10-Q 1 doc1.txt 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 Quarter Ended March 31, 2001 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 Delaware 04-2735766 (State of Incorporation) (I.R.S. Employer Identification No.) 4375 River Green Parkway, Duluth, GA 30096 Telephone: (678) 258-4000 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 --- --- Number of shares of the Registrant's Common Stock, par value $0.01 per share, outstanding as of April 30, 2001 was 55,057,413.
PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONCURRENT COMPUTER CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, 2001 2000 2001 2000 -------- -------- -------- --------- Revenues: Product sales Real-time systems $ 6,028 $ 6,367 $17,477 $ 20,220 Video-on-demand systems 10,349 3,703 17,618 6,912 -------- -------- -------- --------- Total product sales 16,377 10,070 35,095 27,132 Service and other 5,704 6,950 17,831 22,494 -------- -------- -------- --------- Total 22,081 17,020 52,926 49,626 Cost of sales Real-time and video-on-demand systems 8,744 5,235 18,945 14,068 Service and other 3,127 3,995 9,518 12,375 -------- -------- -------- --------- Total 11,871 9,230 28,463 26,443 -------- -------- -------- --------- Gross margin 10,210 7,790 24,463 23,183 Operating expenses: Sales and marketing 4,059 4,728 12,198 14,978 Research and development 2,925 2,685 8,374 7,316 General and administrative 2,320 2,476 8,100 6,232 Cost of purchased in-process research and development - - - 14,000 Relocation and restructuring - - - 2,367 -------- -------- -------- --------- Total operating expenses 9,304 9,889 28,672 44,893 -------- -------- -------- --------- Operating income (loss) 906 (2,099) (4,209) (21,710) Interest income - net 60 53 77 136 Other non-recurring income - - - 761 Other expense - net (14) (19) (106) (124) -------- -------- -------- --------- Income (loss) before income taxes 952 (2,065) (4,238) (20,937) Provision for income taxes 150 150 450 450 -------- -------- -------- --------- Net income (loss) $ 802 $(2,215) $(4,688) $(21,387) ======== ======== ======== ========= Net income (loss) per share Basic $ 0.01 $ (0.04) $ (0.09) $ (0.42) ======== ======== ======== ========= Diluted $ 0.01 $ (0.04) $ (0.09) $ (0.42) ======== ======== ======== =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. -1-
CONCURRENT COMPUTER CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (DOLLARS IN THOUSANDS) MARCH 31, JUNE 30, 2001 2000 ----------- ---------- Current assets: Cash and cash equivalents $ 5,998 $ 10,082 Accounts receivable - net 18,686 12,907 Inventories 9,155 5,621 Prepaid expenses and other current assets 2,270 2,381 ----------- ---------- Total current assets 36,109 30,991 Property, plant and equipment - net 10,437 11,314 Purchased developed computer software 1,631 1,773 Goodwill - net 2,707 2,943 Other long-term assets - net 337 1,019 ----------- ---------- Total assets $ 51,221 $ 48,040 =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 13,877 $ 13,297 Deferred revenue 6,531 2,608 ----------- ---------- Total current liabilities 20,408 15,905 Other long-term liabilities 2,681 2,902 ----------- ---------- Total liabilities 23,089 18,807 Stockholders' equity: Common stock 550 538 Capital in excess of par value 130,386 125,740 Accumulated deficit after eliminating accumulated deficit of $81,826 at December 31, 1991, date of quasi-reorganization (100,643) (95,955) Treasury stock (58) (58) Accumulated other comprehensive loss (2,103) (1,032) ----------- ---------- Total stockholders' equity 28,132 29,233 ----------- ---------- Total liabilities and stockholders' equity $ 51,221 $ 48,040 =========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. -2-
CONCURRENT COMPUTER CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS) NINE MONTHS ENDED MARCH 31, 2001 2000 -------- --------- OPERATING ACTIVITIES Net loss $(4,688) $(21,387) Adjustments to reconcile net loss to net cash used in operating activities: Write-off of in-process research and development - 14,000 Accrual of non-cash warrants 759 - Depreciation, amortization and other 3,701 4,143 Other non cash expenses 1,821 1,001 Changes in operating assets and liabilities (net of effect of business acquired): Accounts receivable (6,282) (2,326) Inventories (4,847) (523) Prepaid expenses and other current assets 111 (558) Other long-term assets 530 (483) Accounts payable and accrued expenses 580 1,941 Deferred revenue 3,923 (565) Other long-term liabilities (168) (133) -------- --------- Total adjustments to net loss 128 16,497 -------- --------- Net cash used in operating activities (4,560) (4,890) INVESTING ACTIVITIES Net additions to property, plant and equipment (2,467) (3,297) Proceeds from sale of facility - 1,223 Other - 76 -------- --------- Net cash used in investing activities (2,467) (1,998) FINANCING ACTIVITIES Net repayment of capital lease obligation (53) - Proceeds from sale and issuance of common stock 3,892 6,552 -------- --------- Net cash provided by financing activities 3,839 6,552 Effect of exchange rates on cash and cash equivalents (896) (443) -------- --------- Decrease in cash and cash equivalents (4,084) (779) Cash and cash equivalents at beginning of period 10,082 6,872 -------- --------- Cash and cash equivalents at end of period $ 5,998 $ 6,093 ======== ========= Cash paid during the period for: Interest $ 249 $ 163 ======== ========= Income taxes (net of refunds) $ 612 $ 230 ======== =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. -3- CONCURRENT COMPUTER CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying condensed consolidated financial statements of Concurrent Computer Corporation ("Concurrent" or the "Company") have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. The foregoing financial information reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods presented. All such adjustments are of a normal recurring nature. While the Company believes that the disclosures presented are adequate to make the information not misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Annual Report on Form 10-K as filed with the Securities and Exchange Commission. The results of interim periods are not necessarily indicative of the results to be expected for the full fiscal year. 2. BASIC AND DILUTED NET INCOME (LOSS) PER SHARE Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during each year. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares including common share equivalents. Under the treasury stock method, incremental shares representing the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued are included in the computation. The number of shares used in computing basic and diluted net income per share for the three months ended March 31, 2001 was 55,021,000 and 57,125,000, respectively. The number of shares used in computing basic and diluted net loss per share for the nine months ended March 31, 2001 was 54,558,000. Because of the losses for the nine months ended March 31, 2001, the common share equivalents were anti-dilutive and were not considered in the diluted earnings per share calculations. The number of shares used in computing basic and diluted net loss per share for the three months ended March 31, 2000 and the nine months ended March 31, 2000 was 53,503,000 and 51,335,000, respectively. Because of the losses for these periods, the common share equivalents were anti-dilutive and were not considered in the diluted earnings per share calculations. 3. INVENTORIES Inventories are valued at the lower of cost or market, with cost being determined by using the first-in, first-out ("FIFO") method. The components of inventories are as follows: (DOLLARS IN THOUSANDS) MARCH 31, JUNE 30, 2001 2000 --------- -------- Raw materials $ 7,102 $ 4,333 Work-in-process 1,461 947 Finished goods 592 341 --------- -------- $ 9,155 $ 5,621 ========= ======== -4- 4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES The components of accounts payable and accrued expenses are as follows: (DOLLARS IN THOUSANDS) MARCH 31, JUNE 30, 2001 2000 --------- -------- Accounts payable, trade $ 5,577 $ 4,484 Accrued payroll, vacation and other employee expenses 5,769 6,292 Other accrued expenses 2,531 2,521 --------- -------- $ 13,877 $ 13,297 ========= ======== 5. COMPREHENSIVE INCOME (LOSS) The Company's total comprehensive income (loss) is as follows: (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, 2001 2000 2001 2000 ------ -------- -------- --------- Net income (loss) $ 802 $(2,215) $(4,688) $(21,387) Other comprehensive income (loss) (626) (436) (1,071) (329) ------ -------- -------- --------- Total comprehensive income (loss) $ 176 $(2,651) $(5,759) $(21,716) ====== ======== ======== =========
6. SEGMENT INFORMATION The Company operates its business in two divisions: real-time and video-on-demand ("VOD"). Its Real-Time Division is a leading provider of high-performance, real-time computer systems, solutions and software for commercial and government markets focusing on strategic market areas that include hardware-in-the-loop and man-in-the-loop simulation, data acquisition, industrial systems, and software and embedded applications. Its VOD Division is a leading supplier of digital video server systems to a wide range of industries serving a variety of markets, including the broadband/cable, hospitality, intranet/distance learning, and other related markets. Shared expenses are primarily allocated based on either revenues or headcount. There were no material intersegment sales or transfers. Corporate costs include costs related to the offices of the Chief Executive Officer, Chief Financial Officer, Investor Relations and other administrative costs including annual audit and tax fees, Board of Director fees and similar costs. -5-
The following summarizes the operating income (loss) by segment for the three month periods ended March 31, 2001 and March 31, 2000, respectively: (DOLLARS IN THOUSANDS) THREE MONTHS ENDED MARCH 31, 2001 (UNAUDITED) --------------------------------------------- REAL-TIME VOD CORPORATE TOTAL ---------- ----------- ----------- -------- Revenues: Product sales $ 6,028 $ 10,349 $ - $16,377 Service and other 5,704 - - 5,704 ---------- ----------- ----------- -------- Total 11,732 10,349 - 22,081 Cost of sales Systems 3,392 5,352 - 8,744 Service and other 3,127 - - 3,127 ---------- ----------- ----------- -------- Total 6,519 5,352 - 11,871 ---------- ----------- ----------- -------- Gross margin 5,213 4,997 - 10,210 Operating expenses Sales and marketing 1,913 2,027 119 4,059 Research and development 880 2,045 - 2,925 General and administrative 495 513 1,312 2,320 ---------- ----------- ----------- -------- Total operating expenses 3,288 4,585 1,431 9,304 ---------- ----------- ----------- -------- Operating income (loss) $ 1,925 $ 412 $ (1,431) $ 906 ========== =========== =========== ======== THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED) ---------------------------------------------- REAL-TIME VOD CORPORATE TOTAL ---------- ----------- ----------- -------- Revenues: Product sales $ 6,367 $ 3,703 $ - $10,070 Service and other 6,950 - - 6,950 ---------- ----------- ----------- -------- Total 13,317 3,703 - 17,020 Cost of sales Systems 2,921 2,314 - 5,235 Service and other 3,995 - - 3,995 ---------- ----------- ----------- -------- Total 6,916 2,314 - 9,230 ---------- ----------- ----------- -------- Gross margin 6,401 1,389 - 7,790 Operating expenses Sales and marketing 2,737 1,903 88 4,728 Research and development 1,094 1,591 - 2,685 General and administrative 446 290 1,740 2,476 ---------- ----------- ----------- -------- Total operating expenses 4,277 3,784 1,828 9,889 ---------- ----------- ----------- -------- Operating income (loss) $ 2,124 $ (2,395) $ (1,828) $(2,099) ========== =========== =========== ========
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The following summarizes the operating income (loss) by segment for the nine month periods ended March 31, 2001 and March 31, 2000, respectively: (DOLLARS IN THOUSANDS) NINE MONTHS ENDED MARCH 31, 2001 (UNAUDITED) -------------------------------------------- REAL-TIME VOD CORPORATE TOTAL ---------- -------- ----------- -------- Revenues: Product sales $ 17,477 $17,618 $ - $35,095 Service and other 17,831 - - 17,831 ---------- -------- ----------- -------- Total 35,308 17,618 - 52,926 Cost of sales Systems 9,284 9,661 - 18,945 Service and other 9,518 - - 9,518 ---------- -------- ----------- -------- Total 18,802 9,661 - 28,463 ---------- -------- ----------- -------- Gross margin 16,506 7,957 - 24,463 Operating expenses Sales and marketing 5,700 6,059 439 12,198 Research and development 2,553 5,821 - 8,374 General and administrative 1,269 1,306 5,525 8,100 ---------- -------- ----------- -------- Total operating expenses 9,522 13,186 5,964 28,672 ---------- -------- ----------- -------- Operating income (loss) $ 6,984 $(5,229) $ (5,964) $(4,209) ========== ======== =========== ========
NINE MONTHS ENDED MARCH 31, 2000 (UNAUDITED) REAL-TIME VOD CORPORATE TOTAL ---------- --------- ----------- --------- Revenues: Product sales $ 20,220 $ 6,912 $ - $ 27,132 Service and other 22,494 - - 22,494 ---------- --------- ----------- --------- Total 42,714 6,912 - 49,626 Cost of sales Systems 9,316 4,752 - 14,068 Service and other 12,375 - - 12,375 ---------- --------- ----------- --------- Total 21,691 4,752 - 26,443 ---------- --------- ----------- --------- Gross margin 21,023 2,160 - 23,183 Operating expenses Sales and marketing 9,087 5,676 215 14,978 Research and development 3,269 4,047 - 7,316 General and administrative 1,459 888 3,885 6,232 Cost of purchased in-process research and development - 14,000 - 14,000 Relocation and restructuring 1,208 1,159 - 2,367 ---------- --------- ----------- --------- Total operating expenses 15,023 25,770 4,100 44,893 ---------- --------- ----------- --------- Operating income (loss) $ 6,000 $(23,610) $ (4,100) $(21,710) ========== ========= =========== =========
-7- 7. RESTRUCTURING AND RELOCATION In August 1999, the Company relocated its Corporate Headquarters and its VOD Division to Duluth, Georgia. In connection with this move, the Company incurred employee relocation costs of $769,000, which is recorded as an operating expense in the condensed consolidated statement of operations for the nine months ended March 31, 2000. In addition to the VOD Division relocation discussed above, management decided in the first quarter of fiscal year 2000 to "right-size" the Real-Time Division to bring its expenses in line with its anticipated revenues. In connection with these events, the Company recorded a $1.6 million operating expense in the condensed consolidated statement of operations for the nine months ended March 31, 2000. This expense represents workforce reductions of approximately 38 employees in all areas of the Company. 8. SALE OF SUBSIDIARY On September 8, 1999, the Company entered into an agreement to sell the stock of Concurrent Vibrations, a wholly owned subsidiary of Concurrent Computer Corporation S.A., to Data Physics, Inc. The transaction, which had an effective date of August 31, 1999, resulted in a gain of $761,000. This gain is recorded in other non-recurring items in the condensed consolidated statement of operations for the nine months ended March 31, 2000. 9. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended by Statement No. 137 and No. 138, which provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. Derivative instruments will be recognized in the balance sheet at fair value, and changes in the fair values of such instruments must be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS 133 was effective for the Company on July 1, 2000. As the Company does not have any hedging and derivative positions, adoption of these pronouncements did not have a material effect on the Company's financial position. In December 1999, the SEC issued Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. The Company will adopt SAB 101 as required in the fourth fiscal quarter of 2001. The adoption of this pronouncement is not expected to have a material impact on the operations of the Company. 10. ACQUISITION OF VIVID TECHNOLOGY On October 28, 1999, the Company acquired Vivid Technology, Inc. ("Vivid") for total consideration of $19.8 million, consisting of 2,233,689 shares of common stock valued at $16.8 million, $0.2 million of acquisition costs, and 378,983 shares reserved for future issuance upon exercise of stock options with a value of $2.8 million. The acquisition was treated as a purchase for accounting purposes, and, accordingly, the assets and liabilities were recorded based on their fair values at the date of the acquisition. The purchase price allocation and the respective useful lives of the intangible assets are as follows:
(DOLLARS IN THOUSANDS) Allocation Life ----------- -------- Working Capital $ 72 Fixed Assets 257 Other Long-Term Assets 13 Developed Completed Computer Software Technology 1,900 10 yrs Employee Workforce 400 3 yrs Goodwill 3,153 10 yrs In-Process Computer Software Technology 14,000
-8- Amortization of intangible assets is on a straight line basis over the assets' estimated useful life. Vivid's operations are included in the condensed consolidated statements of operations from the date of acquisition. At the acquisition date, Vivid had one product under development that had not demonstrated technological or commercial feasibility. This product was the Vivid interactive video-on-demand integrated system. The in-process technology has no alternative use in the event that the proposed product does not prove to be feasible. This development effort falls within the definition of In-Process Research and Development ("IPR&D") contained in Statement of Financial Accounting Standards ("SFAS") No. 2 and was expensed in the nine months ended March 31, 2000 as a one-time charge. Consistent with the Company's policy for internally developed software, the Company determined the amounts to be allocated to IPR&D based on whether technological feasibility had been achieved and whether there was any alternative future use for the technology. As of the date of the acquisition, the Company concluded that the IPR&D had no alternative future use after taking into consideration the potential for usage of the software in different products, resale of the software and internal usage. The following unaudited proforma information presents the results of operations of the Company as if the acquisition had taken place on July 1, 1999 and includes the one-time charge related to the write-off of the purchased IPR&D of $14 million in the nine month period ended March 31, 2000: (DOLLARS IN THOUSANDS) NINE MONTHS ENDED MARCH 31, 2000 ----------------- Revenues $ 49,980 ================= Net loss $ (22,083) ================= Basic net loss per share $ (0.42) ================= Diluted net loss per share $ (0.42) ================= 11. Issuance of Non-Cash Warrants On March 29, 2001, the Company entered into a definitive purchase agreement with Comcast Cable providing for the purchase of VOD equipment. In connection with the purchase agreement, the Company issued warrants to purchase 50,000 shares of its common stock, exercisable at $5.196 per share over a four year term. The exercise price is subject to adjustment for stock splits, combinations, stock dividends, mergers, and other similar recapitalization events. The exercise price is also subject to adjustment for issuance of additional equity securities at a purchase price less than the then current fair market value of the Company's common stock. In addition, the Company is generally obligated to issue new warrants to purchase shares of its common stock to Comcast at the end of each quarter through March 31, 2004, based upon performance goals measured by the number of subscribers to Comcast's cable service with the ability to utilize the Company's VOD systems. The Company will also issue additional warrants to purchase shares of its common stock, if at the end of any quarter the total number of Comcast cable subscribers with the ability to utilize its VOD system exceeds specified threshold levels. Based upon the information currently available, the Company does not expect the warrants to be issued to Comcast to exceed 1% of its outstanding shares of common stock. The exercise price of warrants to be issued to Comcast will equal the average closing price of the Company's common stock for the 30 trading days prior to the applicable warrant issuance date and will be exercisable over a four-year term. -9- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SELECTED OPERATING DATA AS A PERCENTAGE OF NET SALES The following table sets forth selected operating data as a percentage of net sales for certain items in the Company's consolidated statements of operations for the periods indicated.
THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, 2001 2000 2001 2000 -------- -------- -------- -------- (Unaudited) (Unaudited) Net sales: Product sales (% of total sales): Real-time systems 27.3% 37.4% 33.0% 40.7% Video-on-demand systems 46.9 21.8 33.3 13.9 -------- -------- -------- -------- Total product sales 74.2 59.2 66.3 54.7 Service and other 25.8 40.8 33.7 45.3 -------- -------- -------- -------- Total 100.0 100.0 100.0 100.0 Cost of sales (% of respective sales category): Real-time and video-on-demand systems 53.4 52.0 54.0 51.9 Service and other 54.8 57.5 53.4 55.0 -------- -------- -------- -------- Total 53.8 54.2 53.8 53.3 -------- -------- -------- -------- Gross margin 46.2 45.8 46.2 46.7 Operating expenses: Sales and marketing 18.4 27.8 23.0 30.2 Research and development 13.2 15.8 15.8 14.7 General and administrative 10.5 14.5 15.3 12.6 Cost of purchased in-process research and - - - - Development - - - 28.2 Relocation and restructuring - - - 4.8 -------- -------- -------- -------- Total operating expenses 42.1 58.1 54.2 90.5 -------- -------- -------- -------- Operating income (loss) 4.1 (12.3) (8.0) (43.7) Interest income - net 0.3 0.3 0.1 0.3 Other non-recurring income - - - 1.5 Other expense - net (0.1) (0.1) (0.2) (0.2) -------- -------- -------- -------- Income (loss) before income taxes 4.3 (12.1) (8.0) (42.2) Provision for income taxes 0.7 0.9 0.9 0.9 -------- -------- -------- -------- Net income (loss) 3.6% (13.0)% (8.9)% (43.1)% ======== ======== ======== ========
-10- RESULTS OF OPERATIONS THE QUARTER ENDED MARCH 31, 2001 COMPARED TO THE QUARTER ENDED MARCH 31, 2000 Product Sales. Total product sales were $16.4 million for the three months ended March 31, 2001, an increase of $6.3 million or 62.6% from $10.1 million for the three months ended March 31, 2000. Sales of Real-Time products decreased slightly to $6.0 million in the three month period ended March 31, 2001 from $6.4 million in the three month period ended March 31, 2000, continuing the gradual decline in sales of real-time computer systems. Sales of VOD products increased to $10.3 million in the three month period ended March 31, 2001 from $3.7 million in the three month period ended March 31, 2000. The increase is primarily due to sales of video systems to a new customer, Comcast Cable Communications, in connection with their planned roll-out of Video-on-Demand. Service and Other Sales. Real-time service revenues decreased to $5.7 million or 17.9% for the three months ended March 31, 2001 from $7.0 million for the three months ended March 31, 2000. The decline resulted from customers switching from proprietary systems to Concurrent's open systems which are less expensive to maintain, and the cancellation of other proprietary computer maintenance contracts as the machines are removed from service. Gross Margin. Gross margin increased 31.1% to $10.2 million for the three months ended March 31, 2001 from $7.8 million for the three months ended March 31, 2000. The gross margin as a percentage of sales increased to 46.2% in the three month period ended March 31, 2001 compared to 45.8% in the three month period ended March 31, 2000. The gross margin on real-time service revenue increased to 45.2% for the three months ended March 31, 2001 compared to 42.5% for the three months ended March 31, 2000, due to cost reduction efforts made in previous quarters. The gross margin on sales of VOD products increased to 48.3% in the three month period ended March 31, 2001 from 37.5% in the three month period ended March 31, 2000 principally due to cost efficiencies in the Company's new MediaHawk Model 2000 server solution and increased economies of scale. Sales and Marketing. Sales and marketing expenses decreased as a percentage of sales to 18.4% for the three months ended March 31, 2001 as compared to 27.8% for the three months ended March 31, 2000. These expenses decreased to $4.1 million in the three month period ended March 31, 2001 from $4.7 million in the three month period ended March 31, 2000 primarily due to the decrease in the Real-Time Division's worldwide sales and marketing personnel. Research and Development. Research and development expenses decreased as a percentage of sales to 13.2% in the three month period ended March 31, 2001 from 15.8% in the three month period ended March 31, 2000. These expenses increased to $2.9 million in the three month period ended March 31, 2001 from $2.7 million in the three month period ended March 31, 2000 primarily due to the growth in the VOD Division research and development personnel. This increase was partially offset by cost reduction efforts in the Real-Time Division. General and Administrative. General and administrative expenses decreased to 10.5% of sales in the three month period ended March 31, 2001 from 14.5% in the three month period ended March 31, 2000. These expenses decreased to $2.3 million in the three month period ended March 31, 2001 from $2.5 million in the three month period ended March 31, 2000 primarily due to a non-recurring $0.7 million severance charge recorded in the three month period ended March 31, 2000. This decrease was partially offset by an increase in the provision for bad debts. Income Taxes. The Company recorded income tax expense for foreign subsidiaries of $150,000 in each of the three month periods ended March 31, 2001 and March 31, 2000. The Company had pre-tax income of $1.0 million in the three month period ended March 31, 2001 and a pre-tax loss of $2.1 million in the three month period ended March 31, 2000. -11- Net Income (Loss). The Company recorded net income of $0.8 million or basic and diluted earnings per share of $0.01 for the three months ended March 31, 2001 compared to a net loss of $2.2 million or basic and diluted loss per share of $0.04 for the three months ended March 31, 2000. THE NINE MONTHS ENDED MARCH 31, 2001 COMPARED TO THE NINE MONTHS ENDED MARCH 31, 2000 Product Sales. Total product sales were $35.1 million for the nine months ended March 31, 2001, an increase of $8.0 million or 29.3% from $27.1 million for the nine months ended March 31, 2000. Sales of VOD products increased to $17.6 million in the nine month period ended March 31, 2001 from $6.9 million in the nine month period ended March 31, 2000. The increase in VOD product sales was primarily due to higher sales of video systems to domestic cable operators, including Time Warner, Comcast Cable Communications and Cox Communications. Sales of Real-Time products decreased to $17.5 million in the nine month period ended March 31, 2001 from $20.2 million in the nine month period ended March 31, 2000 continuing the decline in sales of real-time computer systems resulting from the move by our customers to less expensive off the shelf systems from the legacy proprietary systems sold by Concurrent and decreased governmental spending outside of the United States. Service and Other Sales. Real-time service revenues decreased to $17.8 million or 20.7% for the nine months ended March 31, 2001 from $22.5 million for the nine months ended March 31, 2000. The decline resulted from customers switching from proprietary systems to Concurrent's open systems which are less expensive to maintain, and the cancellation of other proprietary computer maintenance contracts as the machines are removed from service. Gross Margin. Gross margin increased 5.5% to $24.5 million for the nine months ended March 31, 2001 from $23.2 million for the nine months ended March 31, 2000. The gross margin as a percentage of sales decreased to 46.2% in the nine month period ended March 31, 2001 from 46.7% in the nine month period ended March 31, 2000. The gross margin on real-time service revenue increased to 46.6% for the nine months ended March 31, 2001 compared to 45.0% for the nine months ended March 31, 2000, due to cost reduction efforts made in previous quarters. The gross margin on sales of VOD products increased to 45.2% in the nine month period ended March 31, 2001 from 31.3% in the nine month period ended March 31, 2000 principally due to cost efficiencies in the Company's new MediaHawk Model 2000 server solution and increased economies of scale. Sales and Marketing. Sales and marketing expenses decreased as a percentage of sales to 23.0% for the nine months ended March 31, 2001 as compared to 30.2% for the nine months ended March 31, 2000. These expenses decreased to $12.2 million in the nine month period ended March 31, 2001 from $15.0 million in the nine month period ended March 31, 2000 primarily due to the decrease in the Real-Time Division's worldwide sales and marketing personnel which was partially offset by the increase in the number of worldwide sales and marketing personnel and related activities in the Company's VOD Division. Research and Development. Research and development expenses increased as a percentage of sales to 15.8% in the nine month period ended March 31, 2001 from 14.7% in the nine month period ended March 31, 2000. These expenses increased to $8.4 million in the nine month period ended March 31, 2001 from $7.3 million in the nine month period ended March 31, 2000 primarily due to the growth in the VOD Division research and development personnel and the additional development personnel as a result of the acquisition of Vivid in October of 1999. These increases were partially offset by cost reduction efforts in the Real-Time Division. General and Administrative. General and administrative expenses increased to 15.3% of sales in the nine month period ended March 31, 2001 from 12.6% in the nine month period ended March 31, 2000. These expenses increased to $8.1 million in the nine month period ended March 31, 2001 from $6.2 million in the nine month period ended March 31, 2000 primarily due to a $1.2 million severance charge recorded in the nine month period ended March 31, 2001 related to the resignation of the Company's Chief Executive Officer in October, 2000 as well as increases in the provision for bad debts and accounting related fees. These increases were partially offset by a $0.7 million severance charge recorded in the nine month period ended March 31, 2000. -12- Other. Included in operating expenses in the nine month period ended March 31, 2000 is a $14.0 million non-cash charge for the write-off of in-process research and development in connection with the acquisition of Vivid and a $2.4 million restructuring and relocation provision for personnel reduction costs in the Real-Time Division and the relocation of the corporate headquarters and VOD Division offices to Duluth, Georgia. Income Taxes. The Company recorded income tax expense for foreign subsidiaries of $450,000 in each of the nine month periods ended March 31, 2001 and March 31, 2000 on pre-tax losses of $4.2 million and $20.9 million, respectively, due to the inability to recognize the future tax benefit of the respective period's net operating loss. Net Loss. The company recorded a net loss of $4.7 million or basic and diluted loss per share of $0.09 for the nine months ended March 31, 2001 compared to a net loss of $21.4 million or basic and diluted loss per share of $0.42 for the nine months ended March 31, 2000. ACQUISITION OF VIVID TECHNOLOGY, INC. On October 28, 1999, the Company acquired Vivid Technology, Inc., a former competitor in the video-on-demand industry. Vivid's interactive stand-alone video-on-demand system ("the Vivid VOD system") was specifically being designed to integrate with the most popular digital set-top boxes used by General Instruments, a division of Motorola. The Vivid VOD system was also expected to be compatible with the digital set-top boxes used by other leading cable operators such as Philips, Panasonic and Sony. The Vivid VOD system was based on a cluster of Microsoft Windows NT computers with proprietary hardware and software added to provide high video streaming capacity and fault tolerance. The Vivid VOD system was also being designed to eventually provide VOD service including pause, rewind, and fast forward VCR-like functions. The Vivid VOD system would also provide necessary back office support software for video content management, video selection graphical user interface, subscriber management, purchase management, billing interfaces, content provider account settlement and consumer marketing feedback. In addition, the Vivid VOD system was being designed to support other interactive applications such as on-line banking, home shopping, merchandising and on-demand/addressable advertising. The in-process computer software technology was estimated to be 80% complete at the date of acquisition and was estimated to cost an additional $650,000 to complete the VOD system technology project in December of 2000. A variety of tasks were yet to be completed which would be required in order for the Vivid VOD system to be deployed on a commercial basis: - The Content Manager, which is used to load movies from studios, did not have the functionality necessary to create a royalty payment affidavit which is required for the cable operators to pay the required royalties to the movie studios. Also, the Content Manager, which had been implemented using a SQL data base, needed to be ported to other relational data bases such as Oracle to support high end data base applications. - The Resource Manager had been alpha tested; however, an advanced beta test had not been completed which would validate its ability to scale up to the required number of subscribers or connections in an actual commercial deployment. - The Subscriber Manager, which had been implemented using a SQL data base, needed to be ported to other relational data bases such as Oracle to support high end data base applications. - The Set Top VOD application needed to be tested under advanced beta test conditions to ensure that the back channel key stroke system performance can fulfill operational requirements. -13- - The Hub Server, or video pump, needed to be tested under full load in an operational environment to ensure stability over an extended period of time. The random conditions resulting from the in home use of tens of thousands of subscribers can only be simulated in an advanced beta test which has yet to be performed. The method used to allocate the purchase consideration to IPR&D was the modified income approach. Under the income approach, fair value reflects the present value of the projected free cash flows that will be generated by the IPR&D project and that is attributable to the acquired technology, if successfully completed. The modified income approach takes the income approach, modified to include the following factors: - Analysis of the stage of completion of each project; - Exclusion of value related to research and development yet-to-be completed as part of the on-going IPR&D projects; and - The contribution of existing products/technologies. The projected revenues used in the income approach were based upon the incremental revenues likely to be generated upon completion of the project and the beginning of commercial sales of the Vivid VOD system, as estimated by Company management to begin in the quarter ending December 31, 2000. The projections assumed that the Vivid VOD system would be successful and the products' development and commercialization were as set forth by management. The discount rate used in this analysis was an after-tax rate of 28%. Subsequent to the acquisition date, the Company decided to merge the Vivid VOD system and the Concurrent VOD system into one standard VOD platform. The Company began shipping the new hardware platform at the end of the quarter ended September 30, 2000. Initially, the new hardware platform has two software alternatives, one which is compatible with digital set-top boxes used by General Instruments, using core software technology developed by and purchased from Vivid, and one which is compatible with digital set-top boxes used by Scientific-Atlanta, Inc. The merger of these two software solutions into one standard solution is expected to be complete by the end of calendar 2001. -14- LIQUIDITY AND CAPITAL RESOURCES The liquidity of the Company is dependent on many factors, including sales volume, operating profit, debt service and the efficiency of asset use and turnover. The future liquidity of the Company will be affected by, among other things: - The actual versus anticipated decline in sales of real-time proprietary systems and service maintenance revenue; - Revenue growth from VOD systems; - Ongoing cost control actions and expenses, including for example, research and development and capital expenditures; - The margins on the VOD and real-time businesses; - Timing of product shipments which occur primarily during the last month of the quarter; - The percentage of sales derived from outside the United States where there are generally longer accounts receivable collection cycles and which receivables are not included in the borrowing base of the revolving credit facility; and - The number of countries in which the Company operates, 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. The Company used cash of $4.6 million and $4.9 million in operating activities during the nine month periods ended March 31, 2001 and March 31, 2000, respectively, primarily due to the losses generated by the Company's VOD business. On November 3, 2000, the Company entered into a $15 million revolving credit facility with Wachovia Bank which expires June 30, 2002 and replaces the previous credit facility which expired on October 31, 2000. Borrowings under the facility are limited to 85% of eligible accounts receivable and bear interest at between prime and prime plus .75% or between LIBOR plus 2.25% and LIBOR plus 3.00% depending on the Company's ratio of Consolidated Funded Debt (as defined in the credit facility) to EBITDA. The Company has pledged substantially all of its assets as collateral for the facility. No borrowings were outstanding at March 31, 2001 under the credit facility. The amount of cash available to borrow under the credit facility was approximately $11.2 million at March 31, 2001. The credit facility contains financial covenants which limit the ratio of total liabilities to tangible net worth and which require the Company to achieve on a quarterly basis minimum EBITDA in each of the Company's operating divisions. The Company was in compliance with these covenants at March 31, 2001. The Company invested $2.5 and $3.3 million in property, plant and equipment during the nine month periods ended March 31, 2001 and March 31, 2000, respectively. Current year capital expenditures primarily relate to computer equipment and development equipment for the Company's VOD Division. The Company received $3.9 million in proceeds from the issuance of common stock to employees and directors who exercised stock options during the nine month period ended March 31, 2001 compared to $6.6 million during the nine month period ended March 31, 2000. At March 31, 2001, the Company's working capital was $15.7 million, and the Company did not have any material commitments for capital expenditures. The Company believes that existing cash balances, the available credit facility and funds generated by operations will be sufficient to meet the Company's anticipated working capital and capital expenditure requirements for the next twelve months. On March 29, 2001, the Company entered into a definitive purchase agreement with Comcast Cable providing for the purchase of VOD equipment. In connection with the purchase agreement, the Company issued warrants to purchase 50,000 shares of its common stock, exercisable at $5.196 per share over a four year term. The exercise price is subject to adjustment for stock splits, combinations, stock dividends, mergers, and other similar recapitalization events. The exercise price is also subject to adjustment for issuances of additional equity securities at a purchase price less than the then current fair -15- market value of the Company's common stock. In addition, the Company is generally obligated to issue new warrants to purchase shares of its common stock to Comcast at the end of each quarter through March 31, 2004, based upon performance goals measured by the number of subscribers to Comcast's cable service with the ability to utilize the Company's VOD systems. The Company will also issue additional warrants to purchase shares of its common stock, if at the end of any quarter the total number of Comcast cable subscribers with the ability to utilize its VOD system exceeds specified threshold levels. Based upon the information currently available, the Company does not expect the warrants to be issued to Comcast to exceed 1% of its outstanding shares of common stock. The exercise price of warrants to be issued to Comcast will equal the average closing price of the Company's common stock for the 30 trading days prior to the applicable warrant issuance date and will be exercisable over a four-year term. -16- CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements made in this report, and other written or oral statements made by or on behalf of Concurrent or its representatives, may constitute "forward-looking statements" within the meaning of the federal securities laws. When used in this report, the words "believes," "expects," "estimates" and similar expressions are intended to identify forward-looking statements. Statements regarding future events and developments and Concurrent's future performance, as well as its expectations, beliefs, plans, estimates or projections relating to the future, are forward-looking statements within the meaning of these laws. 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 the Company's performance or results include, without limitation: - changes in product demand; - economic conditions; - various inventory risks due to changes in market conditions; - uncertainties relating to the development and ownership of intellectual property; - uncertainties relating to the ability of the Company and other companies to enforce their intellectual property rights; - the pricing and availability of equipment, materials and inventories; - the limited operating history of the VOD segment; - the concentration of the Company's customers; - failure to effectively manage growth; - delays in testing and introductions of new products; - rapid technology changes; - the highly competitive environment in which the Company operates; - the entry of new well-capitalized competitors into the Company's markets and other risks and uncertainties. Other important risk factors are discussed in Item 5 of Concurrent's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 and other documents as filed from time to time with the Securities and Exchange Commission. These statements are based on current expectations and speak only as of the date of such statements. Concurrent undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of future events, new information or otherwise. -17- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company is exposed to market risk from changes in interest rates and foreign currency exchange rates. The Company is exposed to the impact of interest rate changes on its short-term cash investments, which are backed by U.S. government obligations, and other investments in respect of institutions with the highest credit ratings, all of which have maturities of 3 months or less. These short-term investments carry a degree of interest rate risk. The Company believes that the impact of a 10% increase or decline in interest rates would not be material to its investment income. The Company conducts business in the United States and around the world. The most significant foreign currency transaction exposures relate to the United Kingdom, those Western European countries that use the Euro as a common currency, Australia and Japan. The Company does not hedge against fluctuations in exchange rates and believes that a hypothetical 10% upward or downward fluctuation in foreign currency exchange rates relative to the United States dollar would not have a material impact on future earnings, fair values, or cash flows. -18- PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: (10.1) Video-On-Demand Purchase Agreement, dated March 29, 2001, by and between Concurrent Computer Corporation and Comcast Cable Communications of Pennsylvania, Inc. (portions of the exhibit have been omitted pursuant to a request for confidential treatment) (11) Statement on computation of per share earnings (b) Reports on Form 8-K. None. -19- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report for the quarter ended March 31, 2001 to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 2, 2001 CONCURRENT COMPUTER CORPORATION By: /s/ Steven R. Norton ------------------------- Steven R. Norton Chief Financial Officer (Principal Financial and Accounting Officer) -20-