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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2003
COMMISSION FILE NUMBER 0-13150
CONCURRENT COMPUTER CORPORATION
(Exact name of registrant as specified in our charter)
DELAWARE 04-2735766
(State of Incorporation) (I.R.S. Employer Identification Number)
4375 RIVER GREEN PARKWAY, DULUTH, GEORGIA, 30096 (678) 258-4000
(Address and telephone number of principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock (par value $0.01 per share)
Preferred Stock Purchase Rights
Indicate by check mark whether 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by a check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
----- -----
As of September 8, 2003, there were 62,367,686 shares of Common Stock
outstanding. The aggregate market value of shares of such Common Stock (based
upon the last sale price of $4.24 per share as reported for September 8, 2003 on
the Nasdaq National Market) held by non-affiliates was approximately
$261,633,000.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Registrant's Proxy Statement to be used in connection
with Registrant's 2003 Annual Meeting of Stockholders scheduled to be held on
October 21, 2003 are incorporated by reference in Part III hereof.
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PART I
ITEM 1. BUSINESS
OVERVIEW
We are a leading provider of computer systems for both the video-on-demand,
or VOD, market through our Xstreme division and high-performance computing
applications through our Integrated Solutions division (formerly the Real-Time
division). Our Xstreme division provides VOD systems consisting of hardware and
software as well as integration services, primarily to residential cable
companies that have upgraded their networks to support interactive, digital
services. Our Integrated Solutions division provides high-performance,
real-time computer systems to commercial and government customers for use in
applications such as simulation and data acquisition. Although almost all of
our revenues prior to fiscal 2000 were derived from our Integrated Solutions
division, we expect in the near term that a majority of our future revenue
growth will come from our Xstreme division, which began commercial sales in
1999.
Our VOD systems enable cable systems that have two-way capability to
deliver movies and a large variety of other content to subscribers with digital
set-top boxes. The subscribers can then view the content at any time with
familiar VCR-like functionality such as fast-forward, rewind, and pause. We
have been selected to supply our VOD system to 62 markets. We provided VOD for
the first successful commercial deployment of VOD in 1999 and some of the
largest system-wide commercial deployments to date. The largest cable companies
in the U.S. have begun deploying VOD services in one or more residential
markets.
Our high-performance computing systems and software are specially designed
to acquire, process, store, analyze and display large amounts of rapidly
changing information in real time - that is, with microsecond response as
changes occur. We have over 37 years of experience in high-performance
computing systems, including specific expertise in operating systems, computer
hardware, application software, productivity tools, and networking. Our systems
and software support applications in the simulation and training, data
acquisition, and industrial process control systems markets.
We recently created a new subsidiary, Concurrent Federal Systems, Inc., to
focus on opportunities within the federal government, leveraging Concurrent's
status under The North American Industry Classification System as a small
business that can offer end-to-end computing solutions.
We were incorporated in Delaware in 1981 under the name Massachusetts
Computer Company.
We make our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports available, free of
charge, on our web site located at www.ccur.com. Since at least as early as
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November 15, 2002, we have made these reports available as soon as reasonably
practicable after filing with the SEC. Additionally, we have adopted a code of
ethics that is applicable to our principal executive, financial, and accounting
officers. This ethics policy is also posted on our web site. If we amend or
change our code of ethics or grant a waiver to it, we will disclose these events
through our website.
Financial information about our industry segments is included in Note 14 to
the consolidated financial statements included herein.
THE VOD MARKET
Technological developments have laid the groundwork for digitally upgraded,
two-way capable networks that enable cable companies to deliver VOD services to
their digitally enabled subscribers. These new systems include additional
bandwidth capability and digital equipment throughout the network. These
digitally upgraded systems are capable of carrying a larger quantity of signals
at a faster rate. As of December 2002, according to the National Cable
Television Association, digital upgraded cable service is available to
approximately 82% of the homes passed by basic cable service in the United
States. Further, many major movie studios, major television
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networks, premium channel providers, and other program and content creators are
converting their most popular titles into a digital format, thus, making content
available for VOD services.
We believe these advancements have opened the door for our VOD systems to
serve the home video entertainment market. Our VOD systems offer the following
improvements over traditional home video services:
- Home video rentals. VOD eliminates travel to pick-up or return rentals
and late charges.
- Pay-per-view. VOD enables a subscriber to view content at any time
with interactive capabilities such as play, rewind, fast-forward and
pause and is not limited by the availability of channel frequencies
for delivering content.
- Digital Video Recorder. A digital video recorder (DVR) is an
additional set-top device or an enhanced set-top device that enables a
user to record programming for playback after the "live" program began
with VCR-like functionality on the saved content. VOD does not require
subscribers to purchase an expensive DVR device, install and maintain
the device, update the device and learn how to operate the device.
Further, since VOD is network based, cable companies can incrementally
add storage (thus, a greater selection) whereas storage on a DVR
device is not so easily increased.
- Advertising. VOD has the potential to enable cable companies to target
advertising and offer an interactive advertising experience.
We believe that VOD is a key strategic competitive initiative for cable
companies because it provides them with an opportunity to differentiate their
service offerings, in that digital broadcast satellite providers are technically
unable to duplicate the full functionality of cable delivered VOD. Further, we
believe VOD will provide the cable companies access to new revenue generating
opportunities from subscribers, advertisers and electronic commerce initiatives.
THE HIGH-PERFORMANCE COMPUTING MARKETS
Our Integrated Solutions division focuses on high-performance systems that
offer unique solutions for a wide-range of applications that require
state-of-the-art technology. The solutions we provide typically offer
high-performance computation, high data throughput, and predictable and
repeatable responses to critical events. Our computer systems and software are
currently used in host, client server, and distributed computing solutions,
including fault tolerance applications. End uses of our products include the
following:
- Simulation and Training. Applications that utilize our systems include
training simulators for commercial and military aviation, vehicle
operation and power plants, mission planning and rehearsal, and
engineering design for avionics and automotive labs subsystems. Our
high-performance computer systems also run hardware-in-the-loop type
applications in which accurate simulations are constructed to verify
hardware designs.
- Data Acquisition. Applications that run on our systems include
environmental analysis and display, engine testing, range and
telemetry systems, weather satellite data acquisitions and
forecasting, intelligence data acquisition and analyses, and command
and control.
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BUSINESS STRATEGY
XSTREME DIVISION
Our VOD strategy is comprised of the following primary initiatives:
- Maintain Existing and Establish New Relationships with Top Domestic Cable
Companies. We have been selected to supply VOD systems for 62 markets. Our
customers include, in alphabetical order, Adelphia Communications
Corporation, AOL Time Warner, Inc., Blue Ridge Communications, Bright House
Networks, Cablevision Systems Corporation, Charter Communications, Inc.,
Cogeco, Inc., Comcast Corporation, Cox Communications, Inc., Knology, Inc.,
Mediacom Communications Corporation, and Vid otron Lt e. We will focus on
continuing to serve these customers and adding to the customer base by
providing the product innovations and customer support the cable companies
need to succeed. Additionally, we are focusing our sales team on new
opportunities in new markets within our base as well as other domestic
network providers.
- Develop Partnerships Enabling Incremental Revenue Opportunities for Cable
Companies. With the evolution of the television viewing experience, we
believe there will be opportunities for our customers to generate
incremental revenues with other product offerings complementary to VOD
services. To that end, we have an active partner program to develop
relationships with other industry suppliers. Examples include, in
alphabetical order, Cisco Systems, Inc., Digeo, Inc., Gemstar-TV Guide
International, Inc., Gotuit Media Corporation, Microsoft Corporation,
TVGateway, LLC, Wink Communications, Inc., and others. Additionally, we
support and partner with major providers of network equipment such as
Scientific-Atlanta, Inc., Motorola, Inc., Harmonic, Inc., BigBand Networks,
Inc., Internet Photonics, Inc. and others. We have also invested in and
formed a strategic partnership with Everstream Holdings, Inc., a company
specializing in incremental software applications for the collection of
information from our VOD systems. Further, Everstream has developed an
application for the delivery of targeted advertising via our VOD systems.
- Focus on International Operations. The rollout of residential VOD service
internationally over both cable television systems and DSL-based telephone
networks is progressing more slowly than we originally expected. As a
result, we have reduced our presence in certain markets so we can focus on
more promising opportunities. We will continue to nurture relationships
with international cable companies and telephone companies in order to take
advantage of opportunities as they arise.
- Maintain a Technological Leadership Position in VOD Server Systems. We have
developed our VOD technology through internal research and development,
acquisitions, and relationships with third-party technology providers. We
intend to continue to focus on the development of future VOD technologies
in order to remain a technology leader by improving streaming flexibility,
asset management, encryption techniques, network based digital video
recorder applications, software clients, time shifted programming, and
functionality such as compatibility with high definition television.
INTEGRATED SOLUTIONS DIVISION
As the high-performance, real-time, computing market shifted to open
systems, we introduced new products to meet these open system requirements while
maintaining support for our proprietary systems. Our strategy strikes a balance
between offering upgrades for our proprietary system offerings and investing in
our open-source RedHawk(TM) Linux(R) operating system and our iHawk integrated
computer system solutions.
RedHawk(TM) Linux(R) is a real-time operating system that incorporates a
number of changes to Linux that make it a powerful real-time, multi-processing
operating system for time-critical applications. RedHawk includes the popular
Red Hat(TM) Linux distribution. RedHawk also maintains third-party software
compatibility with Red Hat Linux, allowing us to take advantage of the full
range of third-party software applications that run on Red Hat.
The iHawk family is a line of Intel-based servers available in single,
dual, quad, and 8-way processor models. iHawks are available in a wide-range of
configurations that include our proprietary real-time clock and
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interrupt module as well as the optional NightStar tool suite. We expect that
the introduction of a wide-range of Intel-based servers running RedHawk Linux
will allow us to compete for a broader range of business opportunities.
Concurrent Federal Systems, Inc., a wholly owned subsidiary of Concurrent
Computer Corporation, was established in October 2002 to help us respond to the
growing needs of the federal government. The subsidiary operates as a prime
contractor or subcontractor or as part of a team to develop new and innovative
ways to address the difficult problems encountered in the information technology
arena for border and transportation security, emergency response, homeland
security, infrastructure protection and military action.
PRODUCTS AND SERVICES
Our products fall into two principal groups, VOD systems sold by our
Xstreme division and high-performance systems sold by our Integrated Solutions
division. In addition, both divisions provide technical support to our
customers. The percentage of total revenue contributed by our Xstreme division's
products, our Integrated Solutions division's products and our service offering
is discussed in Management's Discussion and Analysis of Financial Condition and
Results of Operation in this Annual Report on Form 10-K.
XSTREME DIVISION PRODUCTS
Our VOD system may be located at the headend or hub in a distributed or
centralized architecture with our thin client software, or an alternative client
application, residing on the subscriber's set-top-box. When a subscriber selects
a movie, a video session is established between our video server and the digital
set-top box in the subscriber's home via the resource manager over the cable
system's network. The selected movie is accessed from the video server where it
is stored at either a headend or a hub. The purchase is captured by our
back-office software, creating a billing and royalty record for the cable
company's billing system.
Our VOD systems integrate video streaming technology, content management,
and back-office software and readily available commercial hardware platforms to
provide interactive, VOD capabilities. Our VOD systems include the following:
- MediaHawk(R) Family of Video Servers. Our MediaHawk video servers are
high-performance computer systems designed for the demanding requirements
of interactive VOD applications. The MediaHawk video server includes
multiple content storage devices, stream processors and input/output
interfaces. In June 2003, we began shipping our fourth generation of
servers, the MediaHawk 4G On-Demand Platform, which separates streaming,
storage, and content capture to maximize flexibility and scalability. The
MediaHawk 4G will work with legacy MediaHawk family products, enabling our
customers to seamlessly grow their VOD streaming capabilities.
- Resource Manager. Our resource manager establishes the network connection
that allows the video to be streamed to the home over the cable operator's
network as a dedicated session. The resource manager is designed to route
video streams in the most efficient manner available at any given time.
- MediaHawk Business Management System. Our business management system is an
industry standard, relational database supporting subscriber and provider
data management. Our back-office applications include customer access
management, content distribution management, order management, royalty
management, billing interfaces and marketing analysis.
- Real Time Media. Our Real Time Media System enables our customers to
capture satellite or broadcast television programming at the time of
broadcast and simultaneously digitally encode and store the captured
programs for future viewing by the subscriber.
- Client. Our client is a small software module that resides on each
set-top-box, empowering the subscriber to select on-demand content and
maintain complete interactive control.
- System Management and Maintenance Software. Our system management and
maintenance software is designed to detect failed components, to re-route
video streams bypassing the failed component, and to notify the cable
company that maintenance is required.
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- Integration Options. Our VOD systems are compatible with a wide range of
equipment and software employed by cable companies to deliver digital
television service, including digital set-top boxes from
Scientific-Atlanta, Motorola, Pioneer, Sony and Pace Micro and transport
topologies such as Gigabit Ethernet, DVB-ASI, ATM, and 64 and 256 QAM IF or
RF. Further, since our VOD technology allows us to perform functionality in
the server rather than in the digital set-top box, we can overcome the
challenge of providing VOD services through digital set-top boxes with
limited processing capability.
- Subscription VOD (SVOD) Technology. SVOD is a complementary service to VOD,
enabling impulse viewing of premium network programming such as HBO,
Showtime or Starz at flat monthly fees with VCR-like functionality. SVOD is
not a service that can be offered by direct broadcast satellite and we
believe it will provide cable companies with a competitive advantage and
build greater subscriber satisfaction and retention.
- Fault Tolerant System Designs. Our VOD systems are designed with multiple
layers of redundancy, including fully redundant storage, power and cooling
systems to provide seamless end-user viewing. Thus, in most cases, system
repairs can be made during delivery without any interruption to the
end-user.
- Intelligent Digital Asset Management. Our VOD systems enable cable
companies to automate the movement of content from one storage location to
another based upon demand and other network requirements. This feature
enables the most efficient streaming and storage of content. We have
applied for a patent to protect our developments in this area.
- Multiple Operating Systems. We offer solutions utilizing both proprietary,
purpose-specific operating systems, as well as open, commercially available
operating systems. Our general expectations are an orderly migration to
open systems, thus reinforcing our stance of embracing open standards where
feasible.
XSTREME DIVISION SERVICES
Our support offerings are an essential piece of successfully deploying VOD
services. A VOD system has multiple interface points with other network
elements; e.g., transport equipment, set-top boxes, conditional access,
navigators (electronic program guides), billing systems, content receivers,
other applications and back office systems. Our system engineers are able to
integrate these diverse elements, creating seamless VOD services. The basic
customer service plans and support options offered to our VOD customers include
24x7 telephone support, software patches to correct problems in existing
software, 24-hour parts replacement, product service training classes, limited
on-site services and preventative maintenance services. These services are
typically provided at no additional charge during the warranty period and are
available for additional fees under maintenance agreements after the warranty
period. In addition to these basic service and support options, we also offer,
for additional fees, software upgrades and onsite hardware maintenance services.
INTEGRATED SOLUTIONS DIVISION PRODUCTS
The principle products sold by our Integrated Solutions division are:
- Power Hawk(R) 700 and 900. Power Hawk is our family of highly-scalable,
advanced systems capable of supporting data acquisition, simulation and
industrial process control applications in environments ranging from entry
level to highly complex. The Power Hawk line is designed around the
Motorola PowerPC processor, and is available in single, dual and quad
central processing unit (CPU) versions.
- PowerMAXION(R). The PowerMAXION is our mid-level system specifically
targeted to the real-time data acquisition market, such as radar and
weapons control in the military market. The PowerMAXION series is designed
around the PowerPC 604e processors from IBM and Motorola and is available
in one-to-eight CPUs.
- Model 3200-2000. The Model 3200-2000 is the most recent addition to our
Series 3200 family of high-performance proprietary platforms. Model
3200-2000 provides an upgrade to processing power and system
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throughput required by demanding real-time applications. Model 3200-2000
runs our proprietary operating system.
- PowerMAX Operating System. The PowerMAX Operating System is our
highly-deterministic UNIX-based operating system used on our Power Hawk and
PowerMAXION systems.
- NightStar Tools. The NightStar development tools help users debug their
application software running under both the PowerMAX and RedHawk Linux
operating systems.
- RedHawk(TM) Linux. RedHawk Linux is an industry-standard, real-time version
of the open source Linux operating system. RedHawk Linux, which includes
the popular Red Hat(R) Linux distribution, provides high-speed transfer of
data, guaranteed fast response to external events and optimized
interprocess communications.
- iHawk(TM). Our iHawk Intel-based servers feature the RedHawk Linux
operating system and our real-time clock and interrupt module. Although
this product is still new to the marketplace, we anticipate that it will be
deployed in simulation, data acquisition and industrial process control
applications, and satisfy scientific and other complex computing
requirements.
INTEGRATED SOLUTIONS DIVISION SERVICES
Customer Support. We offer worldwide hardware and software maintenance and
support services for our Integrated Solutions division products and for the
products of other computer and peripheral suppliers. Services include on-site
maintenance, return-to-factory warranty, depot repair, and software support
update service. We provide these support services at no additional charge during
the warranty period. We have routinely offered and delivered long-term service
and support of our products for as long as 15 to 20 years under maintenance
contracts for additional fees. However, we anticipate this source of revenue to
decline over time due to legacy product obsolescence.
Custom Engineering and Integration Services. We provide custom engineering
and integration services in the design of special hardware and software to help
our customers with their specific applications. This may include custom
modifications to our products or integration of third-party interfaces or
devices into our systems. Many customers use these services to migrate existing
applications from earlier generations of our systems or our competitors' systems
to our state-of-the-art systems. These services also include classroom and
on-site training, system and site performance analysis, and multiple vendor
support planning.
SALES AND MARKETING
We sell our systems primarily in the U.S. through our direct field sales
and support offices, as well as through value added resellers and systems
integrators. As of June 30, 2003, on a consolidated basis, we had 91 employees
in our sales and marketing force, which includes sales support, corporate
communications, application engineering, field sales, and sales administration.
Of these employees, ten are shared by our divisions.
XSTREME DIVISION
Our VOD sales strategy primarily focuses on maintaining and expanding
existing relationships and developing new relationships, with domestic cable
companies and international cable and DSL providers. Our domestic sales force
has significant experience as either prior employees of, or vendors to, the
largest domestic cable companies. During the fiscal year we added employees to
our direct sales team to enable us to better respond to our customers' needs.
Outside the North American cable market, we have a small direct sales team
that is augmented by value added resellers and systems integrators.
As of June 30, 2003, we employed 41 people worldwide as part of our Xstreme
sales and marketing team.
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INTEGRATED SOLUTIONS DIVISION
We sell our high-performance computing systems in key markets worldwide
through direct field sales and support offices, as well as through value added
resellers and systems integrators. As of June 30, 2003, we employed 40 people
worldwide as part of our sales and marketing team.
CUSTOMERS
Both of our divisions derive revenue from a limited number of customers. As
a result, the loss of, or reduced demand for products or related services from
any of our major customers could adversely affect our business, financial
condition and results of operations. Our products are typically manufactured and
shipped in the same quarter the purchase order is received. Accordingly, we do
not believe backlog is a meaningful indicator of future level of sales. Our
backlog for real-time and VOD systems at June 30, 2003 and 2002 totaled $2.0
million and $2.3 million respectively. In addition, we had deferred revenue of
$7.6 million and $5.7 million at June 30, 2003 and 2002, respectively, which
resulted from prepaid maintenance services and shipments of systems where the
revenue had not yet been recognized.
We have purchase agreements with many customers, but none of these
agreements require fixed minimum purchases of our products except for our
agreement with Lockheed-Martin. As a result, sales to specific customers tend
to, and are expected to continue to, vary from year-to-year, depending on such
customers' budgets for capital expenditures and new product introductions.
XSTREME DIVISION
A significant portion of our VOD revenue has come from, and is expected to
continue to come from, sales to the large cable companies. Customers accounting
for more than 10% of total revenue consisted of AOL Time Warner (16%) and
Comcast (10%) for the year ended June 30, 2003; AOL Time Warner (31%) and Cox
Communications (13%) for the fiscal year ended June 30, 2002; and Comcast (12%)
and AOL Time Warner (11%) for the fiscal year ended June 30, 2001. No other
Xstreme division customer accounted for more than 10% of total revenue during
the last three fiscal years.
INTEGRATED SOLUTIONS DIVISION
Lockheed-Martin accounted for 16% and 12% of total revenues in the fiscal
years ended June 30, 2003 and 2002, respectively. No other Integrated Solutions
division customer accounted for more than 10% of total revenue during the last
three fiscal years.
We derive a significant portion of our revenues from the supply of
integrated computer systems to U.S. Government prime contractors and agencies of
the U.S. Government. The supplied systems include configurations from the
PowerMAXION, Power Hawk, and 3200-2000 product lines, with certain systems
incorporating custom enhancements requested by the customer. We sell these
integrated computer systems to prime contractors, including Boeing,
Lockheed-Martin, and Raytheon. We also supply spare parts, upgrades, and
engineering consulting services and both hardware and software maintenance. For
the fiscal year ended June 30, 2003, we recorded $18.2 million in revenues to
U.S. Government prime contractors and agencies of the U.S. Government,
representing 24% of total sales for the period. Government business is subject
to many risks, such as delays in funding, reduction or modification of contracts
or subcontracts, failure to exercise options, changes in government policies and
the imposition of budgetary constraints. A loss of government contract revenues
could have a material adverse effect on our business, results of operations and
financial condition.
NEW PRODUCT DEVELOPMENT
We are committed to the development of new technology and rapid innovation
in the evolving markets in which we compete. Research and development costs are
expensed when incurred and aggregated $18,775,000, $15,291,000, and $11,579,000
in fiscal years 2003, 2002, and 2001, respectively.
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XSTREME DIVISION
Our research and development strategies with respect to our VOD solutions
are focused on the following:
- Network Digital Video Recorder Technology. This technology will allow the
subscriber to pause and rewind time-shifted programming, effectively
providing "TV on-demand." We believe this is superior to existing DVR
devices because cable subscribers will not be required to purchase or
maintain an extra device since all the required equipment will reside on
the cable company's network. We have released the first generation of our
real time media product line that captures, encodes, and stores broadcast
programs for future viewing. Additionally, we have released our MediaHawk
4G On-Demand Platform that will enable cable companies to grow streaming,
storage, and content capture independently so they can more easily provide
"TV on-demand".
- Interactive and Targeted Advertising. Interactive long format advertising
is already being deployed by Cox Communications in their systems. Targeted
advertising technology provided by partners such as Everstream will allow
our VOD system to insert different television commercials into the video
streams for different consumers. This technology will allow the advertiser
to closely "target" product advertisements to consumers most likely to buy,
rather than broadcasting the same advertisements to everyone.
- High Definition VOD. We are adding full end-to-end support for
high-definition content to our system this year. Such content requires
substantially greater streaming and storage capacity which, in turn, will
require more VOD products. For example, high-definition content typically
requires streaming capacity of 19 megabits/second while standard content
streams at 3.75 megabits/second. Thus, high-definition content consumes
approximately five times the storage and approximately five times the
streaming capacity.
- Content Management. As VOD matures as an industry, we anticipate that
demand for stored content will increase from a few hundred hours to many
thousands of hours. We continue to enhance our systems to intelligently and
automatically manage the distribution and lifecycle of stored content,
thus, increasing the efficiency of our customers' networks.
- Resource Management. We have developed an advanced distributed resource
management system that will allow on-demand systems to grow into the
"everything on demand" environment that we believe the cable industry is
now envisioning.
- Platform Consolidation. As our VOD systems have become more widely
deployed, we have been developing a single platform to focus future
development and ease support requirements.
INTEGRATED SOLUTIONS DIVISION
Our product development strategies will focus on higher-performance and
cost-effective scalable products that will provide the latest technology with a
wider range of solutions for our customers. New product development will be
focused on the following:
- iHawk. We plan to offer systems based on new 64-bit processor technology in
addition to systems based on higher-performance 32-bit processors from
Intel(R). These systems should be available in single, dual, quad and 8-way
processor configurations.
- RedHawk Linux. We are further developing our RedHawk Linux real-time
operating system to provide increased determinism for time-critical
applications.
- Opal-RT RT-LAB Simulation. We have entered into an engineering alliance
with Opal-RT whereby Opal-RT will make their automotive data acquisition
testing product available on our RedHawk Linux based systems. RT-LAB is a
widely-used real-time application that allows engineers to use mathematical
block diagrams for design, simulation, control and related functions.
RT-LAB offers a scalable, high-performance, environment for the most
demanding of hard-real-time simulations such as for internal
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combustion engines, hydraulic systems, car dynamics and flexible multi-body
mechanical systems, as well as electrical and power electronic systems.
- Data Acquisition Products. We are developing data acquisition products
compatible with graphics-based software applications for acquiring,
storing, analyzing, filtering and displaying of multiple data streams. We
believe these developments will allow us to compete for general
high-performance data acquisition market applications.
- Image Generation. We are developing PC-based products based on visual
software from Multigen-Paradigm Inc. These image generation systems will
directly address the requirements of the simulation and training markets.
Typically we have provided only the "host computer" component of training
systems. The new products will allow us to compete for the visual
subsystems.
- Multi-Level Security Systems. We are developing multi-level security
features for our real-time products that will ensure that no user, either
authorized or unauthorized, can launch any process that circumvents the
security mechanisms.
COMPETITION
Both our Xstreme and Integrated Solutions divisions operate in
highly-competitive environments, driven by rapid technological innovation. Both
divisions compete based upon features, reliability, service, and price. Due in
part to the range of performance and applications capabilities of our products,
we compete in various markets against a number of companies.
The major competitors of the Xstreme Division currently include the
following:
- SeaChange International, Inc. and nCUBE Corporation. Additionally, there
are a number of other entities in the market, including Kasenna, Inc.,
Mid-Stream Technologies, Inc., Broadbus Technologies, Inc., N2 Broadband,
Inc., and Silicon Graphics, Inc. We believe SeaChange International Inc.
and ourselves are the leaders in the VOD market based on subscribers in the
markets served.
Our Integrated Solutions Division competes with a number of companies. Our
major competitors can be categorized as follows:
- major computer companies that participate in the high-performance computing
business by layering specialized hardware and software on top of, or as an
extension of, their general purpose product platforms, including Sun
Microsystems, Hewlett Packard Corporation and IBM Corporation.
- other computer companies that provide solutions for applications that
address specific performance characteristics, such as fault tolerance or
high-performance graphics, including Silicon Graphics, Inc. and Hewlett
Packard Corporation.
- single board computer companies that provide board-level processors that
are typically integrated into a customer's computer system, including Force
Computers, Inc., Motorola, Inc., Multicomputers, Inc., and Mercury, Inc.
- companies providing competitive offering on the Linux platform including
RedHat, Inc., MontaVista Software, Inc., FSMLabs, Inc., SuSE, Inc. and
TimeSys Corporation.
Additional competitors with significant market presence and financial
resources, including computer hardware and software companies, content providers
and television equipment manufacturers, including digital set-top-box
manufacturers, may enter our markets, thereby further intensifying competition.
Our future competitors also may include one or more of the parties with whom we
currently have a strategic relationship. Although we have proprietary rights
with respect to much of the technology incorporated in our VOD and real-time
systems, our strategic partners have not agreed to refrain from competing
against us. Increased competition could result in price reductions that would
adversely affect our business, financial condition and results of operations.
Many of our
9
current and potential future competitors have longer operating histories,
significantly greater financial, technical, marketing and other resources than
us, and greater brand name recognition. In addition, many of our competitors
have well-established relationships with our current and potential customers and
have extensive knowledge of our markets.
INTELLECTUAL PROPERTY
We rely on a combination of contracts and copyright, trademark, patents and
trade secret laws to establish and protect our proprietary rights in our
technology. We distribute our products under software license agreements which
grant customers perpetual licenses to our products and which contain various
provisions protecting our ownership and confidentiality of the licensed
technology. The source code of our products is protected as a trade secret and
as an unpublished copyright work. In addition, in limited instances, we license
our products under licenses that give licensees limited access to the source
code of certain of our products, particularly in connection with our strategic
alliances.
Despite the precautions we have taken, there can be no assurance that our
products or technology will not be copied or otherwise obtained and used without
authorization. In addition, effective copyright and trade secret protection may
be unavailable or limited in certain foreign countries. We believe that, due to
the rapid pace of innovation within our industry, factors such as the
technological and creative skills of our personnel are more important to
establishing and maintaining a technology leadership position within the
industry than are the various legal protections for our technology.
We do not own any material issued patents. However, we have four patent
applications pending in the United States and one pending abroad and have
obtained patent licenses to the portfolios owned by Everstream Holdings, Inc. (4
patents and 6 patent applications) and previously owned by Thirdspace Living
Limited (13 patents, 29 patent applications, and all additions, divisionals,
continuations, continuations-in-part, extensions, reissues, and foreign
counterparts thereof). The patents so licensed cover multiple interactive
television, targeted advertising, and VOD technologies.
We have entered into licensing agreements with several third-party software
developers and suppliers. Generally, such agreements grant us non-exclusive,
worldwide licenses with respect to certain software provided as part of
computers and systems we market and terminate on varying dates.
SUPPLIERS
We sometimes purchase product components from a single supplier in order to
obtain the required technology and the most favorable price and delivery terms.
These components include, for example, processors, power supplies, integrated
circuit and storage devices. We purchase product components from the following
single suppliers: Seagate Technology, Inc., Intel Corporation, Qlogic
Corporation, VME Micro System Corporation, Precision Analog Systems, Macrolink,
Inc., LSI Logic Corporation, National Instruments, Dell Computer Corporation,
Xyratex Storage Systems, Synergy Micro Systems, Peritek Corporation, Unipower
Corporation, Vicor Corporation, Wall Industries, Inc., and Vitesse Semiconductor
Corporation. In most cases, comparable products are available from other
sources, but would require significant reengineering to conform to our system
specifications.
SEASONALITY
We have experienced variations in the revenue, expenses and operating
results from quarter to quarter in our VOD business, and it is possible that
these variations will continue. We believe that fluctuations in the number of
orders for our VOD systems being placed from quarter to quarter are principally
attributable to the buying patterns and budgeting cycles of cable companies. In
addition, orders are often not finalized until the end of a quarter. We do not
believe seasonality is a relevant factor at this time.
10
GOVERNMENTAL REGULATION
We are subject to various international, U.S. federal, state and local laws
affecting our business. Any finding that we have been or are in noncompliance
with such laws could result in, among other things, governmental penalties.
Further, changes in existing laws or new laws may adversely affect our business.
The television industry is subject to extensive regulation in the United
States and other countries. Our VOD business is dependent upon the continued
growth of the digital television industry in the United States and
internationally. Cable companies are subject to extensive government regulation
by the Federal Communications Commission and other federal and state regulatory
agencies. These regulations could have the effect of limiting capital
expenditures by cable companies and thus could have a material adverse effect on
our business, financial condition and results of operations. The enactment by
federal, state or international governments of new laws or regulations could
adversely affect our cable operator customers, and thereby materially adversely
affect our business, financial condition and results of operations.
ENVIRONMENTAL MATTERS
We purchase, use, and arrange for certified disposal of chemicals used in
the manufacturing process at our Pompano Beach facility. As a result, we are
subject to federal and state environmental protection and community
right-to-know laws. Violations of such laws, in certain circumstances, can
result in the imposition of substantial remediation costs and penalties. We
believe we are in compliance with all material environmental laws and
regulations.
EMPLOYEES
As of June 30, 2003, we had 418 employees worldwide. Of these employees,
339 were in the United States and 79 were international. We had 148 employees
in our Xstreme division, 181 employees in our Integrated Solutions division,
and 89 employees shared between the two divisions. The shared employees include
administrative, marketing and communications, and manufacturing personnel. Our
employees are not unionized.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
A summary of net sales (consolidated net sales reflects sales to
unaffiliated customers) attributable to our foreign and domestic operations for
the fiscal years ended June 30, 2003, 2002, and 2001 is presented in Note 18 to
the consolidated financial statements included herein. Financial information
about our foreign operations is included in Note 18 to the consolidated
financial statements included herein.
11
RISK FACTORS
The following are risk factors we face.
RISKS RELATED TO OUR BUSINESS
IT IS DIFFICULT TO EVALUATE OUR BUSINESS AND PROSPECTS BECAUSE OF DECLINES IN
OUR INTEGRATED SOLUTIONS DIVISION BUSINESS AND THE EMERGING NATURE OF THE VOD
MARKET. OUR NET SALES OF REAL-TIME SYSTEMS AND SERVICES HAVE DECREASED
SIGNIFICANTLY OVER THE PAST SIX YEARS.
Prior to the fiscal year ended June 30, 1997, we focused solely on
providing real-time computer systems and related services. Over the last five
full fiscal years, we have experienced a decline in real-time net sales from
$68.8 million for the fiscal year ended June 30, 1999 to $36.9 million for the
fiscal year ended June 30, 2003. Although almost all of our revenues prior to
fiscal 2000 were derived from our Integrated Solutions division, we expect in
the near term that a majority of our future revenue growth will come from our
Xstreme division, which began commercial sales in 1999. Revenues for VOD systems
increased from $1.2 million for the fiscal year ended June 30, 1999 to $48.0
million for the fiscal year ended June 30, 2002 and decreased to $38.6 million
for the fiscal year ended June 30, 2003.
Over the past several years, the real-time computer industry has seen a
significant shift in demand from high-priced, proprietary real-time systems to
lower-priced, open server systems. High-performance processing in the past
required a large, expensive computer with significant proprietary and customized
software. Today, these requirements are often met by much smaller and less
expensive computers with off-the-shelf computer hardware and software. This
shift in demand has resulted in the significant decreases in our revenues from
real-time products and services over the last several years.
This decline in our real-time revenue together with the emerging nature of
the VOD market make it difficult to evaluate our current business and prospects
or to accurately predict our future revenue or results of operations. We will
encounter risks and difficulties in our VOD business frequently encountered by
companies in emerging markets. We may not successfully address any of these
risks. If we do not successfully address these risks, our business, financial
condition and results of operations would be adversely affected.
THE VOD MARKET MAY NOT GAIN BROAD MARKET ACCEPTANCE; OUR CUSTOMERS MAY NOT
CONTINUE TO PURCHASE OUR VOD SYSTEMS; AND OUR CABLE COMPANY CUSTOMERS MAY ENTER
INTO ARRANGEMENTS WITH OUR COMPETITORS ANY OF WHICH COULD MATERIALLY AND
ADVERSELY AFFECT OUR BUSINESS.
We are focusing much of our VOD sales efforts on North American cable
companies that have upgraded some or all of their cable systems to support
digital, two-way service. Therefore, in order for our VOD business to succeed,
cable companies, particularly the largest North American cable companies, must
successfully market VOD to their cable television subscribers. To date, we have
been publicly selected by (in alphabetical order) Adelphia, AOL Time Warner,
Blue Ridge Communications, Bright House Networks, Cablevision, Charter
Communications, Cogeco Cable, Comcast, Cox Communications, Knology, Mediacom,
and Videotron for commercial VOD deployments. However, none of our cable
company customers are contractually obligated to introduce, market or promote
VOD, nor are any of our customers bound to achieve any specific product
introduction schedule. Accordingly, even if a cable company initiates a
customer trial using our system, it is under no obligation to launch a
full-scale commercial introduction using our technology. Further, we do not
have exclusive arrangements with our customers. Therefore, our customers may
enter into arrangements with one or more of our current or future competitors.
The growth and future success of our VOD business depends largely upon our
ability to penetrate new markets and sell our systems to digitally-upgraded
domestic and international cable companies, international digital subscriber
line operators, educational institutions and others. If these potential
customers determine that VOD is not viable as a business proposition or if they
decide to delay their purchase decisions, as a result of capital expenditure
restraints or otherwise, or to purchase systems from our competitors, our
business, financial condition and results of operations will be significantly
adversely affected.
12
A SIGNIFICANT PORTION OF OUR VOD REVENUE HAS COME FROM, AND IS EXPECTED TO
CONTINUE TO COME FROM, SALES TO THE LARGE, NORTH AMERICAN CABLE COMPANIES. IF
WE ARE UNSUCCESSFUL IN MAINTAINING AND EXPANDING RELATIONSHIPS WITH THESE
CUSTOMERS OR LOSE ANY OF THESE CUSTOMERS, OUR BUSINESS WILL BE ADVERSELY
AFFECTED.
For the fiscal year ended June 30, 2003, Time Warner, Comcast, Charter and
Cogeco accounted for approximately 32%, 20%, 14% and 14% of our VOD revenues,
respectively. Many cable companies are currently evaluating the extent and pace
of their VOD deployment plans. If we are unsuccessful in maintaining and
expanding these key relationships with cable companies, our VOD business will be
adversely affected. Further, if we are unsuccessful in establishing
relationships with other cable companies or experience problems in any of our
VOD system commercial launches, our ability to attract new cable companies and
sell additional products to existing customers will be materially adversely
affected.
WE INCURRED NET LOSSES IN THE PAST AND MAY INCUR FURTHER LOSSES IN THE FUTURE.
We incurred a net loss of $24.6 million in the fiscal year ended June 30,
2003, net income of $4.4 million in the fiscal year ended June 30, 2002, and a
net loss of $6.2 million in the fiscal year ended June 30, 2001. Our net loss
for the fiscal year ended June 30, 2003 includes a charge of $13.0 million from
the write-down of our investment in Thirdspace and a restructuring charge of
$1.6 million. As of June 30, 2003, we had an accumulated deficit of
approximately $122.9 million. We may incur additional net losses in the future.
SYSTEM ERRORS, FAILURES, OR INTERRUPTIONS COULD CAUSE DELAYS IN SHIPMENTS,
REQUIRE DESIGN MODIFICATIONS OR FIELD REPLACEMENT WHICH MAY HAVE A NEGATIVE
IMPACT ON OUR BUSINESS AND DAMAGE OUR REPUTATION AND CUSTOMER RELATIONSHIPS.
System errors or failures may adversely affect our business, financial
condition and results of operations. Despite our testing and testing by current
and potential customers, all errors or failures may not be found in our products
or, if discovered, successfully corrected in a timely manner. These errors or
failures could cause delays in product introductions and shipments or require
design modifications that could adversely affect our competitive position.
Further, some errors may not be detected until the systems are deployed. In
such a case, we may have to undertake substantial field replacement programs to
correct the problem. Our reputation may also suffer if our customers view our
products as unreliable, whether based on actual or perceived errors or failures
in our products.
Further, a defect, error or performance problem with our VOD systems could
cause our customers' cable television systems to fail for a period of time. Any
such failure would cause customer service and public relations problems for our
customers. As a result, any failure of our customers' systems caused by our
technology could result in delayed or lost revenue due to adverse customer
reaction, negative publicity regarding us and our products and services and
claims for substantial damages against us, regardless of our responsibility for
such failure. Any claim could be expensive and require us to spend a
significant amount of resources.
OUR OPERATING RESULTS MAY CONTINUE TO BE VOLATILE AND DIFFICULT TO PREDICT, AND
IN SOME FUTURE QUARTERS, OUR OPERATING RESULTS MAY FALL BELOW OUR EXPECTATIONS
AND THE EXPECTATIONS OF SECURITIES ANALYSTS AND INVESTORS, WHICH COULD RESULT IN
MATERIAL DECLINES OF OUR STOCK PRICE.
Our quarterly operating results may vary depending on a number of factors,
including:
- demand for our VOD and real-time systems and services;
- delay in customer orders based on, among other reasons, capital
expenditure restraints or the availability of content for VOD and
pending completion of negotiations for content between the cable
companies and content providers, particularly major movie studios and
providers of subscription based content such as HBO, Showtime, and
Starz-Encore;
- the timing, pricing and number of sales of our products;
- actions taken by our competitors, including new product introductions
and enhancements;
- changes in our prices or the prices of our competitors;
- our ability to develop and introduce new products and to deliver new
services and enhancements that meet customer requirements in a timely
manner;
- the length of the sales cycle for our products;
- our ability to control costs;
13
- technological changes in our markets;
- deferrals of customer orders in anticipation of product enhancements
or new products;
- customer budget cycles and changes in these budget cycles;
- our ability to service our existing customer base;
- interoperatability of our products and new versions thereof; and
- general political and economic conditions in the United States and
abroad, including, but not limited to, terrorist activity and
potential and actual armed conflict.
TRENDS IN OUR VOD BUSINESS MAY CAUSE OUR QUARTERLY OPERATING RESULTS TO
FLUCTUATE; THEREFORE, PERIOD-TO-PERIOD COMPARISONS OF OUR OPERATING RESULTS MAY
NOT NECESSARILY BE MEANINGFUL.
We have experienced significant variations in the revenue, expenses and
operating results from quarter to quarter in our VOD business, and it is
possible that these variations will continue. We believe that fluctuations in
the number of orders for our VOD systems being placed from quarter to quarter
are principally attributable to the buying patterns and budgeting cycles of
cable companies. In addition, orders are often not finalized until the end of a
quarter. As a result, our results of operations have in the past and will
possibly continue, at least in the near future, to fluctuate in accordance with
this purchasing activity. Therefore, period-to-period comparisons of our
operating results may not necessarily be meaningful. In addition, because these
factors are difficult for us to forecast, our business, financial condition and
results of operations for one quarter or a series of quarters may be adversely
affected and below the expectations of securities analysts and investors, which
could result in material declines of our stock price.
THE VOD AND REAL-TIME MARKETS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE AND WE
MAY BE UNABLE TO COMPETE SUCCESSFULLY AGAINST OUR CURRENT AND FUTURE COMPETITORS
WHICH WOULD ADVERSELY AFFECT OUR BUSINESS.
The market for VOD systems is still young. Although there have been many
commercial deployments of VOD systems, ultimate market share has yet to be
determined and there are numerous new entries into the market. We believe that
the long-term primary factors influencing competition in the VOD market include
the flexibility of the VOD system, product quality and reliability and
established relationships with providers of interactive television services,
including cable companies. A list of the competitors faced by both of our
divisions and a categorization of our competitors is included under the
Competition heading in the Business section in this Annual Report on Form 10-K.
IF WE DO NOT MANAGE OUR ANTICIPATED GROWTH IN OUR VOD OPERATIONS, WE MAY NOT BE
ABLE TO OPERATE OUR BUSINESS EFFECTIVELY. OUR FAILURE TO MANAGE GROWTH COULD
DISRUPT OUR OPERATIONS AND ADVERSELY AFFECT OUR BUSINESS.
We anticipate growth in our VOD operations and that a majority of our
future revenue growth will come from our VOD operations. Our anticipated growth
could place a strain on our management systems and other resources. Our ability
to successfully implement our business plan in a rapidly evolving market will
require an effective planning and management process. We cannot assure you that
we will be able to successfully manage our anticipated expansion. If we fail to
manage our anticipated growth, our operations may be disrupted and our business
may be adversely affected. We must continue to improve and effectively utilize
our existing operational, management, marketing and financial systems and
successfully recruit, hire, train and manage personnel, which we may be unable
to do. Further, we must maintain close coordination among our technical,
finance, marketing, sales and production staffs.
OUR FUTURE SUCCESS WILL REQUIRE THAT WE DEVELOP AND MARKET ADDITIONAL PRODUCTS
THAT ACHIEVE MARKET ACCEPTANCE AND ENHANCE OUR CURRENT PRODUCTS. IF WE FAIL TO
DEVELOP AND MARKET NEW PRODUCTS AND PRODUCT ENHANCEMENTS IN A TIMELY MANNER, OUR
BUSINESS COULD BE ADVERSELY AFFECTED.
Our inability to develop, on a timely basis, new products or enhancements
to existing products, or the failure of such new products or enhancements to
achieve market acceptance could have a material adverse effect on our business,
financial condition and results of operations. We recently completed the
development of our MediaHawk 4G On-Demand Platform. Although we have shipped
and installed the new system to a limited number of cable companies, we may
experience unexpected problems. Although delivery of VOD over digital
subscriber lines currently is not practical in the United States, we will look
for opportunities in the domestic market as digital
14
subscriber line technology continues to advance. There can be no assurance that
we will be successful in pursuing any domestic digital subscriber line
opportunities.
A SIGNIFICANT PORTION OF OUR INTEGRATED SOLUTIONS DIVISION REVENUE HAS BEEN, AND
IS EXPECTED TO CONTINUE TO BE, CONCENTRATED IN A SMALL NUMBER OF CUSTOMERS. IF
WE LOSE ONE OR MORE SIGNIFICANT INTEGRATED SOLUTIONS DIVISION CUSTOMERS, OUR
BUSINESS WOULD BE ADVERSELY AFFECTED.
We currently derive, and expect to continue to derive, a significant
portion of our real-time revenue from a limited number of customers. As a
result, the loss of, or reduced demand for products or related services from one
or more of our major customers could adversely affect our business, financial
condition and results of operations.
In the fiscal year ended June 30, 2003, we recorded $12.4 million in sales
to Lockheed-Martin. This amount accounted for approximately 34% of our total
Integrated Solutions division revenue during fiscal 2003.
We also derive a significant portion of our Integrated Solutions division's
revenues from the supply of systems under government contracts. For the fiscal
year ended June 30, 2003, we recorded $18.2 million in sales to U.S. government
prime contractors and agencies of the U.S. Government. This amount represents
approximately 24% of our total Integrated Solutions division sales in the
period. Government business is subject to many risks, such as delays in
funding, reduction or modification of contracts or subcontracts, changes in
governmental policies and the imposition of budgetary constraints. A loss of
government contract revenues could have a material adverse effect on our
business, results of operations and financial condition.
Except for our agreement with Lockheed-Martin, we do not have written
agreements that require customers to purchase fixed minimum quantities of our
products. Our sales to specific customers tend to, and are expected to continue
to, vary from year-to-year, depending on such customers' budgets for capital
expenditures and new product introductions.
WE RELY ON A COMBINATION OF CONTRACTS AND COPYRIGHT, TRADEMARK, AND TRADE SECRET
LAWS TO ESTABLISH AND PROTECT OUR PROPRIETARY RIGHTS IN OUR TECHNOLOGY. WE DO
NOT OWN ANY SIGNIFICANT PATENTS DIRECTLY. IF WE ARE UNABLE TO PROTECT OUR
INTELLECTUAL PROPERTY RIGHTS, OUR COMPETITIVE POSITION COULD BE HARMED OR WE
COULD BE REQUIRED TO INCUR EXPENSES TO ENFORCE OUR RIGHTS. OUR BUSINESS ALSO
COULD BE ADVERSELY AFFECTED IF WE ARE FOUND TO INFRINGE ON THE INTELLECTUAL
PROPERTY RIGHTS OF OTHERS.
We typically enter into confidentiality or license agreements with our
employees, consultants, customers and vendors, in an effort to control access to
and distribution of our proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use our
proprietary technology without authorization. The steps we take may not prevent
misappropriation of our intellectual property, and the agreements we enter into
may not be enforceable. In addition, effective copyright and trade secret
protection may be unavailable or limited in some foreign countries. Other
companies, including our competitors, may currently own or obtain patents or
other proprietary rights that might prevent, limit or interfere with our ability
to make, use or sell our products. As a result, we may be found to infringe on
the intellectual property rights of others. In the event of a successful claim
of infringement against us and our failure or inability to license the infringed
technology, our business and operating results could be adversely affected.
Any litigation or claims, whether or not valid, could result in substantial
costs and diversion of our resources. Intellectual property litigation or
claims could force us to do one or more of the following:
- cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;
- obtain a license from the holder of the infringed intellectual
property right, which license may not be available on reasonable
terms, if at all; and
- redesign products or services that incorporate the disputed
technology.
If we are forced to take any of the foregoing actions, we could face
substantial costs and our business could be seriously harmed. Although we carry
general liability insurance, our insurance may not cover potential claims of
this type or be adequate to indemnify us for all liability that may be imposed.
15
We may initiate claims or litigation against third parties in the future
for infringement of our proprietary rights or to determine the scope and
validity of our proprietary rights or the proprietary rights of competitors.
These claims could result in costly litigation and the diversion of our
technical and management personnel. As a result, our operating results could
suffer and our financial condition could be harmed.
IN SOME CASES, WE RELY ON A LIMITED NUMBER OF SUPPLIERS, WHICH ENTAILS SEVERAL
RISKS, INCLUDING THE POSSIBILITY OF DEFECTIVE PARTS, A SHORTAGE OF COMPONENTS,
AN INCREASE IN COMPONENT COSTS, AND REDUCED CONTROL OVER DELIVERY SCHEDULES.
We sometimes purchase product components from a single supplier in order to
obtain the required technology and the most favorable price and delivery terms.
These components include, for example, processors, power supplies, integrated
circuits and storage devices. We purchase product components from the following
single suppliers: Seagate Technology, Inc., Intel Corporation, Qlogic
Corporation, VME Micro System Corporation, Precision Analog Systems, Macrolink,
Inc., LSI Logic Corporation, National Instruments, Dell Computer Corporation,
Xyratex Storage Systems, Synergy, Peritek Corporation, Unipower Corporation,
Vicor Corporation, Wall Industries, Inc., and Vitesse Semiconductor Corporation.
In most cases, comparable products are available from other sources, but would
require significant reengineering to conform to our system specifications.
Historically, we have not experienced any major disruption in manufacturing our
products due to problems with, or defective products from, a single supplier,
but our reliance on single suppliers entails a number of risks, including the
possibility of defective parts, a shortage of components, increase in components
costs, and reduced control over delivery schedules. Any of these events could
adversely affect our business, results of operations and financial condition.
We estimate that a lead-time of 16-24 weeks may be necessary to switch to an
alternative supplier of certain custom application specific integrated circuit
and printed circuit assemblies. A change in the supplier of these components
without the appropriate lead-time could result in a material delay in shipments
by us of certain products. Where alternative sources are available,
qualification of the alternative suppliers and establishment of reliable
supplies of components from such sources may also result in delays. Shipping
delays may also result in a delay in revenue recognition, possibly outside the
fiscal period originally planned, and, as a result, may adversely affect our
financial results for that particular period.
OUR BUSINESS MAY BE ADVERSELY AFFECTED IF WE FAIL TO RETAIN OUR CURRENT KEY
PERSONNEL, MANY OF WHOM WOULD BE DIFFICULT TO REPLACE, OR FAIL TO ATTRACT
ADDITIONAL QUALIFIED PERSONNEL.
Our future performance depends on the continued service of our senior
management and our engineering, sales and marketing and manufacturing personnel.
Competition for qualified personnel is intense, and we may fail to retain our
key employees or to attract or retain other highly qualified personnel. We do
not carry key person life insurance on any of our employees. The loss of the
services of one or more of our key personnel could seriously impact our
business. Our future success also depends on our continuing ability to attract,
hire, train and retain highly skilled managerial, technical, sales, marketing
and customer support personnel. In addition, new employees frequently require
extensive training before they achieve desired levels of productivity.
WE CURRENTLY HAVE STRATEGIC RELATIONSHIPS WITH SCIENTIFIC-ATLANTA, MOTOROLA,
MICROSOFT CORPORATION, TV GUIDE, AND PIONEER, AMONG OTHERS. WE MAY BE
UNSUCCESSFUL IN MAINTAINING THESE STRATEGIC RELATIONSHIPS, OR ESTABLISHING NEW
STRATEGIC RELATIONSHIPS, THAT WILL BE AN IMPORTANT PART OF OUR FUTURE SUCCESS.
IN EITHER EVENT, OUR BUSINESS COULD BE ADVERSELY AFFECTED.
The success of our business is and will continue to be dependent in part on
our ability to maintain existing and enter into new strategic relationships.
There can be no assurance that:
- such existing or contemplated relationships will be commercially
successful;
- we will be able to find additional strategic partners; or
- we will be able to negotiate acceptable terms with potential strategic
partners.
We cannot provide assurance that existing or future strategic partners will
not pursue alternative technologies or develop alternative products in addition
to or in lieu of our technology, either on their own or in collaboration with
others, including our competitors. These alternative technologies or products
may be in direct competition with our technologies or products and may
significantly erode the benefit of our strategic relationships and adversely
affect our business, financial condition and results of operations.
16
INTERNATIONAL SALES ACCOUNTED FOR APPROXIMATELY 14% AND 15% OF OUR REVENUE IN
FISCAL YEARS 2003 AND 2002, RESPECTIVELY. ACCORDINGLY, OUR BUSINESS IS
SUSCEPTIBLE TO NUMEROUS RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.
Although our anticipated revenue growth in the near term is expected to
occur primarily in North America, we expect that long-term growth will require
expansion of our international operations as DSL and digital cable technology is
more widely deployed in Europe and Asia. As a result, we are subject to a
number of risks associated with international business activities that could
increase our costs, lengthen our sales cycle and require significant management
attention. These risks include:
- compliance with, and unexpected changes in, regulatory requirements
resulting in unanticipated costs and delays;
- lack of availability of trained personnel in international locations;
- tariffs, export controls and other trade barriers;
- longer accounts receivable payment cycles than in the United States;
- potential difficulty of enforcing agreements and collecting
receivables in some foreign legal systems;
- potential difficulty in enforcing intellectual property rights in
certain foreign countries;
- potentially adverse tax consequences, including restrictions on the
repatriation of earnings;
- the burdens of complying with a wide variety of foreign laws;
- general economic conditions in international markets; and
- currency exchange rate fluctuations.
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DILUTE THE OWNERSHIP INTEREST OF OUR
STOCKHOLDERS, CAUSE US TO INCUR DEBT OR ASSUME CONTINGENT LIABILITIES OR PRESENT
OTHER CHALLENGES, SUCH AS INTEGRATION ISSUES, FOR OUR BUSINESS, WHICH IF NOT
SUCCESSFULLY RESOLVED WOULD ADVERSELY AFFECT OUR BUSINESS.
As part of our business strategy, we review acquisition prospects that
would compliment our current product offerings, enhance our technical
capabilities or otherwise offer growth opportunities. While we currently have
no agreements with respect to any acquisition, we periodically review
investments in new businesses, and we may acquire businesses, products or
technologies in the future. In the event of any future acquisitions, we could
issue equity securities that would dilute current stockholders' percentage
ownership, incur substantial debt, or assume contingent liabilities. These
actions could materially adversely affect our operating results. Acquisitions
also entail numerous risks, including:
- difficulties in the assimilation of acquired operations, technologies
or services;
- unanticipated costs associated with the acquisition;
- diversion of management's attention from other business concerns;
- adverse effects on existing business relationships;
- risks associated with entering markets in which we have no or limited
prior experience; and
- potential loss of key employees of acquired companies.
We cannot assure that we will be able to successfully integrate any
business, products, technologies or personnel that we might acquire in the
future. Our failure to do so could materially adversely affect our business,
operating results and financial condition.
WE MAY EXPERIENCE COMPETITIVE PRICING PRESSURE FOR OUR PRODUCTS AND SERVICES,
WHICH MAY IMPAIR OUR REVENUE GROWTH AND OUR ABILITY TO ACHIEVE PROFITABILITY.
We may experience decreasing prices for our products and services due to
competition, the purchasing leverage of our customers and other factors. If we
are required to decrease prices, our results of operations will be adversely
affected. We may reduce prices in the future to respond to competition and to
generate increased sales volume.
IMPLEMENTATION OF OUR PRODUCTS IS COMPLEX, TIME CONSUMING AND EXPENSIVE, AND WE
FREQUENTLY EXPERIENCE LONG SALES AND IMPLEMENTATION CYCLES. CONSEQUENTLY, OUR
QUARTERLY REVENUES, EXPENSES AND OPERATING RESULTS MAY VARY SIGNIFICANTLY IN THE
FUTURE, PERIOD-TO-PERIOD COMPARISONS OF OUR RESULTS OF OPERATIONS MAY NOT
17
NECESSARILY BE MEANINGFUL, AND THESE COMPARISONS SHOULD NOT BE RELIED UPON AS
INDICATIONS OF FUTURE PERFORMANCE.
Real-time and VOD products are relatively complex, their purchase generally
involves a significant commitment of capital, and there are frequent delays
associated with large capital expenditures and implementation procedures within
an organization. Moreover, the purchase of such products typically requires
coordination and agreement among a potential customer's corporate headquarters
and its regional and local operations. As a result, the sales cycles associated
with the purchase of many of our products are typically lengthy and subject to a
number of significant risks, including customers' budgetary constraints and
internal acceptance reviews, over which we have little or no control.
RISKS RELATED TO OUR INDUSTRIES
THE CURRENT UNCERTAINTY AND FINANCIAL INSTABILITY OF THE CABLE INDUSTRY MAY
ADVERSELY IMPACT THE SUCCESS OF OUR VOD BUSINESS.
We sell our VOD products to cable companies that have upgraded their
networks to support interactive, digital services. However, the cable industry
has received negative publicity regarding cable companies' lack of sufficient
free cash flow to fund capital expenditures and debt service requirements after
years of significant capital spending to upgrade their cable plants to digital,
two-way interactive capability. As a result, certain cable companies have
communicated their intent to reduce capital spending to accelerate the point at
which they will generate free cash flow and improve their financial stability.
This may adversely impact the speed at which these cable companies deploy VOD in
their cable markets. Another factor contributing to the uncertainty in the cable
industry was the bankruptcy filing by Adelphia Communications Corporation.
THE SUCCESS OF OUR VOD BUSINESS IS DEPENDENT UPON THE EMERGING DIGITAL VIDEO
MARKET, WHICH MAY NOT GAIN BROAD MARKET ACCEPTANCE. ANY FAILURE BY THE MARKET
TO ACCEPT DIGITAL VIDEO TECHNOLOGY WILL HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS.
VOD is an emerging technology, and we cannot assure you that it will
attract widespread demand or market acceptance. Further, the potential size of
the VOD market and the timing of our development are uncertain. Our success in
the VOD market will depend upon the commercialization and broad acceptance of
VOD by residential cable subscribers and other industry participants, including
cable companies, content providers, set-top box manufacturers, and educational
institutions.
Cable companies historically have relied on traditional analog technology
for video delivery and distribution. Interactive technology installation, which
is necessary to provide VOD, requires a significant initial investment of
capital. The future growth of our VOD business will depend on the pace of the
installation of interactive digital cable and digital set-top-boxes, the rate at
which cable companies deploy digital infrastructure, the rate at which digital
video technology expands to additional market segments, and the rate that the
technology is adopted by consumers.
THE SUCCESS OF OUR VOD BUSINESS IS DEPENDENT ON THE AVAILABILITY OF, AND THE
DISTRIBUTION WINDOWS FOR, MOVIES, PROGRAMS AND OTHER CONTENT. IF SUFFICIENT VOD
CONTENT IS NOT AVAILABLE ON A TIMELY BASIS, OUR VOD BUSINESS WILL BE ADVERSELY
AFFECTED.
The success of VOD will largely be dependent on the availability of a wide
variety and substantial number of movies, subscription based content from
providers such as Home Box Office, Inc., Showtime Networks, Inc., and Starz
Encore Group, LLC, specialty programs and other material, which we refer to as
content, in digital format. We do not provide digital VOD content. Therefore,
the future success of our VOD business is dependent in part on content
providers, such as traditional media and entertainment companies, providing
significant content for VOD. Further, we are dependent in part on other third
parties to convert existing analog content into digital content so that it may
be delivered via VOD.
In addition, we believe that the ultimate success of VOD will depend in
part on the timing of the VOD distribution window. The distribution window is
the time period during which different mediums, such as home movie rental
businesses, receive and have exclusive rights to motion picture releases.
Currently, video rental businesses have an advantage of receiving motion picture
releases on an exclusive basis before most other forms of
18
non-theatrical movie distribution, such as pay-per-view, premium television,
VOD, basic cable and network syndicated television. The length of the exclusive
distribution window for movie rental businesses varies, typically ranging from
30 to 90 days for domestic video stores. Thereafter, movies are made
sequentially available to various television distribution channels. We believe
the success of VOD will depend in part on movies being available for VOD
distribution either simultaneously with, or shortly after, they are available
for video rental distribution. The order, length and exclusivity of each window
for each distribution channel is determined solely by the studio releasing the
movie. Given the size of the home video rental industry, the studios have a
significant interest in maintaining that market. We cannot assure you that
favorable changes, if any, will be made relating to the length and exclusivity
of the video rental and television distribution windows.
A number of the major studios have entered into agreements with certain
cable companies and content aggregators to provide digital movies for
distribution through VOD. However, not all of the major studios have reached
agreements regarding the content for VOD. If studios fail to reach agreements
regarding content or cancel existing agreements, our customers could delay or
cancel VOD system orders, which would adversely affect our VOD business.
WE CANNOT ASSURE YOU THAT OUR PRODUCTS AND SERVICES WILL KEEP PACE WITH
TECHNOLOGICAL DEVELOPMENTS AND EMERGING INDUSTRY STANDARDS, ADDRESS THE CHANGING
NEEDS OF OUR CUSTOMERS OR ACHIEVE MARKET ACCEPTANCE, ANY OF WHICH COULD
MATERIALLY ADVERSELY AFFECT OUR BUSINESS.
The markets for our products are characterized by rapidly changing
technology, evolving industry standards and new product introductions and
enhancements. There can be no assurance that we will be successful in enhancing
the products of our Xstreme and Integrated Solutions divisions or developing,
manufacturing and marketing new products that satisfy customer needs or achieve
market acceptance. In addition, services, products or technologies developed by
others may render one or more of our products or technologies uncompetitive,
unmarketable or obsolete. Future technological advances in the real-time,
television and video industries may result in the availability of new products
and services that could compete with our solutions or reduce the cost of
existing products or services. Our future success will depend on our ability to
continue to enhance our existing products, including development of new
applications for our technology, and to develop and introduce new products to
meet and adapt to changing customer requirements and emerging technologies.
Further, announcements of currently planned or other new product offerings by
our competitors may cause customers to defer purchase decisions or to fail to
purchase our existing solutions. Our failure to respond to rapidly changing
technologies could adversely affect our business, financial condition and
results of operations.
WE ARE SUBJECT TO GOVERNMENTAL REGULATION, AS IS THE TELEVISION INDUSTRY. ANY
FINDING THAT WE HAVE BEEN OR ARE IN NONCOMPLIANCE WITH SUCH LAWS COULD RESULT
IN, AMONG OTHER THINGS, GOVERNMENTAL PENALTIES. FURTHER, CHANGES IN EXISTING
LAWS OR NEW LAWS MAY ADVERSELY AFFECT OUR BUSINESS.
We are subject to various international, U.S. federal, state and local laws
affecting our Xstreme and Integrated Solutions divisions. The television
industry is subject to extensive regulation in the United States and other
countries. Our VOD business is dependent upon the continued growth of the
digital television industry in the United States and internationally. Cable
companies are subject to extensive government regulation by the Federal
Communications Commission and other federal and state regulatory agencies.
These regulations could have the effect of limiting capital expenditures by
cable companies and thus could have a material adverse effect on our business,
financial condition and results of operations. The enactment by federal, state
or international governments of new laws or regulations could adversely affect
our cable operator customers, and thereby materially adversely affect our
business, financial condition and results of operations.
WE MAY BE SUBJECT TO LIABILITY IF PRIVATE INFORMATION SUPPLIED TO OUR CUSTOMERS,
INCLUDING CABLE COMPANIES, IS MISUSED.
Our VOD systems allow cable companies to collect and store video
preferences and other data that many viewers may consider confidential.
Unauthorized access or use of this information could result in liability to our
customers, and potentially us, and might deter potential VOD viewers. We have
no control over the policy of our customers with respect to the access to this
data and the release of this data to third parties.
19
OTHER RISKS
WE HAVE IMPLEMENTED CERTAIN ANTI-TAKEOVER PROVISIONS THAT COULD MAKE IT MORE
DIFFICULT FOR A THIRD PARTY TO ACQUIRE US.
Provisions of Delaware law and our restated certificate of incorporation,
amended and restated bylaws, and rights plan could make it more difficult for a
third party to acquire us, even if doing so would be beneficial to our
stockholders.
We are subject to certain Delaware anti-takeover laws regulating corporate
takeovers. These anti-takeover laws prevent a Delaware corporation from
engaging in a business combination involving a merger or sale of more than 10%
of our assets with any stockholder, including affiliates and associates of the
stockholder, who owns 15% or more of the outstanding voting stock, for three
years following the date that the stockholder acquired 15% or more of the
corporation's stock except under limited circumstances.
There are provisions in our restated certificate of incorporation and our
amended and restated bylaws that also may delay, deter or impede hostile
takeovers or changes of control.
In addition, we have a rights plan, also known as a poison pill. The
rights plan has the potential effect of significantly diluting the ownership
interest in us of any person that acquires beneficial ownership of 15% or more
of our common stock or commences a tender offer that would result in a person or
group owning 15% or more of our common stock.
IN THE FUTURE, WE MAY NEED TO RAISE ADDITIONAL CAPITAL. THIS CAPITAL MAY NOT BE
AVAILABLE ON ACCEPTABLE TERMS, IF AT ALL. IF WE CANNOT RAISE FUNDS ON
ACCEPTABLE TERMS, IF AND WHEN NEEDED, WE MAY NOT BE ABLE TO DEVELOP OR ENHANCE
OUR PRODUCTS AND SERVICES, TAKE ADVANTAGE OF FUTURE OPPORTUNITIES, GROW OUR
BUSINESS OR RESPOND TO COMPETITIVE PRESSURES OR UNANTICIPATED REQUIREMENTS.
We believe that our existing cash balances and funds generated by
operations will be sufficient to meet our anticipated working capital and
capital expenditure requirements for the next twelve months. After that, we may
need to raise additional funds. We cannot be certain that we will be able to
obtain additional financing on favorable terms, if at all.
TERRORIST ATTACKS AND THE POSSIBILITY OF WIDER ARMED CONFLICT MAY HAVE AN
ADVERSE EFFECT ON OUR BUSINESS AND OPERATING RESULTS.
Terrorist attacks and other acts of violence or war, such as those that
took place on September 11, 2001 and in Iraq, could have a material adverse
affect on our business and operating results. There can be no assurance that
there will not be further terrorist attacks against the United States or our
interests. Future terrorist attacks or wars could result in political and
social turmoil that could put further pressure on economic conditions in the
United States and worldwide. These political, social and economic conditions
could make it difficult for us, our vendors and our customers to accurately
forecast and plan future business activities and could have a material adverse
effect on our business and results of operations. Finally, further terrorist
acts could cause the United States to enter into a wider armed conflict which
could further impact our business and results of operations.
OUR STOCK PRICE HAS BEEN VOLATILE IN THE PAST AND MAY BE VOLATILE IN THE FUTURE.
Our common stock is traded on the Nasdaq National Market. For the fiscal
year ended June 30, 2003, the high and low prices reported on the Nasdaq
National Market were $4.78 and $1.25, respectively. Further, as of September 8,
2003, the price as reported on the Nasdaq National Market was $4.24. The market
price of our common stock may fluctuate significantly in the future in response
to various factors, some of which are beyond our control, including the
following and the other risks discussed under the heading "Risk Factors:"
- variations in our quarterly operating results;
- changes in securities analysts' estimates of our financial
performance;
- the development of the VOD market in general;
- changes in market valuations of similar companies;
20
- announcement by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
- loss of a major customer or failure to complete significant
transactions; and
- additions or departures of key personnel.
In addition, in recent years the stock market in general, and the Nasdaq
National Market and the market for technology companies in particular, have
experienced extreme price and volume fluctuations. In some cases, these
fluctuations have been unrelated or disproportionate to the operating
performance of these companies. These market and industry factors may
materially and adversely affect our stock price, regardless of our operating
performance.
In the past, class action litigation often has been brought against
companies following periods of volatility in the market price of those
companies' common stock. We may become involved in this type of litigation in
the future. Litigation is often expensive and diverts management's attention
and resources, which could materially and adversely affect our business,
financial condition and results of operations.
21
ITEM 2. PROPERTIES
Our principal facilities as of June 30, 2003, are listed below. All of the
principal facilities are leased. Management considers all facilities listed
below to be suitable for the purpose(s) for which they are used, including
manufacturing, research and development, sales, marketing, service, and
administration.
EXPIRATION APPROX.
LOCATION PRINCIPAL USE DATE OF LEASE FLOOR AREA(SQ. FEET)
- ------------------------ -------------------------------- ------------- --------------------
4375 River Green Parkway Corporate Headquarters, August 2006 33,000
Suite 100 Administration, Research &
Duluth, Georgia Development, Sales and Marketing
2800 Gateway Drive Manufacturing and Service December 2004 40,000
Pompano Beach, Florida
2881 Gateway Drive Administrative and Sales and December 2004 30,000
Pompano Beach, Florida Marketing
3535 Route 66 Repair and Service Depot May 2009 17,000
Bldg. 3
Neptune, New Jersey
3rd Floor, Voyager Place Sales, Service and Research & January 2008 10,000
Shoppenhangers Road Development
Maidenhead, Berkshire UK
100 Highpoint Drive Research & Development December 2006 16,500
Chalfont, Pennsylvania
Except for the Chalfont, Pennsylvania facility, which is used exclusively
for the Xstreme division, and the Administrative and Sales and Marketing offices
at 2881 Gateway Drive and Repair and Service Depot at Neptune, NJ, which are
used exclusively for the Integrated Solutions division, our facilities are used
for both divisions. In addition to the facilities listed above, we also lease
space in various domestic and international industrial centers for use as sales
and service offices and warehousing.
ITEM 3. 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:
- SeaChange International, Inc. v. Putterman, et al, Pulaski County
------------------------------------------------------
Circuit Court, Arkansas, Case No. 99-5384. The suit was filed on June
14, 1999 alleging that we defamed SeaChange International, Inc.
("SeaChange"). On June 14, 2000, we counterclaimed against SeaChange
alleging that SeaChange defamed us. On January 4, 2001, the court
granted our motion to dismiss all claims against us. SeaChange
subsequently successfully appealed and the matter is now set for trial
in January 2004.
- Eason v. Concurrent Computer Corp, et al., Superior Court of New
---------------------------------------------
Jersey, Appellate Division, Docket No. A-003181-02T2. This suit arose
out of personal injury claim filed in 1994 wherein plaintiff alleged
that he was injured when a lamp post in our parking lot fell. The case
against us was dismissed in 1995, but in 2000 the plaintiff amended
the cause of action and refiled against us alleging spoliation of
evidence. The plaintiff obtained a default judgment for $119,800 in
December 2001 that was vacated in August 2002. Plaintiff subsequently
refiled and in February 2003 the court granted our motion to dismiss
all claims. Plaintiff has appealed, but no date for arguments has been
set.
22
We are involved in various other legal proceedings. We believe that any
liability which may arise as a result of these proceedings, including the
proceedings specifically discussed above, will not have a material adverse
effect on our financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM X. OFFICERS OF THE REGISTRANT
Our officers are elected by the Board of Directors to hold office until
their successors have been chosen and qualified or until earlier resignation or
removal. Set forth below are the names, positions, and ages of executive
officers as of September 8, 2003:
NAME POSITION AGE
- ---- -------- ---
Jack A. Bryant, III President, Chief Executive Officer, and Director 45
Stephen K. Necessary President, Xstreme Division 47
Paul C. Meyer President, Integrated Solutions Division 56
Steven R. Norton Executive Vice President, Chief Financial Officer and Secretary 42
Robert E. Chism Vice President, Development and Chief Technical Officer, Xstreme 50
Division
Robert T. Menzel Vice President, Sales & Marketing, Integrated Solutions Division 50
David Nicholas Vice President, North American Cable Sales, Xstreme Division 49
Kirk L. Somers General Counsel 38
Jack A. Bryant, III, President, Chief Executive Officer, and Director. Mr.
Bryant has served as President and Chief Executive Officer since October 2000.
Mr. Bryant served as President of the Xstreme division from July 2000 to October
2000. Mr. Bryant was named a Director in January 2001. Since May 2002, Mr.
Bryant has also served as Director for Thirdspace Living Ltd. Prior to joining
Concurrent, he held a number of positions at Arris Corporation (f.k.a. Antec
Corporation), a communications technology company that specializes in
hybrid-fiber-coax-based networks, from 1991 to June 2000. The positions
included, from March 1998 to June 2000, President of the Network Technologies
Group, from January 1996 to March 1998, President of the Digital Systems
Division, and from January 1995 to January 1996, Vice President of Marketing.
Before joining Arris, Mr. Bryant held various product marketing and sales
positions at General Instrument and Scientific-Atlanta.
Stephen K. Necessary, President, Xstreme Division. Mr. Necessary has
served as President of the Xstreme division since June 2002. From January 2000
to June 2002, Mr. Necessary was President, CEO, and a Director of PowerTV, Inc,
a software subsidiary of Scientific-Atlanta. From April 1998 to January 2000,
Mr. Necessary served as Corporate Vice President and Vice President of
Marketing at Scientific-Atlanta. From June 1982 to February 1991 and then from
October 1995 to April 1998, he also held a number of other positions with
Scientific-Atlanta, including Vice President and General Manager of analog video
systems. Mr. Necessary also spent several years at Arris Corporation (f.k.a.
Antec Corporation), where his final position was President of the products
group. Earlier in his career, he was a team manager for Procter & Gamble.
Paul C. Meyer, President, Integrated Solutions Division. Mr. Meyer has
served as President of the Integrated Solutions division since December 2000.
Immediately prior to joining Concurrent, he was the President of ASM Associates,
Inc. from 1996 to 2000, a consulting firm that provides interim senior
management services. From 1994 to 1996, he served as the Executive Vice
President and General Manager of Viacom New Media. From 1988 to 1994, he served
as President of his own consulting firm, Paul C. Meyer & Associates, Ltd.,
leading a small team of professionals in consulting assignments involving
turnaround, restructuring, and crisis management. Before forming his own firm,
he served in various positions with Coleco Industries, Inc.
Steven R. Norton, Executive Vice President, Chief Financial Officer and
Secretary. Mr. Norton has served as the Executive Vice President and Chief
Financial Officer since October 1999. From March 1996 to April 1999,
23
Mr. Norton was Vice President of Finance and Administration for LHS Group, Inc.,
a formerly publicly held provider of services to communications services
providers and Chief Financial Officer for one of its subsidiaries, LHS
Communications Systems, Inc. Prior to his employment with LHS, he was an Audit
Senior Manager for Ernst & Young and KPMG LLP.
Robert E. Chism, Vice President, Development and Chief Technology Officer,
Xstreme Division. Mr. Chism has served as Vice President, Development of the
Xstreme division since April 1999 and was named Chief Technology Officer in
February 2002. From June 1996 to April 1999, he served as the Vice President,
Development. From October 1994 through June 1996, he served as Vice President,
Technical and Production Operations of Harris Computer Systems Corporation. In
June 1993, he joined the Harris Computer Systems Division of Harris Corporation
as Director, Simulation Business Area. Before joining the Harris Computer
Systems Division, he held diverse engineering, program management and marketing
assignments in computer and related industries with General Electric Company, a
diversified industrial corporation, and from May 1978 to June 1993 he was
Subsection Manager of Satellite Command and Data Handling.
Robert T. Menzel, Vice President, Sales & Marketing, Integrated Solutions
Division. Mr. Menzel has served as Vice President, Sales & Marketing of the
Integrated Solutions division since April 1999. He served as the Vice
President, real-time systems from June 1997 to March 1999, and the Vice
President, North American Sales, from June 1996 to February 1997. From June
1996 to June 1997, he was the Vice President, Interactive Video-on-Demand. Mr.
Menzel was Vice President, General Manager of the Trusted Systems Division of
Harris Computer Systems Corporation from April 1995 to June 1996, and he served
as Vice President, National Sales of Harris Computer Systems Corporation from
October 1994 to April 1995.
David M. Nicholas, Vice President, North American Cable Sales, Xstreme
Division. Mr. Nicholas has served as Vice President, North American Cable
Sales, of the Xstreme division since March 1999. From September 1995 to
February 1999 he served as Executive Vice President of Pioneer New Media
Technologies, Inc., a provider of audio video products. From August 1993 to
August 1995, he served as Vice President and General Manager of Texscan Network
Systems, a privately held provider of advertising insertion solutions. Prior to
that time, he served in various positions at Pioneer Communications of America,
Panasonic Industrial, and Magnavox.
Kirk L. Somers, General Counsel. Mr. Somers has served as General Counsel
since November 2001. Immediately prior to joining Concurrent, from December
1998 to November 2001, Mr. Somers was the Assistant General Counsel for a
company within divine, inc. (f.k.a. eshare communication, Inc.) where he was
responsible for corporate-wide development and enforcement of the company's
intellectual property portfolio as well as commercial contracts and other
corporate matters. From December 1995 to December 1998, Mr. Somers was a
partner in the law firm of Marshall & Melhorn in Toledo, Ohio practicing in the
area of litigation. Prior to that, he was a JAG in the USAF.
24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is currently traded under the symbol "CCUR" on The Nasdaq
National Market. The following table sets forth the high and low sale
information for our Common Stock for the periods indicated, as reported by The
Nasdaq National Market.
FISCAL YEAR 2003
QUARTER ENDED: HIGH LOW
------ -----
September 30, 2002 $ 4.78 $2.10
December 31, 2002 $ 3.44 $1.25
March 31, 2003 $ 3.87 $1.90
June 30, 2003 $ 3.66 $1.94
FISCAL YEAR 2002
QUARTER ENDED: HIGH LOW
------ -----
September 30, 2001 $12.70 $5.76
December 31, 2001 $16.99 $7.25
March 31, 2002 $17.68 $7.11
June 30, 2002 $ 9.23 $4.25
As of September 8, 2002, there were 62,367,686 shares of Common Stock
outstanding, held of record by approximately 1,379 stockholders with a closing
price on the Nasdaq National Market of $4.24.
We have never declared or paid any cash dividends on our capital stock.
Our present policy is to retain all available funds and any future earnings to
finance the operation and expansion of our business, and no change in the policy
is currently anticipated.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data which has been derived from our audited consolidated financial statements.
The information set forth below is not necessarily indicative of the results of
future operations and should be read in conjunction with, and is qualified by
reference to, our financial statements and related notes thereto included
elsewhere herein and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
25
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED JUNE 30,
---------------------------------------------------------
INCOME STATEMENT DATA 2003 2002 2001 2000 1999
- ---------------------------- ------------- ------- -------- ------------- --------
Net sales $ 75,453 $89,369 $72,821 $ 68,090 $69,963
Gross margin 36,423 44,566 33,020 31,743 35,337
Operating income (loss) (11,429) (1) 3,679 (5,591) (23,987) (3) (1,289)
Net income (loss) (24,552) (2) 4,383 (6,189) (23,715) (3) (1,665)
Net income (loss) per share
Basic $ (0.40) (2) $ 0.07 $ (0.11) $ (0.46) (3) $ (0.03)
Diluted $ (0.40) (2) $ 0.07 $ (0.11) $ (0.46) (3) $ (0.03)
AT JUNE 30,
---------------------------------------------------------
BALANCE SHEET DATA 2003 2002 2001 2000 1999
- ---------------------------- ------------- ------- -------- ------------- --------
Cash, cash equivalents and
short-term investments $ 30,697 $30,519 $ 9,460 $ 10,082 $ 6,872
Working capital 30,042 43,545 14,824 15,383 14,694
Total assets 77,839 98,688 57,052 57,078 40,569
Stockholders' equity 43,458 69,224 33,283 38,271 26,011
Book value per share $ 0.70 $ 1.12 $ 0.60 $ 0.71 $ 0.54
(1) Operating loss for the year ended June 30, 2003, includes a
restructuring charge of $1.6 million.
(2) Net loss for the year ended June 30, 2003 includes a $13.0 million
impairment charge related to our investment in Thirdspace and a
restructuring charge of $1.6 million.
(3) In October 1999, Concurrent acquired Vivid Technology. In connection
with the acquisition, management placed a value of $14.0 million on
in-process research and development based on valuation methods it
deemed appropriate. This entire amount was written off as required by
the APB No. 16, "Business Combinations", which has since been
superceded by SFAS No. 141, "Business Combinations".
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and the notes thereto which appear elsewhere herein. The following
discussion contains 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 below, elsewhere
herein and in other filings made with the Securities and Exchange Commission.
OVERVIEW
We operate our business as two distinct divisions, the Xstreme division and
the Integrated Solutions divisions. In 1998, we created the Xstreme division to
capitalize on the increasing opportunities in the emerging digital television
services market and focus on the development and sale of digital VOD systems to
cable providers that are upgrading their networks to support digital services.
Although almost all of our revenues prior to fiscal 2000 were derived from the
Integrated Solutions division, we expect in the near term that a majority of our
growth will come from our Xstreme division. VOD revenues result from the sale
of VOD systems and related services primarily to cable television providers in
North America, and to a lesser extent, to DSL service providers and cable
service providers, internationally.
Over the past several years, the real-time computer processing industry has
seen a significant shift in demand from high-priced, proprietary real-time
systems to lower-priced, open server systems. High performance processing in
the past required a large, expensive computer system with significant
proprietary and customized
26
software. Today, these requirements are often met by much smaller and less
expensive computers with off-the-shelf computer hardware and software. As a
result, revenues from both real-time products and services have been declining.
We are currently working to stabilize the revenue and possibly reverse this
trend by dedicating more resources and technology to the data acquisition market
and also by creating a unit, Concurrent Federal Systems, Inc., dedicated to
pursuing opportunities with the U.S. Government in various areas, including
homeland security. Integrated Solutions revenues consist of real-time computer
system sales to prime contractors, domestic and foreign government agencies and
commercial corporations, and fees for maintenance and other services provided to
our real-time customers.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Revenue Recognition
VOD and real-time system revenues are recognized based on the guidance in
American Institute of Certified Public Accountants Statement of Position, or
SOP, 97-2, "Software Revenue Recognition", 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." We recognize revenue from
the sale of these products when: (1) persuasive evidence of an arrangement
exists; (2) the system has been shipped; (3) the fee is fixed or determinable;
and (4) collectibility of the fee is probable. Under multiple element
arrangements, we allocate revenue to the various elements based on
vendor-specific objective evidence ("VSOE") of fair value. VSOE of fair value
is determined based on the price charged when the same element is sold
separately. If evidence of fair value does not exist for all elements in a
multiple element arrangement, we recognize 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.
Determination of criteria (3) and (4) are based on our judgments regarding the
fixed nature of the fee charged for products and services delivered and the
collectibility of those fees. Should changes in conditions cause us to
determine these criteria are not met for certain future transactions, revenue
recognized for any reporting period could be adversely affected.
In certain instances, our customers require significant customization of
both software and hardware products and, therefore, revenues are recognized as
long term contracts using the percentage-of-completion method, which relies on
estimates of total expected contract revenue and costs. We follow this method
since reasonably dependable estimates of the revenue and costs applicable to
various stages of a contract can be made. Recognized revenues and profit are
subject to revisions as the contract progresses to completion. Revisions in
profit estimates are charged to income in the period in which the facts that
give rise to the revision become known.
Valuation and Accrual of Non-Cash Warrants
Comcast Cable Communications, Inc. Warrants
In March 2001, we entered into a three-year definitive purchase agreement
with Comcast Cable, to provide for the sale of VOD equipment. As part of that
agreement, we agreed to issue three types of warrants (See Note 16 to the
consolidated financial statements).
We recognized the value of the Initial Warrant as a reduction of revenue in
the quarter ended March 31, 2001. We recognize the value of Performance Warrants
and Cliff Warrants as an adjustment to revenue over the term of the agreement as
Comcast purchases additional VOD servers from us and makes the service available
to its customers.
The value of the warrants is determined using the Black-Scholes valuation
model. The weighted assumptions used for the year ended June 30, 2003 were:
expected dividend yield - 0.0%; risk free interest rate - 2.1%; expected life
- - 4 years; and expected volatility - 113.3%. We adjust the value of the earned
but unissued warrants on a quarterly basis using the valuation option-pricing
model until the warrants are actually issued. The value of the new warrants
earned and any adjustments in value for warrants previously earned is determined
using the Black-Scholes valuation model and recognized as part of revenue on a
quarterly basis. To the extent the above assumptions change on a periodic
basis, or the number of subscribers capable of receiving VOD increases or
decreases, revenue and gross margins may be positively or negatively impacted.
27
Scientific Atlanta, Inc. Warrants
In accordance with a five-year definitive agreement with Scientific
Atlanta, Inc., or SAI, executed in August 1998, we agreed to issue warrants to
SAI upon achievement of pre-determined revenue targets. (See Note 16 to the
consolidated financial statements.) The value of these warrants could not exceed
5% of applicable revenue and the number of shares related to the warrant were
determined using the Black-Scholes valuation model and could not exceed 888,888
shares for every $30 million of revenue from the sale of VOD servers using the
SAI platform. We accrued this cost as a part of cost of sales at the time of
recognition of applicable revenue in anticipation of reaching the next $30
million threshold. As a result of not reaching the next $30 million threshold by
the August 17, 2003 deadline, it is likely we will recognize a reduction of
approximately $1.3 million to cost of sales in the first quarter of fiscal
2004.
Warranty Accrual/Maintenance Revenue Deferral
In accordance with the requirements under SOP 97-2, we either accrue the
estimated costs to be incurred in performing warranty services at the time of
revenue recognition and shipment of the servers, or defer revenue associated
with the maintenance services to be provided during the warranty period based
upon the value for which we would sell such services separately, depending upon
the specific terms of the customer agreement. Our estimate of costs to service
warranty obligations is based on historical experience and expectation of future
conditions. To the extent we experience increased warranty claim activity or
increased costs associated with servicing those claims, our warranty accrual
will increase resulting in decreased gross margin.
Allowance for Doubtful Accounts
The allowance for doubtful accounts receivable is based on the aging of
accounts receivable and our assessment of the collectibility of our receivables.
If there is a deterioration of one of our major customer's credit worthiness or
actual account defaults are higher than our historical trends, our reserve
estimates could be adversely impacted.
Inventory Valuation Reserves
We provide for inventory obsolescence based upon assumptions about future
demand, market conditions and anticipated timing of the release of next
generation products. If actual market conditions or future demand are less
favorable than those projected, or if next generation products are released
earlier than anticipated, additional inventory write-downs may be required.
Impairment of Goodwill
At June 30, 2003, we had $10.7 million of goodwill, all of which is
allocated to our Xstreme division. In assessing the recoverability of our
goodwill, we make assumptions regarding estimated future cash flows and other
factors to determine the fair value of the respective assets. If the estimates
or their related assumptions change in the future, we may be required to record
impairment charges for these assets not previously recorded. In connection with
the adoption of Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"), we were required to perform
an impairment assessment within six months of its July 1, 2001 adoption, which
is required to be updated and reviewed at least annually or upon the occurrence
of a significant adverse event.
At July 1, 2003 and 2002, our annual testing day, as required by SFAS 142,
we updated and reviewed the impairment analysis in conjunction with our revised
expected future operating results, and as a result there was no impairment
charge necessary in either period. Subsequent impairment charges, if any, will
be reflected in operating income in the Consolidated Statements of Operations.
Valuation of Deferred Tax Assets
In assessing the realizability of deferred tax assets, we consider whether
it is more likely than not that some portion or all of the deferred tax assets
will be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. At June 30, 2003 and June 30, 2002,
substantially all of the deferred tax assets have been fully reserved
28
due to the tax operating losses for the past several years and the inability to
assess as more likely than not the likelihood of generating sufficient future
taxable income to realize such benefits.
Investment In and Receivable from Minority Owned Company
We do not own more than a 20% equity investment and we do not exercise
significant influence over the companies in which we have investments. We
account for and review our investments for impairment in accordance with SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and
Accounting Principle Board Opinion No. 18, or APB No. 18, "The Equity Method of
Accounting for Investments in Common Stock". As discussed in further detail in
the Results of Operations, we have recorded impairment charges related to our
investment in Thirdspace of $13.0 million for the year ended June 30, 2003,
which includes a $6.1 million charge for the write-off of the two $3 million
notes receivables and related accrued interest.
29
SELECTED OPERATING DATA AS A PERCENTAGE OF NET SALES
The following table sets forth selected operating data as a percentage of
total revenue for certain items in our consolidated statements of operations for
the periods indicated.
YEAR ENDED JUNE 30,
-----------------------
2003 2002 2001
-------- ----- ------
Revenues:
Product sales
Real-time systems 25.7% 24.2% 35.3%
VOD systems 46.5 52.4 32.7
-------- ----- ------
Total product sales 72.2 76.6 68.0
Service
Real-time systems 23.1 22.2 32.0
VOD systems 4.7 1.2 -
-------- ----- ------
Total service sales 27.8 23.4 32.0
-------- ----- ------
Total sales 100.0 100.0 100.0
Cost of sales (% of respective sales category):
Product sales
Real-time systems 40.3 39.7 54.8
VOD systems 50.9 48.1 55.0
-------- ----- ------
Total product costs of sales 47.1 45.5 54.9
Service
Real-time systems 59.5 58.5 54.2
VOD systems 84.0 195.5 -
-------- ----- ------
Total service costs of sales 63.6 65.5 54.2
-------- ----- ------
Total cost of sales 51.7 50.1 54.7
-------- ----- ------
Gross margin 48.3 49.9 45.3
Operating expenses:
Sales and marketing 24.0 19.0 22.1
Research and development 24.9 17.1 15.9
General and administrative 12.4 9.7 15.0
Restructuring charge 2.1 - -
-------- ----- ------
Total operating expenses 63.4 45.8 53.0
-------- ----- ------
Operating income (loss) (15.1) 4.1 (7.7)
Impairment loss on minority investment (17.2) - -
Interest expense (0.0) (0.1) (0.3)
Interest income 0.8 1.0 0.4
Other (expense) - net (0.2) (0.1) (0.1)
-------- ----- ------
Income (loss) before provision for income taxes (31.7) 4.9 (7.7)
Provision for income taxes 0.8 - 0.8
-------- ----- ------
Net income (loss) (32.5)% 4.9% (8.5)%
======== ===== ======
30
RESULTS OF OPERATIONS
We recognize revenue for product sales in accordance with the appropriate
accounting guidance as described in our critical accounting policies. We
recognize revenue from customer service plans ratably over the term of each
plan, which are typically between one and three years.
Custom engineering and integration services performed by the Integrated
Solutions division are typically completed within 90 days from receipt of an
order. Revenues from these services are recognized upon completion and delivery
of the software solution to the customer.
Cost of sales consists of the cost of the computer systems sold, including
labor, material, overhead and third party product costs. Cost of sales also
includes the salaries, benefits and other costs of the maintenance, service and
help desk personnel associated with product installation and support activities.
Sales and marketing expenses consist primarily of the salaries, benefits
and travel expenses of employees responsible for acquiring new business and
maintaining existing customer relationships, as well as marketing expenses
related to trade publications, advertisements and trade shows.
Research and development expenses are comprised of salaries, benefits, and
travel expenses of employees involved in hardware and software product and
enhancement development, cost of outside contractors engaged to perform software
development services, and software certification costs of Motorola and
Scientific Atlanta. All development costs are expensed as incurred.
General and administrative expenses consist primarily of salaries, benefits
and travel expenses of management and administrative personnel, human resources,
information systems, investor relations, and fees for legal, accounting, and
other professional services.
FISCAL YEAR 2003 IN COMPARISON TO FISCAL YEAR 2002
Product Sales. Total product sales for fiscal year 2003 were $54.5
million, a decrease of $14.0 million or 20.5% from fiscal year 2002. This
decrease resulted in part from VOD product sales decreasing $11.9 million, or
25.3%, to $35.0 million in fiscal 2003 from $46.9 million in fiscal 2002. The
decrease in VOD product sales was due primarily to increased scrutiny by a
majority of our customers of their capital expenditures in an effort to attain
positive free cash flow combined with certain competitive pricing pressures. In
addition, Comcast's initial VOD deployment plan did not favor Concurrent based
on some initial geographic and operational priorities established by Comcast.
During fiscal year 2003, VOD product purchases by each of four North American
cable companies accounted for more than 10% of VOD product revenue and accounted
for 82.3% of VOD product revenue in the aggregate.
Sales of real-time products decreased $2.2 million, or 10.1% to $19.4
million in fiscal 2003 from $21.6 million in fiscal 2002. The decrease in
real-time product sales is due in part to a nonrecurring sale to an Australian
customer in fiscal 2002, unfavorable economic factors in Europe, Asia, and
domestically, and a longer than expected sales cycle domestically and
internationally, partially offset in the domestic market by an increase in sales
to one specific customer, as compared to fiscal 2002. Sales to a single customer
accounted for approximately 51.0% of real-time product sales during fiscal 2003
compared to 36.1% in fiscal 2002.
Service Revenue. Service revenue increased slightly to $21.0 million in
fiscal year 2003 from $20.9 million in fiscal year 2002. The increase in service
revenue is due primarily to an increase in VOD service revenue of $2.4 million,
or 232.0%, to $3.5 million in fiscal 2003 from $1.1 million in fiscal 2002. The
Xstreme division continued to recognize deferred maintenance revenue and expand
its VOD customer base requiring additional installation, training, technical
support, and hardware and software maintenance services. Off-setting this
increase was a decrease in real-time service revenue of $2.3 million, or 11.8%,
due to the cancellation of maintenance contracts as machines were removed from
service and from customers purchasing our new products which are less expensive
to maintain.
31
Product Gross Margin. The product gross margin decreased $8.6 million, or
22.9% to $28.8 million in fiscal year 2003 from $37.4 million in fiscal year
2002. Product gross margin as a percent of product sales decreased to 52.9% in
fiscal year 2003 from 54.5% in fiscal year 2002. VOD product gross margins
decreased to 49.1% for fiscal year 2003 from 51.9% for fiscal year 2002 due to a
less favorable product mix and certain costs being spread over lower product
sales volumes, partially offset by efficiencies in the Media Hawk 3000 video
server. The gross margin on sales of real-time products decreased slightly to
59.7% as a percent of product sales in fiscal year 2003 from 60.3% in fiscal
year 2002 due primarily to strong margins on higher software product sales in
fiscal 2002, partially offset by a favorable product mix on hardware products
during the first nine months of fiscal year 2003.
Service Gross Margin. The service gross margin increased $0.4 million, or
6.0%, to $7.6 million in fiscal year 2003 from $7.2 million in fiscal year 2002.
The service gross margin as a percent of service sales increased to 36.4% for
fiscal year 2003 from 34.5% for fiscal year 2002. The increase in service gross
margins is due to an increase in VOD service revenue, bringing VOD service
margins to 16.0% in fiscal 2003 as compared to a negative margin of 95.5% in
fiscal 2002. VOD service margins increased as the Xstreme division continued to
recognize deferred maintenance revenue and expand its customer base requiring
additional installation, training, technical support, and software and
maintenance services, at a faster rate than the growth of the costs to support
such services. The increase in VOD service margins was partially offset by a
decrease in real-time service margins to 40.5% in fiscal 2003 from 41.5% in
fiscal 2002. The decrease in real-time service gross margins is due to the
inability to reduce fixed costs at the same rate as revenue has decreased. The
decrease in real-time service revenue is due to a decline in contractual
obligations resulting from the cancellation of maintenance contracts as machines
were removed from service and from customers purchasing our new products which
are less expensive to maintain.
Sales and Marketing. Sales and marketing expenses increased as a percent
of sales to 24.0% for fiscal year 2003 from 19.0% for fiscal year 2002. These
expenses increased $1.1 million, or 6.5%, to $18.1 million in fiscal year 2003
from $17.0 million in fiscal year 2002. The increase in sales and marketing
expenses are due to an increase of $0.5 million and $0.6 million in VOD and
real-time sales and marketing expenses, respectively. The increase in VOD sales
and marketing expense is primarily due to an increase of $0.6 million in sales
and marketing personnel costs and an increase of $0.3 million in severance
expense not associated with the restructuring, partially offset by a decrease of
$0.2 million in incentive based compensation due to lower sales volume in the
Xstreme division in fiscal year 2003. The increase in sales and marketing
expense of $0.6 million in the Integrated Solutions division was primarily due
to a $0.7 million increase in sales and marketing personnel costs, a $0.1
million increase in severance expense not associated with the restructuring and
the addition of a new salesperson at Concurrent Federal Systems, Inc. The
increase in real-time sales and marketing expense was partially offset by a
decrease in incentive based compensation of $0.4 million due to lower sales
volume in the Integrated Solutions division in fiscal 2003.
Research and Development. Research and development expenses increased as a
percent of sales to 24.9% in fiscal year 2003 from 17.1% in fiscal year 2002.
These expenses increased $3.5 million, or 22.8%, to $18.8 million in fiscal year
2003 from $15.3 million in fiscal year 2002. The increase in research and
development of $3.5 million in fiscal 2003 was attributable to an increase in
VOD research and development of $3.6 million, offset by a decrease of $0.1
million in real-time research and development expenses. The $3.6 million
increase in VOD research and development resulted primarily from the addition of
new development staff and utilization of outside consultants to focus on new
application software development and customer specific integration activities.
The addition of the development staff and use of outside consultants resulted in
an increase of $1.8 million and $0.8 million, respectively. In addition, there
was an increase of $0.2 million in Acadia and Creative Edge product
certification costs, an additional $0.3 million of depreciation expense from
purchases of new testing and quality assurance equipment, an increase of $0.1
million in rent expense while temporarily occupying two development facilities
as a result of moving our U.K. office, and a $0.2 million increase as a result
of foreign currency exchange fluctuations. Research and development expense for
the Integrated Solutions division decreased slightly by $0.1 million due to a
decrease in incentive based compensation.
General and Administrative. General and administrative expenses increased
as a percent of sales to 12.4% in fiscal 2003 from 9.7% in fiscal 2002. These
expenses increased $0.8 million, or 9.1%, to $9.4 million in fiscal year 2003
from $8.6 million in fiscal year 2002, primarily due to a $0.8 million increase
in salaries and benefits as we hired a new Xstreme division president and added
personnel to our legal and investor relations departments, a $0.5 million
increase related to corporate insurance costs, an increase of $0.3 million in
accounting and legal fees, and an increase in travel expenses of $0.1 million,
partially offset by a decrease in incentive based compensation of
32
$0.6 million and a decrease of bad debt expense of $0.4 million as compared to
the prior fiscal year.
Restructuring Charge. During the fourth quarter of fiscal 2003, the Board
of Directors approved a Restructuring Plan. The Restructuring Plan includes
certain initiatives designed to realign our resources to focus on more strategic
and immediate growth opportunities and to align our cost structure with our
revenue projections. The decision to implement the Restructuring Plan was due to
certain economic and geographic circumstances in the Integrated Solutions and
Xstreme divisions and the state of the overall global economic environment. As
part of the Restructuring Plan, the following actions were initiated, resulting
in a total restructuring charge of $1.6 million recorded in the fourth quarter
of fiscal 2003:
- We terminated 33 employees, or 7% of our current global workforce in
both our Integrated Solutions and Xstreme divisions, and as a result,
recorded a charge of $1.1 million related to severance and other
employee termination costs.
- We reduced office space in certain international facilities in France
and Japan, and as a result, recorded a charge of $0.3 million for
estimated lease cancellation costs, write-off of leasehold
improvements and facility restoration costs, all net of estimated
sub-lease rental income.
- We also recorded charges for other restructuring costs of $0.2 million
related to the write-off of certain assets that were impaired as a
result of the restructuring initiatives.
This Restructuring Plan was accounted for and recorded in accordance with
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," and SFAS No. 144, "Accounting for the Impairment of or Disposal of
Long-Lived Assets", and other related interpretative guidance. We adopted the
provisions of SFAS No. 146, which is effective for transactions initiated after
December 31, 2002.
A summary of our restructuring charge is as follows:
Our restructuring related reserves are summarized as follows (in thousands):
TOTAL RESTRUCTURING
RESTRUCTURING NON-CASH CASH RESERVE AT
CHARGES CHARGES PAYMENTS JUNE 30, 2003
Workforce reduction $ 1,057 $ - $ 191 $ 866
Lease terminations 319 72 49 198
Other 227 202 - 25
-------------- -------------- --------- --------------
TOTAL $ 1,603 $ 274 $ 240 $ 1,089
============== ============== ========= ==============
Our restructuring related charges for each division are summarized as follows
(in thousands):
LEASE TOTAL
WORKFORCE TERMINATION RESTRUCTURING
REDUCTION COSTS COSTS OTHER CHARGE
Integrated Solutions division $ 713 $ 257 $ 23 $ 993
Xstreme division 344 62 204 610
---------------- ------------ -------------- -------
TOTAL $ 1,057 $ 319 $ 227 $ 1,603
================ ============ ============== =======
33
Our domestic and international restructuring related charges are summarized as
follows (in thousands):
LEASE TOTAL
WORKFORCE TERMINATION RESTRUCTURING
REDUCTION COSTS COSTS OTHER CHARGE
Domestic $ 385 $ - $ 52 $ 437
International 672 319 175 1,166
---------------- ------------ -------------- -------------
TOTAL $ 1,057 $ 319 $ 227 $ 1,603
================ ============ ============== =============
The $1.1 million accrued liability is recorded in the Consolidated Balance
Sheets under the line item Accounts payable and accrued expenses and the $1.6
million restructuring charge is recorded in the line item Restructuring charge,
in continuing operations, in the Consolidated Statements of Operations.
All activities under the Restructuring Plan and all cash payments are
expected to be complete by the end of fiscal 2004.
Impairment Loss on Minority Investment and Related Notes Receivable. In
fiscal 2003, we recorded a $13.0 million impairment charge due to an
other-than-temporary decline in the market value of our investment in
Thirdspace, which included a $6.1 million charge for the write-off of two $3
million notes receivable and related accrued interest. The impairment of the
investment and write-off of the related notes receivable and accrued interest
was based upon Thirdspace's deteriorating financial condition and actual
performance relative to expected performance, the status of Thirdspace's capital
raising initiatives, the market conditions of the telecommunications sector, the
uncertainty of the collectibility of the notes, the state of the overall economy
and the reduced market value of Thirdspace. In May 2003, Thirdspace sold the
majority of its assets to a third party. As a result of the sale of these
certain assets, we received $471,000 in proceeds, net of legal costs of $75,000,
and an additional $275,000 was placed in escrow for our benefit, pending the
resolution of certain outstanding items. In return for these proceeds, we
relinquished our security interest in the intellectual assets of Thirdspace;
however, we still retain a secured interest in all other assets retained by
Thirdspace. Although Thirdspace is currently in liquidation proceedings, it is
not possible at this time to determine the amount or timing of receipt of any
additional proceeds, including the $275,000 in escrow, as part of the
liquidation process. The net proceeds received to date of $471,000 are recorded
as a reduction to the impairment loss, which is recorded in the line item
Impairment loss on minority investment in the Consolidated Statements of
Operations. The value of the equity investment and notes receivable and accrued
interest were reduced to zero as of the third quarter of fiscal 2003 and remain
at zero on the June 30, 2003 Consolidated Balance Sheets. Any further receipt of
proceeds as part of the liquidation of Thirdspace will be recorded as a
reduction to the impairment loss in the line item Impairment loss on minority
investment in the Consolidated Statements of Operations. As of June 30, 2003, we
do not have any further funding requirements or commitments related to these
transactions with Thirdspace and we also believe that the Thirdspace warrants
have no value.
Interest income. Interest income decreased $0.2 million to $0.6 million in
fiscal 2003 from $0.8 million in fiscal 2002 primarily due to lower average
daily interest rates than the prior year.
Income Taxes. We recorded income tax expense for our domestic and foreign
subsidiaries of $589,000 in fiscal 2003, of which approximately $390,000 relates
to a negotiated settlement with the Greek Tax Authority relating to a 1993
through 1995 audit of our former Greek subsidiary, which was sold in December
1995. The remaining $199,000 tax expense is related primarily to foreign
withholding taxes and income earned in foreign locations, which cannot be offset
by net operating loss carryforwards. There was no income tax provision recorded
in fiscal year 2002 on pretax income of $4.4 million due to the utilization of
previously unrecognized tax net operating loss carryovers.
Net Income (Loss). The net loss for fiscal year 2003 was $24.6 million or
$0.40 per basic and diluted share compared to net income of $4.4 million or
$0.07 per basic and diluted share in fiscal year 2002.
34
FISCAL YEAR 2002 IN COMPARISON TO FISCAL YEAR 2001
Product Sales. Total product sales for fiscal year 2002 were $68.5
million, an increase of $18.9 million or 38.2% from fiscal year 2001. The
increase was the result of a $23.1 million increase in sales of VOD systems to
$46.9 million in fiscal year 2002 from $23.8 million in fiscal year 2001. The
increase in VOD product sales was primarily due to the increase in VOD server
purchases from AOL Time Warner and Cox Communications, which accounted for
approximately 57.1% and 24.0%, respectively, of VOD system revenue during the
fiscal year ended June 30, 2002. These increased server purchases were directly
related to the increase in the number of cable markets where VOD is being
deployed, combined with increased digital penetration in markets where VOD was
previously deployed. Partially off-setting the increase in VOD product sales
was the continued decline in sales of real-time computer systems. Sales of
real-time products decreased 16.1% to $21.6 million in fiscal year 2002 from
$25.7 million in fiscal year 2001, primarily due to the non-recurring revenue
recognized in fiscal 2001 from a contract with Hamilton-Sunstrand, a United
Technology Company, for testing of aircraft power subsystems, which included
production and development systems and engineering and training services.
Service Revenue. Service revenue decreased 10.3% to $20.9 million in
fiscal year 2002 from $23.3 million in fiscal year 2001. The decline resulted
primarily from customers switching from proprietary real-time systems to our
open systems which are less expensive to maintain, and from the cancellation of
other proprietary computer maintenance contracts as the machines were removed
from service, partially offset by an increase of $1.1 million in VOD service
revenue.
Gross Margin. The gross margin increased by $11.6 million to $44.6 million
in fiscal year 2002 from $33.0 million in fiscal year 2001. The gross margin as
a percent of sales increased to 49.9% in fiscal year 2002 from 45.3% in fiscal
year 2001. VOD product gross margins increased to 51.9% for fiscal year 2002
from 45.0% for fiscal year 2001 due to (1) a cost reduction in the MediaHawk
3000 video server, (2) an increase in sales volume and certain fixed customer
service and support costs being spread over higher sales, and (3) a more
favorable product mix resulting from sales of more fully configured video
servers with higher video stream capacity. The gross margin on sales of
real-time products increased to 60.3% of sales in fiscal year 2002 from 45.2% in
fiscal year 2001 primarily as a result of the reduction in large-scale
integration projects with lower gross margins and an increase in demand for the
higher margin PowerMAXION hardware and software products. The gross margin on
service sales declined to 34.5% for fiscal year 2002 from 45.8% for fiscal year
2001 because, as service revenues continue to decline, service expenses have
been reduced on a less than pro-rata basis to ensure quality service and to
fulfill contractual agreements in the Integrated Solutions division, and also
due to the addition of service personnel in the Xstreme division due to the
expectation of increased VOD implementations.
Sales and Marketing. Sales and marketing expenses decreased as a percent of
sales to 19.0% for fiscal year 2002 from 22.1% for fiscal year 2001. These
expenses increased 5.4% to $17.0 million in fiscal year 2002 from $16.1 million
in fiscal year 2001, primarily due to a $0.9 million increase in domestic VOD
sales and marketing personnel costs, as well as a $0.2 million increase in VOD
sales and marketing department travel expenses. This increase was partially
offset by a $0.4 million decrease in domestic real-time sales commissions that
were generated by sales to a single real-time customer in fiscal year 2001.
Research and Development. Research and development expenses increased as a
percent of sales to 17.1% in fiscal year 2002 from 15.9% in fiscal year 2001.
These expenses increased 32.1% to $15.3 million in fiscal year 2002 from $11.6
million in fiscal year 2001 due to personnel additions in both the real-time and
VOD research and development departments. The Integrated Solutions division's
research and development expense increased $1.9 million, primarily due to
additional resources required for development of the new Linux based real-time
operating system. The Xstreme division also added new development staff in
fiscal year 2002 to focus on TV Guide integrations, targeted and interactive
advertising integration, development of our personal video channel (pVC(TM))
technology, and next generation server and server architectures. The additional
VOD research and development personnel resulted in a $1.6 million increase in
VOD research and development expenses in fiscal 2002 compared to the prior year.
General and Administrative. General and administrative expenses decreased
as a percent of sales to 9.7% in fiscal 2002 from 15.0% in fiscal 2001. These
expenses decreased to $8.6 million in fiscal year 2002 from $10.9 million in
fiscal year 2001, primarily due to a non-recurring $1.2 million severance charge
recorded in fiscal year 2001. In addition, after the July 1, 2001
implementation of SFAS 142, goodwill relating to the acquisition of Vivid
35
Technology, Inc. was no longer amortized. Discontinuation of this goodwill
amortization expense decreased VOD general and administrative expense by $1.3
million for fiscal year 2002 compared to the prior year. Furthermore,
accounting related costs decreased $0.2 million due to consolidation of
accounting departments that existed in both Duluth, GA and Ft. Lauderdale, FL
during part of fiscal year 2001. These decreases were partially offset by a
$0.4 million increase in insurance expense and $0.2 million increase in bad debt
expense for fiscal year 2002 compared to fiscal year 2001.
Interest income. Interest income increased $0.5 million to $0.8 million in
fiscal 2002 from $0.3 million in fiscal 2001 primarily due to the earnings from
investing the net proceeds from the private placement of 5.4 million shares of
common stock that was completed in July 2001.
Income Taxes. No income tax provision was recorded in fiscal year 2002 on
pretax income of $4.4 million due to the utilization of previously unrecognized
tax net operating loss carryovers.
Net Income (Loss). The net income for fiscal year 2002 was $4.4 million or
$0.07 per basic and diluted share compared to a net loss of $6.2 million or
$0.11 per basic and diluted share in fiscal year 2001.
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 actual versus anticipated decline in sales of real-time
proprietary systems and service maintenance revenue;
- Revenues from open real-time systems;
- Revenue growth from VOD systems and the pace at which cable companies
implement VOD technology;
- Ongoing cost control actions and expenses, including for example,
research and development and capital expenditures;
- The margins on the VOD and real-time businesses;
- The ability to raise additional capital, if necessary;
- The ability to obtain bank financing, if necessary;
- 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;
- The number of countries in which we operate, which may require
maintenance of minimum cash levels in each country and, in certain
cases, may restrict the repatriation of cash, such as cash held on
deposit to secure office leases.
We provided cash of $7.1 million and $5.8 million from operating activities
in fiscal year 2003 and 2002, respectively. The increase of $1.3 million in cash
generated from operating activities is due to strong collections of accounts
receivable in fiscal 2003 compared to fiscal 2002, partially offset by an
operating loss in fiscal 2003 as compared to operating income in fiscal 2002.
Our $5.0 million revolving credit facility with Wachovia Bank expired December
31, 2002. The credit facility was not renewed or replaced.
We invested $5.6 million in property, plant and equipment during fiscal
year 2003 compared to $4.5 million during fiscal year 2002. Current year capital
expenditures relate primarily to product development, testing and demonstration
equipment for our Xstreme division, and for real-time and VOD manufacturing
equipment in Fort Lauderdale, FL. In September 2002, we loaned Thirdspace an
additional $3.0 million in exchange for a long-term note receivable.
We received $24.0 million in net proceeds from a private placement of 5.4
million shares of common stock on July 19, 2001.
We also received $0.5 million and $3.5 million from the issuance of common
stock to employees and directors who exercised stock options during fiscal years
2003 and 2002, respectively.
At June 30, 2003, we had working capital of $30.0 million and had no
material commitments for capital expenditures.
36
On September 18, 2003, we received $1.1 million from Thirdspace as a result
of a partial liquidation of Thirdspace's assets. See Note 22 to our consolidated
financial statements included herein.
We believe that the existing cash balances and funds generated by
operations will be sufficient to meet the anticipated working capital and
capital expenditure requirements for the next 12 months.
Deferred revenues increased $1.9 million to $7.6 million at June 30, 2003
from $5.7 million at June 30, 2002, due to the growing base of cable customers
with maintenance programs where the revenue is recognized ratably over the
maintenance period.
We maintain pension plans for certain employees and former employees in the
United Kingdom and Germany. The projected benefit obligation for the benefit
plans at June 30, 2003 and June 30, 2002 as determined in accordance with FAS
No. 87, "Employers Accounting for Pensions", was $21.5 million and $17.0
million, respectively, and the value of the plans assets were $12.9 million and
$12.0 million, respectively. As a result, the plans were underfunded by $8.6
million at June 30, 2003 and by $5.0 million at June 30, 2002. In addition, the
pension cost recognized in the financial statements for the year ended June 30,
2003, 2002, and 2001, was $0.7 million, $0.5 million, and $0.2 million
respectively. The expense to be recognized in future periods will likely
increase further, depending upon the amount of the change in the fair market
value of the plan assets and the change in the projected benefit obligation.
We also recorded a reduction to stockholders' equity as of June 30, 2003
and 2002, amounting to $3.0 million and $1.6 million, respectively, due to the
decrease in the discount rate used to calculate the projected benefit obligation
and the less than anticipated investment returns. We do not currently believe
the underfunded status of the pension plans will materially affect our financial
position.
NEW ACCOUNTING STANDARDS
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with the Exit or Disposal Activities" ("SFAS 146"). The standard
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. Costs are covered by the standard include lease
termination costs and certain employee severance costs that are associated with
a restructuring, discontinued operation, plant closing, or other exit or
disposal activity. This statement is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. We implemented the
provisions of SFAS 146 in accounting for the restructuring discussed in Note 5
of these financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS 148"). This statement amends
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), to provide
alternative methods of transition for voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The transition guidance and annual disclosure
provisions of SFAS No. 148 are effective for our fiscal 2003 annual financial
statements and all subsequent interim periods. We plan to continue accounting
for our stock option plans in accordance with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations; however, we implemented the disclosure requirements
under SFAS No. 148 in the quarter ended March 31, 2003. The related disclosures
are included in Note 2 of these financial statements.
In December 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including indirect
Guarantees of Indebtedness of Others," which provides for additional disclosures
to be made by a guarantor in its interim and annual financial statements about
its obligations and requires, under certain circumstances, a guarantor to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. We have adopted the
disclosure requirements for our fiscal year ended June 30, 2003. We do not
expect the recognition and measurement provisions of Interpretation No. 45 for
guarantees issued or modified after December 31, 2002, to have a material impact
on our consolidated financial statements.
37
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Our only significant contractual obligations and commitments relate to
certain operating leases for sales, service and manufacturing facilities in the
United States, Europe and Asia. The following table summarizes our significant
contractual obligations and commitments:
PAYMENTS DUE BY FISCAL YEAR
---------------------------------------------------
(DOLLARS IN THOUSANDS)
CONTRACTUAL OBLIGATIONS TOTAL 2004 2005-2006 2007-2008 THEREAFTER
- ------------------------- ------ ------ ---------- ---------- -----------
OPERATING LEASES $8,022 $2,507 $ 3,679 $ 1,576 $ 260
CAPITAL LEASE OBLIGATIONS 152 101 51 - -
------ ------ ---------- ---------- -----------
TOTAL $8,174 $2,608 $ 3,730 $ 1,576 $ 260
====== ====== ========== ========== ===========
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates and foreign
currency exchange rates. We are exposed to the impact of interest rate changes
on our short-term cash investments, which are backed by U.S. government
obligations, and other investments in respect of institutions with the highest
credit ratings, all of which have maturities of three months or less. These
short-term investments carry a degree of interest rate risk. We believe that
the impact of a 10% increase or decline in interest rates would not be material
to our investment income.
We conduct business in the United States and around the world. Our 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. We do not hedge against fluctuations in exchange rates and
believe that a hypothetical 10% upward or downward fluctuation in foreign
currency exchange rates relative to the United States dollar would not have a
material impact on future earnings, fair values, or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements and supplementary data are
included herein.
PAGE
----
Independent Auditors' Report 46
Consolidated Balance Sheets as of June 30, 2003 and 2002 47
Consolidated Statements of Operations for each of the three years 48
in the period ended June 30, 2003
Consolidated Statements of Stockholders' Equity and Comprehensive 49
Income (Loss) for each of the three years in the period ended June 30, 2003
Consolidated Statements of Cash Flows for each of the three 50
years in the period ended June 30, 2003
Notes to Consolidated Financial Statements 51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
38
ITEM 9A. 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 controls during the period
covered by this annual 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.
39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Registrant hereby incorporates by reference in this Form 10-K certain
information contained under the caption "Election of Directors" in Registrant's
Proxy Statement to be used in connection with its Annual Meeting of Stockholders
to be held on October 21, 2003 ("Registrant's 2003 Proxy Statement").
The Registrant hereby incorporates by reference in this Form 10-K certain
information contained under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in Registrant's 2003 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The Registrant hereby incorporates by reference in this Form 10-K certain
information contained under the caption "Executive Compensation" in the
Registrant's 2003 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Registrant hereby incorporates by reference in this Form 10-K certain
information contained under the captions "Common Stock Ownership of Management
and Certain Beneficial Owners" and "Equity Compensation Plan Information" in
Registrant's 2003 Proxy Statement.
The Registrant knows of no contractual arrangements, including any pledge
by any person of securities of the Registrant, the operation of which may at a
subsequent date result in a change in control of the Registrant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The Registrant hereby incorporates by reference in this Form 10-K certain
information contained under the caption "Certain Relationships and Related Party
Transactions" in Registrant's 2003 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The registrant hereby incorporates by reference in this Form 10-K certain
information under the caption "Report of the Audit Committee" in Registrant's
2003 Proxy Statement.
40
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements Filed As Part Of This Report:
Independent Auditors' Report
Consolidated Balance Sheets as of June 30, 2003 and 2002
Consolidated Statements of Operations for each of the three years in
the period ended June 30, 2003
Consolidated Statements of Stockholders' Equity and Comprehensive
Income (Loss) for each of the three years in the period ended June 30,
2003
Consolidated Statements of Cash Flows for each of the three years in
the period ended June 30, 2003
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Schedule II Valuation and Qualifying Accounts
All other financial statements and schedules not listed have been
omitted since the required information is included in the Consolidated Financial
Statements or the Notes thereto, or is not applicable, material or required.
(3) Exhibits
EXHIBIT DESCRIPTION OF DOCUMENT
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 Registrants 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).
4.4 --Warrant to purchase 50,000 shares of common stock of the Registrant
dated March 29, 2001 issued to Comcast Concurrent Holdings, Inc.
(incorporated by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 2002).
41
4.5 --Warrant to purchase 4,431 shares of common stock of the Registrant
dated October 9, 2001 issued to Comcast Concurrent Holdings, Inc.
(incorporated by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 2002).
4.6 --Warrant to purchase 261,164 shares of common stock of the Registrant
dated April 1, 2002 issued to Scientific-Atlanta, Inc. (incorporated
by reference to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2002).
4.7 --Warrant to purchase 52,511 shares of common stock of the Registrant
dated January 15, 2002 issued to Comcast Concurrent Holdings, Inc.
(incorporated by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 2002).
4.8 --Warrant to purchase 1,502 shares of common stock of the Registrant
dated August 10, 2002 issued to Comcast Concurrent Holdings, Inc.
(incorporated by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 2002).
10.1 --1991 Restated Stock Option Plan (as amended as of October 26, 2000)
(incorporated by reference Exhibit A to the Registrant's Proxy
Statement dated September 18, 2000).
10.2 --Richard Rifenburgh Non-Qualified Stock Option Plan and Agreement
(incorporated by reference to the Registrant's Registration Statement
on Form S-8 (No. 333-82686)).
10.3 --Concurrent Computer Corporation 2001 Stock Option Plan (incorporated
by reference to Annex II to the Registrant's Proxy Statement dated
September 19, 2001).
10.4 --Form of Incentive Stock Option Agreement between the Registrant and
its executive officers (incorporated by reference to the Registrant's
Registration Statement on Form S-1. (No. 33-45871)).
10.5 --Form of Non-Qualified Stock Option Agreement between the Registrant
and its executive officers (incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 1997).
10.6 --Form of Employment Agreement between the Registrant and its
executive officers (incorporated by reference to of the Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1991).
10.7 --Amended and Restated Employment Agreement dated as of November 15,
1999 between the Registrant and Steve G. Nussrallah (incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended December 31, 1999).
10.8 --Employment Agreement dated as of October 28, 1999 between the
Registrant and Steven R. Norton (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended December 31, 1999).
10.9 --Employment Agreement dated as of July 10, 2000 between the
Registrant and Jack A. Bryant, III (incorporated by reference to the
Registrant's Annual Report on Form 10-K/A for the fiscal year ended
June 30, 2000).
10.10 --Employment Agreement dated as of December 13, 2000 between the
Registrant and Paul C. Meyer (incorporated by reference to the
Registrant's Annual Report on Form 10-K/A for the fiscal year ended
June 30, 2001).
10.11 --Employment Agreement dated as of November 26, 2001 between the
Registrant and Kirk Somers (incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 2002).
42
10.12 --Employment Agreement dated as of June 17, 2002 between the
Registrant and Steve Necessary (incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 2002).
10.13 --Employment Agreement dated as of June 27, 1996 between the
Registrant and Robert T. Menzel (incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 2002).
10.14 --Employment Agreement dated as of March 1, 1999 between the
Registrant and David Nicholas (incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 2002).
10.15 --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)
(incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 2001).
10.16 --Registration Rights Agreement, dated March 29, 2001, between the
Registrant and Comcast Concurrent Holdings, Inc. (incorporated by
reference to the Registrant's Registration Statement on Form S-3 (No.
333-72012)).
10.17 --Letter Amendment, dated October 22, 2001, to Registration Rights
Agreement between the Registrant and Comcast Concurrent Holdings, Inc.
dated March 29, 2001(incorporated by reference to the Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 2002).
10.18 --Registration Rights Agreement, dated March 19, 2002 between
Concurrent Computer Corporation and Thirdspace Living Limited
(incorporated by Reference to the Registrant's Current Report on Form
8-K filed on March 20, 2002).
10.19 --Share Purchase and Warrant Agreement, dated March 19, 2002 between
Concurrent Computer Corporation and Thirdspace Living Limited
(incorporated by Reference to the Registrant's Current Report on Form
8-K filed on March 20, 2002).
10.20 --Strategic Alliance Agreement, dated March 19, 2002 between
Concurrent Computer Corporation and Thirdspace Living Limited
(incorporated by Reference to the Registrant's Current Report on Form
8-K filed on March 20, 2002).
21.1* --List of Subsidiaries.
23.1* --Consent of Deloitte & Touche LLP.
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.
* Included herewith.
(b) Reports On Form 8-K.
The following reports on Form 8-K were filed during the last quarter of the
period covered by this report:
43
(1) Current Report on Form 8-K filed on April 24, 2003 furnishing (i) the
condensed consolidated balance sheets as of March 31, 2003 (unaudited) and June
30, 2002, (ii) the unaudited condensed consolidated statements of operations for
the three and nine months ended March 31, 2003 and the three and nine months
ended March 31, 2002 and (iii) the unaudited segment data for the three and nine
months ended March 31, 2003 and the three and nine months ended March 31, 2002.
44
CONCURRENT COMPUTER CORPORATION
ANNUAL REPORT ON FORM 10-K
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
YEAR ENDED JUNE 30, 2003
45
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Concurrent Computer Corporation:
We have audited the accompanying consolidated balance sheets of Concurrent
Computer Corporation and subsidiaries as of June 30, 2003 and 2002, and the
related consolidated statements of operations, stockholders' equity and
comprehensive income (loss) and cash flows for each of the three years in the
period ended June 30, 2003. Our audits also included the consolidated financial
statement schedule for each of the three years in the period ended June 30, 2003
listed in the Index at Item 15(a)(2). These consolidated financial statements
and the consolidated financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and the consolidated financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Concurrent Computer Corporation
and subsidiaries as of June 30, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2003, in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such consolidated financial
statement schedule for each of the three years in the period ended June 30,
2003, when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information set
forth therein.
As discussed in Note 2 to the consolidated financial statements, effective
July 1, 2001, Concurrent Computer Corporation changed its method of accounting
for goodwill and other intangible assets to conform with Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets". Also, as
discussed in Note 5 to the consolidated financial statements, Concurrent
Computer Corporation adopted the provisions of Statement of Financial Accounting
Standards No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities".
/s/ Deloitte & Touche LLP
Atlanta, Georgia
August 1, 2003
(August 17, 2003 as to Note 16)
(September 18, 2003 as to Note 22)
46
CONCURRENT COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
JUNE 30,
---------------------
2003 2002
---------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 30,697 $ 30,519
Accounts receivable, less allowance for doubtful accounts
of $868 at June 30, 2003 and $965 at June 30, 2002 10,371 23,894
Inventories 7,174 6,822
Deferred tax asset 998 870
Prepaid expenses and other current assets 879 1,009
---------- ---------
Total current assets 50,119 63,114
Property, plant and equipment - net 11,862 10,696
Purchased developed computer software - net 1,203 1,393
Goodwill - net 10,744 10,744
Investment in minority owned companies 553 7,814
Note receivable from minority owned company - 3,000
Deferred tax asset 1,749 1,087
Other long-term assets - net 1,609 840
---------- ---------
Total assets $ 77,839 $ 98,688
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 14,644 $ 15,514
Deferred revenue 5,433 4,055
---------- ---------
Total current liabilities 20,077 19,569
Long-term liabilities:
Deferred revenue 2,212 1,677
Deferred tax liability 2,107 1,634
Pension liability 9,617 6,053
Other 368 531
---------- ---------
Total liabilities 34,381 29,464
Stockholders' equity:
Shares of series preferred stock, par value $.01; 25,000,000 authorized; none issued - -
Shares of class A preferred stock, par value $100; 20,000 authorized; none issued - -
Shares of series A participating cumulative preferred stock, par value $0.01;
300,000 authorized; none issued - -
Shares of common stock, par value $.01; 100,000,000 authorized;
62,367,449 and 61,856,993 issued at June 30, 2003 and 2002, respectively 623 618
Capital in excess of par value 174,396 172,929
Accumulated deficit (122,929) (98,377)
Treasury stock, at cost; 840 shares (58) (58)
Unearned compensation (576) -
Accumulated other comprehensive loss (7,998) (5,888)
---------- ---------
Total stockholders' equity 43,458 69,224
---------- ---------
Total liabilities and stockholders' equity $ 77,839 $ 98,688
========== =========
The accompanying notes are an integral part of the consolidated financial
statements.
47
CONCURRENT COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED JUNE 30,
-----------------------------
2003 2002 2001
--------- -------- --------
Revenues:
Product sales
Real-time systems $ 19,417 $21,601 $25,740
VOD systems 35,039 46,900 23,814
--------- -------- --------
Total product sales 54,456 68,501 49,554
Service
Real-time systems 17,474 19,807 23,267
VOD systems 3,523 1,061 -
--------- -------- --------
Total service sales 20,997 20,868 23,267
--------- -------- --------
Total sales 75,453 89,369 72,821
Cost of sales:
Product sales
Real-time systems 7,817 8,586 14,102
VOD systems 17,851 22,555 13,091
--------- -------- --------
Total product costs of sales 25,668 31,141 27,193
Service
Real-time systems 10,402 11,588 12,608
VOD systems 2,960 2,074 -
--------- -------- --------
Total service costs of sales 13,362 13,662 12,608
--------- -------- --------
Total cost of sales 39,030 44,803 39,801
--------- -------- --------
Gross margin 36,423 44,566 33,020
Operating expenses:
Sales and marketing 18,081 16,984 16,112
Research and development 18,775 15,291 11,579
General and administrative 9,393 8,612 10,920
Restructuring charge 1,603 - -
--------- -------- --------
Total operating expenses 47,852 40,887 38,611
--------- -------- --------
Operating income (loss) (11,429) 3,679 (5,591)
Impairment loss on minority investment (12,951) - -
Interest expense (30) (76) (214)
Interest income 592 828 302
Other expense - net (145) (48) (86)
--------- -------- --------
Income (loss) before provision for income taxes (23,963) 4,383 (5,589)
Provision for income taxes 589 - 600
--------- -------- --------
Net income (loss) $(24,552) $ 4,383 $(6,189)
========= ======== ========
Basic and diluted net income (loss) per share $ (0.40) $ 0.07 $ (0.11)
========= ======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
48
CONCURRENT COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY AND COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 2003
COMMON STOCK ACCUMULATED
------------------- CAPITAL IN OTHER
PAR EXCESS OF ACCUMULATED UNEARNED COMPREHENSIVE
SHARES VALUE PAR VALUE DEFICIT COMPENSATION INCOME (LOSS)
---------- ------ ----------- ---------- -------------- --------------
Balance at June 30, 2000 53,910,918 $ 538 $ 135,394 $ (96,571) $ - $ (1,032)
Sale of common stock under stock plans 1,150,920 13 3,903
Performance warrants 1,055
Comprehensive loss:
Net loss (6,189)
Foreign currency translation adjustment (967)
Minimum pension liability adjustment (2,803)
Total comprehensive loss
---------- ------ ----------- ---------- -------------- --------------
Balance at June 30, 2001 55,061,838 551 140,352 (102,760) - (4,802)
Sale of common stock under stock plans 1,103,694 10 3,537
Issuance of common stock related to
private placement 5,400,000 54 23,891
Issuance of common stock related to
investment in minority owned company 291,461 3 2,984
Performance warrants 2,165
Comprehensive income (loss):
Net income 4,383
Foreign currency translation adjustment 513
Minimum pension liability adjustment (1,599)
Total comprehensive income
---------- ------ ----------- ---------- -------------- --------------
Balance at June 30, 2002 61,856,993 618 172,929 (98,377) - (5,888)
Sale of common stock under stock plans 226,988 2 548
Issuance of common stock related to
investment in minority owned company (17)
Issuance of Restricted Stock 283,468 3 598 (601)
Amortization of Unearned Compensation 25
Performance warrants 338
Comprehensive income (loss):
Net loss (24,552)
Foreign currency translation adjustment 915
Minimum pension liability adjustment (3,025)
Total comprehensive loss
---------------------------------------------------------------------------
Balance at June 30, 2003 62,367,449 $ 623 $ 174,396 $(122,929) $ (576) $ (7,998)
===========================================================================
TREASURY STOCK
---------------
SHARES COST TOTAL
------- ------ ---------
Balance at June 30, 2000 (840) $ (58) $ 38,271
Sale of common stock under stock plans 3,916
Performance warrants 1,055
Comprehensive loss:
Net loss (6,189)
Foreign currency translation adjustment (967)
Minimum pension liability adjustment (2,803)
---------
Total comprehensive loss (9,959)
------- ------ ---------
Balance at June 30, 2001 (840) (58) 33,283
Sale of common stock under stock plans 3,547
Issuance of common stock related to
private placement 23,945
Issuance of common stock related to
investment in minority owned company 2,987
Performance warrants 2,165
Comprehensive income (loss):
Net income 4,383
Foreign currency translation adjustment 513
Minimum pension liability adjustment (1,599)
---------
Total comprehensive income 3,297
------- ------ ---------
Balance at June 30, 2002 (840) (58) 69,224
Sale of common stock under stock plans 550
Issuance of common stock related to
investment in minority owned company (17)
Issuance of Restricted Stock -
Amortization of Unearned Compensation 25
Performance warrants 338
Comprehensive income (loss):
Net loss (24,552)
Foreign currency translation adjustment 915
Minimum pension liability adjustment (3,025)
---------
Total comprehensive loss (26,662)
--------------------------
Balance at June 30, 2003 (840) $ (58) $ 43,458
==========================
The accompanying notes are an integral part of the consolidated financial
statements.
49
CONCURRENT COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED JUNE 30,
------------------------------
2003 2002 2001
--------- --------- --------
Cash flows provided by (used in) operating activities:
Net income (loss) $(24,552) $ 4,383 $(6,189)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Impairment loss on minority investment 12,951 - -
Accrual of non-cash warrants 338 2,165 1,055
Depreciation and amortization 4,824 5,008 5,995
Provision for inventory reserves 317 343 1,712
Amortization of stock compensation 25 - -
Other non-cash expenses 15 519 597
Decrease (increase) in assets:
Accounts receivable 13,495 (10,030) (2,031)
Inventories (669) (118) (3,278)
Prepaid expenses and other current assets 2 (821) 1,047
Other long-term assets (1,624) 133 (1,146)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (870) 1,585 632
Short-term deferred revenue 1,378 755 989
Long-term liabilities 1,469 1,836 404
--------- --------- --------
Net cash provided by (used in) operating activities 7,099 5,758 (213)
Cash flows provided by (used in) investing activities:
Net additions to property, plant and equipment (5,595) (4,522) (3,761)
Investment in minority owned company - (4,827) -
Note receivable from minority owned company (3,000) (3,000) -
Net proceeds from sale of subsidiary - - 276
Repayment of note receivable from
minority owned company 471 - -
--------- --------- --------
Net cash (used in) investing activities (8,124) (12,349) (3,485)
Cash flows provided by (used in) financing activities:
Net repayment of debt (85) (85) (71)
Proceeds from sale and issuance of common stock 550 27,492 3,916
--------- --------- --------
Net cash provided by financing activities 465 27,407 3,845
Effect of exchange rates on cash and cash equivalents 738 243 (769)
--------- --------- --------
Increase (decrease) in cash and cash equivalents 178 21,059 (622)
Cash and cash equivalents - beginning of year 30,519 9,460 10,082
--------- --------- --------
Cash and cash equivalents - end of year $ 30,697 $ 30,519 $ 9,460
========= ========= ========
Cash paid during the period for:
Interest $ 20 $ 49 $ 277
========= ========= ========
Income taxes (net of refunds) $ 474 $ 413 $ 621
========= ========= ========
Non-cash investing/financing activities:
Common stock issued for investment in minority owned company $ - $ 3,000 $ -
========= ========= ========
The accompanying notes are an integral part of the consolidated financial
statements.
50
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OVERVIEW OF THE BUSINESS
Concurrent Computer Corporation ("Concurrent") is a leading supplier of
high-performance computer systems, software, and services and operates in two
divisions, the Video-On-Demand ("VOD") division, Xstreme, located in Duluth,
Georgia, and the Integrated Solutions division located in Fort Lauderdale,
Florida.
Concurrent's Xstreme division provides VOD systems consisting of hardware
and software as well as integration services, primarily to residential cable
companies that have upgraded their networks to support interactive, digital
services.
Concurrent's Integrated Solutions division provides high-performance,
real-time computer systems to commercial and government customers for use in
applications such as simulation and data acquisition.
Concurrent provides sales and support from offices and subsidiaries
throughout North America, Europe, Asia, and Australia.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Concurrent
and all wholly-owned domestic and foreign subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
Foreign Currency
The functional currency of all of Concurrent's foreign subsidiaries is the
applicable local currency. The translation of the applicable foreign currencies
into U.S. dollars is performed for balance sheet accounts using current exchange
rates in effect at the balance sheet date and for revenue and expense accounts
using average rates of exchange prevailing during the fiscal year. Adjustments
resulting from the translation of foreign currency financial statements are
accumulated in a separate component of stockholders' equity. Gains or losses
resulting from foreign currency transactions are included in the Consolidated
Statements of Operations, except for those relating to intercompany transactions
of a long-term investment nature which are accumulated in a separate component
of stockholders' equity.
Gains (losses) on foreign currency transactions of $(27,000), $(104,000)
and $1,000 for the years ended June 30, 2003, 2002 and 2001, respectively, are
included in other income (expense) - net in the Consolidated Statements of
Operations.
Cash Equivalents
Short-term investments with maturities of ninety days or less at the date
of purchase are considered cash equivalents. Cash equivalents are stated at cost
plus accrued interest, which approximates market, and represent cash invested in
U.S. Government securities, bank certificates of deposit, or commercial paper.
Inventories
Inventories are stated at the lower of cost or market, with cost determined
on the first-in, first-out basis. Concurrent establishes excess and obsolete
inventory reserves based upon historical and anticipated usage.
Property, Plant and Equipment
Property, plant and equipment are stated at acquired cost less accumulated
depreciation. Depreciation is provided on a straight-line basis over the
estimated useful lives of assets ranging from one to ten years. Leasehold
51
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
improvements are amortized over the shorter of the useful lives of the
improvements or the terms of the related lease. Gains and losses resulting from
the disposition of property, plant and equipment are included in operations.
Expenditures for repairs and maintenance are charged to operations as incurred
and expenditures for major renewals and betterments are capitalized.
Goodwill
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets"("SFAS 142"). Under SFAS 142, goodwill and intangible
assets with indefinite lives are no longer amortized but are subject to annual
impairment tests. Intangible assets with finite lives will continue to be
amortized over their useful lives. SFAS 142 was effective for fiscal years
beginning after December 15, 2001. All goodwill and other intangible assets are
allocated to the Xstreme division. As permitted, Concurrent early-adopted SFAS
142 as of July 1, 2001, the beginning of its fiscal year, and discontinued the
amortization of goodwill effective July 1, 2001 (see Note 9 to the consolidated
financial statements).
At July 1, 2003 and 2002, Concurrent's annual testing day, and in
accordance with the requirements under SFAS 142, Concurrent updated and reviewed
the impairment analysis in conjunction with revised expected future operating
results and as a result, there was no impairment charge necessary in either
period. Subsequent impairment charges, if any, will be reflected in operating
income in the Consolidated Statements of Operations.
Revenue Recognition and Related Matters
VOD and real-time system revenues are recognized based on the guidance in
American Institute of Certified Public Accountants Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2") and related amendments, SOP 98-4,
"Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue
Recognition" and SOP 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions". Concurrent recognizes
revenue from VOD and real-time systems when persuasive evidence of an
arrangement exists, the system has been shipped, the fee is fixed or
determinable and collectibility of the fee is probable. Under multiple element
arrangements, Concurrent allocates revenue to the various elements based on
vendor-specific objective evidence ("VSOE") of fair value. Concurrent's VSOE of
fair value is determined based on the price charged when the same element is
sold separately. If evidence of fair value does not exist for all elements in
a multiple element arrangement, Concurrent recognizes revenue using the residual
method. Under the residual method, the fair value of the undelivered elements
is deferred and the remaining portion of the arrangement is recognized as
revenue.
In certain instances, Concurrent's customers require significant
customization of both the software and hardware products and, therefore, the
revenues are recognized as long term contracts in conformity with Accounting
Research Bulletin ("ARB") No. 45, "Long Term Construction Type Contracts" and
SOP 81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts." 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.
Custom engineering and integration services performed by the Integrated
Solutions division are typically completed within 90 days from receipt of an
order. Revenues from these services are recognized upon completion and delivery
of such services to the customer.
Deferred Revenue
Deferred revenue consists of billings for maintenance contracts and for
products that are pending completion of the revenue recognition process.
Maintenance revenue, whether bundled with the product or priced separately, is
recognized ratably over the maintenance period. At June 30, 2003, deferred
revenue includes billings to certain customers who agreed to make progress
payments for systems that had not yet been completed and revenue had not yet
been recognized.
52
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Capitalized Software
Concurrent accounts for software development costs in accordance with SFAS
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed" ("SFAS 86"). Under SFAS 86, the costs associated with
software development are required to be capitalized after technological
feasibility has been established. Concurrent ceases capitalization upon the
achievement of customer availability. Costs incurred by Concurrent between
technological feasibility and the point at which the products are ready for
market are insignificant and as a result Concurrent has no internal software
development costs capitalized at June 30, 2003 and 2002.
Concurrent has not incurred costs related to the development of internal
use software.
Research and Development
Research and development expenditures are expensed as incurred.
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 dilutive common share
equivalents. Under the treasury stock method, incremental shares representing
the number of additional common shares that would have been outstanding if the
dilutive potential common shares had been issued are included in the
computation. Common share equivalents of 6,131,000, 4,247,000 and 7,575,000 for
the years ended June 30, 2003, 2002, and 2001, respectively, were excluded from
the calculation as their effect was antidilutive. The following table presents
a reconciliation of the numerators and denominators of basic and diluted loss
per share for the periods indicated:
YEAR ENDED JUNE 30,
----------------------------
2003 2002 2001
--------- ------- --------
(DOLLARS AND SHARE DATA IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Basic EPS calculation:
Net income (loss) $(24,552) $ 4,383 $(6,189)
Weighted average number of shares outstanding 61,944 60,997 54,683
--------- ------- --------
Basic EPS $ (0.40) $ 0.07 $ (0.11)
========= ======= ========
Diluted EPS calculation:
Net income (loss) $(24,552) $ 4,383 $(6,189)
Weighted average number of shares outstanding 61,944 60,997 54,683
Incremental shares from assumed conversion of stock options - 3,091 -
--------- ------- --------
61,944 64,088 54,683
--------- ------- --------
Diluted EPS $ (0.40) $ 0.07 $ (0.11)
========= ======= ========
53
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Impairment of Long-Lived Assets
On July 1, 2002, Concurrent adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which superseded the
accounting and reporting provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS 121"), and APB Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("APB
30"). Concurrent reviews long-lived assets quarterly and on an as needed basis
to determine if there has been any adverse circumstances that would cause
impairment, such as a significant change in legal factors or the business
climate or circumstances surrounding a certain class of assets that could
potentially cause impairment of that class of assets. As a result of these
reviews, since the inception of the adoption of this standard, Concurrent has
not recorded any impairment losses related to long-lived assets, except those
related to the restructuring activities in fiscal 2003, and therefore there has
been no material impact on Concurrent's Consolidated Statements of Operations or
financial condition as of and for the year ended June 30, 2003.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable,
inventories, prepaid expenses, accounts payable and short term debt approximate
fair value because of the short maturity of these instruments.
Fair value estimates are made at a specific point in time, based on the
relevant market information and information about the financial instrument.
These estimates are subjective in nature and involve uncertainties and matters
of significant judgment and therefore cannot be determined with precision.
Changes in assumption could significantly affect the estimates.
Income Taxes
Concurrent and its domestic subsidiaries file a consolidated federal income
tax return. All foreign subsidiaries file individual tax returns pursuant to
local tax laws. Concurrent follows the asset and liability method of accounting
for income taxes. Under the asset and liability method, a deferred tax asset or
liability is recognized for temporary differences between financial reporting
and income tax bases of assets and liabilities, tax credit carryforwards and
operating loss carryforwards. A valuation allowance is established to reduce
deferred tax assets if it is more likely than not that such deferred tax assets
will not be realized. Utilization of net operating loss carryforwards and tax
credits, which originated prior to Concurrent's quasi-reorganization in November
of 1991, are recorded as adjustments to capital in excess of par value.
Stock-Based Compensation
Concurrent has stock-based employee compensation plans and accounts for
these plans using Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations. For the year ended
June 30, 2003, Concurrent recognized $25,000 of stock compensation expense for
the issuance of restricted stock awards. There is no other expense recognized
in the reported net loss in fiscal 2003 for stock options issued. For fiscal
years 2002 and 2001, there is no stock-based employee compensation reflected in
reported net income (loss), as all options granted under those plans had an
exercise price equal to the market value of the underlying stock on the grant
date.
In accordance with SFAS Statement No. 148, "Accounting for Stock Based
Compensation-Transition and Disclosure-An amendment of FASB Statement No. 123"
("SFAS 148"), the following table illustrates the effect on net income (loss)
and earnings (loss) per share if the company had applied the fair value
recognition provisions of SFAS Statement No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), to stock-based employee compensation:
54
YEAR ENDED JUNE 30,
2003 2002 2001
--------- -------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss) as reported $(24,552) $ 4,383 $ (6,189)
Deduct: Total stock-based employee compensation
expense determined under the fair value method, net
of related taxes (6,458) (9,613) (7,870)
--------- -------- ---------
Pro forma net loss $(31,010) $(5,230) $(14,059)
========= ======== =========
Earnings (loss) per share:
Basic- as reported $ (0.40) $ 0.07 $ (0.11)
========= ======== =========
Basic-pro forma $ (0.50) $ (0.09) $ (0.26)
========= ======== =========
Diluted-as reported $ (0.40) $ 0.07 $ (0.11)
========= ======== =========
Diluted-pro forma $ (0.50) $ (0.09) $ (0.26)
========= ======== =========
Refer to note 15 for assumptions used in calculation of fair value.
Segment Information
Concurrent reports its operating results separately for both its Xstreme
division and its Integrated Solutions division in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131").
Comprehensive Income (Loss)
Concurrent reports comprehensive income (loss) in addition to net income
(loss) from operations as required by SFAS No. 130, "Reporting Comprehensive
Income". Comprehensive income (loss) is a more inclusive financial reporting
methodology that includes disclosure of certain financial information that
historically has not been recognized in the calculation of net income (loss).
Comprehensive income (loss) is defined as a change in equity during the
financial reporting period of a business enterprise resulting from non-owner
sources.
55
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Accumulated other comprehensive income (loss) consists of the following
components :
FOREIGN CURRENCY ACCUMULATED OTHER
TRANSLATION MINIMUM COMPREHENSIVE
ADJUSTMENTS PENSION LIABILITY INCOME (LOSS)
----------------- ----------------- ---------------
(DOLLARS IN THOUSANDS)
Balance at June 30, 2000 $ (1,032) $ - $ (1,032)
Other Comprehensive loss (967) (2,803) (3,770)
----------------- ----------------- ---------------
Balance at June 30, 2001 (1,999) (2,803) (4,802)
Other Comprehensive income (loss) 513 (1,599) (1,086)
----------------- ----------------- ---------------
Balance at June 30, 2002 (1,486) (4,402) (5,888)
Other Comprehensive income (loss) 915 (3,025) (2,110)
----------------- ----------------- ---------------
Balance at June 30, 2003 $ (571) $ (7,427) $ (7,998)
================= ================= ===============
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.
Reclassifications
Certain prior years' amounts have been reclassified to conform to the
current year's presentation.
3. INVESTMENTS IN AND RECEIVABLE FROM MINORITY OWNED COMPANIES
In March 2002, Concurrent purchased a 14.4% equity ownership interest in
Thirdspace Living Limited ("Thirdspace"). Thirdspace is a closely held United
Kingdom global software services corporation that offered interactive and
on-demand television solutions for DSL (digital subscriber line) and other
broadband networks. Concurrent invested cash of $4 million and issued 291,461
shares of its common stock (valued at $10.29 per share) in exchange for
1,220,601 series C shares of Thirdspace, giving Concurrent a 14.4% ownership
interest in all shares outstanding as of the investment date. As part of this
transaction, Concurrent capitalized approximately $300,000 in various
transaction costs and as a result, the total equity investment in Thirdspace was
$7.3 million. The resale of the 291,461 shares was registered under a resale
registration statement filed with the Securities and Exchange Commission and
declared effective on June 20, 2002. As of December 31, 2002, Thirdspace had
sold all of these shares. In exchange for its investment, Concurrent also
received a warrant for 400,000 series C shares of Thirdspace. The warrant
became exercisable on December 19, 2002. If the fair market value of the
warrant on the date of exercise is less than $5.73 per share, then the exercise
price will be the then current fair market value. If the fair market value of
the warrant on the date of exercise is equal to or greater than $5.73 per share,
then the exercise price will be the greater of $5.73 or 85% of the then current
fair market value. This investment was accounted for under the cost method of
accounting.
In addition to the equity investment, Concurrent also loaned Thirdspace $6
million in exchange for two $3 million long-term convertible notes receivable,
bearing interest at 8% annually, with interest payments first due December 31,
2002, and semi-annually, thereafter. The notes were convertible into Series C
shares of Thirdspace, at the option of Concurrent, beginning six months after
issuance (March 19, 2002 and September 3, 2002,
56
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
respectively) and may be converted at any time prior to 48 months after the
issuance of the notes. The notes are convertible based on the then fair market
value of the common stock. The first and second notes became convertible on
September 19, 2002 and March 3, 2003, respectively. Concurrent had a security
interest in all of Thirdspace's assets and in May 2003, Concurrent agreed to
relinquish its security interest in the intellectual property of Thirdspace in
return for proceeds received in conjunction with the sale of certain of
Thirdspace's assets in preparation for full liquidation of Thirdspace; however,
Concurrent remains a secured party in all other assets retained by Thirdspace.
In fiscal 2003, Concurrent recorded a $13.0 million net impairment charge
due to an other than temporary decline in the market value of the investment in
Thirdspace, which included a $6.1 million charge for the write-off of two $3
million notes receivable and related accrued interest. The impairment of the
investment and write-off of the related notes receivable and accrued interest
was based upon Thirdspace's deteriorating financial condition and actual
performance relative to expected performance, the status of Thirdspace's capital
raising initiatives, the market conditions of the telecommunications sector, the
uncertainty of the collectibility of the notes, the state of the overall economy
and the reduced market value of Thirdspace. In May 2003, Thirdspace sold the
majority of its assets to a third party. As a result of the sale of these
certain assets, Concurrent received $471,000 in proceeds, net of legal costs of
$75,000, and an additional $275,000 was placed in escrow for the benefit of
Concurrent, pending resolution of certain outstanding items. In return for these
proceeds, Concurrent relinquished its security interest in the intellectual
assets of Thirdspace; however, Concurrent still remains a secured party to all
other assets retained by Thirdspace. Although Thirdspace is currently in
liquidation proceedings, it is not possible at this time to determine the amount
or timing of receipt of any additional proceeds, including the $275,000 in
escrow, as part of the liquidation process. The net proceeds received to date of
$471,000 are recorded as a reduction to the impairment loss, which is recorded
in the line item Impairment loss on minority investment in the Consolidated
Statements of Operations. The value of the equity investment and notes
receivable and accrued interest were reduced to zero as of the third quarter of
fiscal 2003 and remain at zero on the June 30, 2003 Consolidated Balance Sheets,
and any further receipt of proceeds as part of the liquidation of Thirdspace
will be recorded as a reduction to the impairment loss in the line item
Impairment loss on minority investment in the Consolidated Statements of
Operations. As of June 30, 2003, Concurrent does not have any further funding
requirements or commitments related to these transactions with Thirdspace and
Concurrent also believes that the Thirdspace warrants have no value.
In April 2002, Concurrent invested cash of $500,000 in Everstream Holdings,
Inc. ("Everstream") in exchange for 480,770 shares of Series C Preferred stock
giving Concurrent a 4.9% ownership interest. Everstream is a privately held
company specializing in broadband advertising systems, software, infrastructure
and related integration services. Concurrent is accounting for its investment
in the Series C Preferred stock of Everstream using the cost method, as
Concurrent does not believe it exercises significant influence on Everstream.
This investment is reviewed quarterly for impairment, and as of June 30, 2003,
there has been no impairment of the Everstream investment.
All of Concurrent's equity investments and related notes receivable are
reviewed for impairment on a quarterly basis in accordance with Accounting
Principles Board Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock" and SFAS 115, "Accounting for Certain Investments
in Debt and Equity Securities", respectively.
During fiscal year 2003 and 2002, Concurrent purchased $50,000 and $90,000,
respectively, of equipment from Thirdspace. During fiscal year 2003 and 2002,
Concurrent sold equipment of $90,000 and $0 to Thirdspace, respectively.
In the ordinary course of business, Concurrent sells equipment to
Everstream and purchases consulting services from Everstream. During fiscal
year 2003 and 2002, Concurrent sold $0 and $49,000, respectively, of equipment
to Everstream and purchased $910,000 and $75,000, respectively, of consulting
services from Everstream.
57
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. PRIVATE PLACEMENT
In July 2001, Concurrent issued 5,400,000 shares of Common Stock in a
private placement. The net proceeds from the private placement were
approximately $24.0 million. The resale of the shares was registered under a
resale registration statement filed with the Securities and Exchange Commission
and declared effective on July 19, 2001.
5. RESTRUCTURING CHARGE
During the fourth quarter of fiscal 2003, the Board of Directors approved a
Restructuring Plan. The Restructuring Plan includes certain initiatives
designed to realign the company's resources in order to focus on more strategic
and immediate growth opportunities and to align the company's cost structure
with revenue projections. The decision to implement the initiatives under the
Restructuring Plan was due to certain economic and geographic circumstances in
the Integrated Solutions and Xstreme divisions and the state of the overall
global economic environment. As part of the Restructuring Plan, the following
actions were initiated, resulting in a total restructuring charge of $1.6
million recorded in the fourth quarter of fiscal 2003:
- Terminated 33 employees, or approximately 7% of Concurrent's current
global workforce in both the Integrated Solutions and Xstreme
divisions, and as a result, recorded a charge of $1.1 million related
to severance and other employee termination costs.
- Reduced office space in certain international facilities in France and
Japan, and as a result, recorded a charge of $0.3 million for
estimated lease cancellation costs, write-off of leasehold
improvements and facility restoration costs, all net of estimated
sub-lease rental income.
- Recorded charges for other restructuring costs of $0.2 million related
to the write-off of certain assets that were impaired as a result of
the restructuring initiatives.
This Restructuring Plan was accounted for and recorded in accordance with
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," and SFAS No. 144, "Accounting for the Impairment of or Disposal of
Long-Lived Assets", and other related interpretative guidance. Concurrent
adopted the provisions of SFAS No. 146, which is effective for transactions
initiated after December 31, 2002.
Restructuring related reserves are summarized as follows (in thousands):
TOTAL RESTRUCTURING
RESTRUCTURING NON-CASH CASH RESERVE AT
CHARGES CHARGES PAYMENTS JUNE 30, 2003
Workforce reduction $ 1,057 $ - $ 191 $ 866
Lease terminations 319 72 49 198
Other 227 202 - 25
-------------- -------------- --------- --------------
TOTAL $ 1,603 $ 274 $ 240 $ 1,089
============== ============== ========= ==============
Restructuring related charges for each division are summarized as follows (in
thousands):
LEASE TOTAL
WORKFORCE TERMINATION RESTRUCTURING
REDUCTION COSTS COSTS OTHER CHARGE
Integrated Solutions division $ 713 $ 257 $ 23 $ 993
Xstreme division 344 62 204 610
---------------- ------------ -------------- -------
TOTAL $ 1,057 $ 319 $ 227 $ 1,603
================ ============ ============== =======
58
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Domestic and international restructuring related charges are summarized as
follows (in thousands):
LEASE TOTAL
WORKFORCE TERMINATION RESTRUCTURING
REDUCTION COSTS COSTS OTHER CHARGE
Domestic $ 385 $ - $ 52 $ 437
International 672 319 175 1,166
---------------- ------------ -------------- -------
TOTAL $ 1,057 $ 319 $ 227 $ 1,603
================ ============ ============== =======
The $1.1 million accrued liability is recorded in the Consolidated Balance
Sheets under Accounts payable and accrued expenses and the $1.6 million of
expense is recorded in the Consolidated Statements of Operations under
Restructuring charge.
All activities under the Restructuring Plan and all cash payments are
expected to be complete by the end of fiscal 2004.
6. DISSOLUTION OF SUBSIDIARIES
During the year ended June 30, 2002, Concurrent made the decision to
dissolve its Belgium subsidiary, Concurrent Computer Belgium B.V./S.A. ("CCUR
Belgium") and its Singapore subsidiary, Concurrent Computer Far East Pte. Ltd.
("CCUR Singapore"). In connection with the decision to dissolve these
subsidiaries, Concurrent recorded a charge of $217,000 for the write-off of the
cumulative translation adjustment, the termination of an employee and other
miscellaneous costs. The charge was recorded as an operating expense in the
Consolidated Statements of Operations for the year ended June 30, 2002. The
final dissolution of CCUR Belgium and CCUR Singapore was complete as of June 30,
2003. During fiscal 2003, Concurrent made total cash payments of $156,000
related to the dissolution of CCUR Belgium and CCUR Singapore. The remaining
reserve of $49,000 was not necessary and therefore was reversed and as a result
there is no reserve recorded for the dissolution of either subsidiary as of June
30, 2003. During fiscal year 2002, Concurrent made cash payments of $7,000 and
had a remaining accrual of $205,000 at June 30, 2002.
7. INVENTORIES
Inventories consist of the following:
JUNE 30,
---------------------
2003 2002
----------- --------
(DOLLARS IN THOUSANDS)
Raw materials, net $ 5,933 $5,030
Work-in-process 1,024 1,633
Finished goods 217 159
----------- --------
$ 7,174 $6,822
=========== ========
At June 30, 2003 and 2002, some portion of Concurrent's inventory was in
excess of the current requirements based upon the planned level of sales for
future years. Accordingly, Concurrent had inventory valuation allowances for raw
materials of $3.0 million and $3.3 million to reduce the value of the inventory
to its estimated net realizable value at June 30, 2003 and 2002, respectively.
59
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
JUNE 30,
--------------------
2003 2002
--------- ---------
(DOLLARS IN THOUSANDS)
Leasehold improvements $ 3,032 $ 2,527
Machinery, equipment and customer support spares 35,076 33,228
--------- ---------
38,108 35,755
Less: Accumulated depreciation (26,246) (25,059)
--------- ---------
$ 11,862 $ 10,696
========= =========
For the years ended June 30, 2003, 2002 and 2001, depreciation and
amortization expense for property, plant and equipment amounted to $4,590,000,
$4,685,000 and $4,386,000, respectively.
9. GOODWILL AND OTHER INTANGIBLES
In accordance with SFAS 142, Concurrent discontinued the amortization of
goodwill effective July 1, 2001 and began testing goodwill for impairment at
least annually as required by SFAS 142. The impairment test has been performed
for fiscal years 2003, 2002, and 2001, and there has not been any impairment
charge as a result of these assessments. The goodwill for all years presented
relates to the Xstreme division and no amortization expense has been recorded
for fiscal years 2003 and 2002. A reconciliation of previously reported net
income and earnings per share to the amounts adjusted for the exclusion of
goodwill amortization is as follows:
YEAR ENDED JUNE 30,
----------------------------
2003 2002 2001
--------- ------- --------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Reported net income (loss) $(24,552) $ 4,383 $(6,189)
Add: Goodwill amortization - - 1,281
--------- ------- --------
Adjusted net income (loss) $(24,552) $ 4,383 $(4,908)
========= ======= ========
Basic income (loss) per share:
Reported net income (loss) $ (0.40) $ 0.07 $ (0.11)
Goodwill amortization - - 0.02
--------- ------- --------
Adjusted net income (loss) $ (0.40) $ 0.07 $ (0.09)
========= ======= ========
Diluted income (loss) per share:
Reported net income (loss) $ (0.40) $ 0.07 $ (0.11)
Goodwill amortization - - 0.02
--------- ------- --------
Adjusted net income (loss) $ (0.40) $ 0.07 $ (0.09)
========= ======= ========
Weighted average shares outstanding - basic 61,944 60,997 54,683
========= ======= ========
Weighted average shares outstanding - diluted 61,944 64,088 54,683
========= ======= ========
The goodwill balance as of June 30, 2003 and 2002 is $10.7 million. There
have been no additions or
60
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
impairment charges to the goodwill balance, and there has been no amortization
of goodwill as required under SFAS 142 for the years ended June 30, 2003 and
2002. Therefore, there have been no changes in the goodwill balance as of June
30, 2003 and 2002. All of the goodwill on the Consolidated Balance Sheets as of
June 30, 2003 and 2002 is allocated to the Xstreme division.
A summary of Concurrent's other intangible assets is as follows (in
thousands):
INTANGIBLE ASSETS
----------------------------------------------------------------
AS OF JUNE 30, 2003 AS OF JUNE 30, 2002
------------------------------- -------------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
--------------- -------------- --------------- --------------
AMORTIZED INTANGIBLE ASSETS
Purchased developed software $ 1,773 $ (570) $ 1,773 $ (380)
Other 311 (311) 311 (267)
--------------- -------------- --------------- --------------
Total $ 2,084 $ (881) $ 2,084 $ (647)
=============== ============== =============== ==============
The aggregate amortization expense for the years ended June 30, 2003, 2002, and
2001 was $234,000, $323,000, and $323,000, respectively. The estimated
amortization expense for the next five fiscal years for intangible assets is
$190,000 for each year. The amortizable assets lives ranges from 3-10 years.
Concurrent does not have any other unamortized intangible assets.
10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
JUNE 30,
----------------
2003 2002
------- -------
(DOLLARS IN THOUSANDS)
Accounts payable, trade $ 4,138 $ 5,351
Accrued payroll, vacation and
other employee expenses 4,760 5,872
Warranty accrual 2,131 2,272
Restructuring reserve 1,089 -
Other accrued expenses 2,526 2,019
------- -------
$14,644 $15,514
======= =======
61
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Our estimate of warranty obligations is based on historical experience and
expectation of future conditions. The changes in the warranty accrual during
fiscal 2003 and 2002 consist of the following (in thousands):
Balance at June 30, 2001 $ 977
Charged to costs and expenses 1,918
Deductions (623)
-------
Balance at June 30, 2002 2,272
Charged to costs and expenses 267
Deductions (408)
-------
Balance at June 30, 2003 $2,131
=======
11. REVOLVING CREDIT FACILITY
Concurrent had a revolving credit facility with a bank that expired on
December 31, 2002 and which provided for borrowings of up to $5 million.
Concurrent did not renew this credit facility and there were no borrowings
outstanding as of and for the year ended June 30, 2003.
12. INCOME TAXES
The domestic and foreign components of income (loss) before provision for
income taxes are as follows:
YEAR ENDED JUNE 30,
-----------------------------
2003 2002 2001
--------- -------- --------
(DOLLARS IN THOUSANDS)
United States $(18,374) $ 6,297 $(5,222)
Foreign (5,589) (1,914) (367)
--------- -------- --------
$(23,963) $ 4,383 $(5,589)
========= ======== ========
The components of the provision for income taxes are as follows:
YEAR ENDED JUNE 30,
--------------------
2003 2002 2001
----- ------ -----
(DOLLARS IN THOUSANDS)
Current:
Federal $ - $ - $ -
State 17 - -
Foreign (credit) 572 (338) 600
----- ------ -----
Total 589 (338) 600
----- ------ -----
Deferred:
Federal - - -
Foreign - 338 -
----- ------ -----
Total - 338 -
----- ------ -----
Total $ 589 $ - $ 600
===== ====== =====
62
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In May 2003, Concurrent reached a negotiated settlement with the Greek Tax
Authorities relating to a 1993 through 1995 audit of the company's Greek
subsidiary, which was sold in December of 1995. The amount of the settlement was
$390,000 and is included in the current foreign provision of $572,000.
A reconciliation of the income tax (benefit) expense computed using the
Federal statutory income tax rate to Concurrent's provision for income taxes is
as follows:
YEAR ENDED JUNE 30,
-----------------------------
2003 2002 2001
--------- -------- --------
(DOLLARS IN THOUSANDS)
Income (loss) before provision for
income taxes $(23,963) $ 4,383 $(5,589)
--------- -------- --------
Tax (benefit) at Federal statutory rate (8,147) 1,490 (1,899)
Change in valuation allowance 8,980 (3,733) (2,264)
Other permanent differences, net (244) 2,243 4,763
--------- -------- --------
Provision for income taxes $ 589 $ - $ 600
========= ======== ========
As of June 30, 2003 and 2002, Concurrent's deferred tax assets and liabilities
were comprised of the following:
JUNE 30,
--------------------
2003 2002
--------- ---------
(DOLLARS IN THOUSANDS)
Gross deferred tax assets related to:
U.S. and foreign net operating loss carryforwards $ 73,116 $ 70,621
Book and tax basis differences for reporting purposes 177 158
Other reserves 5,485 4,580
Accrued compensation 620 531
Impairment loss on minority investment 4,861 -
Other 3,311 2,171
--------- ---------
Total gross deferred tax assets 87,570 78,061
Valuation allowance (84,823) (76,104)
--------- ---------
Total deferred tax asset 2,747 1,957
Gross deferred tax liabilities related to
property and equipment/other 2,107 1,634
--------- ---------
Total gross deferred tax liability 2,107 1,634
--------- ---------
Deferred income taxes $ 640 $ 323
========= =========
As of June 30, 2003, Concurrent has U.S. Federal Tax net operating loss
carryforwards of approximately $171 million for income tax purposes which expire
at various dates through 2021. Any future benefits attributable to the U.S.
Federal net operating loss carryforwards which originated prior to Concurrent's
quasi-reorganization in November, 1991 are accounted for through adjustments to
the capital in excess of par value. Approximately $55
63
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
million of the net operating loss carryforwards originated prior to Concurrent's
quasi-reorganization in 1991.
Under Section 382 of the Internal Revenue Code, future benefits
attributable to the net operating loss carryforwards and tax credits which
originated prior to Concurrent's quasi-reorganization are limited to $1.0
million per year. Tax net operating losses in the amount of approximately $5
million that originated subsequent to Concurrent's quasi-reorganization through
the date of Concurrent's July, 1993 comprehensive refinancing ("1993
Refinancing") are limited to approximately $1.9 million per year. To the extent
that the unused tax net operating loss carryforwards can not be used in a given
year, whether limited or not, the unused amount can be carried forward and used
in future years until they expire.
The tax benefits associated with nonqualified stock options and
disqualifying dispositions of incentive stock options increased the federal net
operating loss carryforward by approximately $177,000 and $3.5 million for the
years ended June 30, 2003 and 2002, respectively. Such benefits will be recorded
as an increase to additional paid-in capital when realized.
Deferred income taxes have not been provided for undistributed earnings of
foreign subsidiaries, which originated subsequent to Concurrent's
quasi-reorganization, primarily due to Concurrent's required investment in
certain subsidiaries.
Additionally, deferred income taxes have not been provided on undistributed
earnings of foreign subsidiaries which originated prior to Concurrent's
quasi-reorganization. The impact of both the subsequent repatriation of such
earnings and the resulting offset, in full, from the utilization of net
operating loss carryforwards will be accounted for through adjustments to
capital in excess of par value.
The valuation allowance for deferred tax assets as of June 30, 2003 and
2002 was approximately $85 million and $76 million, respectively. The net change
in the total valuation allowance for the year ended June 30, 2003 was an
increase of approximately $8.7 million. The net increase in the total valuation
allowance for the year ended June 30, 2002 was approximately $1.3 million and
the net increase in the total valuation allowance for the year ended June 30,
2001 was approximately $2.8 million. In assessing the realizability of deferred
tax assets, Concurrent considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. As such, the deferred tax assets have been reduced by the valuation
allowance since Concurrent considers it more likely than not that these deferred
tax assets will not be realized.
13. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
Concurrent maintains a retirement savings plan (the "Plan") available to
U.S. employees which qualifies as a defined contribution plan under Section
401(k) of the Internal Revenue Code. Concurrent may make a discretionary
matching contribution up to 100% of the first 6% of employees' contributions.
For the years ended June 30, 2003, 2002 and 2001, Concurrent matched 100% of the
employees' Plan contributions up to 6%.
Concurrent's matching contributions under the Plan are as follows:
2003 2002 2001
------ ------ ------
(DOLLARS IN THOUSANDS)
Matching Contribution $1,424 $1,243 $1,120
64
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Certain foreign subsidiaries of Concurrent maintain pension plans for their
employees which conform to the common practice in their respective countries.
The related changes in benefit obligation and plan assets and the amounts
recognized in the consolidated balance sheets are presented in the following
tables:
Reconciliation of Funded Status
----------------------------------
JUNE 30,
------------------
2003 2002
-------- --------
(DOLLARS IN THOUSANDS)
Change in benefit obligation:
Benefit obligation at beginning of year $16,987 $15,361
Service cost 303 276
Interest cost 1,036 909
Plan participants' contributions 56 49
Actuarial loss (gain) 1,632 (486)
Foreign currency exchange rate change 1,677 1,493
Benefits paid (190) (615)
-------- --------
Benefit obligation at end of year $21,501 $16,987
======== ========
Change in plan assets:
Fair value of plan assets at beginning of year $12,001 $12,426
Actual return on plan assets (550) (1,268)
Employer contributions 394 323
Plan participants' contributions 56 49
Benefits paid (157) (586)
Foreign currency exchange rate change 1,145 1,057
-------- --------
Fair value of plan assets at end of year $12,889 $12,001
======== ========
Funded status $(8,612) $(4,986)
Unrecognized actuarial loss 7,518 4,441
Unrecognized prior service cost 190 199
Unrecognized net transition liability (asset) 69 (13)
-------- --------
Net amount recognized $ (835) $ (359)
======== ========
Amounts Recognized in the Consolidated Balance Sheets
-----------------------------------------------------
JUNE 30,
------------------
2003 2002
-------- --------
(DOLLARS IN THOUSANDS)
Accrued pension cost, net $(8,452) $(4,960)
Intangible asset 190 199
Accumulated other comprehensive loss 7,427 4,402
-------- --------
Net amount recognized $ (835) $ (359)
======== ========
65
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for pension plans with accumulated benefit obligations in
excess of plan assets were $21.5 million, $20.7 million and $12.9 million,
respectively, as of June 30, 2003, and $17.0 million, $16.3 million and $12.0
million, respectively, as of June 30, 2002.
Plan assets are comprised primarily of investments in managed funds
consisting of common stock, money market and real estate investments.
The assumptions used to measure the present value of benefit obligations
and net periodic benefit cost are shown in the following table:
Significant Assumptions
- ------------------------
JUNE 30,
----------------------------------------------
2003 2002 2001
-------------- -------------- --------------
Discount rate 5.25% to 5.50% 5.75% to 6.25% 6.00% to 6.25%
Expected return on plan assets 6.00% 5.75% to 6.00% 5.75% to 6.00%
Compensation increase rate 1.00% to 4.25% 3.50% to 4.25% 3.50% to 4.50%
Components of Net Periodic Benefit Cost
- ---------------------------------------
YEAR ENDED JUNE 30,
-----------------------
2003 2002 2001
------- ------ ------
(DOLLARS IN THOUSANDS)
Service cost $ 303 $ 276 $ 281
Interest cost 1,036 909 837
Expected return on plan assets (737) (750) (839)
Amortization of unrecognized net transition obligation (67) (63) (63)
Amortization of unrecognized prior service benefit 24 22 22
Recognized actuarial loss 188 71 (30)
------- ------ ------
Net periodic benefit cost $ 747 $ 465 $ 208
======= ====== ======
14. SEGMENT INFORMATION
For the years ended June 30, 2003, 2002 and 2001, Concurrent operated its
business in two divisions: Integrated Solutions (formerly the Real-Time
division) and Xstreme, in accordance with SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". Concurrent's Integrated
Solutions 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. Concurrent's Xstreme division is a leading supplier of digital
video server systems primarily to the broadband cable television market. Shared
expenses are primarily allocated based on either revenues or headcount. There
were no material intersegment sales or transfers. For the year ended June 30,
2003, one customer accounted for approximately 34% of total real-time revenue
and four customers accounted for approximately 32%, 20%, 14%, and 14% of total
VOD revenue, respectively. For the year ended June 30, 2002, one customer
accounted for approximately 25% of the total real-time revenue and two customers
accounted for approximately 57% and 24% of the total VOD revenue, respectively.
For the year ended June 30, 2001, one customer accounted for approximately 12%
of real-time revenue and three customers accounted for approximately 38%, 34%
and 12% of VOD revenue, respectively. There were no other customers in fiscal
years 2003, 2002 and 2001 that accounted for more than 10%
66
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
of revenue for either division. The following summarizes the operating income
(loss) by segment for the years ended June 30, 2003, 2002 and 2001,
respectively. Corporate costs include costs related to the offices of the Chief
Executive Officer, Chief Financial Officer, General Counsel, Investor Relations,
Human Resources and other administrative costs including annual audit and tax
fees, board of director fees and similar costs.
YEAR ENDED JUNE 30, 2003
----------------------------------------------
INTEGRATED
SOLUTIONS XSTREME CORPORATE TOTAL
----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
Revenues:
Product sales $ 19,417 $ 35,039 $ - $ 54,456
Service 17,474 3,523 - 20,997
----------- --------- ----------- ---------
Total 36,891 38,562 - 75,453
Cost of sales:
Product sales 7,817 17,851 - 25,668
Service 10,402 2,960 - 13,362
----------- --------- ----------- ---------
Total 18,219 20,811 - 39,030
----------- --------- ----------- ---------
Gross margin 18,672 17,751 - 36,423
Operating expenses
Sales and marketing 7,564 9,918 599 18,081
Research and development 5,343 13,432 - 18,775
General and administrative 1,738 2,008 5,647 9,393
Restructuring charge 993 610 - 1,603
----------- --------- ----------- ---------
Total operating expenses 15,638 25,968 6,246 47,852
----------- --------- ----------- ---------
Operating income (loss) $ 3,034 $ (8,217) $ (6,246) $(11,429)
=========== ========= =========== =========
67
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED JUNE 30, 2002
-----------------------------------------------
INTEGRATED
SOLUTIONS XSTREME CORPORATE TOTAL
----------- ----------- ----------- --------
(DOLLARS IN THOUSANDS)
Revenues:
Product sales $ 21,601 $ 46,900 $ - $68,501
Service 19,807 1,061 - 20,868
----------- ----------- ----------- --------
Total 41,408 47,961 - 89,369
Cost of sales:
Product sales 8,586 22,555 - 31,141
Service 11,588 2,074 - 13,662
----------- ----------- ----------- --------
Total 20,174 24,629 - 44,803
----------- ----------- ----------- --------
Gross margin 21,234 23,332 - 44,566
Operating expenses
Sales and marketing 6,877 9,521 586 16,984
Research and development 5,409 9,882 - 15,291
General and administrative 1,500 1,795 5,317 8,612
----------- ----------- ----------- --------
Total operating expenses 13,786 21,198 5,903 40,887
----------- ----------- ----------- --------
Operating income (loss) $ 7,448 $ 2,134 $ (5,903) $ 3,679
=========== =========== =========== ========
YEAR ENDED JUNE 30, 2001
-----------------------------------------------
INTEGRATED
SOLUTIONS XSTREME CORPORATE TOTAL
----------- ----------- ----------- --------
(DOLLARS IN THOUSANDS)
Revenues:
Product sales $ 25,740 $ 23,814 $ - $49,554
Service 23,267 - - 23,267
----------- ----------- ----------- --------
Total 49,007 23,814 - 72,821
Cost of sales:
Product sales 14,102 13,091 - 27,193
Service 12,608 - - 12,608
----------- ----------- ----------- --------
Total 26,710 13,091 - 39,801
----------- ----------- ----------- --------
Gross margin 22,297 10,723 - 33,020
Operating expenses
Sales and marketing 7,548 8,007 557 16,112
Research and development 3,493 8,086 - 11,579
General and administrative 1,748 2,635 6,537 10,920
----------- ----------- ----------- --------
Total operating expenses 12,789 18,728 7,094 38,611
----------- ----------- ----------- --------
Operating income (loss) $ 9,508 $ (8,005) $ (7,094) $(5,591)
=========== =========== =========== ========
68
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Summarized financial information for fiscal year 2003, 2002 and 2001,
respectively, is as follows:
AS OF AND FOR THE YEAR ENDED JUNE 30, 2003
----------------------------------------------
INTEGRATED
SOLUTIONS XSTREME CORPORATE TOTAL
----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
Net sales $ 36,891 $ 38,562 $ - $ 75,453
Operating income (loss) $ 3,034 $ (8,217) $ (6,246) $(11,429)
Identifiable assets $ 15,725 $ 35,229 $ 26,885 $ 77,839
Depreciation and amortization $ 1,517 $ 2,955 $ 352 $ 4,824
Capital expenditures $ 704 $ 4,365 $ 526 $ 5,595
AS OF AND FOR THE YEAR ENDED JUNE 30, 2002
----------------------------------------------
INTEGRATED
SOLUTIONS XSTREME CORPORATE TOTAL
----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
Net sales $ 41,408 $ 47,961 $ - $ 89,369
Operating income (loss) $ 7,448 $ 2,134 $ (5,903) $ 3,679
Identifiable assets $ 18,415 $ 54,198 $ 26,075 $ 98,688
Depreciation and amortization $ 2,289 $ 2,409 $ 310 $ 5,008
Capital expenditures $ 1,332 $ 3,122 $ 68 $ 4,522
AS OF AND FOR THE YEAR ENDED JUNE 30, 2001
----------------------------------------------
INTEGRATED
SOLUTIONS XSTREME CORPORATE TOTAL
----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
Net sales $ 49,007 $ 23,814 $ - $ 72,821
Operating income (loss) $ 9,508 $ (8,005) $ (7,094) $ (5,591)
Identifiable assets $ 19,179 $ 31,880 $ 5,993 $ 57,052
Depreciation and amortization $ 2,631 $ 2,746 $ 618 $ 5,995
Capital expenditures $ 978 $ 2,536 $ 247 $ 3,761
15. EMPLOYEE STOCK PLANS
Concurrent has Stock Option Plans providing for the grant of incentive
stock options to employees and non-qualified stock options to employees and
non-employee directors. The Stock Option Plans are administered by the
Compensation Committee. Under the plans, the Compensation Committee may award,
in addition to stock options, shares of Common Stock on a restricted basis. The
plan also specifically provides for stock appreciation rights and authorizes the
Compensation Committee to provide, either at the time of the grant of an option
or otherwise, that the option may be cashed out upon terms and conditions to be
determined by the Committee or the Board.
In April 2003, the Compensation Committee approved the issuance of 283,468
restricted shares of common stock to certain executives. The restrictions lapse
25% a year over a four year period as of the date of issuance. The fair value of
the restricted shares at the date of grant was $600,952 and was initially
recorded as unearned compensation as a component of equity, which will be
expensed over the period during which the restrictions lapse. Concurrent
recorded compensation expense of $25,000 for the year ended June 30, 2003, which
is recorded in the Consolidated Statements of Operations as an operating
expense. For fiscal years 2002 and 2001, there was no
69
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
restricted stock granted or outstanding. Options issued under the Stock Option
Plans generally vest over four years and are exercisable for ten years from the
grant date. The Company's 2001 Stock Option Plan became effective November 1,
2001 and replaced the 1991 Restated Stock Option Plan that expired on January
31, 2002. As of November 1, 2001 there were no options for shares of Common
Stock available for future grant under the 1991 Restated Stock Option Plan. The
2001 Stock Option Plan terminates on October 31, 2011. Stockholders have
authorized the issuance of up to 15,825,000 shares under these plans and at June
30, 2003 and 2002 there were 1,133,925 and 1,919,000 shares available for future
grants, respectively.
Changes in options outstanding under the plan during the years ended June
30, 2003, 2002, and 2001 are as follows:
2003 2002 2001
----------------------- -------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- ---------- ------------ ------ ----------- ------
Outstanding at beginning of year 5,803,144 $ 7.11 5,388,161 $ 6.00 5,681,521 $ 4.28
Granted 530,815 $ 2.22 1,750,000 $ 8.23 1,049,600 $12.03
Exercised (225,228) $ 2.44 (1,105,089) $ 3.21 (1,140,333) $ 3.17
Forfeited (266,383) $ 5.33 (229,928) $ 8.35 (202,627) $ 4.96
----------- ------------ -----------
Outstanding at year end 5,842,348 $ 6.92 5,803,144 $ 7.11 5,388,161 $ 6.00
=========== ============ ===========
Options exercisable at year end 3,834,886 3,149,444 2,638,708
=========== ============ ===========
Weighted average fair value
of options granted during
the year $ 1.87 $ 6.91 $ 10.37
=========== ============ ===========
The weighted-average assumptions used for the years ended June 30, 2003,
2002 and 2001 were: expected dividend yield of 0.0% for all periods; risk-free
interest rate of 3.0%, 4.3% and 5.0%, respectively; expected life of 6 years for
all periods; and an expected volatility of 111.4%, 108.9%, and 114.6%,
respectively.
70
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes information about stock options outstanding
and exercisable at June 30, 2003:
OUTSTANDING OPTIONS OPTIONS EXERCISABLE
------------------------------------------ ------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES LIFE AT JUNE 30, 2003 PRICE AT JUNE 30, 2003 PRICE
- ---------------------------------------------------------------------------------------
$0.37 - $0.99 4.18 221,166 $ 0.37 221,166 $ 0.37
$1.00 - $1.99 5.49 167,853 1.70 165,990 1.70
$2.00 - $2.99 5.88 1,414,439 2.37 1,010,499 2.45
$3.00 - $3.99 9.33 39,000 3.21 1,000 3.44
$4.00 - $4.99 5.66 298,000 4.41 298,000 4.41
$5.00 - $5.99 7.74 651,499 5.04 342,749 5.04
$6.00 - $6.99 8.73 639,000 6.83 182,750 6.79
$7.00 - $7.99 7.66 158,600 7.11 93,800 7.05
$8.00 - $8.99 6.15 148,290 8.00 147,540 8.00
$9.00 - $9.99 8.07 2,000 9.26 500 9.26
$10.00 - $10.99 6.37 507,833 10.13 506,333 10.12
$11.00 - $11.99 8.09 544,000 11.06 174,709 11.06
$12.00 - $12.99 7.27 822,001 12.38 502,681 12.38
$13.00 - $13.99 6.65 20,000 13.75 20,000 13.75
$14.00 - $14.99 8.41 32,000 14.10 8,000 14.10
$15.00 - $15.99 8.45 10,000 15.92 2,500 15.92
$17.00 - $17.99 7.19 25,000 17.83 16,668 17.83
$18.00 - $18.99 6.90 126,667 18.53 126,667 18.53
$19.00 - $19.99 6.88 15,000 19.48 13,334 19.52
---------------- ----------------
6.89 5,842,348 $ 6.92 3,834,886 $6.67
================ ================
71
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
16. ISSUANCE AND ACCRUAL OF NON-CASH WARRANTS
Comcast Cable Communications Inc. Warrants
On March 29, 2001, Concurrent entered into a definitive purchase agreement
with Comcast Cable, providing for the purchase of VOD equipment. As part of that
agreement Concurrent agreed to issue three different types of warrants.
Concurrent issued warrants to purchase 50,000 shares of its Common Stock on
March 29, 2001, exercisable at $5.196 per share over a four-year term. These
warrants are referred to as the "Initial Warrants". Concurrent has recognized
$224,000 in the Consolidated Statements of Operations for the year ended June
30, 2001 as a reduction to revenue for the value of these warrants.
Concurrent is also 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 specified performance goals which are measured by the
number of Comcast basic cable subscribers that have the ability to utilize the
VOD service. The incremental number of subscribers that have access to VOD at
each quarter end as compared to the prior quarter end multiplied by a specified
percentage is the number of additional warrants that were earned during the
quarter. These warrants are referred to as the "Performance Warrants".
Concurrent issued to Comcast a performance warrant for 4,431 shares on October
9, 2001, exercisable at $6.251 per share over a four-year term, a performance
warrant for 52,511 shares on January 15, 2002, exercisable at $15.019 per share
over a four-year term, and a performance warrant for 1,502 shares on August 10,
2002, exercisable at $5.707 over a four-year term.
The resale of the shares issuable upon exercise of the warrants to purchase
50,000 shares and 4,431 shares were registered under a registration statement
filed with the Securities and Exchange Commission and declared effective on
November 20, 2001.
Concurrent will also issue additional warrants to purchase shares of its
Common Stock, if at the end of any quarter the then total number of Comcast
basic cable subscribers with the ability to utilize the VOD system exceeds
specified threshold levels. These warrants are referred to as the "Cliff
Warrants".
Concurrent is recognizing the value of the Performance Warrants and the
Cliff Warrants over the term of the agreement as Comcast purchases additional
VOD servers from Concurrent and makes the service available to its customers.
Concurrent has recognized $62,000, $398,000, and $433,000 in the Consolidated
Statements of Operations for the years ended June 30, 2003, 2002, and 2001,
respectively, as a reduction to revenue for the value of the Performance
Warrants and Cliff Warrants that have been earned.
The value of the warrants is determined using the Black-Scholes valuation
model. The weighted-average assumptions used for the years ended June 30, 2003,
2002, and 2001: expected dividend yield of 0% for all three periods; risk-free
interest rate of 2.1%, 3.7% and 5.0%, respectively; expected life of 4 years in
all three periods; and an expected volatility of 113%, 117% and 138%,
respectively. Concurrent will adjust the value of the earned but unissued
warrants on a quarterly basis using the Black-Scholes valuation model until the
warrants are actually issued. The value of the new warrants earned and any
adjustments in value for warrants previously earned will be determined using the
Black-Scholes valuation model and recognized as part of revenue on a quarterly
basis.
The exercise price of the warrants 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 Concurrent's Common Stock. Based on the
information that is currently available, Concurrent does not expect the warrants
to be issued to Comcast to exceed 1% of its outstanding shares of Common Stock
over the term of the agreement. The exercise price of the warrants to be issued
to Comcast will equal the average closing price of Concurrent's Common Stock for
the 30 trading days prior to the applicable warrant issuance date and will be
exercisable over a four-year term.
72
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Scientific Atlanta, Inc. Warrants
A five-year definitive agreement was signed on August 17, 1998 with
Scientific-Atlanta, Inc. ("SAI") providing for the joint development and
marketing of a VOD system to cable network operators. In exchange for SAI's
technical and marketing contributions, Concurrent issued warrants for 2 million
shares of its Common Stock, exercisable at $5 per share for four years from the
date of issuance at which time the warrants expire, if not already exercised,
and recorded a charge of $1.6 million representing the fair value of the
underlying stock using the Black-Scholes valuation model. The weighted
assumptions used were: expected dividend yield 0%, risk-free interest rate of
5.0%, expected life of 4.01years and an expected volatility of 35%. As of June
30, 2003, the warrants had expired unissued.
The agreement further stipulates that Concurrent is required to issue
additional warrants to SAI upon achievement of pre-determined revenue targets.
These warrants are to be issued with a strike price of a 15% discount to the
then current market price. Concurrent issued warrants to purchase 261,164 shares
of its Common Stock on April 1, 2002, exercisable at $7.106 per share over a
four-year term. Concurrent has recognized charges of $275,000, $1,825,000 and
$398,000 in the Consolidated Statements of Operations for the years ended June
30, 2003, 2002 and 2001, respectively, representing the fair market value of the
warrants earned during each year. The value of these warrants could not exceed
5% of applicable revenue and the number of shares related to the warrant were
determined using the Black-Scholes valuation model and could not exceed 888,888
shares for every $30 million of revenue from the sale of VOD servers using the
SAI platform and the maximum number of additional shares that could be issued
under this agreement was 8 million. Concurrent accrued this cost as a part of
cost of sales at the time of recognition of applicable revenue in anticipation
of reaching the next $30 million threshold. As a result of not reaching the next
$30 million threshold by the August 17, 2003 deadline, it is likely Concurrent
will recognize a reduction of $1.3 million to cost of sales in the first quarter
of fiscal 2004.
17. RIGHTS PLAN
On July 31, 1992, the Board of Directors of Concurrent declared a dividend
distribution of one Series A Participating Cumulative Preferred Right for each
share of Concurrent's Common Stock. The dividend was made to stockholders of
record on August 14, 1992. On August 7, 2002, the Rights Agreement creating
these Rights was extended for another 10 years to August 14, 2012 and American
Stock Transfer & Trust Company was appointed as the successor rights agent
pursuant to an Amended and Restated Rights Agreement. Under the Rights
Agreement, each Right becomes exercisable when any person or group acquires 15%
of Concurrent's common stock. Such an event triggers the rights plan and
entitles each right holder to purchase from Concurrent one one-hundredth of a
share of Series A Participating Cumulative Preferred Stock at a cash price of
$30 per right.
Under certain circumstances each holder of a Right upon exercise of such
Right will receive, in lieu of Series A Participating Cumulative Preferred
Stock, common stock of Concurrent or its equivalent, or common stock of the
acquiring entity, in each case having a value of two times the exercise price of
the Right. The Rights will expire on August 14, 2012 unless earlier exercised or
redeemed, or earlier termination of the plan.
73
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
18. CONCENTRATION OF RISK
A summary of Concurrent's financial data by geographic area follows:
YEAR ENDED JUNE 30,
2003 2002 2001
--------- -------- --------
(DOLLARS IN THOUSANDS)
Net sales:
United States $ 64,586 $76,352 $55,400
Intercompany 3,121 3,528 3,310
--------- -------- --------
67,707 79,880 58,710
--------- -------- --------
Europe 5,484 6,650 7,572
Intercompany - - -
--------- -------- --------
5,484 6,650 7,572
--------- -------- --------
Asia/Pacific 4,918 5,899 9,128
Intercompany 13 - -
--------- -------- --------
4,931 5,899 9,128
--------- -------- --------
Other 465 468 721
--------- -------- --------
78,587 92,897 76,131
Eliminations (3,134) (3,528) (3,310)
--------- -------- --------
$ 75,453 $89,369 $72,821
========= ======== ========
Operating income (loss):
United States $ (6,042) $ 5,734 $(5,608)
Europe (3,518) (1,711) (448)
Asia/Pacific (1,841) (453) 155
Other 205 59 174
Eliminations (233) 50 136
--------- -------- --------
$(11,429) $ 3,679 $(5,591)
========= ======== ========
74
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30,
--------------------
2003 2002
--------- ---------
(DOLLARS IN THOUSANDS)
Identifiable assets:
United States $105,884 $124,849
Europe 11,239 11,571
Asia/Pacific 10,244 11,263
Other 1,171 774
Eliminations (50,699) (49,769)
--------- ---------
Total $ 77,839 $ 98,688
========= =========
Intercompany transfers between geographic areas are accounted for at prices
similar to those available to comparable unaffiliated customers. Sales to
unaffiliated customers outside the U.S., including U.S. export sales, were
$18,672,000 $13,433,000 and $18,354,000 for the years ended June 30, 2003, 2002
and 2001, respectively, which amounts represented 25%, 15% and 25% of total
sales for the respective fiscal years.
Sales to the U.S. Government and its agencies amounted to approximately
$18,183,000, $19,723,000 and $16,063,000 for the years ended June 30, 2003, 2002
and 2001, respectively, which amounts represented 24%, 22% and 22% of total
sales for the respective fiscal years.
Sales to three commercial customers amounted to $12,368,000 or 16% of total
sales, $12,312,000 or 16% of total sales, and $7,615,000, or 10% of total sales,
respectively, for the year ended June 30, 2003. Sales to three commercial
customers amounted to $27,364,000 or 31% of total sales, $11,507,000 or 13% of
total sales, and $10,524,000 or 12% of total sales, respectively, for the year
ended June 30, 2002. Sales to two commercial customers amounted to approximately
$8,962,000 or 12% of total sales and $8,072,000 or 11% of total sales,
respectively, for the year ended June 30, 2001. There were no other customers
during fiscal years 2003, 2002 or 2001 representing more than 10% of total
revenues.
Concurrent assesses credit risk through ongoing credit evaluations of
customers' financial condition and collateral is generally not required. There
were three customers that accounted for $2,363,000 or 21% of trade receivables,
$1,538,000 or 14% of trade receivables, and $1,087,000 or 10% of trade
receivables, at June 30, 2003. There were two customers that accounted for
$12,654,000 or 51% of total trade receivables and $3,468,000 or 14% of total
trade receivables at June 30, 2002.
75
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
19. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of quarterly financial results for the years
ended June 30, 2003 and 2002:
THREE MONTHS ENDED
------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
2002 2002 2003 2003
--------------- -------------- ------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2003
Net sales $ 22,141 $ 20,134 $ 17,648 $15,530
Gross margin $ 11,857 $ 9,605 $ 7,935 $ 7,026
Operating income (loss) $ 678 $ (1,997) $ (3,724) $(6,386) (3)
Net income (loss) $ 620 $ (4,665) (1) $(14,260) (2) $(6,247) (3)
Net income (loss) per share-basic $ 0.01 $ (0.08) (1) $ (0.23) (2) $ (0.10) (3)
Net income (loss) per share-diluted $ 0.01 $ (0.08) (1) $ (0.23) (2) $ (0.10) (3)
THREE MONTHS ENDED
------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
2001 2001 2002 2002
--------------- -------------- ------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2002
Net sales $ 14,102 $ 22,481 $ 25,028 $ 27,758
Gross margin $ 6,460 $ 10,080 $ 12,761 $ 15,265
Operating income (loss) $ (3,064) $ 62 $ 2,361 $ 4,320
Net income (loss) $ (3,010) $ 56 $ 2,304 $ 5,033
Net income (loss) per share-basic $ (0.05) $ 0.00 $ 0.04 $ 0.08
Net income (loss) per share-diluted $ (0.05) $ 0.00 $ 0.04 $ 0.08
(1) The net loss for the quarter ended December 31, 2002 includes an
impairment charge for the Thirdspace investment of $2.9 million.
(2) The net loss for the quarter ended March 31, 2003 includes an
impairment charge for the write-off of the remaining Thirdspace equity
investment and the write-off of the related notes receivable and
accrued interest, totaling $10.5 million.
(3) The operating loss and net loss for the quarter ended June 30, 2003,
includes a restructuring charge of $1.6 million.
76
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
20. COMMITMENTS AND CONTINGENCIES
Concurrent leases certain sales and service offices, warehousing, and
equipment under various operating leases. The leases expire at various dates
through 2009 and generally provide for the payment of taxes, insurance and
maintenance costs. Additionally, certain leases contain escalation clauses
which provide for increased rents resulting from the pass through of increases
in operating costs, property taxes and consumer price indexes.
At June 30, 2003, future minimum lease payments for the years ending June
30 are as follows:
CAPITAL OPERATING
LEASES LEASES TOTAL
--------- ---------- ------
(DOLLARS IN THOUSANDS)
2004 $ 101 $ 2,507 $2,608
2005 51 2,065 2,116
2006 - 1,614 1,614
2007 - 1,022 1,022
2008 - 554 554
2009 and thereafter - 260 260
--------- ---------- ------
152 $ 8,022 $8,174
========== ======
Amount representing interest (10)
---------
Present value of minimum
capital lease payments $ 142
=========
Rent expense under all operating leases amounted to $3,825,000, $3,612,000
and $3,406,000 for the years ended June 30, 2003, 2002 and 2001, respectively.
Concurrent, from time to time, is involved in litigation incidental to the
conduct of its business. Concurrent believes that such pending litigation will
not have a material adverse effect on Concurrent's results of operations or
financial condition.
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 one-year period, in an annualized amount equal to the
respective employee's base salary then in effect. At June 30, 2003, the maximum
contingent liability under these agreements is approximately $2.0 million.
Concurrent's employment agreements with certain of its officers contain certain
offset provisions, as defined in their respective agreements.
21. NEW ACCOUNTING PRONOUNCEMENTS
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The transition guidance and annual disclosure provisions of SFAS No.
148 are effective for Concurrent's fiscal 2003 annual
77
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
financial statements and all subsequent interim periods. Concurrent plans to
continue accounting for its stock option plans in accordance with the provisions
of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations, however, Concurrent implemented the
disclosure requirements under SFAS No. 148 in the quarter ended March 31, 2003.
In December 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including indirect
Guarantees of Indebtedness of Others," which provides for additional disclosures
to be made by a guarantor in its interim and annual financial statements about
its obligations and requires, under certain circumstances, a guarantor to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. Concurrent has adopted the
disclosure requirements for fiscal year ended June 30, 2003. Concurrent does
not expect the recognition and measurement provisions of Interpretation No. 45
for guarantees issued or modified after December 31, 2002, to have a material
impact on the consolidated financial statements.
22. SUBSEQUENT EVENT
On September 18, 2003, Concurrent received proceeds of $1.1 million as a
result of a partial liquidation of Thirdspace's remaining assets. The proceeds
of $1.1 million will be recorded as other income in the Consolidated Statements
of Operations in the first quarter ended September 30, 2003.
78
SCHEDULE II
CONCURRENT COMPUTER CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 2003, 2002 AND 2001
(DOLLARS IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND DEDUCTIONS AT END
DESCRIPTION OF YEAR EXPENSES (a) OF YEAR
----------- ----------- ------------ --------
Reserves and allowances deducted
from asset accounts:
2003
- ----
Reserve for inventory obsolescence
and shrinkage $ 3,276 $ 317 $ (589) $ 3,004
Allowance for doubtful accounts 965 28 (125) 868
Warranty accrual 2,272 267 (408) 2,131
2002
- ----
Reserve for inventory obsolescence
and shrinkage $ 3,481 $ 343 $ (548) $ 3,276
Allowance for doubtful accounts 860 484 (379) 965
Warranty accrual 977 1,918 (623) 2,272
2001
- ----
Reserve for inventory obsolescence
and shrinkage $ 4,034 $ 1,712 $ (2,265) $ 3,481
Allowance for doubtful accounts 484 590 (214) 860
Warranty accrual 668 780 (471) 977
(a) Charges and adjustments to the reserve accounts for write-offs and credits
issued during the year.
79
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CONCURRENT COMPUTER CORPORATION
By: /s/ Jack A. Bryant , III
------------------------------
Jack A. Bryant, III
President and Chief Executive Officer
Date: September 18, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of Registrant and in
the capacities indicated on September 18, 2003.
NAME TITLE
- ---- -----
/s/ Steve G. Nussrallah Chairman of the Board and Director
- -----------------------
Steve G. Nussrallah
President, Chief Executive Officer and Director
/s/ Jack A. Bryant, III (Principal Executive Officer)
- -----------------------
Jack A. Bryant, III
Executive Vice President, Chief Financial Officer and Secretary
/s/ Steven R. Norton (Principal Financial and Accounting Officer)
- -----------------------
Steven R. Norton
/s/ Alex B. Best Director
- -----------------------
Alex B. Best
/s/ Charles Blackmon Director
- -----------------------
Charles Blackmon
/s/ Michael A. Brunner Director
- -----------------------
Michael A. Brunner
/s/ Bruce N. Hawthorne Director
- -----------------------
Bruce N. Hawthorne
/s/ C. Shelton James Director
- -----------------------
C. Shelton James
80
EXHIBIT DESCRIPTION OF DOCUMENT
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 Registrants 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).
4.4 --Warrant to purchase 50,000 shares of common stock of the Registrant
dated March 29, 2001 issued to Comcast Concurrent Holdings, Inc.
(incorporated by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 2002).
4.5 --Warrant to purchase 4,431 shares of common stock of the Registrant
dated October 9, 2001 issued to Comcast Concurrent Holdings, Inc.
(incorporated by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 2002).
4.6 --Warrant to purchase 261,164 shares of common stock of the Registrant
dated April 1, 2002 issued to Scientific-Atlanta, Inc. (incorporated
by reference to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2002).
4.7 --Warrant to purchase 52,511 shares of common stock of the Registrant
dated January 15, 2002 issued to Comcast Concurrent Holdings, Inc.
(incorporated by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 2002).
4.8 --Warrant to purchase 1,502 shares of common stock of the Registrant
dated August 10, 2002 issued to Comcast Concurrent Holdings, Inc.
(incorporated by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 2002).
10.1 --1991 Restated Stock Option Plan (as amended as of October 26, 2000)
(incorporated by reference Exhibit A to the Registrant's Proxy
Statement dated September 18, 2000).
10.2 --Richard Rifenburgh Non-Qualified Stock Option Plan and Agreement
(incorporated by reference to the Registrant's Registration Statement
on Form S-8 (No. 333-82686)).
10.3 --Concurrent Computer Corporation 2001 Stock Option Plan (incorporated
by reference to Annex II to the Registrant's Proxy Statement dated
September 19, 2001).
81
10.4 --Form of Incentive Stock Option Agreement between the Registrant and
its executive officers (incorporated by reference to the Registrant's
Registration Statement on Form S-1. (No. 33-45871)).
10.5 --Form of Non-Qualified Stock Option Agreement between the Registrant
and its executive officers (incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 1997).
10.6 --Form of Employment Agreement between the Registrant and its
executive officers (incorporated by reference to of the Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1991).
10.7 --Amended and Restated Employment Agreement dated as of November 15,
1999 between the Registrant and Steve G. Nussrallah (incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended December 31, 1999).
10.8 --Employment Agreement dated as of October 28, 1999 between the
Registrant and Steven R. Norton (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended December 31, 1999).
10.9 --Employment Agreement dated as of July 10, 2000 between the
Registrant and Jack A. Bryant, III (incorporated by reference to the
Registrant's Annual Report on Form 10-K/A for the fiscal year ended
June 30, 2000).
10.10 --Employment Agreement dated as of December 13, 2000 between the
Registrant and Paul C. Meyer (incorporated by reference to the
Registrant's Annual Report on Form 10-K/A for the fiscal year ended
June 30, 2001).
10.11 --Employment Agreement dated as of November 26, 2001 between the
Registrant and Kirk Somers (incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 2002).
10.12 --Employment Agreement dated as of June 17, 2002 between the
Registrant and Steve Necessary (incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 2002).
10.13 --Employment Agreement dated as of June 27, 1996 between the
Registrant and Robert T. Menzel (incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 2002).
10.14 --Employment Agreement dated as of March 1, 1999 between the
Registrant and David Nicholas (incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 2002).
10.15 --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)
(incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 2001).
10.16 --Registration Rights Agreement, dated March 29, 2001, between the
Registrant and Comcast Concurrent Holdings, Inc. (incorporated by
reference to the Registrant's Registration Statement on Form S-3 (No.
333-72012)).
10.17 --Letter Amendment, dated October 22, 2001, to Registration Rights
Agreement between the Registrant and Comcast Concurrent Holdings, Inc.
dated March 29, 2001(incorporated by reference to the Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 2002).
82
10.18 --Registration Rights Agreement, dated March 19, 2002 between
Concurrent Computer Corporation and Thirdspace Living Limited
(incorporated by Reference to the Registrant's Current Report on Form
8-K filed on March 20, 2002).
10.19 --Share Purchase and Warrant Agreement, dated March 19, 2002 between
Concurrent Computer Corporation and Thirdspace Living Limited
(incorporated by Reference to the Registrant's Current Report on Form
8-K filed on March 20, 2002).
10.20 --Strategic Alliance Agreement, dated March 19, 2002 between
Concurrent Computer Corporation and Thirdspace Living Limited
(incorporated by Reference to the Registrant's Current Report on Form
8-K filed on March 20, 2002).
21.1* --List of Subsidiaries.
23.1* --Consent of Deloitte & Touche LLP.
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.
* Included herewith.
83