 14,800 $ 33,828 $ 38,544
Japan 2,702 2,291 6,064 4,416
Other Asia Pacific countries 544 388 1,469 1,843
--------- ----------- -------- -----------
Asia Pacific 3,246 2,679 7,533 6,259
Europe 1,526 2,640 6,702 9,653
Other - 514 - 1,240
--------- ----------- -------- -----------
Total revenue $ 16,148 $ 20,633 $ 48,063 $ 55,696
========= =========== ======== ===========
11
In addition, the following summarizes revenues by significant customer
where such revenue equaled or exceeded 10% of total revenues for any one of the
indicated periods:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ---------------------
2007 2006 2007 2006
---------- ---------- --------- ----------
Customer A 21% 16% 12% 16%
Customer B 12% < 10% < 10% < 10%
Customer C < 10% 19% 12% 14%
Customer D < 10% 16% < 10% 14%
Concurrent assesses credit risk through ongoing credit evaluations of
customers' financial condition and collateral is generally not required. At
March 31, 2007, two customers accounted for $3.4 million and $1.6 million or 24%
and 11%, respectively, of trade receivables. At June 30, 2006, one customer
accounted for $3.6 million or 24% of trade receivables and a second customer
accounted for $2.7 million or 17% of trade receivables. No other customers
accounted for 10% or more of trade receivables as of March 31, 2007 or June 30,
2006.
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 March 31, 2007, purchases from each
of three suppliers were equal to, or in excess of 10% of Concurrent's total
purchases. These three suppliers accounted for 25%, 22% and 10% of Concurrent's
purchases during the three months ended March 31, 2007. Also, for the three
months ended March 31, 2006, purchases from two suppliers were equal to, or in
excess of, 10% of Concurrent's total purchases. These two suppliers accounted
for 32% and 26% of Concurrent's purchases during the three months ended March
31, 2006. For the nine months ended March 31, 2007, purchases from two
suppliers were in excess of 10% of Concurrent's total purchases. These two
suppliers accounted for 24% and 19% of Concurrent's purchases during the nine
months ended March 31, 2007. Also, for the nine months ended March 31, 2006,
purchases from two suppliers were in excess of 10% of Concurrent's total
purchases. These two suppliers accounted for 24% and 23% of Concurrent's
purchases during the nine months ended March 31, 2006.
10. TERM LOAN, REVOLVING CREDIT FACILITY AND SHORT-TERM NOTE PAYABLE
On December 22, 2006, Concurrent entered into an Amended and Restated Loan
and Security Agreement (the "Credit Agreement") with Silicon Valley Bank (the
"Bank"). The Credit Agreement amends and restates Concurrent's then existing
outstanding credit facilities with the Bank and provides for a $10,000,000
revolving credit line (the "Revolver") with a borrowing base dependent upon
Concurrent's outstanding accounts receivable. The Credit Agreement requires
Concurrent to pay minimum monthly interest payments of $10,000, regardless of
whether any amounts have been advanced under the Revolver. The interest amount
will be based upon the amount advanced and the rate varies based upon
Concurrent's accounts receivable and the amount of cash in excess of debt. The
Credit Agreement also has an early termination fee equal to 100% of the
remaining minimum monthly interest payments. The outstanding principal amount
plus all accrued but unpaid interest is payable in full at the expiration of the
credit facility. The Credit Agreement expires on December 22, 2007 unless
Concurrent obtains subsequent equity financing in excess of $10,000,000, in
which case it will expire on December 22, 2008. Concurrent used a portion of the
Revolver to repay its existing term loan as of the date of the Credit Agreement.
Based on the borrowing formula and Concurrent's financial position as of March
31, 2007, $9,943,000 was available to Concurrent under the Revolver. As of
March 31, 2007, Concurrent had drawn $1,077,000 under the Revolver that was used
to repay the previous term loan, resulting in approximately
12
$8,866,000 of remaining available funds under the Revolver. Balances under the
previous term loan and existing Revolver are as follows (in thousands):
MARCH 31, JUNE 30,
2007 2006
---------- ----------
Revolving bank line of credit $ 1,077 $ -
Current portion of note payable to bank - 1,034
---------- ----------
Total current bank debt 1,077 1,034
Note payable to bank - 1,583
Less current portion - (1,034)
---------- ----------
Total long-term bank debt - 549
---------- ----------
Total bank debt $ 1,077 $ 1,583
========== ==========
Interest on any outstanding amounts under the Revolver would be payable
monthly at the prime rate (8.25% at March 31, 2007) plus 0.50% per annum.
In addition, the Credit Agreement contains certain financial covenants,
including a required adjusted quick ratio (the ratio of certain highly liquid
assets to current liabilities (less the current portion of deferred revenue)) of
at least 1.25 to 1.00 and a minimum tangible net worth of at least $8,000,000.
The Credit Agreement also contains customary restrictive covenants concerning
Concurrent's operations. As of March 31, 2007, Concurrent's adjusted quick
ratio was 1.65 to 1.00 and its tangible net worth (defined as total assets (less
goodwill and other intangibles) minus total liabilities) was approximately
$9,383,000. Concurrent was in compliance with all applicable covenants at March
31, 2007.
On August 1, 2006, we entered into an unsecured short-term note payable, to
finance insurance premiums, totaling $690,000. The note payable matures on April
25, 2007 and bears interest at 6.80% with $71,000 monthly payments of principal
and interest. As of March 31, 2007, the balance of this short-term note payable
was $71,000.
11. RETIREMENT PLANS
The following table provides a detail of the components of net periodic
benefit cost for the three and nine months ended March 31, 2007 and 2006 (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------ -----------------------
2007 2006 2007 2006
----------- ----------- ---------- -----------
Service cost $ 8 $ 7 $ 25 $ 21
Interest cost 59 47 176 141
Expected return on plan assets (23) (15) (69) (45)
Amortization of unrecognized net transition obligation 8 8 25 24
----------- ----------- ---------- -----------
Net periodic benefit cost $ 52 $ 47 $ 157 $ 141
=========== =========== ========== ===========
Concurrent contributed $16,000 and $52,000 to its German subsidiary's
defined benefit plan during the three and nine months ended March 31, 2007,
respectively, and expects to make similar contributions during the remaining
quarters of fiscal 2007. Concurrent contributed $17,000 and $51,000 to its
German subsidiary's defined benefit plan during the three and nine months ended
March 31, 2006, respectively.
Concurrent maintains a retirement savings plan, available to U.S.
employees, which qualifies as a defined contribution plan under Section 401(k)
of the Internal Revenue Code. During the three months ended March 31, 2007 and
2006, Concurrent contributed $159,000 and $107,000 to this plan, respectively.
During the
13
nine months ended March 31, 2007 and 2006, Concurrent contributed $313,000 and
$437,000 to this plan, respectively.
Concurrent also maintains a defined contribution plan ("Stakeholder Plan")
for its U.K. based employees. Concurrent's U.K. subsidiary has agreements with
certain of its U.K. based employees to make supplementary contributions to the
Stakeholder Plan over the next two to three years, contingent upon their
continued employment with Concurrent. During the three months ended March 31,
2007 and 2006, Concurrent contributed $149,000 and $47,000 to the Stakeholder
Plan, respectively. During the nine months ended March 31, 2007 and 2006,
Concurrent contributed $487,000 and $208,000 to this plan, respectively.
12. COMMITMENTS AND CONTINGENCIES
Concurrent, from time to time, is involved in litigation and disputes
incidental to the conduct of its business. Concurrent believes that such
pending matters will not have a material adverse effect on its results of
operations or financial condition.
Concurrent enters into agreements in the ordinary course of business with
customers, resellers, distributors, integrators and suppliers 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 products. Concurrent received
similar notice from some of its on-demand customers regarding a lawsuit brought
by U.S.A. Video Inc. (U.S. District Court, Eastern District of Texas, Marshall
Division) alleging infringement of U.S Patent No. 5,130,792. Some of these
customers have requested indemnification under their customer agreements.
Concurrent continues to review its potential obligations under its
indemnification agreements with these customers, in view of the claims by Acacia
and U.S. Video, and the indemnity obligations to these customers from other
vendors that also provided systems and services to these customers. 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 has not made any significant payments as a result
of these indemnification clauses and, in accordance with FIN No. 45, "Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," Concurrent has not accrued a liability in
relation to these items because such an amount is immaterial. The maximum
potential amount of future payments that Concurrent could be required to make is
unlimited.
Pursuant to the terms of the employment agreements with the executive
officers of Concurrent, employment may be terminated by either Concurrent or the
respective executive officer at any time. In the event the executive officer
voluntarily resigns (except as described below) or is terminated for cause,
compensation under the employment agreement will end. In the event an agreement
is terminated directly by Concurrent without cause or in certain circumstances
constructively by Concurrent, the terminated employee will receive severance
compensation for a period from 6 to 12 months, depending on the officer, in an
annualized amount equal to the respective employee's base salary then in effect.
At March 31, 2007, the maximum contingent liability under these agreements is
approximately $1.6 million. Concurrent's employment agreements with certain of
its officers contain certain offset provisions, as defined in their respective
agreements.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with the Condensed
Consolidated Financial Statements and the related Notes thereto which appear
elsewhere herein. Except for the historical financial information, many of the
matters discussed in this Item 2 may be considered "forward-looking" statements
that reflect our plans, estimates and beliefs. Actual results could differ
materially from those discussed in the forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in the "Cautionary Note regarding Forward-Looking Statements,"
elsewhere herein and in other filings made with the Securities and Exchange
Commission.
OVERVIEW
During the nine months ended March 31, 2007, we used $3.3 million in cash
and cash equivalents from operations, and ended the period with $8.8 million in
cash and cash equivalents. The use of cash from operations during the nine
months ended March 31, 2007 was due primarily to operating losses during this
period. In addition, we had the ability to draw up to an additional $8.9 million
under our revolving line of credit at March 31, 2007. Based on information
currently available, we believe that existing cash balances combined with
availability under our revolving line of credit and anticipated sales and
collections will be sufficient to meet our anticipated liquidity requirements
for the next twelve months. However, we are subject to various financial
covenants under our credit agreement, including a requirement that we maintain a
tangible net worth (defined as total assets (less goodwill and other
intangibles) minus total liabilities) of at least $8 million. As of March 31,
2007, our tangible net worth was $9.4 million. If our tangible net worth drops
below $8 million, we will be in default under our credit agreement. If we
violate the covenant discussed above, and our lender is unwilling to grant
forbearance, waivers or amendments, our lender could accelerate the maturity of
amounts then outstanding under the credit agreement and we would not be able to
borrow under the credit agreement, which would have a material adverse effect on
our liquidity position.
We expect that we will report a net loss for fiscal 2007 and continue to
use cash from operating activities during the fourth quarter. However, we
believe we are executing on our business plan and expense reduction initiatives
to achieve profitability in the medium term. In addition, we are currently
reviewing all of our strategic options, which may include raising additional
funds through an offering of stock at a discounted price, further reducing
employee headcount and continuing the business on a more limited scale and
securing additional financing. We may not be able to successfully execute on
our business plans to achieve profitability or execute on other strategic
alternatives, which could result in a continuing deterioration of our liquidity
position. Further deterioration of our liquidity position could result in our
being required to restructure our existing obligations and/or take actions
including, without limitation, seeking bankruptcy protection. See further
discussions in the "Liquidity and Capital Resources" section of this document.
During the nine months ended March 31, 2007, we took steps to reduce our
operating expenses and our costs of goods and services by terminating
approximately 7% of our employees in July 2006, and terminating an additional 2%
by December 31, 2006. We will continue to review and realign our cost structure
as needed and this may include investing resources in other key strategic areas.
During the nine months ended March 31, 2007, we decreased worldwide headcount by
approximately 10% through terminations and employee attrition.
Our on-demand business has experienced pricing pressure due to the entrance of
small competitors, a number of which have been recently acquired by
substantially larger companies. The on-demand market has a limited number of
customers, a number of well-financed competitors, and requires significant
research and development expenditures. As a result, competition is significant
within the on-demand business. Our business plan assumes greater demand from
our customers that we believe could materialize in calendar year 2007. In
addition, we believe we are better positioned with new products than in previous
periods. Further, our Everstream subsidiary is continuing to gain subscribers
and introduce new and innovative software products that address the traditional
on-demand market as well as new markets such as satellite, audience measurement,
targeted advertising, and IPTV. We cannot assure the success of any of these
initiatives.
In addition, a recent trend in the real-time market is the reallocation of
government spending away from some of our traditional real-time projects to
other initiatives. This redeployment of resources has resulted in a
15
number of opportunities being delayed and, in some cases, terminated. Further,
some projects in our pipeline have not come in as quickly as expected causing
the business difficulties in achieving revenue goals.
Other trends in our business are detailed in our Annual Report on Form 10-K
for the year ended June 30, 2006 filed with the Securities and Exchange
Commission ("SEC") on September 1, 2006.
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 Annual Report
on Form 10-K for the year ended June 30, 2006 filed with the SEC on September 1,
2006.
SELECTED OPERATING DATA AS A PERCENTAGE OF TOTAL REVENUE
The following table sets forth selected operating data as a percentage of
total revenue, unless otherwise indicated, for certain items in our consolidated
statements of operations for the periods indicated.
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ---------------------
2007 2006 2007 2006
---------- ---------- --------- ----------
Revenues:
Product 65.0 % 73.3 % 65.6 % 69.7 %
Service 35.0 26.7 34.4 30.3
---------- ---------- --------- ----------
Total revenues 100.0 100.0 100.0 100.0
Cost of sales (% of respective sales category):
Product 55.2 49.3 57.0 48.7
Service 44.0 53.5 47.4 50.6
---------- ---------- --------- ----------
Total cost of sales 51.2 50.4 53.7 49.3
---------- ---------- --------- ----------
Gross margin 48.8 49.6 46.3 50.7
Operating expenses:
Sales and marketing 21.9 19.7 24.9 22.3
Research and development 28.4 23.5 27.8 25.3
General and administrative 15.5 11.6 16.1 13.1
---------- ---------- --------- ----------
Total operating expenses 65.8 54.8 68.8 60.7
---------- ---------- --------- ----------
Operating loss (17.0) (5.2) (22.5) (10.0)
Interest income (expense) - net 0.2 0.2 (0.1) 0.3
Other income (expense) - net (0.2) - (0.3) 1.2
---------- ---------- --------- ----------
Loss before income taxes (17.0) (5.0) (22.9) (8.5)
Provision for income taxes 1.9 0.1 1.0 0.2
---------- ---------- --------- ----------
Net loss (18.9)% (5.1)% (23.9)% (8.7)%
========== ========== ========= ==========
16
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED MARCH 31, 2007 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2006
THREE MONTHS ENDED
MARCH 31,
------------------
(DOLLARS IN THOUSANDS) 2007 2006 $CHANGE %CHANGE
-------- -------- -------- ---------
Product revenues $10,492 $15,133 $(4,641) (30.7%)
Service revenues 5,656 5,500 156 2.8%
-------- -------- -------- ---------
Total revenues 16,148 20,633 (4,485) (21.7%)
Product cost of sales 5,788 7,456 (1,668) (22.4%)
Service cost of sales 2,487 2,944 (457) (15.5%)
-------- -------- -------- ---------
Total cost of sales 8,275 10,400 (2,125) (20.4%)
-------- -------- -------- ---------
Product gross margin 4,704 7,677 (2,973) (38.7%)
Service gross margin 3,169 2,556 613 24.0%
-------- -------- -------- ---------
Total gross margin 7,873 10,233 (2,360) (23.1%)
Operating expenses:
Sales and marketing 3,539 4,053 (514) (12.7%)
Research and development 4,587 4,852 (265) (5.5%)
General and administrative 2,506 2,395 111 4.6%
-------- -------- -------- ---------
Total operating expenses 10,632 11,300 (668) (5.9%)
-------- -------- -------- ---------
Operating loss (2,759) (1,067) (1,692) 158.6%
Interest income (expense) - net 27 49 (22) NM (1)
Other expense - net (34) (16) (18) NM (1)
-------- -------- -------- ---------
Loss before income taxes (2,766) (1,034) (1,732) 167.5%
Provision for income taxes 310 14 296 NM (1)
-------- -------- -------- ---------
Net loss $(3,076) $(1,048) $(2,028) 193.5%
======== ======== ======== =========
(1) NM denotes percentage is not meaningful
Product Sales. Total product sales for the three months ended March 31,
2007 were $10.5 million, a decrease of approximately $4.6 million, or 31%, from
$15.1 million for the three months ended March 31, 2006. The decrease in
product sales resulted from the $3.0 million, or 47%, decrease in real-time
product sales to $3.4 million in the three months ended March 31, 2007 from $6.4
million in the three months ended March 31, 2006. This decrease was due to
significantly lower sales of our first-generation Aegis products to
Lockheed-Martin.
Additionally, on-demand product sales decreased approximately $1.6 million,
or 18%, to $7.1 million for the three months ended March 31, 2007 from $8.7
million in the three months ended March 31, 2006. The decrease in on-demand
product revenue resulted from a decrease of $1.8 million and $0.6 million in
sales in North America and Europe, respectively. These decreases were partially
offset by an increase in sales to Asia which included approximately $1.2 million
of revenue from a Japanese cable distributor for a web client project during the
three months ended March 31, 2007. The total revenue for this project is
approximately $2.5 million and is expected to be substantially completed by June
30, 2007. As of March 31, 2007, Concurrent has incurred approximately 50% of the
total projected costs and has recognized revenue under the
percentage-of-completion
17
method of accounting. 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.
Service Revenue. Total service revenue for the three months ended March
31, 2007 was $5.7 million, an increase of approximately $0.2 million, or 3%,
from $5.5 million for the three months ended March 31, 2006.
Service revenue related to on-demand products increased $0.3 million, or
10%, to $3.3 million for the three months ended March 31, 2007 from $3.0 million
for the three months ended March 31, 2006, primarily due to an increase in
service revenue from on-demand products in Asia.
Service revenue related to real-time products decreased $0.1 million to
$2.4 million for the three months ended March 31, 2007 compared to $2.5 million
for the three months ended March 31, 2006. However, we expect service revenue
associated with real-time products to continue its declining trend, primarily
due to the expiration of maintenance contracts as legacy machines are 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 $4.7 million for the three
months ended March 31, 2007, a decrease of approximately $3.0 million, or 39%,
from $7.7 million for the three months ended March 31, 2006. Product gross
margin as a percentage of product revenue decreased to 45% in the three months
ended March 31, 2007 from 51% in the three months ended March 31, 2006. Product
gross margins, as a percentage of product revenue, decreased primarily due to a
favorable real-time product mix during the prior year quarter. Product margins
during the three months ended March 31, 2006 were generated by higher margin
real-time hardware and software sales of first generation Aegis products with
gross margins that were not replaced in the current year period by sales of
second generation Aegis software. However, product gross margin for the three
months ended March 31, 2007 benefited by approximately $0.3 million from a web
client project for a Japanese cable distributor. The total gross margin for this
project is approximately $0.6 million and is expected to be substantially
completed by June 30, 2007. As of March 31, 2007, Concurrent has incurred
approximately 50% of the total projected costs and has recognized revenue under
the percentage-of-completion method of accounting. In addition, our margins have
been adversely affected by on-demand product pricing pressure. Continued
on-demand product pricing pressure may further impact product gross margins in
the future.
Service Gross Margin. The gross margin on service revenue increased
approximately $0.6 million, or 24%, to $3.2 million, or 56% of service revenue
in the three months ended March 31, 2007 from $2.6 million, or 46% of service
revenue in the three months ended March 31, 2006. The increase in service
margins was primarily due to efficiencies gained due to the termination of part
of the service work-force. We expect to maintain similar service margins as we
continue to scale down the infrastructure necessary to fulfill declining
real-time product related contractual obligations.
Sales and Marketing. Sales and marketing expenses decreased approximately
$0.5 million, or 13% to $3.5 million in the three months ended March 31, 2007
from $4.1 million in the three months ended March 31, 2006. Decreasing sales and
marketing expenses were primarily attributable to a $0.2 million reduction in
salaries, wages and benefits and a $0.4 million reduction in commissions and
marketing expenses, primarily associated with a decline in real-time product
sales. Partially offsetting these cost savings, during the three months ended
March 31, 2007, we incurred an additional $0.1 million in depreciation expense
related to our new MediaHawk 4500 on-demand systems that are being used as
demonstration systems for customers.
Research and Development. Research and development expenses decreased
approximately $0.3 million, or 6% to approximately $4.6 million in the three
months ended March 31, 2007 from $4.9 million in the three months ended March
31, 2006. Decreasing research and development expenses were primarily
attributable to the reduction in salaries, benefits and other employee related
costs during the three months ended March 31, 2007, compared to the same period
in the prior year, resulting from the termination of a part of our development
and engineering workforce earlier in the fiscal year in an effort to reduce
operating expenses.
General and Administrative. General and administrative expenses increased
$0.1 million, or 5% to $2.5 million in the three months ended March 31, 2007
from $2.4 million in the three months ended March 31, 2006. This increase is
primarily due to higher legal expenses recorded during the three months ended
March 31, 2007.
18
Provision for Income Taxes. We recorded income tax expense for our foreign
subsidiaries of $0.3 million in the three months ended March 31, 2007, 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 March 31, 2007 was $3.1
million or $0.04 per basic and diluted share compared to a net loss for the
three months ended March 31, 2006 of $1.0 million or $0.01 per basic and diluted
share.
19
THE NINE MONTHS ENDED MARCH 31, 2007 COMPARED TO THE NINE MONTHS ENDED MARCH 31, 2006
NINE MONTHS ENDED
MARCH 31,
-------------------
(DOLLARS IN THOUSANDS) 2007 2006 $CHANGE %CHANGE
--------- -------- -------- ---------
Product revenues $ 31,509 $38,826 $(7,317) (18.8%)
Service revenues 16,554 16,870 (316) (1.9%)
--------- -------- -------- ---------
Total revenues 48,063 55,696 (7,633) (13.7%)
Product cost of sales 17,974 18,908 (934) (4.9%)
Service cost of sales 7,847 8,544 (697) (8.2%)
--------- -------- -------- ---------
Total cost of sales 25,821 27,452 (1,631) (5.9%)
--------- -------- -------- ---------
Product gross margin 13,535 19,918 (6,383) (32.0%)
Service gross margin 8,707 8,326 381 4.6%
--------- -------- -------- ---------
Total gross margin 22,242 28,244 (6,002) (21.3%)
Operating expenses:
Sales and marketing 11,985 12,415 (430) (3.5%)
Research and development 13,346 14,090 (744) (5.3%)
General and administrative 7,751 7,297 454 6.2%
--------- -------- -------- ---------
Total operating expenses 33,082 33,802 (720) (2.1%)
--------- -------- -------- ---------
Operating loss (10,840) (5,558) (5,282) 95.0%
Interest income (expense) - net (31) 137 (168) NM (1)
Other income (expense) - net (127) 673 (800) NM (1)
--------- -------- -------- ---------
Loss before income taxes (10,998) (4,748) (6,250) 131.6%
Provision for income taxes 461 87 374 NM
--------- -------- -------- ---------
Net loss $(11,459) $(4,835) $(6,624) 137.0%
========= ======== ======== =========
(1) NM denotes percentage is not meaningful
Product Sales. Total product sales in the nine months ended March 31, 2007
were $31.5 million, a decrease of approximately $7.3 million, or 19%, from $38.8
million in the nine months ended March 31, 2006. The decrease in product sales
resulted from the $7.9 million, or 41%, decrease in real-time product sales to
$11.3 million in the nine months ended March 31, 2007 from $19.2 million in the
nine months ended March 31, 2006. This decrease was due to significantly lower
sales of our first-generation Aegis products to Lockheed-Martin.
Partially offsetting the decrease in real-time product sales, on-demand
product sales increased approximately $0.6 million, or 3%, to $20.2 million in
the nine months ended March 31, 2007 from $19.6 million in the nine months ended
March 31, 2006. The increase in on-demand product revenue was driven by $1.7 and
$0.7 million increases in sales to North America and Asia, respectively. The
increase in sales was primarily generated by an increase in revenue from
on-demand system and storage expansion, some of which included our newest
MediaHawk 4500 on-demand system and approximately $1.2 million of revenue from a
Japanese cable distributor for a web client project. The total revenue for this
project is approximately $2.5 million and is expected to be substantially
completed by June 30, 2007. As of March 31, 2007, Concurrent has incurred
approximately 50% of the total projected costs and has recognized revenue under
the percentage-of-completion method of accounting. Partially offsetting the
increase was a decrease in European on-demand product revenue
20
during the nine months ended March 31, 2007 of $1.8 million, compared to the
nine months ended March 31, 2006. The decrease in European on-demand product
revenue resulted from significant initial site deployments of on-demand systems
in the prior fiscal year. During the nine months ended March 31, 2007, European
on-demand product revenue was driven by expansions of existing sites, which
generated less sales volume than initial deployments. 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.
Service Revenue. Total service revenue for the nine months ended March 31,
2007 was $16.6 million, a decrease of approximately $0.3 million, or 2%, from
$16.9 million for the nine months ended March 31, 2006. Service revenue
associated with on-demand products remained relatively flat year over year.
Service revenue related to real-time products decreased by $0.3 million, or
4%, during the nine months ended March 31, 2007, compared to the same period in
the prior year. Service revenue associated with real-time products continued to
decline primarily due to the expiration of maintenance contracts as legacy
product 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 $13.5 million for the nine
months ended March 31, 2007, a decrease of approximately $6.4 million, or 32%,
from $19.9 million for the nine months ended March 31, 2006. Product gross
margin as a percentage of product revenue decreased to 43% in the nine months
ended March 31, 2007 from 51% in the nine months ended March 31, 2006. Product
gross margins, as a percentage of product revenue, decreased primarily due to a
favorable real-time product mix during the prior year period. Product margins
during the nine months ended March 31, 2006 were generated by higher margin
real-time hardware and software sales of first generation Aegis products with
gross margins that were not replaced in the current year period by sales of
second generation Aegis software. However, product gross margin for the nine
months ended March 31, 2007 benefited by approximately $0.3 million from a web
client project from a Japanese cable distributor. The total gross margin for
this project is $0.6 million and is expected to be substantially completed by
June 30, 2007. As of March 31, 2007, Concurrent has incurred approximately 50%
of the total projected costs and has recognized revenue under the
percentage-of-completion method of accounting.
In addition, our margins have been adversely affected by on-demand product
pricing pressure in the nine month period. Also, our margins were further
impacted by an additional $0.5 million of amortization expense incurred during
the nine months ended March 31, 2007 compared to $0.4 million of amortization
expense for the nine months ended March 31, 2006, related to the acquired
Everstream technology.
Service Gross Margin. The gross margin on service revenue increased
approximately $0.4 million, or 5%, to approximately $8.7 million, or 53% of
service revenue in the nine months ended March 31, 2007 from approximately $8.3
million, or 49% of service revenue in the nine months ended March 31, 2006. The
increase in service margins was primarily due to efficiencies gained from the
termination of part of the service work-force. We expect to maintain similar
service margins as we continue to scale down the infrastructure necessary to
fulfill declining real-time product related contractual obligations.
Partially offsetting the impact of lower service revenue on service gross
margins was the fact that service cost of sales decreased $0.7 million, or 8%,
during the nine months ended March 31, 2007, compared to the same period in the
prior year. During the nine months ended March 31, 2007 we incurred an
additional $0.3 million in severance expense, as we have scaled down the
infrastructure necessary to fulfill declining real-time product related
contractual obligations. This incremental severance expense was more than offset
by a $0.9 million savings in salaries, wages and benefits during the nine months
ended March 31, 2007, compared to the same period in the prior year from the
employee work-force reductions in fiscal 2007.
Sales and Marketing. Sales and marketing expenses decreased approximately
$0.4 million, or 3%, to approximately $12.0 million in the nine months ended
March 31, 2007 from approximately $12.4 million in the nine months ended March
31, 2006. This decrease is primarily due to a $0.5 million reduction in
salaries, wages and benefits during the nine months ended March 31, 2007,
compared to the same period in the prior year, resulting from the termination of
a part of our sales and marketing workforce during the beginning of our fiscal
year 2007, in an effort to reduce operating expenses. Additionally, we
experienced a $0.4 million reduction in commissions primarily associated with a
decline in real-time product sales. Offsetting these cost savings, we
21
incurred an additional $0.2 million in severance as a result of these
terminations, compared to the same period of the prior year. We also incurred
an additional $0.3 million in depreciation expense related to our new MediaHawk
4500 on-demand systems that are being used as demonstration systems for
customers during the nine months ended March 31, 2007, compared to the same
period of the prior year.
Research and Development. Research and development expenses decreased
approximately $0.7 million, or 5% to approximately $13.3 million in the nine
months ended March 31, 2007 from approximately $14.1 million in the nine months
ended March 31, 2006. Decreasing research and development expenses were
primarily attributable to the $0.7 million reduction in salaries, benefits and
other employee related costs during the nine months ended March 31, 2007,
compared to the same period in the prior year, resulting from the termination of
a part of our development and engineering workforce during the beginning of our
fiscal year 2007 in an effort to reduce operating expenses. Partially offsetting
these cost savings, we incurred an additional $0.1 million in severance as a
result of these terminations, compared to the same period of the prior year.
General and Administrative. General and administrative expenses increased
$0.5 million, or 6% to $7.8 million in the nine months ended March 31, 2007 from
$7.3 million in the nine months ended March 31, 2006. During the nine months
ended March 31, 2007, our chief operating officer was terminated and, pursuant
to his employment agreement, he will receive one year of severance equal to the
value of his salary and benefits. This action resulted in approximately $0.4
million of additional severance expense during the nine months ended March 31,
2007. Additionally, we recorded $0.4 million of additional legal expenses,
partially offset by a $0.1 million decrease in outside accounting expenses year
over year.
Interest expense. Interest expense for the nine months ended March 31, 2007
increased $0.1 million due to the accrual of interest on past due withholding
tax payments.
Other income (expense). Other expense of $0.1 million for the nine months
ended March 31, 2007 related to withholding taxes due on intercompany interest
earned over the past several years by one of our wholly owned subsidiaries.
During the nine months ended March 31, 2006, other income of $0.7 million
related to a refund from the Australian Tax Authority. This refund related to
previous withholding tax payments, over many years, on intercompany charges with
our Australian subsidiary. These charges and the related withholding tax refund
are unrelated to the withholding tax accrued during the nine months ended March
31, 2007. Expense associated with previous payments was originally recorded to
"other expense" within our Consolidated Statement of Operations; therefore, we
have recorded the refund to "other income" within our Consolidated Statement of
Operations.
Provision for Income Taxes. We recorded income tax expense for our foreign
subsidiaries of $0.5 million in the nine months ended March 31, 2007, primarily
attributable to income earned in foreign locations that cannot be offset by net
operating loss carryforwards.
Net Loss. The net loss for the nine months ended March 31, 2007 was $11.5
million or $0.16 per basic and diluted share compared to a net loss for the nine
months ended March 31, 2006 of $4.8 million or $0.07 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 or decline, 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 and
product sales of real-time proprietary systems;
- ongoing cost control actions and expenses, including capital expenditures;
22
- the margins on our product lines;
- our ability to leverage the potential of Everstream;
- our ability to raise additional capital, if necessary;
- our ability to obtain additional bank financing, if necessary;
- our ability to meet the covenants contained in our Credit Agreement;
- the timing of product shipments, which typically occur 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 $3.3 million of cash from operating activities during the nine
months ended March 31, 2007 compared to using $4.1 million of cash during the
same period of the prior year. The use of cash from operations for the nine
months ended March 31, 2007 was primarily due to an increase in operating
losses, partially offset by sources of cash from a decrease in inventories and
an increase in accounts payable and accrued expenses. Prior period cash usage
resulted from both operating losses and increases in accounts receivable and
prepaid and other assets.
We invested $2.1 million in property, plant and equipment during the nine
months ended March 31, 2007 compared to $1.4 million during the nine months
ended March 31, 2006. Capital additions during each of these periods related
primarily to product development and testing equipment. During the nine months
ended March 31, 2007, we also incurred $0.6 million in capital expenditures for
our new MediaHawk 4500 on-demand systems that are being used as demonstration
systems for customers. We expect to continue at a similar level of capital
additions during the remainder of this fiscal year.
On December 22, 2006, we entered into an Amended and Restated Loan and
Security Agreement (the "Credit Agreement") with Silicon Valley Bank (the
"Bank"). The Credit Agreement amends and restates our then existing outstanding
credit facilities with the Bank and provides for a $10.0 million revolving
credit line (the "Revolver") with a borrowing base dependent upon our
outstanding domestic and Canadian accounts receivable. The Credit Agreement
requires us to pay minimum monthly interest payments of $10,000, regardless of
whether any amounts have been advanced under the Revolver. The interest amount
will be based upon the amount advanced and the rate varies based upon our
accounts receivable and the amount of cash in excess of debt. The interest rate
on the Revolver was 8.75% as of March 31, 2007. The Credit Agreement also has an
early termination fee equal to 100% of the remaining minimum monthly interest
payments. The outstanding principal amount plus all accrued but unpaid interest
is payable in full at the expiration of the credit facility. The Credit
Agreement expires on December 22, 2007 unless we obtain subsequent equity
financing in excess of $10.0 million, in which case it will expire on December
22, 2008. We used a portion of the Revolver to repay our existing term loan as
of the date of the Credit Agreement. Based on the borrowing formula and our
financial position as of March 31, 2007, $9.9 million was available to us under
the Revolver. As of March 31, 2007, we had drawn $1.1 million under the Revolver
that was used to repay our previous term loan, resulting in $8.8 million of
remaining available funds under the Revolver.
In addition, the Credit Agreement contains certain financial covenants,
including a required adjusted quick ratio (the ratio of certain highly liquid
assets to current liabilities (less the current portion of deferred revenue)) of
at least 1.25 to 1.00 and a minimum tangible net worth of at least $8.0 million,
as of March 31, 2007. The Credit Agreement also contains customary restrictive
covenants concerning our operations. As of March 31, 2007, our adjusted quick
ratio was 1.65 to 1.00 and our tangible net worth was $9.4 million. As of March
31, 2007, we were in compliance with these covenants. If we violate the
covenants discussed above, and our lender is unwilling to grant forbearance,
waivers or amendments, our lender could accelerate the maturity of amounts
23
then outstanding under the credit agreement and we would not be able to borrow
under the credit agreement, which would have a material adverse effect on our
liquidity position.
On August 1, 2006, we entered into an unsecured short-term note payable, to
finance insurance premiums, totaling $690,000. The note payable matures on April
25, 2007 and bears interest at 6.80% with $71,000 monthly payments of principal
and interest. As of March 31, 2007, the balance of this short-term note payable
was $71,000.
At March 31, 2007, we had working capital of $8.0 million and had no
material commitments for capital expenditures compared to working capital of
$17.4 million at June 30, 2006. Based on the information currently available we
believe that existing cash balances combined with a credit facility and
anticipated sales and collections will be sufficient to meet our liquidity
requirements for the next twelve months. However, unless and until our revenue
increases and stabilizes, it is likely that we will continue to use cash from
operating activities. If we continue to use cash from operating activities, we
may be forced to take certain measures to continue the business, such as raising
additional funds through an offering of stock at a discounted price, further
employee reductions, re-capitalization or reorganization transactions at
undesirable prices, sale transactions, incurring significant debt at above
market rates, or seeking bankruptcy protection. We expect that we will report a
net loss for fiscal 2007 and will continue to use cash from operating
activities.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Our contractual obligations and commercial commitments are disclosed in our
Annual Report on Form 10-K for the year ended June 30, 2006. On December 22,
2006, we entered into a Credit Agreement with Silicon Valley Bank that amends
and restates our then existing outstanding credit facilities. See the "Liquidity
and Capital Resources" section of Item 2, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" for additional information.
There have been no other material changes to our contractual obligations and
commercial commitments during the nine months ended March 31, 2007.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements made or incorporated by reference in this release may
constitute "forward-looking statements" within the meaning of the federal
securities laws. When used or incorporated by reference in this release, the
words "believes," "expects," "estimates," "anticipates," and similar
expressions, are intended to identify forward-looking statements. Statements
regarding future events and developments, our future performance, market share,
and new market growth, as well as our expectations, beliefs, plans, estimates,
or projections relating to the future, are forward-looking statements within the
meaning of these laws. Examples of our forward-looking statements in this
report include, but are not limited to, our pricing trends, our expected cash
position, our expectations of market share and growth, the impact of interest
rate changes and fluctuation in currency exchange rates, our sufficiency of
cash, our ability to remove any transfer limitations on our patents, the impact
of litigation, and our trend of declining real-time service revenue. These
statements are based on beliefs and assumptions of Concurrent's management,
which are based on currently available information. All forward-looking
statements are subject to certain risks and uncertainties that could cause
actual events to differ materially from those projected. The risks and
uncertainties which could affect our financial condition or results of
operations include, without limitation: our ability to keep our customers
satisfied; delays or cancellations of customer orders; changes in product
demand; economic conditions; our ability to satisfy the financial covenants in
our Credit Agreement; various inventory risks due to changes in market
conditions; uncertainties relating to the development and ownership of
intellectual property; uncertainties relating to our ability and the ability of
other companies to enforce their intellectual property rights; the pricing and
availability of equipment, materials and inventories; the concentration of our
customers; failure to effectively manage growth; delays in testing and
introductions of new products; rapid technology changes; system errors or
failures; reliance on a limited number of suppliers and failure of components
provided by those suppliers; uncertainties associated with international
business activities, including foreign regulations, trade controls, taxes, and
currency fluctuations; the impact of competition on the pricing of VOD
products; failure to effectively service the installed base; the entry of new
well-capitalized competitors into our markets; the success of new on-demand and
real-time products; financing for working capital needs; the availability of
Linux software in light of issues raised by SCO Group; the success of our
relationships with Alcatel and Novell; capital spending patterns by a limited
customer base; and privacy concerns over data collection.
24
Other important risk factors are discussed in Item 1A, "Risk Factors" of
this Quarterly Report on Form 10-Q for the nine months ended March 31, 2007, and
our Annual Report on Form 10-K for the fiscal year ended June 30, 2006.
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.
25
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 and bank loans. Short-term cash investments
are backed by U.S. government obligations, and other investments in 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. Bank
loans include a one-year, variable rate Revolver. We believe that the impact of
a 10% increase or decrease in interest rates would not be material to our
investment income and interest expense from bank loans.
We conduct business in the United States and around the world. Our most
significant foreign currency transaction exposure relates to the United Kingdom,
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 10% upward or downward fluctuation in foreign currency exchange rates
relative to the United States dollar would not have a material impact on future
earnings, fair values, or cash flows.
ITEM 4. CONTROLS AND PROCEDURES
As required by Securities and Exchange Commission rules, we have evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report. This evaluation
was carried out under the supervision and with the participation of our
management, including our principal executive officer and principal financial
officer. Based on this evaluation, these officers have concluded that the
design and operation of our disclosure controls and procedures are effective.
There were no significant changes to our internal control over financial
reporting during the period covered by this report that materially affected, or
are reasonably likely to materially affect, our internal controls over financial
reporting.
Disclosure controls and procedures are our controls and other procedures
designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act are recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file under the
Exchange Act are accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as appropriate, to
allow timely decisions regarding required disclosure.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our ordinary course of business. We are not presently involved
in any material litigation, but have the following matters pending:
- Vicor, Inc. v. Concurrent Computer Corporation, Essex Superior Court,
----------------------------------------------
Massachusetts, Civil Action No. C5-1437A. This suit was filed August 18,
2005 requesting declaratory relief regarding a contractual dispute between
the parties. On March 8, 2006, after briefing and arguments, the case was
dismissed for resolution by arbitration. Vicor unsuccessfully appealed the
matter and unsuccessfully moved to stay the arbitration (Case No. 32 181 Y
00738 05). The arbitration is proceeding in Florida.
ITEM 1A. RISK FACTORS
CERTAIN PATENTS LICENSED TO CONCURRENT MAY NOT PASS TO AN ACQUIRER.
We have a license to a significant portfolio of video streaming patents
that was originally granted to us by Thirdspace Living Ltd. ("Thirdspace") and
subsequently regranted to us by Alcatel when Alcatel purchased the portfolio
from Thirdspace. The portfolio includes U.S. Patent Nos. 5,623,595 and
5,805,804 ("Subject Patents"). Although our license from Alcatel does not, on
its face, terminate upon a merger, acquisition, or change in control of
Concurrent, a November 2000 agreement regarding the Subject Patents and entered
into by Thirdspace may have the effect of terminating our license to the Subject
Patents upon a merger or acquisition that results in a change in control of
Concurrent. This license limitation does not affect current operations, but
upon a
26
change of control the successor could face a lawsuit for selling on-demand
products. We currently are working to eliminate or mitigate the impact of this
limitation, but we cannot assure that we will be successful in altering this
limitation on favorable terms, or at all. This limitation may make it more
difficult to pursue, and may result in less favorable terms for us in connection
with, a sale of the company, a sale of one of our businesses or any other
business combination transaction should such an opportunity arise.
WE HAVE SUBSTANTIAL LIQUIDITY NEEDS AND FACE SIGNIFICANT LIQUIDITY PRESSURE.
At March 31, 2007, our cash and cash equivalents were $8.8 million. Our
Credit Agreement contains certain financial covenants, including a requirement
that we maintain a minimum tangible net worth of at least $8.0 million. As of
March 31, 2007, our tangible net worth was $9.4 million. If we continue to use
cash from operating activities and do not obtain equity financing we may violate
this covenant. If we violate the minimum tangible net worth covenant in our
Credit Agreement, and our lender is unwilling to grant forbearance, waivers or
amendments, our lender could accelerate the maturity of amounts then outstanding
under the Credit Agreement, which would have a material adverse effect on our
liquidity position. In such a case we may be forced to take certain measures to
continue the business, such as raising additional funds through an offering of
stock at a discounted price, further employee reductions, re-capitalization or
reorganization transactions at undesirable prices, sale transactions, incurring
significant debt at above market rates, or seeking bankruptcy protection.
Other important risk factors are discussed in Item 1A, "Risk Factors" of
our Annual Report on Form 10-K for the fiscal year ended June 30, 2006.
ITEM 6. EXHIBITS
3.1 Restated Certificate of Incorporation of the Registrant (incorporated by reference to the Registrant's
Registration Statement on Form S-2 (No. 33-62440)).
3.2 Amended and Restated Bylaws of the Registrant (incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the period ended March 31, 2003).
3.3 Certificate of Correction to Restated Certificate of Incorporation of the Registrant (incorporated by
reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2002).
3.4 Amended Certificate of Designations of Series A Participating Cumulative Preferred Stock
(incorporated by reference to the Form 8-A/A, dated August 9, 2002).
3.5 Amendment to Amended Certificate of Designations of Series A Participating Cumulative Preferred
Stock (incorporated by reference to the Form 8-A/A, dated August 9, 2002).
4.1 Form of Common Stock Certificate (incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q for the period ended March 31, 2003).
4.2 Form of Rights Certificate (incorporated by reference to the Registrant's Current Report on Form 8-
K/A filed on August 12, 2002).
4.3 Amended and Restated Rights Agreement dated as of August 7, 2002 between the Registrant and
American Stock Transfer & Trust Company, as Rights Agent (incorporated by reference to the
Registrant's Current Report on Form 8-K/A filed on August 12, 2002).
10.1 Consulting Services Agreement dated as of March 8, 2007 among the Registrant and TechCFO LLC
and Emory O. Berry (incorporated by reference to the Registrant's Current Report on Form 8-K filed
on March 9, 2007).
10.2 Indemnification Agreement between the Registrant and Emory O. Berry, dated March 8, 2007
(incorporated by reference to the Registrant's Current Report on Form 8-K filed on March 9, 2007).
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.
27
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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 7, 2007 CONCURRENT COMPUTER CORPORATION
By: /s/ Emory O. Berry
-------------------
Emory O. Berry
Chief Financial Officer
(Principal Financial and Accounting Officer)
28
EXHIBIT INDEX
-------------
3.1 Restated Certificate of Incorporation of the Registrant (incorporated by reference to the Registrant's
Registration Statement on Form S-2 (No. 33-62440)).
3.2 Amended and Restated Bylaws of the Registrant (incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the 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 Consulting Services Agreement dated as of March 8, 2007 among the Registrant and TechCFO LLC
and Emory O. Berry (incorporated by reference to the Registrant's Current Report on Form 8-K filed on
March 9, 2007).
10.2 Indemnification Agreement between the Registrant and Emory O. Berry, dated March 8, 2007
(incorporated by reference to the Registrant's Current Report on Form 8-K filed on March 9, 2007).
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.
29