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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, 2004
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, SUITE 100, 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
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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. [X]
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
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As of August 23, 2004, there were 62,882,654 shares of Common Stock
outstanding. The aggregate market value of shares of such Common Stock (based
upon the last sale price of $1.81 per share as reported for August 23, 2004 on
the Nasdaq National Market) held by non-affiliates was approximately
$113,000,000.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Proxy Statement to be used in
connection with Registrant's 2004 Annual Meeting of Stockholders scheduled to be
held on October 20, 2004 are incorporated by reference in Part III hereof.
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PART I
Certain statements made or incorporated by reference in this Annual Report
on Form 10-K may constitute "forward-looking statements" within the meaning of
the federal securities laws. All forward-looking statements are subject to
certain risks and uncertainties that could cause actual events to differ
materially from those projected. The risks and uncertainties which could affect
our financial condition or results are discussed below under the heading "Risk
Factors". Our forward-looking statements are based on current expectations and
speak only as of the date of such statements.
ITEM 1. BUSINESS
OVERVIEW
We are a leading provider of computer and software systems for both the
video-on-demand, or VOD, market through our VOD division (formerly the Xstreme
division) and high-performance computing applications through our Integrated
Solutions Division, or ISD, (formerly the Real-Time division). Our VOD 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.
Our VOD systems enable broadband telecommunication providers, mainly cable
television systems, that have two-way capability to stream video content to
their digital subscribers with digital set-top boxes or personal computers.
Once enabled, the subscribers can view and control the video stream at any time
with familiar VCR-like functionality such as fast-forward, rewind, and pause.
We have been selected to supply our VOD systems to 87 cable markets. We
provided the VOD systems for the first successful commercial deployment of VOD
in 1999 and for some of the largest system-wide commercial deployments to date.
The largest cable companies in the U.S. have begun deploying VOD services to
their 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 38 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 information technology, simulation and
training, data acquisition, and industrial process control markets.
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 prior to November 15,
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2002, we have made these reports available as soon as reasonably practicable
after filing with the SEC. We have adopted a code of ethics that is applicable
to all employees as well as a code of ethics applicable to our principal
executive, financial, and accounting officers. Both of these ethics policies
are posted on our web site located at www.ccur.com. Copies will be furnished
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upon written request to the Company at the following address: Attn: Secretary,
4375 River Green Parkway, Suite 100, Duluth, Georgia 30096. If we amend or
change either code of ethics or grant a waiver under either code, we will
disclose these events through our website.
Financial information about our industry segments is included in Note 13 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
forward and reverse path bandwidth capability and digital equipment throughout
the cable network. These digitally upgraded systems are capable of carrying a
larger quantity of signals at a faster rate. As of May 2004,
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according to the National Cable Television Association, there were 108,410,160
households with televisions in the United States, approximately 102,900,000 of
these homes have access to cable, of these homes, 73,782,880 were basic cable
subscribers, while 22,900,000 of the basic were digital subscribers. Further,
many major movie studios, major television networks, premium channel providers,
and other program and content creators are converting their most popular titles
into a digital format making content available for VOD services.
We believe these and other 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 obtain and return
rentals and eliminates 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 analog channel
frequencies for delivering content.
- Free on-Demand. Some of our customers are providing free on-demand
content to their subscribers. There are two main purposes for this
initiative. First, free on-demand is an effective tool for creating
awareness and educating the subscriber of the capabilities of
on-demand television. Secondly, free on-demand is a service that
cannot be duplicated by satellite broadcasters, yet has consumer
appeal and, therefore, reduces subscriber churn.
- 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 on a hard disk drive for playback after the
"live" program began with VCR-like functionality on the saved content.
VOD does not require subscribers to pre-plan recording, purchase or
rent 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 more
economically and efficiently, whereas storage on a DVR device is
typically not as easy to increase.
- Advertising. VOD has enabled interactive long-format advertising and
has the potential to enable cable companies to target advertising and
offer further enhanced 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 from digital broadcast satellite providers, which are
technically unable to duplicate the full functionality of VOD. Further, we
believe VOD will provide cable and other telecommunication companies access to
new revenue generating opportunities, increase subscriber satisfaction and
reduce subscriber churn.
We believe that VOD also will be a strategic differentiator for telephone
companies as they seek to expand services beyond the delivery of voice.
Recently, cable companies have begun offering voice services and, thus,
competing for telephone company customers. In response, we expect that the
telephone companies will begin to expand into television and will deploy VOD for
the same reasons that cable companies have.
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 time-critical software and hardware technology. The solutions
we provide typically offer high-performance computation and high data
throughput, with predictable and repeatable responses to time-critical events.
Our computer systems and software are currently used in host, client server, and
embedded and distributed computing solutions. End uses of our products include
the following:
- Simulation and Training. Applications that utilize our core computing
systems include both man-in-the-loop (M-I-T-L) simulation and training
and hardware-in-the-loop (H-I-T-L) simulation. Examples of M-I-T-L
applications are personnel training simulators for commercial and
military aviation, vehicle operation, mission planning and rehearsal.
H-I-T-L solutions are constructed to create accurate simulations to
verify hardware designs for applications such as engineering design
for power plants, avionics and automotive subsystems.
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- Data Acquisition. Applications that run on our systems include
environmental analysis and display, engine testing, range and
telemetry systems, shock and vibration testing, weather satellite data
acquisition and forecasting, intelligence data acquisition and
analyses, and command and control.
- Industrial Process Control. Applications such as plant monitoring and
control systems that ensure safety and reliable operation in
industrial environments. Examples are gas and oil pipeline
supervision, power plant control systems, and manufacturing
monitoring.
- Information Technology. Data processing applications that require high
reliability and time-critical response to user action with minimal
interrupt latency such as applications used for stock and bond trading
and other financial transaction systems.
- Other Markets. Concurrent has recently expanded its focus to include
other markets that require time-critical solutions such as medical
imaging, air traffic control and telecommunications test systems.
BUSINESS STRATEGY
VIDEO-ON-DEMAND DIVISION
Our VOD strategy is comprised of the following primary initiatives:
- Maintain Existing and Establish New Relationships with Top North
American Cable and Telecommunication Companies. We have been selected
to supply VOD systems for 87 markets. Our primary North American
customers include, in alphabetical order, Blue Ridge Communications,
Bright House Networks, Charter Communications, Inc., Cogeco, Inc.,
Comcast Corporation, Cox Communications, Inc., Knology, Inc., Mediacom
Communications Corporation, Time Warner, Inc., and Videotron Ltee. We
intend to focus on continuing to serve these customers and add to our
customer base by providing the product innovations and customer
support that we believe the cable and other telecommunication
companies need to succeed. Additionally, we are focusing our sales
team on new opportunities in new markets within our existing customer
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,
Liberate, Microsoft Corporation, NDS Group plc, N2 Broadband, Inc.,
Panasonic Consumer Electronics Company, TVGateway, LLC, and others.
Additionally, we support and partner with providers of network
equipment such as Scientific-Atlanta, Inc., Motorola, Inc., Alcatel,
Ciena Corporation, Harmonic, Inc., BigBand Networks, 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 VOD
systems that may be utilized for targeted advertising.
- Focus on International Cable and Telecommunications Markets. The
rollout of residential VOD service internationally over both cable
television systems and DSL-based networks is progressing. We have been
selected for four (Cable and Multimedia Communications Ltd., EM Media
Corporation, Jupiter Communications Inc., and Korea Digital Media
Center) commercial trials in Asia and have seen an increase in quoting
activity over the past 12 months. We believe that over the next 12-18
months, there is potential for additional international VOD
deployments. Additionally, we have executed an agreement with Alcatel
establishing Concurrent as Alcatel's preferred VOD solution on the
Alcatel platform for resale throughout the world. Integration of
Concurrent's VOD products with the Alcatel platform has progressed
well, and we anticipate deployments in the next 12-18 months. We will
continue to pursue relationships with international cable companies
and other telecommunication companies in order to take advantage of
opportunities as they arise.
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- 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, storage and content ingest flexibility,
asset management, encryption techniques, network based digital video
recorder applications, software clients, advertising applications,
time shifted programming, business management software, 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 Unix system offerings and investing in our
open-source RedHawk(TM) Linux(R) operating system and our iHawk(TM) Intel
integrated computer system solutions.
RedHawk(TM) Linux(R) is a real-time operating system that incorporates a
number of enhancements to Linux that make it a powerful real-time,
multi-processing operating system for time-critical applications. RedHawk also
maintains third-party software compatibility with Red Hat(TM) 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-Xeon and AMD Opteron based servers
available in single, dual, quad-, and 8-way processor models. iHawks are
available in a wide-range of configurations that include our popular Real-Time
Clock and Interrupt module as well as the optional NightStar(R) tool suite. We
expect that the on-going introduction of a wide-range of Intel and AMD servers
running RedHawk Linux will allow us to compete for a broader range of business
opportunities.
CONCURRENT FEDERAL SYSTEMS
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. In order to gain greater efficiencies,
we have decided to consolidate this business into our Integrated Solutions
Division.
PRODUCTS AND SERVICES
Our products fall into two principal groups, VOD systems sold by our VOD
division and high performance computers sold by our Integrated Solutions
Division. In addition, both divisions provide technical support to our
customers. The percentage of total revenue contributed by our VOD division's
products, our ISD products and service offerings are discussed in Management's
Discussion and Analysis of Financial Condition and Results of Operation in this
Annual Report on Form 10-K.
VIDEO-ON-DEMAND DIVISION PRODUCTS
For the majority of our deployments, our VOD system may be located at the
cable operator's 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 certain piece of
video content from an on-screen menu, a dedicated 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 hybrid-fiber-coaxial (HFC)
network. The selected video content is accessed from the video server where it
is stored at either a headend or a hub. The purchase is typically 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,
back-office software and readily available commercial hardware platforms to
provide interactive, VOD capabilities. Our VOD systems include the following:
- MediaHawk(R) 4G On-Demand Platform. In June 2003, we began shipping
our fourth generation of servers, the MediaHawk 4G On-Demand Platform.
This platform is based on our extensive software running on commercial
off-the-shelf hardware sourced from leading OEM suppliers. It consists
of the MediaHawk 4000 Video Server, the Media Store 1000 storage
system and the Media Matrix switching fabric. We
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believe that using proven off-the-shelf hardware provides a highly
reliable platform with what we believe to be a superior cost basis. We
believe that we are the only major VOD vendor to separate streaming,
storage, and content capture to maximize flexibility and scalability.
We believe our three dimensional, modular approach provides our
customers with the ability to better manage their initial deployments,
add-on expansion, and proliferation of new services. The highly
scaleable MediaHawk 4G works with legacy MediaHawk family products,
enabling our customers to seamlessly grow their VOD streaming
capabilities. As of June 30, 2004, we had shipped a total of 1,820
MediaHawk servers totaling 548 thousand streams in deployments serving
16.6 million basic subscribers.
- Resource Manager. Our resource manager establishes the network
connection that allows 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 System. Our Real Time Media System enables our
customers to capture broadcast television programming at the time of
broadcast and simultaneously digitally encode, store and propagate the
captured programs for future viewing by subscribers.
- Web Reports(TM). Our Web Report software puts our customers directly
in touch with our Business Management System to obtain real-time VOD
subscriber information via the internet, at their convenience from
anywhere in the world. Operators can obtain customized reports on
their network and information on VOD orders/purchases, usage, and
content.
- Data Mart(TM). A companion product to Web Reports, this software
application provides a data warehousing capability that stores two or
more years of anticipated usage data.
- Client. Our client is a software module with very small memory and
processor requirements that resides on each digital set-top-box,
empowering the subscriber to browse and select on-demand content with
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.
- 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, Pace Micro, Samsung and
Matsushita 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 that enables subscribers to view on-demand content from providers
such as HBO, Showtime or Starz without a transaction fee. SVOD is not
a service that can be economically offered by direct broadcast
satellite, and we believe it is providing cable companies with a
competitive advantage by building greater subscriber satisfaction and
retention.
- Fault Tolerant System Designs. Through the use of proven commercial
off-the-shelf hardware and industry standard storage area network
(SAN) methodology, our VOD systems are designed to be highly fault
resilient as not to impact the subscriber experience. Our design goals
are to provide seamless end-user viewing without any interruption.
- Intelligent 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
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feature enables the most efficient streaming and storage of content.
We have applied for a patent to protect our developments in this area.
VIDEO-ON-DEMAND DIVISION SERVICES
Our integration and support offerings are an essential piece of
successfully deploying and maintaining VOD services. A VOD system has multiple
interface points with other network elements; e.g., transport equipment, set-top
boxes, conditional access, clients, 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:
- 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 or AMD Opteron based servers feature
the RedHawk Linux operating system and our Real-Time Clock & Interrupt
Module. iHawk systems are extensively deployed in simulation, data
acquisition and industrial process control applications, and satisfy
scientific and other complex computing requirements.
- ImaGen(TM). ImaGen is our imaging platform for simulation and modeling
applications that require enhanced realism and the ability to process
very large amounts of input data. Typical ImaGen imaging applications
include civil and military simulation, mission planning, homeland
security, scientific and medical visualization, architectural design,
energy exploration and entertainment.
- Power Hawk(R) 700 and 900. Power Hawk is our family of
highly-scalable, advanced VME 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
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(TM) Tools. The NightStar development tools help users debug
and analyze their application software running under both the PowerMAX
and RedHawk Linux operating systems.
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INTEGRATED SOLUTIONS DIVISION SERVICES
Customer Support. We offer worldwide hardware and software maintenance and
support services for our ISD products and for the products of other computer and
peripheral suppliers used in our systems. 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, 2004, on a consolidated basis, we had 89 employees
in our sales and marketing force, which includes sales, sales support,
marketing, strategic communications, product management, program management, and
business development.
VIDEO-ON-DEMAND 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 telecommunication providers. Our
domestic sales force has significant experience as either prior employees of, or
vendors to, the largest domestic cable companies. Outside the North American
cable market, we have a direct sales team that is augmented by value added
resellers and systems integrators. As of June 30, 2004, we employed 44 people
worldwide as part of our VOD sales and marketing team.
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. We have direct sales facilities in France,
England, Germany, Australia, Hong Kong and Japan. As of June 30, 2004, we
employed 45 people worldwide as part of our ISD 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 ISD and VOD systems at June 30, 2004 and 2003 totaled $2.6 million
and $2.0 million, respectively. In addition, we had deferred revenue of $14.8
million and $7.6 million at June 30, 2004 and 2003, 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 and Time Warner for calendar 2004. 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.
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VIDEO-ON-DEMAND 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 Comcast (32%) and Cox (10%) for
the fiscal year ended June 30, 2004; Time Warner (16%) and Comcast (10%) for the
year ended June 30, 2003; and Time Warner (31%) and Cox Communications (13%) for
the fiscal year ended June 30, 2002. No other VOD division customer accounted
for more than 10% of total revenue during the last three fiscal years.
INTEGRATED SOLUTIONS DIVISION
Lockheed-Martin accounted for 13%, 16%, and 12% of total revenues in the
fiscal years ended June 30, 2004, 2003, and 2002, respectively. No other ISD
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
iHawk, 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, 2004 and 2003, we recorded $14.2 million and
$18.2 million in revenues to U.S. government prime contractors and agencies of
the U.S. government, representing 18% and 24% of total sales for the period,
respectively. 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 $20.0 million, $18.8 million, and $15.3
million in fiscal years 2004, 2003, and 2002, respectively.
VIDEO-ON-DEMAND DIVISION
Our research and development strategies with respect to our VOD solutions
are focused on the following:
- 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.
- Network Digital Video Recorder Technology. This technology allows 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 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 enables 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 has already been 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.
- Targeted Barker. This in-band software application enables the
operator to use more video to sell content through the menu and
enhance on-demand navigation with more graphically rich backgrounds
that intermix full motion video with menu backgrounds. This technology
provides the subscriber with the ability to
8
'window-shop' their on demand content without excessive investment in
additional time or bandwidth by the operators.
- High Definition VOD. We have added 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.
- 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.
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 continue to plan to offer systems based Intel 32-bit
processor technology and will expand our offering with new AMD Opteron
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 plan to continue to enhance our RedHawk Linux
real-time operating system to provide increased determinism for
time-critical applications.
- RT-LAB RLX Simulation. We have entered into an engineering alliance
with Opal-RT whereby Opal-RT has made their automotive data
acquisition testing product available on our RedHawk Linux based
systems. The Concurrent product is called RT-LAB RLX and will allow
engineers to use mathematical block diagrams for design, simulation,
control and related functions. RT-LAB RLX offers a scalable,
high-performance, environment for the most demanding of hard-real-time
simulations such as for internal combustion engines, hydraulic
systems, car dynamics and flexible multi-body mechanical systems, as
well as electrical and power electronic systems.
- Image Generation. ImaGen is our imaging platform for simulation and
modeling applications that require enhanced realism and the ability to
process very large amounts of input data. We are developing this
PC-based product based on visual software from Multigen-Paradigm Inc.
These image generation systems will directly address the requirements
of the simulation and training and other markets. Typically we have
provided only the "host computer" component of training systems. This
new product will allow us to compete for the visual subsystems.
- Laboratory Workbench(TM). Laboratory Workbench (LWB) is a
high-performance graphical user interface data acquisition software
package for iHawk multiprocessing systems. LWB's easy-to-use,
point-and-click interface allows users to acquire, process, display
and record analog data without the need for programming. A set of
symbolic icons and graphic displays represent data acquisition
devices, file operations, signal processing tasks and display options.
COMPETITION
Both our VOD and Integrated Solutions Divisions operate in
highly-competitive environments, driven by rapid technological innovation. Both
divisions compete based upon features, reliability, scalability, 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 VOD division currently include the following:
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- 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., Myrio, Arroyo, Akimbo, Bitband, Video Propulsion,
Orca, Minerva, Silicon Graphics, Inc and others. We believe that we
and SeaChange International Inc. are the leaders in the North American
cable VOD market based on the number of 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., and Mercury, Inc.
- companies providing competitive offerings on the Linux platform
including RedHat, Inc., MontaVista Software, Inc., FSMLabs, Inc.,
SuSE, Inc. and TimeSys Corporation.
- companies involved in data acquisition including dSpace and ADI
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 ISD 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
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, patent 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 eight patent
applications pending in the United States and four 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, now owned by Alcatel (13 patents, 29 patent applications, and all
additions, divisionals, continuations, continuations-in-
10
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
circuits and storage devices. We purchase product components from the following
single suppliers: APW Electronic Solutions, Dell Corporation, DME Corporation,
Kardios Systems Corporation, Macrolink, Inc., Metal Form, Inc., Qlogic
Corporation, Synergy Microsystems, Inc., Sanmina-SCI Corporation, Seagate
Technology, Inc., Tyco Electronics Corporation, VMIC Corporation and Xyratex
Technology Limited. 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 and ISD businesses, 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. We believe that orders for ISD products are dictated by buying
cycles of the government and large government contractors. In addition, in both
divisions, orders are often not finalized until the end of a quarter. We do
not believe seasonality is a significant factor at this time.
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, 2004, we had 425 employees worldwide. Of these employees,
357 were located in the United States and 68 were located internationally. We
had 169 employees in our VOD division, 169 employees in our Integrated Solutions
Division, and 87 employees as shared services between the two divisions. The
shared
11
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, 2004, 2003, and 2002 is presented in Note 17 to
the consolidated financial statements included herein. Financial information
about our foreign operations is included in Note 17 to the consolidated
financial statements included herein.
RISK FACTORS
The following are some of the risk factors we face.
You should carefully consider each of the following risk factors and all of
the other information in this Annual Report on Form 10-K. These risks are not
the only ones we face. Our business operations could also be impaired by
additional risks and uncertainties that, at present, are not known to us, or
that, at present, are considered immaterial.
If any of the following risks and uncertainties develops into actual
events, our business, financial condition and results of operations could be
materially and adversely affected. If that happens, the trading prices of our
common stock and other securities we may issue in the future could decline
significantly.
The risk factors below contain forward-looking statements regarding
Concurrent. Actual results could differ materially from those set forth in the
forward-looking statements. See "Cautionary Statements Regarding
Forward-Looking Statements" on page 39.
RISKS RELATED TO OUR BUSINESS
A SIGNIFICANT PORTION OF OUR VOD REVENUE IS DERIVED FROM, AND IS EXPECTED TO
CONTINUE TO DERIVE 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, 2004, Comcast and Cox accounted for
approximately 32% and 10%, respectively, of our revenues. If we are
unsuccessful in maintaining and expanding key relationships with these and other
existing customers, 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.
Due to our limited customer base and the relative size of each customer
compared to Concurrent, our customers may make unreasonable and extensive
demands upon our business. Such demands may include service obligations and
product obligations and our failure to adequately perform such could result in
liquidated damages. The payment of any liquidated damages or failure to meet
our customers' expectations could substantially harm our future business
prospects.
Except for our agreement with Time Warner for calendar year 2004, we do not
have written agreements that require customers to purchase fixed minimum
quantities of our VOD 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.
A SIGNIFICANT PORTION OF OUR ISD REVENUE HAS BEEN, AND IS EXPECTED TO CONTINUE
TO BE, CONCENTRATED IN A SMALL NUMBER OF CUSTOMERS. IF WE LOSE ONE OR MORE
SIGNIFICANT ISD CUSTOMERS, OUR BUSINESS WOULD BE ADVERSELY AFFECTED.
We currently derive, and expect to continue to derive, a significant
portion of our ISD 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.
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In the fiscal year ended June 30, 2004, we recorded $10.3 million in sales
to Lockheed-Martin. This amount accounted for approximately 13% of our revenue
during fiscal year 2004.
Except for our agreement with Lockheed-Martin, we do not have written
agreements that require customers to purchase fixed minimum quantities of our
ISD 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.
A LOSS OF OUR GOVERNMENT CONTRACTS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS.
We also derive a significant portion of our ISD's revenues from the supply
of systems under government contracts. For the fiscal year ended June 30, 2004,
we recorded $14.2 million in sales to U.S. government prime contractors and
agencies of the U.S. government. This amount represents approximately 18% of
our total 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.
WE INCURRED NET LOSSES IN THE PAST AND MAY INCUR FURTHER LOSSES IN THE FUTURE.
We incurred net losses of $5.7 and $24.6 million in fiscal years ended June
30, 2004 and 2003, respectively. Our net loss for the fiscal year ended June
2004 included a gain of $3.1 million from the partial recovery of a previously
recognized loss in a minority investment. Our net loss for the fiscal year
ended June 30, 2003 included 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, 2004, we had an accumulated deficit of approximately $128.7 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' VOD offerings to fail for a period of time or be degraded.
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.
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. 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.
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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.
IT IS DIFFICULT TO EVALUATE OUR BUSINESS AND PROSPECTS BECAUSE OF DECLINES IN
OUR ISD BUSINESS AND THE DEVELOPING NATURE OF THE VOD MARKET. OUR NET SALES OF
ISD SYSTEMS AND SERVICES HAVE DECREASED SIGNIFICANTLY OVER THE PAST EIGHT 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 eight
full fiscal years, we have experienced a decline in ISD systems and service net
sales from $108.4 million for the fiscal year ended June 30, 1997 to $33.1
million for the fiscal year ended June 30, 2004. Revenues for VOD systems
increased from $1.2 million for the fiscal year ended June 30, 1999 to $46.1
million for the fiscal year ended June 30, 2004.
Over the past decade, the high performance 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
ISD products and services over the last several years.
This decline in our ISD revenue together with the developing 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 developing 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 OPPORTUNITIES BEYOND THE NORTH AMERICAN CABLE MARKET, SUCH AS VOD OVER
DSL, STREAMING VIDEO OVER INTERNET PROTOCOL AND INTERNATIONAL CABLE AND DSL/IP
MARKETS MAY NOT DEVELOP OR MAY NOT BE SUBSTANTIAL TO CONCURRENT.
In recent years there have been several false starts both in North American
and International markets in the deployment of video over DSL and IP streaming.
If there is limited adoption of VOD, further deployment delays or we do not
execute to enable our participation in these new markets, we may not be able to
broaden our customer base and expand revenues. We have little commercial
experience in these markets and cannot assure that we can be successful. Our
failure to do so could materially adversely affect our business, operating
results and financial condition.
AS VOD TECHNOLOGY HAS STABILIZED, THE VOD VENDOR SELECTION PROCESS HAS BEEN
PUSHED OUT, IN SOME CASES, TO THE REGIONAL AND LOCAL MANAGEMENT LEVELS.
The sales process for selling our VOD platform has transitioned from a
centralized VOD vendor selection process to a more distributed vendor selection
process. Our sales resources are limited, and as the selection process is
pushed out to regional and local management teams, it is very difficult for our
sales organization to establish and maintain productive relationships across all
of these levels. Our inability to nurture productive relationships at all
levels within our customers' organizations could significantly hinder our
ability to effectively market and sell our products.
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.
14
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:
- 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 and price reduction;
- our ability to control costs;
- deferrals of customer orders in anticipation of product enhancements
or new products;
- delays in testing and introductions of new products;
- failure to effectively service the installed base;
- decisions by our customers to move to a competitor's platform at an
already deployed site;
- contractual obligations that could require the payment of liquidated
damages, heighten maintenance requirements and otherwise impact
revenue recognition;
- delays or cancellations of customer orders;
- various inventory risks due to changes in market conditions; and
- our inability to forecast customer spending.
TRENDS IN OUR VOD AND ISD 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 and ISD businesses, and it
is possible that these variations will continue. We believe that fluctuations
in the number of orders for our products being placed from quarter to quarter
are principally attributable to the buying patterns and budgeting cycles of our
customers. 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 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 ISD 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 maturing. 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. The traditional market for our ISD products,
although mature, is ever changing. As the demand shifts, we may be unable to
adequately respond to customer demands or technology changes. There may be new
entrants into the ISD market with better, more appropriate products. 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, 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 both of our operations. Our anticipated growth
could place a strain on our management systems and other resources or we may
hire faster than the anticipated growth, causing us to undergo a reduction in
force. 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,
15
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 IS DEPENDENT ON OUR DEVELOPMENT AND MARKETING OF 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. Although delivery of VOD over
digital subscriber lines currently is not widely practical in the United States,
we will look for opportunities in (1) the North American market as digital
subscriber line technology continues to advance (2) the international market
where digital subscriber line technology is further advanced. There can be no
assurance that we will be successful in pursuing any North American or
International digital subscriber line opportunities.
WE RELY ON A COMBINATION OF CONTRACTS AND COPYRIGHT, TRADEMARK, PATENT 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, such as Acacia Technologies Group, Personalized Media Communication
L.L.C., the SCO Group, and 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.
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: APW Electronic Solutions, Dell Corporation, DME Corporation,
Kardios Systems Corporation,
16
Macrolink, Inc., Metal Form, Inc., Qlogic Corporation, Synergy Microsystems,
Inc., Sanmina-SCI Corporation, Seagate Technology, Inc., Tyco Electronics
Corporation, VMIC Corporation and Xyratex Technology Limited. In most cases,
comparable products are available from other sources, but would require
significant reengineering to conform to our system specifications. 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 year period originally
planned, and, as a result, may adversely affect our financial results for that
particular period.
AS OUR PRODUCTS AGE, WE MAY NOT BE ABLE TO PURCHASE NECESSARY PARTS TO SUPPORT
LEGACY SYSTEMS DEPLOYED OR TO BE DEPLOYED.
Our products are beginning to age, especially our ISD products. With the
passage of time, suppliers of essential parts may stop producing these parts.
In such cases, we may be required to make "last-time" buys and subsequently
redesign our products to accommodate the obsolescence. If that occurs, we will
have to spend considerable effort in the redesign and, in some cases, may be
forced to have the redesigned products requalified. Requalification may take
several months, thereby delaying expected revenue.
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. In the
last twelve months we have lost key individuals in sales, product management,
and system engineering. 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 ALCATEL, SCIENTIFIC-ATLANTA,
MOTOROLA, 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.
INTERNATIONAL SALES ACCOUNTED FOR APPROXIMATELY 18%, 14%, AND 15% OF OUR REVENUE
IN FISCAL YEARS 2004, 2003, AND 2002, RESPECTIVELY AND IS EXPECTED TO INCREASE.
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
17
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.
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
NECESSARILY BE MEANINGFUL, AND THESE COMPARISONS SHOULD NOT BE RELIED UPON AS
INDICATIONS OF FUTURE PERFORMANCE.
ISD 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 CERTAIN COMPANIES IN 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
18
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. Other factors contributing to
the uncertainty in the cable industry is the bankruptcy filing of Adelphia
Communications Corporation and subsequent hiring by them of two investment banks
to evaluate strategic alternatives and Cox Communications' bid to go private.
THE SUCCESS OF OUR VOD BUSINESS IS DEPENDENT UPON THE GROWTH OF THE DIGITAL
VIDEO MARKET, WHICH MAY NOT GROW AS WE EXPECT. 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. 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 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.
We believe all of the major studios have entered into agreements with
certain cable companies and content aggregators to provide digital movies for
distribution through VOD. However, these agreements are subject to change. 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
our VOD & ISD products or developing, manufacturing and marketing new products
that satisfy customer needs or achieve market acceptance. In addition,
services, products or technologies developed by others
19
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.
BOTH OF OUR DIVISIONS ARE SUBJECT TO GOVERNMENTAL REGULATION. 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 VOD 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. Our Integrated Solutions Division is also
subject to strict government regulation as the result of the government work we
do. The regulations deal with security clearances, employment practices,
pricing, purchasing, intellectual property and integrity. If we were ever found
in violation or if out of tolerance, our production and resultant revenues could
be halted or significantly delayed.
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.
THE DEPLOYMENT OF VOD BY CABLE COMPANIES MAY BE DELAYED DUE TO LIMITED BANDWIDTH
OR OTHER TECHNOLOGY INITIATIVES THAT COULD REQUIRE CABLE COMPANIES TO FURTHER
UPGRADE THEIR NETWORKS.
Bandwidth is a limited resource to cable companies. VOD deployments may be
delayed as operators focus on new initiatives that require incremental bandwidth
such as high definition television, increased high-speed data speed, voice over
internet protocol, interactive television, gaming and other evolving
applications. These initiatives compete for the cable companies' network
bandwidth and may require the cable companies to increase their bandwidth
capabilities by further upgrading their networks and therefore delaying VOD
deployments.
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.
20
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. However, our
working capital declined from $43.5 million at June 30, 2002 to $26.4 million on
June 30, 2004. We expect that our working capital will continue to decrease
during fiscal year 2005. If our VOD revenue does not increase and stabilize in
future periods, we will continue to use substantial cash from operating
activities, which will cause working capital to further decline. If this
situation continues, 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.
ANY WEAKNESSES IDENTIFIED IN OUR INTERNAL CONTROLS AS PART OF THE EVALUATION
BEING UNDERTAKEN BY US AND OUR INDEPENDENT PUBLIC ACCOUNTANTS PURSUANT TO
SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002 COULD HAVE AN ADVERSE EFFECT ON
OUR BUSINESS.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that companies
evaluate and report on their systems of internal control over financial
reporting. In addition, the independent accountants must report on management's
evaluation. We are in the process of documenting and testing our system of
internal control over financial reporting to provide the basis for our report.
Upon the completion of our review, it is possible that certain deficiencies
could be discovered that will require remediation. Due to the ongoing evaluation
and testing of our internal controls, there can be no assurance that there may
not be significant deficiencies or material weaknesses that would be required to
be reported. In addition, we expect the evaluation process and any required
remediation, if applicable, to increase our accounting, legal and other costs
and divert management resources from core business operations.
THE RECENT CONFLICT IN IRAQ AND ANY FUTURE ARMED CONFLICT OR TERRORIST
ACTIVITIES MAY CAUSE THE ECONOMIC CONDITIONS IN THE U.S. OR ABROAD TO
DETERIORATE, WHICH COULD HARM OUR BUSINESS.
The U.S. and other countries recently engaged in a war in Iraq and military
personnel are still engaged in that country. Continued occupation of Iraq,
future terrorist attacks against U.S. targets, rumor or threats of war,
additional conflicts involving the U.S. or its allies or trade disruptions may
impact our operations or cause general economic conditions in the U.S. and
abroad to deteriorate. A prolonged economic slowdown or recession in the U.S.
or in other areas of the world could reduce the demand for our products and,
therefore, negatively affect our future sales and profits. Any of these events
could have a significant impact on our business, financial condition or results
of operations and may result in the volatility of the market price for our
common stock and other securities.
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, 2004, the high and low prices reported on the Nasdaq
National Market were $6.00 and $1.60, respectively. Further, as of August 23,
2004, the price as reported on the Nasdaq National Market was $1.81. 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, among
others:
- 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;
21
- 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.
ITEM 2. PROPERTIES
Our principal facilities as of June 30, 2004, 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 DATE APPROX.
LOCATION PRINCIPAL USE 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 2007 40,000
Pompano Beach, Florida
2881 Gateway Drive Administrative and Sales and December 2007 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 VOD division, and the Administrative and Sales and Marketing offices at
2881 Gateway Drive, Pompano Beach, FL 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. However, we are involved in various legal
proceedings. We believe that any liability which may arise as a result of these
proceedings will not have a material adverse effect on our financial condition.
22
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 August 23, 2004:
NAME POSITION AGE
- -------------------- -------------------------------------------------- ---
T. Gary Trimm President and Chief Executive Officer 56
Stephen K. Necessary President, Video-on-Demand Division 48
Warren Neuburger President, Integrated Solutions Division 50
Steven R. Norton Executive Vice President & Chief Financial Officer 43
Kirk L. Somers General Counsel & Secretary 39
T. Gary Trimm, President, Chief Executive Officer, and Director. Mr. Trimm
has served as President and Chief Executive Officer of Concurrent since July
2004. He became a director on August 10, 2004. From 2003 to July 2004, Mr. Trimm
was President and Chief Executive Officer of OpVista, Inc., a manufacturer of
scalable transport solutions. From 1997 to 2003, Mr. Trimm served as President
and Chief Executive Officer of Strategic Management, LLC, a consulting firm.
From 1995 to 1997, Mr. Trimm served as President and Chief Executive Officer of
Compression Labs, a developer and marketer of CDV-based video-conferencing
systems, and then from 1988 to 1995, Mr. Trimm served at Scientific-Atlanta,
Inc., where his final position was President of their Subscriber Division. Mr.
Trimm also spent several years at American Technical Services and served in the
United States Navy within the US Navy Submarine Service. Mr. Trimm currently
serves on the board of directors of OpVista and EG Technologies, Inc.
Stephen K. Necessary, President, VOD Division. Mr. Necessary has served as
President of the VOD 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 Group, Inc. (f.k.a. Antec
Corporation), a communications technology company that specializes in
hybrid-fiber-coaxial-based networks, where his final position was President of
the products group. Earlier in his career, he was a team manager for Procter &
Gamble.
Warren Neuburger, President, Integrated Solutions Division. Mr. Neuburger
has served as President of the Integrated Solutions Division since June 2004.
From 2001 to 2003, Mr. Neuburger served as CEO, President , Chief Operations
Officer and Director at Optio Software Inc., a provider of output management
solutions. From 1998 to 2001, Mr. Neuburger held a number of positions at
Glenayre Electronics, including Executive Vice President, Products and President
of the ING Division. Mr. Neuburger also held a number of positions during his
tenures at Voicecom Systems, Inc., Digital Equipment Corporation, and Corning
Glass Works.
Steven R. Norton, Executive Vice President and Chief Financial Officer.
Mr. Norton has served as the Executive Vice President and Chief Financial
Officer since October 1999. From March 1996 to April 1999, 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.
Kirk L. Somers, General Counsel and Secretary. Mr. Somers has served as
General Counsel since November 2001 and was appointed Secretary in August 2004.
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.), a developer and marketer of enterprise
interactive management solutions, 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.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUE PURCHASES OF EQUITY SECURITIES
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 for our
Common Stock for the periods indicated, as reported by the NASDAQ National
Market.
FISCAL YEAR 2004
QUARTER ENDED: HIGH LOW
----- -----
September 30, 2003 $4.75 $2.35
December 31, 2003 $5.47 $3.49
March 31, 2004 $6.00 $3.00
June 30, 2004 $3.71 $1.60
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
As of August 23, 2004, there were 62,882,654 shares of Common Stock
outstanding, held of record by approximately 19,860 stockholders with a closing
price on the Nasdaq National Market of $1.81.
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 that 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."
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SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED JUNE 30,
-----------------------------------------------------------
INCOME STATEMENT DATA 2004 2003 2002 2001 2000
- ---------------------------- -------- --------- ------- -------- ---------
Net sales $79,235 $ 75,453 $89,369 $72,821 $ 68,090
Gross margin 38,722 36,423 44,566 33,020 31,743
Operating income (loss) (8,540) (11,429) (2) 3,679 (5,591) (23,987) (4)
Net income (loss) (5,725) (1) (24,552) (3) 4,383 (6,189) (23,715) (4)
Net income (loss) per share
Basic $ (0.09) (1) $ (0.40) (3) $ 0.07 $ (0.11) $ (0.46) (4)
Diluted $ (0.09) (1) $ (0.40) (3) $ 0.07 $ (0.11) $ (0.46) (4)
AT JUNE 30,
-----------------------------------------------------------
BALANCE SHEET DATA 2004 2003 2002 2001 2000
- ---------------------------- -------- --------- ------- -------- ---------
Cash, cash equivalents and
short-term investments $27,928 $ 30,697 $30,519 $ 9,460 $ 10,082
Working capital 26,378 30,180 43,545 14,824 15,383
Total assets 74,542 77,839 98,688 57,052 57,078
Stockholders' equity 45,726 43,458 69,224 33,283 38,271
Book value per share $ 0.73 $ 0.70 $ 1.12 $ 0.60 $ 0.71
(1) Net loss for the year ended June 30, 2004 includes $3.1 million from
the recovery of a previously recognized impairment charge related to
our investment in Thirdspace.
(2) Operating loss for the year ended June 30, 2003 includes a
restructuring charge of $1.6 million.
(3) 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.
(4) 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
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 Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with the Consolidated
Financial Statements and the related Notes thereto which appear elsewhere
herein. Except for the historical financial information, many of the matters
discussed in this Item 7 may be considered "forward-looking" statements that
reflect our plans, estimates and beliefs. Actual results could differ
materially from those discussed in the forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed below, elsewhere herein and in other filings made with the
Securities and Exchange Commission.
OVERVIEW
We operate our business as two distinct divisions, the VOD division and the
Integrated Solutions Division. In 1998, we created the VOD 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.
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.
Our VOD products consist of both commercial off-the-shelf hardware from
original equipment manufacturers and internally developed software that enables
our customers to offer video to their subscribers, manage the video content
across their network, and bill the subscribers for the video content purchased.
Our software is based upon Linux and Windows NT operating systems and a Unix
based proprietary operating system. Over the past 18 months, we have been
working toward consolidating our software platforms, thereby reducing the
development effort required to support multiple platforms. This effort is still
in process. Further, our customers
25
consistently require the addition of new features to our software to enhance
their service offerings. The impact of supporting these efforts has increased
our internal software development costs.
Historically we have charged our customers a bundled price for our hardware
and software based on the number of video streams purchased on a price per
stream basis. Over the past several years, the average price per stream has
dropped by over 50% as the technology, efficiency, and cost of the hardware has
improved. Additionally, the deployment of VOD has been slower than originally
anticipated due to a number of factors including the difficult economic
conditions in the past several years, the challenging financial condition of
some of our customers, the bankruptcy filing of Adelphia Communications
Corporation, the consolidation of our customers, the introduction of digital
video recorders, the unavailability of content on a timely basis, the focus by
our customers on free cash flow and success based spending, continued network
upgrades, lack of VOD marketing and digital copyright protection concerns. As a
result, the frequency of usage by subscribers has not yet grown to the level
that was originally anticipated. All of these factors have caused revenue from
our sales of VOD products to be volatile. In addition, the unexpected failure
of certain suppliers to meet quality expectations has resulted in product
quality issues that have required additional development resources as well as
additional customer support resources. Further, during the fiscal year we lost
key sales executives that negatively impacted key account coverage and the
effectiveness of marketing activities. The product issues combined with our
sales and marketing challenges have caused us to lose market share with some of
our customers in the last fiscal year.
We made several changes to our internal processes during the last fiscal
year, which have had a positive impact on our software development activities.
Further, we recently released new software, that we believe will eliminate or
significantly reduce previous quality problems. We have strengthened our
customer support organization and expanded the tools available to that
organization to enable them to better deal with customer issues. We are
strengthening our sales team to improve the predictability of our VOD revenue
stream and to ensure that we charge our customers for new software releases and
services provided outside the warranty window. We believe these efforts will
help us meet customer expectations, improve market share and broaden our revenue
base, while reducing the volatility of our revenues.
Over the past decade 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 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 ISD products and services have been declining.
We are currently working to stabilize the revenue and possibly reverse this
trend through creation of industry solutions sold through both direct and
indirect channels. We have also significantly expanded our list of partners who
we believe will help us enter new markets or re-enter markets that we have not
been in for several years. ISD 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 ISD customers.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The SEC defines "critical accounting policies" as those that require
application of management's most difficult, subjective or complex judgments,
often as a result of the need to make estimates about the effect of matters that
are inherently uncertain and may change in subsequent periods.
The following is not intended to be a comprehensive list of all of our
accounting policies. Our significant accounting policies are more fully
described in Note 2 to the Consolidated Financial Statements. In many cases,
the accounting treatment of a particular transaction is specifically dictated by
accounting principles generally accepted in the United States of America, with
no need for management's judgment in their application. There are also areas in
which management's judgment in selecting an available alternative would not
produce a materially different result.
We have identified the following as accounting policies critical to us:
Revenue Recognition
VOD and ISD 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
26
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
Until March 31, 2004, we had one customer, Comcast Cable Communications,
Inc., that earned warrants based on purchases of our products. The value of the
warrants was determined using the Black-Scholes valuation model. The weighted
assumptions used during fiscal year 2004 were: expected dividend yield - 0.0%;
risk free interest rate - 2.5%; expected life - 4 years; and expected
volatility - 110.6%. We adjusted the value of the earned but unissued warrants
on a quarterly basis using the valuation option-pricing model until the warrants
were actually issued. The value of the new warrants earned and any adjustments
in value for warrants previously earned was determined using the Black-Scholes
valuation model and recognized as part of revenue on a quarterly basis. To the
extent the above assumptions changed on a periodic basis, or the number of
subscribers capable of receiving VOD increased or decreased, revenue and gross
margins were positively or negatively impacted.
Warranty Accrual
For certain customers we accrue the estimated costs to be incurred in
performing warranty services at the time of revenue recognition and shipment of
the servers. 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. We
also review, on a quarterly basis, the value of inventory on hand for which a
newer and more advanced technology or product is currently, or will soon be,
available. When we believe that we will not be able to sell the products in
inventory at or above cost, we record an obsolescence reserve to write them down
to fair market value.
Impairment of Goodwill
We review goodwill for impairment on an annual basis or on an interim basis
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Any such impairment loss
27
would be measured as the difference between the carrying amount of the asset and
its fair value based on the present value of estimated future cash flows.
Significant judgment is required in the forecasting of future operating results,
which are used in the preparation of projected cash flows. Due to uncertain
market conditions and potential changes in our strategy and products, it is
possible that forecasts used to support our goodwill may change in the future
which could result in significant non-cash charges that would adversely affect
our results of operations.
At June 30, 2004, we had $10.7 million of goodwill, all of which is
allocated to our VOD division. In assessing whether or not goodwill is
impaired, we make assumptions regarding estimated future cash flows and other
factors to determine the fair value of the respective assets. On July 1, 2004
and 2003, our annual testing day, as required by Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets,"
we updated and reviewed the impairment analysis in conjunction with our revised
expected future operating results. We have concluded that this amount is
realizable based on forecasted discounted cash flows and on our stock market
valuation. Neither method indicated that our goodwill had been impaired and, as
a result, we did not record an impairment loss related to goodwill during the
twelve months ended June 30, 2004. If the estimates or their related assumptions
change in the future, we may be required to record impairment charges for these
assets. 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, 2004 and June 30, 2003,
substantially all of the deferred tax assets have been fully reserved 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.
28
SELECTED OPERATING DATA AS A PERCENTAGE OF NET SALES
The following table sets forth our consolidated historical operating
information, as a percentage of total revenues, for the periods indicated:
YEAR ENDED JUNE 30,
-----------------------
2004 2003 2002
------ ------- ------
Revenues:
Product sales
ISD systems 22.2 % 25.7 % 24.2 %
VOD systems 49.7 46.5 52.4
------ ------- ------
Total product sales 71.9 72.2 76.6
Service:
ISD systems 19.6 23.1 22.2
VOD systems 8.5 4.7 1.2
------ ------- ------
Total service sales 28.1 27.8 23.4
------ ------- ------
Total sales 100.0 100.0 100.0
Cost of sales (% of respective sales category)
Product sales
ISD systems 41.1 40.3 39.7
VOD systems 53.0 50.9 48.1
------ ------- ------
Total product costs of sales 49.3 47.1 45.5
Service
ISD systems 54.7 59.5 58.5
VOD systems 58.0 84.0 195.5
------ ------- ------
Total service costs of sales 55.7 63.6 65.5
------ ------- ------
Total cost of sales 51.1 51.7 50.1
------ ------- ------
Gross margin 48.9 48.3 49.9
Operating expenses:
Sales and marketing 21.8 24.0 19.0
Research and development 25.2 24.9 17.1
General and administrative 12.7 12.4 9.7
Restructuring charge - 2.1 -
Gain on liquidation of foreign subsidiary (0.1) - -
------ ------- ------
Total operating expenses 59.6 63.4 45.8
------ ------- ------
Operating income (loss) (10.7) (15.1) 4.1
Recovery (loss) on minority investment 3.9 (17.2) -
Interest expense - - (0.1)
Interest income 0.4 0.8 1.0
Other expense - net (0.2) (0.2) (0.1)
------ ------- ------
Income (loss) before provision for income taxes (6.6) (31.7) 4.9
Provision for income taxes 0.6 0.8 -
------ ------- ------
Net income (loss) (7.2)% (32.5)% 4.9 %
====== ======= ======
29
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, accounting and fees for legal,
accounting, and other professional services.
30
FISCAL YEAR 2004 IN COMPARISON TO FISCAL YEAR 2003
The following table sets forth summarized consolidated financial
information for each of the two fiscal years ended June 30, 2004 and 2003 as
well as comparative data showing increases and decreases between periods.
DIFFERENCES
YEAR ENDED JUNE 30, BETWEEN PERIODS
------------------------- --------------------
(DOLLARS IN THOUSANDS) 2004 2003 $ %
----------- ------------ --------- ---------
Product revenues $ 56,947 $ 54,456 $ 2,491 4.6%
Service revenues 22,288 20,997 1,291 6.1%
----------- ------------ --------- ---------
Total sales 79,235 75,453 3,782 5.0%
Product cost of sales 28,091 25,668 2,423 9.4%
Service cost of sales 12,422 13,362 (940) (7.0%)
----------- ------------ --------- ---------
Total cost of sales 40,513 39,030 1,483 3.8%
----------- ------------ --------- ---------
Product gross margin 28,856 28,788 68 0.2%
Service gross margin 9,866 7,635 2,231 29.2%
----------- ------------ --------- ---------
Total gross margin 38,722 36,423 2,299 6.3%
Operating expenses:
Sales and marketing 17,302 18,081 (779) (4.3%)
Research and development 20,000 18,775 1,225 6.5%
General and administrative 10,071 9,393 678 7.2%
Restructuring charge - 1,603 (1,603) (100.0%)
Gain on liquidation of foreign subsidiary (111) - (111) NM (1)
----------- ------------ --------- ---------
Total operating expenses 47,262 47,852 (590) (1.2%)
----------- ------------ --------- ---------
Operating income (loss) (8,540) (11,429) 2,889 (25.3%)
Recovery (loss) of minority investment 3,103 (12,951) 16,054 (124.0%)
Other income (expense) - net 184 417 (233) (55.9%)
----------- ------------ --------- ---------
Income (loss) before provision for income taxes (5,253) (23,963) 18,710 (78.1%)
Provision for income taxes 472 589 (117) (19.9%)
----------- ------------ --------- ---------
Net income (loss) $ (5,725) $ (24,552) $ 18,827 (76.7%)
=========== ============ ========= =========
(1) NM denotes percentage is not meaningful
Product Sales. Total product sales for fiscal year 2004 were $56.9
million, an increase of $2.4 million, or 4.6%, from $54.5 million in fiscal year
2003. The slight increase in product sales resulted from the increase in VOD
product sales of $4.4 million, or 12.4%, to $39.4 million in fiscal year 2004
from $35.0 million in fiscal year 2003. The increase in VOD product sales was
due to an increase in volume of VOD system sales due to new VOD market
deployments, increasing amounts of storage for new deployments and add-on
streaming and storage sales into existing markets, as compared to fiscal year
2003. The increase in VOD product sales was also due to software sales of our
newly released Real-Time Media content ingestion application as compared to
fiscal year 2003. The increase in volume of these VOD products sold was
partially offset by change in product mix, continuing declines in the average
price per video stream sold, and an additional $0.2 million reduction of revenue
resulting from additional warrants earned by Comcast, as compared to the same
period of the prior year. Fluctuation in VOD revenue is often due to the fact
that we have a small base of large customers making periodic large purchases
that account for a significant percentage of revenue. Although we have lost
market share with certain customers over the past year to our competitors, we
believe that we will be able to maintain or increase our share of the North
American cable market and also capture a meaningful share of the video-over-DSL
market in both the United States and internationally. We also anticipate that
the erosion of the price per stream that has occurred over the past 5 years
31
will not be as significant going forward.
Partially offsetting the increase in VOD product sales, ISD products sales
declined $1.9 million, or 9.5%, to $17.5 million in fiscal year 2004 from $19.4
million in fiscal year 2003. The decline in domestic revenue from ISD product
sales is primarily due to our customers' plans to control inventory and manage
cash flow. The decline in domestic ISD sales was partially offset by an
increase in international revenue, particularly from strong sales in Europe and
Japan. Over the past year, our Integrated Solutions Division has integrated
software applications from strategic partnerships that we believe will enable it
to expand beyond its traditional customer base. Based on this initiative, we
expect to maintain market share in our traditional ISD markets and expect to
capture market share in new markets needing ISD solutions.
Service Revenue. Service revenue increased $1.3 million, or 6.1%, to $22.3
million in fiscal year 2004 from $21.0 million in fiscal year 2003. VOD service
revenue increased $3.2 million, or 90.8%, to $6.7 million in fiscal year 2004
from $3.5 million in fiscal year 2003, as the VOD division continues to
recognize deferred maintenance revenue and expand its VOD customer base
requiring additional installation, training, technical support, and software and
hardware maintenance services. As the warranty and maintenance agreements that
typically accompany the initial sale and installation of our VOD systems expire,
we expect to sell new, long-term service and support agreements. Because of
these new agreements, our expanding customer base and increasing software
component of our total VOD solution, we expect sales of these VOD services to
continue to increase.
The increase in VOD service revenue was partially offset by a $1.9 million,
or 10.9%, decrease in ISD service revenue to $15.6 million in fiscal year 2004
from $17.5 million in fiscal year 2003. ISD service revenue continued to
decline primarily due to the cancellation of maintenance contracts as legacy
machines were removed from service and, to a lesser extent, from customers
purchasing our new products that produce significantly less service revenue.
We expect this trend of declining ISD service revenue to continue into the
foreseeable future.
Product Gross Margin. Product gross margin remained at $28.8 million for
both fiscal years 2004 and 2003. Product gross margin as a percentage of
product sales decreased to 50.7% in fiscal year 2004 from 52.9% in fiscal year
2003. VOD product gross margin decreased to 47.0% of VOD product revenue for
fiscal year 2004 from 49.1% for fiscal year 2003. The decrease in VOD product
gross margin is due to changes in product mix and continued declines in average
price per video stream sold. In addition, we recorded an additional inventory
obsolescence reserve of $0.5 million related to our third generation of video
servers and storage devices and recorded an additional $0.3 million of warranty
cost related to defective content storage devices deployed in the field.
Furthermore, we recorded an additional $0.2 million of revenue reduction from
the warrant accrual for Comcast, as compared to the prior year, due to an
increase in the Black-Scholes value of the warrants and increased sales to
Comcast during fiscal year 2004. The unfavorable impact of declining price per
stream, revenue reduction related to Comcast warrants, and additional VOD
inventory reserves and warranty cost were partially offset by the favorable
impact from the Scientific Atlanta, Inc. ("SAI") warrant expense reversal and
lower production costs. In fiscal year 2004 we recognized a $1.3 million
reduction in product cost of sales related to the value of warrants that were
accrued in fiscal year 2003 and fiscal year 2002, but were never issued due to
Concurrent not reaching certain VOD sales milestones to customers using the
Scientific-Atlanta digital platform. We also produced savings from the lower
cost of the MediaHawk 4000 system predominantly sold during the current year,
versus the previous generation MediaHawk 3000 system sold during most of fiscal
year 2003. We expect similar future VOD product margins as declining product
costs and increased sales of higher margin software products are offset by the
fact that the current year SAI warrant expense reversal will not recur in future
periods.
The gross margin on sales of ISD product decreased to 58.9% of ISD product
revenue in fiscal year 2004 from 59.7% of ISD product revenue in fiscal year
2003 due to a slightly less favorable product mix, as compared to the same
period of the prior fiscal year.
Service Gross Margin. The gross margin on service sales increased $2.3
million, or 29.2%, to $9.9 million, or 44.3% of service revenue in fiscal year
2004 from $7.6 million, or 36.4% of service revenue in the prior year. The
increase in overall service margins is due to the increase in our VOD service
margin in fiscal year 2004. VOD service margins increased to 42.0% of VOD
service revenue in fiscal year 2004 compared to 16.0% in the prior year as the
VOD division continues to build its VOD customer base and the fixed costs
associated with our customer support activities are being spread over a larger
revenue base. Although our VOD service gross margins in the future will change
quarter to quarter on a percentage basis, we do not anticipate the percentage to
fluctuate at the magnitude of the change from fiscal year 2003 to fiscal year
2004. ISD service gross margin increased to 45.3% of ISD service revenue in
fiscal year 2004 from 40.5% for the same period of the prior year due to reduced
current year costs resulting from the restructuring initiatives implemented in
the fourth quarter of fiscal year 2003. The
32
Integrated Solutions Division will continue to scale down its service
infrastructure in response to declining ISD contractual service obligations as
legacy machines are removed from service and replaced with machines that are
simpler to maintain.
Sales and Marketing. Sales and marketing expenses decreased as a
percentage of sales to 21.8% in fiscal year 2004 from 24.0% in fiscal year 2003.
These expenses decreased $0.8 million, or 4.3%, to $17.3 million during fiscal
year 2004 from $18.1 million in the same period of the prior year, primarily due
to decreased sales and marketing costs within the VOD division. The VOD
division's sales and marketing expenses decreased $1.1 million primarily due to
a $0.5 million reduction in trade show and public relations costs, as we have
focused on streamlining our marketing efforts, and $0.3 million less
international severance expense. Our VOD division also reduced salaries, wages
and benefits by $0.3 million in the current year as we are realizing savings
from the restructuring plan that was implemented in the fourth quarter of the
prior year and experiencing delays in replacing certain sales personnel that
left the Company. Due to VOD customer mix in the current year, VOD commissions
declined by $0.2 million compared to fiscal year 2003. Offsetting these expense
reductions, our VOD division incurred an additional $0.2 million of depreciation
expense from loaner and demo equipment, primarily related to our Media Hawk 4000
VOD systems.
Offsetting the decrease in the VOD division's sales and marketing expenses,
the Integrated Solutions Division's sales and marketing expenses increased $0.3
million, compared to fiscal year 2003, due to stronger than expected sales in
Europe and Japan, and the resulting increase in bonus and commission expense to
international sales personnel.
Research and Development. Research and development expenses increased as a
percentage of sales to 25.2% in fiscal year 2004 from 24.9% in fiscal year 2003.
These expenses increased $1.2 million, or 6.5%, to $20.0 million in fiscal year
2004 from $18.8 million in fiscal year 2003. The increase in research and
development expense is due to a $1.1 million and $0.4 million increase in VOD
and ISD salaries and related costs, respectively, as each division added new
software development staff over the past year. The VOD division has added
development staff and subcontractors to meet the increasing software development
requirements for customers' business management functionality, resource
management and client system monitoring as a result of increases in both our
customer base and deployment base. In fiscal year 2004 the Integrated Solutions
Division has added development staff to focus on developing and expanding our
Linux data acquisition products such as Lab Workbench to better position the
Integrated Solutions Division to target the data acquisition market. In
addition to the increase in personnel costs, the VOD division incurred an
additional $0.4 million in fixed asset depreciation expense related to purchases
of product development and testing equipment, offset by a $0.9 million decrease
in external VOD software development and consulting expenses, compared to the
same period of the prior year. We expect that software development costs will
begin to stabilize and flatten over the next few years, as we reduce our number
of software platforms and as we stabilize our software in the field.
General and Administrative. General and administrative expenses increased
as a percentage of sales to 12.7% in fiscal year 2004 from 12.4% in fiscal year
2003. These expenses increased $0.7 million, or 7.2%, to $10.1 million in
fiscal year 2004 from $9.4 million in fiscal year 2003. This increase in
general and administrative expense is due a $0.5 million increase in legal fees
resulting from our successful defense of a lawsuit brought by SeaChange
International, a $0.6 million severance accrual resulting from the resignation
of our former president and CEO, and a $0.3 million increase in accounting
expenses related to audit fees, Sarbanes-Oxley consulting fees, and accounting
salaries and benefits. These increases were partially offset by decreases in
the bad debt reserve of $0.6 million and insurance expense of $0.1 million. We
expect these costs to be non-recurring, except for the increase in accounting
and auditing expenses, which will continue at their present level, or increase
slightly, in light of the more demanding requirements on public companies.
Gain on Liquidation of Foreign Subsidiary. During the fourth quarter of
fiscal year 2004, we reorganized and recapitalized our operating entities in the
United Kingdom. These activities resulted in the curtailment and settlement of
our UK defined benefit pension plan and a net gain of $111,000. We do not
anticipate that there will be any further cash or net income from these
activities in the future.
Recovery (Loss) of Minority Investment. In the second and third quarters
of fiscal year 2003, in the aggregate, a net impairment charge of approximately
$13.4 million was recorded due to an other-than-temporary decline in the market
value of an equity investment in Thirdspace, which included a $6.1 million
charge for the write-off of two $3.0 million notes receivable and related
accrued interest. At the end of fiscal year 2003, Thirdspace was sold to
Alcatel Telecom Ltd. and placed into liquidation resulting in a recovery for us
of $0.5 million prior to July 1, 2003. During fiscal year 2004 we received an
additional $3.1 million in cash from continued
33
monetization of the Thirdspace assets and settlement of its liabilities. We
expect the cash received in fiscal year 2004 to be the final cash proceeds
related to the liquidation of Thirdspace's remaining assets. The income
recognized related to these proceeds is recorded in the line item "Recovery
(loss) of minority investment" in the Consolidated Statements of Operations and
the value of the investment and notes receivables remain at zero on our June 30,
2004 Consolidated Balance Sheet.
Interest Income. Interest income decreased $0.3 million to $0.3 million in
fiscal year 2004 from $0.6 million in fiscal year 2003 primarily due to lower
average daily interest rates and cash balances than the prior year.
Provision for Income Taxes. We recorded income tax expense for our
domestic and foreign subsidiaries of $472,000 in fiscal year 2004, which is
related primarily to foreign withholding taxes and income earned in foreign
locations, which cannot be offset by net operating loss carryforwards. We
recorded income tax expense for our domestic and foreign subsidiaries of
$589,000 in fiscal year 2003, of which approximately $390,000 related 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 in fiscal year 2003 was related primarily to
foreign withholding taxes and income earned in foreign locations, which cannot
be offset by net operating loss carryforwards.
Net Loss. The net loss for fiscal year 2004 was $5.7 million or $0.09 per
basic and diluted share compared to a net loss for fiscal year 2003 of $24.6
million or $0.40 per basic and diluted share.
34
FISCAL YEAR 2003 IN COMPARISON TO FISCAL YEAR 2002
The following table sets forth summarized consolidated financial
information for each of the two fiscal years ended June 30, 2003 and 2002 as
well as comparative data showing increases and decreases between periods.
DIFFERENCES
YEAR ENDED JUNE 30, BETWEEN PERIODS
------------------------ -------------------
(DOLLARS IN THOUSANDS) 2003 2002 $ %
----------- ----------- --------- --------
Product revenues $ 54,456 $ 68,501 $(14,045) (20.5%)
Service revenues 20,997 20,868 129 0.6%
----------- ----------- --------- --------
Total sales 75,453 89,369 (13,916) (15.6%)
Product cost of sales 25,668 31,141 (5,473) (17.6%)
Service cost of sales 13,362 13,662 (300) (2.2%)
----------- ----------- --------- --------
Total cost of sales 39,030 44,803 (5,773) (12.9%)
----------- ----------- --------- --------
Product gross margin 28,788 37,360 (8,572) (22.9%)
Service gross margin 7,635 7,206 429 6.0%
----------- ----------- --------- --------
Total gross margin 36,423 44,566 (8,143) (18.3%)
Operating expenses:
Sales and marketing 18,081 16,984 1,097 6.5%
Research and development 18,775 15,291 3,484 22.8%
General and administrative 9,393 8,612 781 9.1%
Restructuring charge 1,603 - 1,603 NM (1)
----------- ----------- --------- --------
Total operating expenses 47,852 40,887 6,965 17.0%
----------- ----------- --------- --------
Operating income (loss) (11,429) 3,679 (15,108) (410.7%)
Recovery (loss) of minority investment (12,951) - (12,951) NM (1)
Other income (expense) - net 417 704 (287) (40.8%)
----------- ----------- --------- --------
Income (loss) before provision for income taxes (23,963) 4,383 (28,346) (646.7%)
Provision for income taxes 589 - 589 NM (1)
----------- ----------- --------- --------
Net income (loss) $ (24,552) $ 4,383 $(28,935) (660.2%)
=========== =========== ========= ========
(1) NM denotes percentage is not meaningful
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 year 2003 from $46.9 million in fiscal year
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 ISD products decreased $2.2 million, or 10.1% to $19.4 million in
fiscal year 2003 from $21.6 million in fiscal year 2002. The decrease in ISD
product sales is due in part to a nonrecurring sale to an Australian customer in
fiscal year 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 year 2002. Sales to a single
customer accounted for approximately 51.0% of ISD product sales during fiscal
year 2003 compared to 36.1% in fiscal year 2002.
35
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 year 2003 from $1.1 million in fiscal year
2002. The VOD 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. Offsetting
this increase was a decrease in ISD 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 that are less expensive
to maintain.
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 ISD 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 year
2002, partially offset by a favorable product mix on hardware products during
the first nine months of fiscal year 2003.
Service Gross Margin. The gross margin on service sales increased $0.4
million, or 6.0%, to $7.6 million, or 36.4% of service revenue in fiscal year
2003 from $7.2 million, or 34.5% of service revenue in 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 year 2003 as compared to a
negative margin of 95.5% in fiscal year 2002. VOD service margins increased as
the VOD 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 ISD service margins to 40.5% in fiscal year
2003 from 41.5% in fiscal year 2002. The decrease in ISD service gross margins
is due to the inability to reduce fixed costs at the same rate as revenue has
decreased. The decrease in ISD 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 that 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 ISD
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 VOD
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. The increase in ISD 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 year 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 year 2003 was attributable to an increase
in VOD research and development of $3.6 million, offset by a decrease of $0.1
million in ISD 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.
36
General and Administrative. General and administrative expenses increased
as a percent of sales to 12.4% in fiscal year 2003 from 9.7% in fiscal year
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 VOD 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 $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 year 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 VOD 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 year 2003:
- We terminated 33 employees, or 7% of our current global workforce in
both our Integrated Solutions and VOD 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"
("SFAS 146"), 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 146, which is effective for transactions initiated after
December 31, 2002.
Recovery (Loss) of Minority Investment. In fiscal year 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. The net proceeds received at the end of June
30, 2003 of $471,000 were recorded as a reduction to the impairment loss, which
was recorded in the line item "Recovery (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 year 2003 and remain at zero on the June 30, 2003 Consolidated
Balance Sheets.
Interest Income. Interest income decreased $0.2 million to $0.6 million in
fiscal year 2003 from $0.8 million in fiscal year 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 year 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.
37
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.
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:
- revenue growth from VOD systems and the pace at which cable companies
implement VOD technology;
- the actual versus anticipated decline in revenue from maintenance of
ISD proprietary systems;
- revenues from ISD systems;
- ongoing cost control actions and expenses, including for example,
research and development and capital expenditures;
- the margins on our VOD and ISD businesses;
- our ability to raise additional capital, if necessary;
- our 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; and
- the success of the fourth generation VOD platform and our ISD Linux
products.
Uses and Sources of Cash
We used $2.4 million of cash from operating activities during fiscal year
2004 compared to providing cash of $7.1 million and $5.8 million during fiscal
years 2003 and 2002, respectively. The decrease in cash from operations was
primarily due to net operating losses generated by both of our operating
divisions in fiscal year 2004. The increase in operating cash flows in fiscal
years 2003 and 2002 was primarily due to favorable changes in working capital,
specifically accounts receivable in 2003, and due to overall operating profits
generated in fiscal year 2002. We have accumulated $4.7 million in cash from
operations over the last eight quarters; however, until our VOD revenue
increases and stabilizes, it is likely that we will continue to use cash from
operating activities.
We invested $4.9 million in property, plant and equipment during fiscal
year 2004 compared to $5.6 million during fiscal year 2003 and $4.5 million in
fiscal year 2002. Capital additions during fiscal years 2004, 2003 and 2002
relate primarily to product development and testing equipment, demonstration
equipment and equipment loans to our customers for our VOD division. We expect
a similar mix and cost of capital during the upcoming year, as we continue to
focus on further development of our VOD technology.
We received an additional $3.1 million from the continued liquidation of
Thirdspace during fiscal year 2004, compared to the $471,000 of initial proceeds
received from the liquidation in fiscal year 2003. These receipts represent
partial recoveries of the previously impaired investment in and long-term
receivables due from Thirdspace. In fiscal years 2002 and 2003 we loaned
Thirdspace an aggregate of $6.0 million in exchange for two long term-notes
receivable and invested $4.0 million in cash in Thirdspace stock (see Note 3).
We do not anticipate any further cash proceeds related to the liquidation of
Thirdspace's remaining assets.
We received $1.2 million, $0.6 million, and $3.5 million from the issuance
of common stock to employees and directors who exercised stock options during
fiscal years 2004, 2003 and 2002, respectively. In addition, we also received
$24.0 million in net proceeds from a private placement of 5.4 million shares of
common stock on July 19, 2001.
At June 30, 2004, we had working capital of $26.4 million and had no
material commitments for capital expenditures compared to working capital of
$30.2 million and $43.5 million at June 30, 2003 and 2002, respectively. We
believe that the existing cash balances will be sufficient to meet the
anticipated working capital and capital expenditure requirements for the next 12
months; however, until our VOD revenue increases and stabilizes, it is likely
that we will continue to use substantial cash from operating activities.
38
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 2005 2006-2007 2008-2009 THEREAFTER
- ---------------------------------- ------ ---------- ---------- -----------
OPERATING LEASES $10,492 $2,702 $ 4,585 $ 2,474 $ 731
CAPITAL LEASE OBLIGATIONS 51 51 - - -
------- ------ ---------- ---------- -----------
TOTAL $10,543 $2,753 $ 4,585 $ 2,474 $ 731
======= ====== ========== ========== ===========
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
Certain statements made or incorporated by reference in this release may
constitute "forward-looking statements" within the meaning of the federal
securities laws. When used or incorporated by reference in this release, the
words "believes," "expects," "estimates," "anticipates," and similar expressions
are intended to identify forward-looking statements. Statements regarding future
events and developments and our future performance, as well as our expectations,
beliefs, plans, estimates, or projections relating to the future, are
forward-looking statements within the meaning of these laws. All forward-looking
statements are subject to certain risks and uncertainties that could cause
actual events to differ materially from those projected. The risks and
uncertainties which could affect our financial condition or results of
operations include, without limitation: our ability to keep our customers
satisfied; availability of video-on-demand content; delays or cancellations of
customer orders; changes in product demand; economic conditions; various
inventory risks due to changes in market conditions; uncertainties relating to
the development and ownership of intellectual property; uncertainties relating
to our ability and the ability of other companies to enforce their intellectual
property rights; the pricing and availability of equipment, materials and
inventories; the limited operating history of our video-on-demand segment; the
concentration of our customers; failure to effectively manage growth; delays in
testing and introductions of new products; rapid technology changes; demand
shifts from high-priced, proprietary real-time systems to low-priced, open
server systems; system errors or failures; reliance on a limited number of
suppliers; uncertainties associated with international business activities,
including foreign regulations, trade controls, taxes, and currency fluctuations;
the highly competitive environment in which we operate and predatory pricing
pressures; failure to effectively service the installed base; the entry of new
well-capitalized competitors into our markets; the success of new products in
both the VOD and ISD divisions; the success of our new initiative to penetrate
opportunities with the U.S. government; the availability of Linux software in
light of issues raised by SCO group; capital spending patterns by a limited
customer base; and contract obligations that could impact revenue recognition.
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 exposure relates to the United Kingdom,
those Western European countries that use the Euro as a common currency,
Australia, and Japan. We do not hedge against fluctuations in exchange rates
and believe that a hypothetical 10% upward or downward fluctuation in foreign
currency exchange rates relative to the United States dollar would not have a
material impact on future earnings, fair values, or cash flows.
39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements and supplementary data are
included herein.
PAGE
----
Report of Independent Registered Public Accounting Firm 46
Consolidated Balance Sheets as of June 30, 2004 and 2003 47
Consolidated Statements of Operations for each of the three years 48
in the period ended June 30, 2004
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) 49
for each of the three years in the period ended June 30, 2004
Consolidated Statements of Cash Flows for each of the three years in the period 50
ended June 30, 2004
Notes to Consolidated Financial Statements 51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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.
ITEM 9B. OTHER INFORMATION
None
40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Registrant's executive officers is located in
Item X of this Form 10-K.
The Registrant hereby incorporates by reference in this Form 10-K certain
information contained under the caption "Election of Directors" in the
Registrant's Proxy Statement to be used in connection with its Annual Meeting of
Stockholders to be held on October 20, 2004 ("Registrant's 2004 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 the Registrant's 2004 Proxy Statement.
The Registrant hereby incorporates by reference in this Form 10-K certain
information contained under the caption "Election of Directors - Corporate
Governance and Committees of the Board of Directors - Audit Committees" in the
Registrant's 2004 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 2004 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 2004 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
None.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The registrant hereby incorporates by reference in this Form 10-K certain
information under the caption "Audit Fees and All Other Fees" in Registrant's
2004 Proxy Statement.
41
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements Filed As Part Of This Report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of June 30, 2004 and 2003
Consolidated Statements of Operations for each of the three years in
the period ended June 30, 2004
Consolidated Statements of Stockholders' Equity and Comprehensive
Income (Loss) for each of the three years in the period ended June 30,
2004
Consolidated Statements of Cash Flows for each of the three years in
the period ended June 30, 2004
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
(a) Exhibits:
3.1 --Restated Certificate of Incorporation of the Registrant
(incorporated by reference to the Registrant's Registration Statement
on Form S-2 (No. 33-62440)).
3.2 --Amended and Restated Bylaws of the Registrant (incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q for the
period ended March 31, 2003).
3.3 --Certificate of Correction to Restated Certificate of Incorporation
of the Registrant (incorporated by reference to the Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 2002).
3.4 --Amended Certificate of Designations of Series A Participating
Cumulative Preferred Stock (incorporated by reference to the Form
8-A/A, dated August 9, 2002).
3.5 --Amendment to Amended Certificate of Designations of Series A
Participating Cumulative Preferred Stock (incorporated by reference to
the Form 8-A/A, dated August 9, 2002).
4.1 --Form of Common Stock Certificate (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the period ended March
31, 2003).
4.2 --Form of Rights Certificate (incorporated by reference to the
Registrant's Current Report on Form 8-K/A filed on August 12, 2002).
4.3 --Amended and Restated Rights Agreement dated as of August 7, 2002
between the Registrant and American Stock Transfer & Trust Company, as
Rights Agent (incorporated by reference to the Registrant's Current
Report on Form 8-K/A filed on August 12, 2002).
42
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).
4.9* --Warrant to purchase 14,355 shares of common stock of the Registrant
dated March 22, 2024 issued to Comcast Concurrent Holdings, Inc.
4.10* --Warrant to purchase 5,261 shares of common stock of the Registrant
dated March 22, 2004 issued to Comcast Concurrent Holdings, Inc.
4.11* --Warrant to purchase 27,332 shares of common stock of the Registrant
dated March 22, 2004 issued to Comcast Concurrent Holdings, inc.
4.12* --Warrant to purchase 6 shares of common stock of the Registrant dated
March 22, 2004 issued to Comcast Concurrent Holdings, Inc.
4.13* --Warrant to purchase 63,145 shares of common stock of the Registrant
dated June 4, 2004 issued to Comcast Concurrent Holdings, Inc.
4.14* --Warrant to purchase 50,000 shares of common stock of the Registrant
dated June 4, 2004 issued to Comcast Concurrent Holdings, Inc.
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 --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).
10.7 --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).
43
10.8 --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).
10.9 --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).
10.10 --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).
10.11* --Employment Agreement dated as of June 24, 2004 between the
Registrant and T. Gary Trimm.
10.12* --Employment Agreement dated as of June 24, 2004 between the
Registrant and Warren Neuburger.
10.13 --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).
14.1 -- Code of Ethics for Senior Executives & Financial Officers
(incorporated by reference to the Registrant's Proxy for fiscal year
ended June 30, 2003).
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.
* Filed herewith.
(b) Reports on Form 8-K.
The following reports on Form 8-K were filed or furnished during the
quarter ended June 30, 2004:
- Current Report on Form 8-K furnished on April 22, 2004, relating to
results of operations and financial condition as of and for the
quarter and year ended March 31, 2004.
- Current Report on Form 8-K filed on June 24, 2004, relating to the
resignation of Jack Bryant, President, CEO and board member and the
corresponding naming of T. Gary Trimm as president and CEO, effective
July 19, 2004. In addition, this Current Report on Form 8-K relates to
the naming of Warren Neuburger as president of the Integrated
Solutions Division, effective June 24, 2004.
44
CONCURRENT COMPUTER CORPORATION
ANNUAL REPORT ON FORM 10-K
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
YEAR ENDED JUNE 30, 2004
45
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and 2003, 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, 2004. Our audits also included the consolidated financial
statement schedule for each of the three years in the period ended June 30, 2004
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 standards of the Public Company
Accounting Oversight Board (United States). 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, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2004, 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,
2004, 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 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," effective December 1, 2002.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
August 30, 2004
46
CONCURRENT COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
JUNE 30,
----------------------
2004 2003
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 27,928 $ 30,697
Accounts receivable, less allowance for doubtful accounts
of $200 at June 30, 2004 and $868 at June 30, 2003 10,192 10,371
Inventories 9,617 7,174
Deferred tax asset 517 998
Prepaid expenses and other current assets 861 879
---------- ----------
Total current assets 49,115 50,119
Property, plant and equipment - net 11,569 11,862
Purchased developed computer software - net 1,013 1,203
Goodwill - net 10,744 10,744
Investment in minority owned company 553 553
Deferred tax asset - 1,749
Other long-term assets - net 1,548 1,609
---------- ----------
Total assets $ 74,542 $ 77,839
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 12,069 $ 14,644
Deferred revenue 10,668 5,295
---------- ----------
Total current liabilities 22,737 19,939
Long-term liabilities:
Deferred revenue 4,117 2,350
Deferred tax liability 278 2,107
Pension liability 1,372 9,617
Other 312 368
---------- ----------
Total liabilities 28,816 34,381
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;
62,817,029 and 62,367,449 issued at June 30, 2004 and 2003, respectively 628 623
Capital in excess of par value 174,338 174,396
Accumulated deficit (128,712) (122,929)
Treasury stock, at cost; 19,323 shares at June 30, 3004 and 840 shares at June 30, 2003 (42) (58)
Unearned compensation (351) (576)
Accumulated other comprehensive loss (135) (7,998)
---------- ----------
Total stockholders' equity 45,726 43,458
---------- ----------
Total liabilities and stockholders' equity $ 74,542 $ 77,839
========== ==========
<FN>
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,
-----------------------------
2004 2003 2002
-------- --------- --------
Revenues:
Product sales:
ISD systems $17,568 $ 19,417 $21,601
VOD systems 39,379 35,039 46,900
-------- --------- --------
Total product sales 56,947 54,456 68,501
Service:
ISD systems 15,566 17,474 19,807
VOD systems 6,722 3,523 1,061
-------- --------- --------
Total service sales 22,288 20,997 20,868
-------- --------- --------
Total sales 79,235 75,453 89,369
Cost of sales:
Product sales:
ISD systems 7,228 7,817 8,586
VOD systems 20,863 17,851 22,555
-------- --------- --------
Total product costs of sales 28,091 25,668 31,141
Service:
ISD systems 8,521 10,402 11,588
VOD systems 3,901 2,960 2,074
-------- --------- --------
Total service costs of sales 12,422 13,362 13,662
-------- --------- --------
Total cost of sales 40,513 39,030 44,803
-------- --------- --------
Gross margin 38,722 36,423 44,566
Operating expenses:
Sales and marketing 17,302 18,081 16,984
Research and development 20,000 18,775 15,291
General and administrative 10,071 9,393 8,612
Restructuring charge - 1,603 -
Gain on liquidation of foreign subsidiary (111) - -
-------- --------- --------
Total operating expenses 47,262 47,852 40,887
-------- --------- --------
Operating income (loss) (8,540) (11,429) 3,679
Recovery (loss) of minority investment 3,103 (12,951) -
Interest expense (11) (30) (76)
Interest income 335 592 828
Other expense - net (140) (145) (48)
-------- --------- --------
Income (loss) before provision for income taxes (5,253) (23,963) 4,383
Provision for income taxes 472 589 -
-------- --------- --------
Net income (loss) $(5,725) $(24,552) $ 4,383
======== ========= ========
Basic and diluted net income (loss) per share $ (0.09) $ (0.40) $ 0.07
======== ========= ========
<FN>
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, 2004
COMMON STOCK ACCUMULATED
------------------ CAPITAL IN OTHER
PAR EXCESS OF ACCUMULATED UNEARNED COMPREHENSIVE
SHARES VALUE PAR VALUE DEFICIT COMPENSATION INCOME (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
Other 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
Other 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)
Sale of common stock under stock plans 505,581 5 1,179
Retirement of restricted stock (56,001) (118) 118
Amortization of unearned compensation 107
Performance warrants (1,119)
Acquisition of treasury stock
Disposition of treasury stock (58)
Other comprehensive income (loss):
Net loss (5,725)
Foreign currency translation adjustment 487
Minimum pension liability adjustment 7,376
Total comprehensive income
-----------------------------------------------------------------------------
Balance at June 30, 2004 62,817,029 $ 628 $ 174,338 ($128,712) ($351) ($135)
=============================================================================
TREASURY STOCK
-----------------
SHARES COST TOTAL
------- -------- ---------
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
Other 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
Other 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
Sale of common stock under stock plans 1,184
Retirement of restricted stock -
Amortization of unearned compensation 107
Performance warrants (1,119)
Acquisition of treasury stock (19,323) (42) (42)
Disposition of treasury stock 840 58 -
Other comprehensive income (loss):
Net loss (5,725)
Foreign currency translation adjustment 487
Minimum pension liability adjustment 7,376
---------
Total comprehensive income 2,138
----------------------------
Balance at June 30, 2004 (19,323) ($42) $ 45,726
============================
<FN>
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,
--------------------------------
2004 2003 2002
--------- ---------- ---------
Cash flows provided by (used in) operating activities:
Net income (loss) $ (5,725) $ (24,552) $ 4,383
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Loss (recovery) on minority investment (3,103) 12,951 -
Accrual of (reversal of) non-cash warrants (1,119) 338 2,165
Pension settlement and curtailment (1,482) - -
Depreciation and amortization 5,404 4,824 5,008
Provision for inventory reserves 924 317 343
Provision for (reversal of) bad debts (601) 28 484
Amortization of stock compensation 107 25 -
Other non-cash expenses 502 (13) 35
Decrease (increase) in assets:
Accounts receivable, net 780 13,495 (10,030)
Inventories, net (3,367) (669) (118)
Prepaid expenses and other current assets, net 18 2 (821)
Other long-term assets, net (149) (1,624) 133
Increase (decrease) in liabilities:
Accounts payable and accrued expenses, net (2,575) (870) 1,585
Short-term deferred revenue 5,373 1,240 755
Long-term liabilities, net 2,627 1,607 1,836
--------- ---------- ---------
Net cash provided by (used in) operating activities (2,386) 7,099 5,758
Cash flows provided by (used in) investing activities:
Net additions to property, plant and equipment (4,876) (5,595) (4,522)
Investment in minority owned company - - (4,827)
Repayment of note receivable from
minority owned company 3,103 471 -
Note receivable from minority owned company - (3,000) (3,000)
--------- ---------- ---------
Net cash used in investing activities (1,773) (8,124) (12,349)
Cash flows provided by (used in) financing activities:
Purchase of treasury stock (42) - -
Net repayment of debt (93) (85) (85)
Proceeds from sale and issuance of common stock 1,184 550 27,492
--------- ---------- ---------
Net cash provided by financing activities 1,049 465 27,407
Effect of exchange rates on cash and cash equivalents 341 738 243
--------- ---------- ---------
Increase (decrease) in cash and cash equivalents (2,769) 178 21,059
Cash and cash equivalents - beginning of year 30,697 30,519 9,460
--------- ---------- ---------
Cash and cash equivalents - end of year $ 27,928 $ 30,697 $ 30,519
========= ========== =========
Cash paid during the period for:
Interest $ 14 $ 20 $ 49
========= ========== =========
Income taxes (net of refunds) $ 527 $ 474 $ 413
========= ========== =========
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, located in Duluth, Georgia, and
the Integrated Solutions Division ("ISD"), located in Pompano Beach, Florida.
Concurrent's VOD 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 $8,000, ($27,000), and
($104,000) for the years ended June 30, 2004, 2003 and 2002, respectively, are
included in "Other 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
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.
51
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Goodwill
At July 1, 2004 and 2003, 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 ISD system revenues are recognized based on the guidance in
American Institute of Certified Public Accountants Statement of Position ("SOP")
97-2, "Software Revenue Recognition" ("SOP 97-2") and related amendments, SOP
98-4, "Deferral of the Effective Date of a Provision of SOP 97-2, Software
Revenue Recognition" and SOP 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions". Concurrent recognizes
revenue from VOD and ISD 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, 2004, deferred
revenue includes billings to certain customers who agreed to make progress
payments for systems that had been delivered but were awaiting testing and
acceptance. For these systems, revenue will be recognized on completion of
testing and acceptance.
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, 2004 and 2003.
Concurrent has not incurred costs related to the development of internal
use software.
52
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 in accordance with SFAS No.
128, "Earnings Per Share," by dividing net income (loss) by the weighted average
number of common shares outstanding during each 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 6,002,000, 6,131,000 and 4,247,000 for the years ended June 30,
2004, 2003, and 2002, 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 income (loss) per share for the
periods indicated:
YEAR ENDED JUNE 30,
-----------------------------
(DOLLARS AND SHARE DATA IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2004 2003 2002
-------- --------- --------
Basic and diluted EPS calculation:
Net income (loss) $(5,725) $(24,552) $ 4,383
======== ========= ========
Basic weighted average number of shares outstanding 62,637 61,944 60,997
Effect of dilutive securities:
Employee stock options - - 2,028
Warrants - - 1,063
-------- --------- --------
Diluted weighted average number of shares outstanding 62,637 61,944 64,088
======== ========= ========
Basic EPS $ (0.09) $ (0.40) $ 0.07
======== ========= ========
Diluted EPS $ (0.09) $ (0.40) $ 0.07
======== ========= ========
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 year 2003, and therefore,
there has been no material impact on Concurrent's Consolidated Statements of
Operations or financial condition as of and for the years ended June 30, 2004
and 2003.
53
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 years ended
June 30, 2004 and 2003, Concurrent recognized $107,000 and $25,000,
respectively, of stock compensation expense for the issuance of restricted stock
awards. There is no other expense recognized in the reported net loss in fiscal
years 2004 and 2003 for stock options issued. For fiscal year 2002, there was
no stock-based employee compensation reflected in reported net income, 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:
YEAR ENDED JUNE 30,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2004 2003 2002
-------- --------- --------
Net income (loss) as reported $(5,725) $(24,552) $ 4,383
Deduct: Total stock-based employee compensation
expense determined under the fair value method, net
of related taxes (3,993) (6,458) (9,613)
-------- --------- --------
Pro forma net loss $(9,718) $(31,010) $(5,230)
======== ========= ========
Earnings (loss) per share:
Basic- as reported $ (0.09) $ (0.40) $ 0.07
======== ========= ========
Basic-pro forma $ (0.16) $ (0.50) $ (0.09)
======== ========= ========
Diluted-as reported $ (0.09) $ (0.40) $ 0.07
======== ========= ========
Diluted-pro forma $ (0.16) $ (0.50) $ (0.09)
======== ========= ========
54
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Refer to Note 14 for assumptions used in calculation of fair value.
Segment Information
Concurrent reports its operating results separately for both its VOD
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.
Accumulated other comprehensive income (loss) consists of the following
components:
FOREIGN ACCUMULATED
CURRENCY MINIMUM OTHER
TRANSLATION PENSION COMPREHENSIVE
ADJUSTMENTS LIABILITY INCOME (LOSS)
------------- ----------- ---------------
(DOLLARS IN THOUSANDS)
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)
Other comprehensive income 487 7,376 7,863
------------- ----------- ---------------
Balance at June 30, 2004 $ (84) $ (51) $ (135)
============= =========== ===============
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
55
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
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, respectively) and could be
converted at any time prior to 48 months after the issuance of the notes. The
notes were 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.
In fiscal year 2003, Concurrent recorded a $13.0 million net impairment
charge due to an other than temporary decline in the market value of the
investment in Thirdspace, which included a $6.1 million charge for the write-off
of the 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 Alcatel Telecom Ltd. 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 and a perpetual, royalty-free
license to the patents and patent applications previously owned by Thirdspace,
Concurrent relinquished its security interest in certain intellectual property
of Thirdspace; however, Concurrent retained a security interest in all other
assets of Thirdspace. The net proceeds of $471,000 in fiscal year 2003 were
recorded as a reduction to the impairment loss in the line item "Recovery (loss)
of minority investment." The value of the equity investment and notes
receivable and accrued interest were reduced to zero as of the third quarter of
fiscal year 2003 and remain at zero on the June 30, 2004 and 2003 Consolidated
Balance Sheets. As of June 30, 2004 and 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 fiscal year 2004, Concurrent received, in the aggregate, $3.1 million in
proceeds as a result of the sale of the majority of Thirdspace's remaining
assets. The proceeds received from the sale of these assets are recorded in the
line item "Recovery (loss) of minority investment" in the Consolidated
Statements of Operations. Concurrent does not anticipate any further cash
proceeds related to the liquidation of Thirdspace's remaining assets, and
expects these proceeds to be one of the final assets to be distributed as part
of this liquidation.
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, 2004,
there has been no impairment of the Everstream investment.
Concurrent's equity investment is 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.
56
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
During fiscal year 2004 there were no purchases of equipment from or sales
of equipment to Thirdspace. During fiscal year 2003, Concurrent purchased
$50,000 of equipment from Thirdspace. During fiscal year 2003, Concurrent sold
$90,000 of equipment to Thirdspace.
In the ordinary course of business, Concurrent purchases consulting
services from Everstream. During fiscal year 2004 and 2003, Concurrent
purchased $36,000 and $910,000, respectively, of consulting services from
Everstream.
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 year 2003, the Board of Directors
approved a Restructuring Plan. The Restructuring Plan included 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 VOD 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 year 2003:
- Termination of 33 employees, or approximately 7% of Concurrent's
current global workforce in both the Integrated Solutions and VOD
divisions, and as a result, recorded a charge of $1.1 million related
to severance and other employee termination costs.
- Reduction of 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.
- Recognition of 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"
("SFAS No. 146"), SFAS 144 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):
RESTRUCTURING FISCAL
TOTAL RESERVE AT YEAR 2004 RESTRUCTURING
RESTRUCTURING NON-CASH CASH JUNE 30, CASH RESERVE AT
CHARGES CHARGES PAYMENTS 2003 PAYMENTS JUNE 30, 2004
-------------- --------- --------- -------------- ---------- --------------
Workforce reduction $ 1,057 $ - $ 191 $ 866 $ 809 $ 57
Lease terminations 319 72 49 198 138 60
Other 227 202 - 25 25 -
-------------- --------- --------- -------------- ---------- --------------
TOTAL $ 1,603 $ 274 $ 240 $ 1,089 $ 972 $ 117
============== ========= ========= ============== ========== ==============
57
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Restructuring related charges for each division are summarized as follows (in
thousands):
WORKFORCE LEASE TOTAL
REDUCTION TERMINATION RESTRUCTURING
COSTS COSTS OTHER CHARGE
---------- ------------ ------ --------------
Integrated Solutions Division $ 713 $ 257 $ 23 $ 993
VOD Division 344 62 204 610
---------- ------------ ------ --------------
TOTAL $ 1,057 $ 319 $ 227 $ 1,603
========== ============ ====== ==============
Domestic and international restructuring related charges are summarized as
follows (in thousands):
WORKFORCE LEASE TOTAL
REDUCTION TERMINATION RESTRUCTURING
COSTS COSTS OTHER CHARGE
---------- ------------ ------ --------------
Domestic $ 385 $ - $ 52 $ 437
International 672 319 175 1,166
---------- ------------ ------ --------------
TOTAL $ 1,057 $ 319 $ 227 $ 1,603
========== ============ ====== ==============
The $117,000 and $1.1 million accrued liability at June 30, 2004 and 2003,
respectively, are recorded in the Consolidated Balance Sheets under "Accounts
payable and accrued expenses" and the $1.6 million of expense in fiscal year
2003 is recorded in the Consolidated Statements of Operations under
"Restructuring charge."
All activities under the Restructuring Plan were completed by the end of
fiscal year 2004. Concurrent expects to complete all remaining cash payments by
the end of fiscal year 2005. Remaining payments related to the restructuring
are due to one former employee and to a lessor that provided office space.
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 year 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 or
subsequent to 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.
During June of 2004, Concurrent began liquidation proceedings for its UK
based subsidiary, Concurrent Realisations Limited ("Realisations"), formerly
Concurrent Computer UK Limited, as the Company decided to discontinue the
ongoing funding of this company. The employees were transferred to and certain
assets of the business were sold to Concurrent UK Limited ("Concurrent UK"),
formerly Concurrent Computer Holding Company Ltd., another UK subsidiary of
Concurrent Computer Corporation, for fair market value, as determined by an
independent appraisal firm. As a result, the remaining assets of Realisations
are in the custody of a liquidator and are being used to settle its liabilities
that primarily consist of a liability to the defined benefit pension plan of
Realisations. Concurrent no longer has any control over the assets of
Realisations nor can Concurrent exert influence or control over the liquidation
process. Neither Concurrent, nor any of its subsidiaries, has any further legal
obligation to fund Realisations or its defined benefit pension plan. Therefore,
a curtailment and settlement of the pension plan has occurred. All assets,
liabilities, and additional minimum pension liabilities related to the pension
plan have been removed from the balance sheet, which results in a gain of
$111,000, net of related legal
58
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
and actuarial expenses, during the year ended June 30, 2004. This gain was
recorded in the line item "Gain on liquidation of foreign subsidiary" in the
Consolidated Statements of Operations, and the components of the gain are as
follows (in thousands of dollars):
YEAR ENDED
JUNE 30, 2004
---------------
Net gain on pension settlement and curtailment $ 1,482
Reorganization costs (1,371)
---------------
Gain on liquidation of foreign subsidiary $ 111
===============
The $1,482,000 gain on the settlement and curtailment relates to the
write-off of the $9,846,000 pension liability, the $210,000 intangible pension
asset, and the $8,154,000 additional minimum pension liability. Reorganization
costs include the $918,000 purchase of certain assets of Realisations at fair
market value and $453,000 of legal, actuarial and accounting costs required to
liquidate Realisations.
7. INVENTORIES
Inventories consist of the following:
JUNE 30,
-------------------------
2004 2003
------------ -----------
(DOLLARS IN THOUSANDS)
Raw Materials, net $ 7,361 $ 5,933
Work-in-process 1,229 1,024
Finished goods 1,027 217
------------ -----------
$ 9,617 $ 7,174
============ ===========
At June 30, 2004 and 2003, 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 to reduce the value of the inventory to its
estimated net realizable value at both June 30, 2004 and 2003, respectively.
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
JUNE 30,
---------------------------
2004 2003
--------------- ----------
(DOLLARS IN THOUSANDS)
Leasehold improvements $ 3,204 $ 3,032
Machinery, equipment and customer support spares 38,531 35,076
--------------- ----------
41,735 38,108
Less: Accumulated depreciation (30,166) (26,246)
--------------- ----------
$ 11,569 $ 11,862
=============== ==========
For the years ended June 30, 2004, 2003 and 2002, depreciation and
amortization expense for property, plant and equipment amounted to $5,214,000,
$4,590,000 and $4,685,000, respectively.
59
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 2004, 2003, and 2002, and there has not been any impairment
charge as a result of these assessments. The goodwill for all years presented
relates to the VOD division and no amortization expense has been recorded for
fiscal years 2004, 2003 and 2002.
The goodwill balance as of June 30, 2004 and 2003 is $10.7 million. There
have been no additions or 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, 2004, 2003, and 2002. Therefore, there have been no changes in
the goodwill balance as of June 30, 2004 and 2003. All of the goodwill on the
Consolidated Balance Sheets as of June 30, 2004 and 2003 is allocated to the VOD
division.
A summary of Concurrent's other intangible assets is as follows (in
thousands):
INTANGIBLE ASSETS
--------------------------------------------------------
AS OF JUNE 30, 2004 AS OF JUNE 30, 2003
--------------------------- ---------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
----------- -------------- ----------- --------------
AMORTIZED INTANGIBLE ASSETS
Purchased developed software $ 1,773 $ (760) $ 1,773 $ (570)
The aggregate amortization expense for the years ended June 30, 2004, 2003,
and 2002 was $190,000, $234,000, and $323,000, respectively. The estimated
amortization expense for the next five fiscal years for intangible assets is
$190,000 for each year for purchased developed software with an original
amortizable life of 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,
-------------------------
2004 2003
------------ -----------
(DOLLARS IN THOUSANDS)
Accounts payable, trade $ 3,487 $ 4,138
Accrued payroll, vacation and
other employee expenses 5,420 4,760
Warranty accrual 1,122 2,131
Restructuring reserve 117 1,089
Other accrued expenses 1,923 2,526
------------ -----------
$ 12,069 $ 14,644
============ ===========
60
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 years 2004 and 2003 consist of the following (in thousands):
Balance at June 30, 2002 $ 2,272
Charged to costs and expenses 267
Deductions (408)
--------
Balance at June 30, 2003 2,131
Charged to costs and expenses 668
Deductions (1,677)
--------
Balance at June 30, 2004 $ 1,122
========
11. INCOME TAXES
The domestic and foreign components of income (loss) before provision for
income taxes are as follows:
YEAR ENDED JUNE 30,
--------------------------------
2004 2003 2002
---------- --------- ---------
(DOLLARS IN THOUSANDS)
United States $ (4,393) $(18,374) $ 6,297
Foreign (860) (5,589) (1,914)
---------- --------- ---------
$ (5,253) $(23,963) $ 4,383
========== ========= =========
The components of the provision for income taxes are as follows:
YEAR ENDED JUNE 30,
------------------------------
2004 2003 2002
--------- -------- ---------
(DOLLARS IN THOUSANDS)
Current:
Federal $ - $ - $ -
State 310 17 -
Foreign (credit) 119 572 (338)
--------- -------- ---------
Total 429 589 (338)
--------- -------- ---------
Deferred:
Federal - - -
Foreign 43 - 338
--------- -------- ---------
Total 43 - 338
--------- -------- ---------
Total $ 472 $ 589 $ -
========= ======== =========
In May 2003, Concurrent reached a negotiated settlement with the Greek Tax
Authority 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 fiscal year 2003 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:
61
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED JUNE 30,
--------------------------------
2004 2003 2002
--------- ---------- ---------
(DOLLARS IN THOUSANDS)
Income (loss) before provision for
income taxes $ (5,253) $ (23,963) $ 4,383
--------------------------------
Tax (benefit) at federal statutory rate (1,786) (8,147) 1,490
Change in valuation allowance 2,396 8,980 (3,733)
Other permanent differences, net (138) (244) 2,243
--------------------------------
Provision for income taxes $ 472 $ 589 $ -
================================
As of June 30, 2004 and 2003, Concurrent's deferred tax assets and
liabilities were comprised of the following:
JUNE 30,
--------------------------
2004 2003
------------- -----------
(DOLLARS IN THOUSANDS)
Gross deferred tax assets related to:
U.S. and foreign net operating loss carryforwards $ 74,919 $ 73,116
Book and tax basis differences for reporting purposes 248 177
Bad debt, warranty and inventory reserves 2,067 5,485
Accrued compensation 777 620
Loss on minority investment 3,536 4,861
Deferred revenue 2,844 1,557
Stock warrants 682 1,197
Capital loss carryfoward 780 780
Other 1,883 (223)
------------- -----------
Total gross deferred tax assets 87,736 87,570
Valuation allowance (87,219) (84,823)
------------- -----------
Total deferred tax asset 517 2,747
Gross deferred tax liabilities related to
property and equipment/other 278 2,107
------------- -----------
Total gross deferred tax liability 278 2,107
------------- -----------
Deferred income taxes $ 239 $ 640
============= ===========
As of June 30, 2004, Concurrent has U.S. Federal Tax net operating loss
carryforwards of approximately $175 million for income tax purposes which expire
at various dates through 2022. 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 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
62
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 $296,000 and $177,000 for the years
ended June 30, 2004 and 2003, 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, 2004 and
2003 was approximately $87.2 million and $84.8 million, respectively. The net
change in the total valuation allowance for the year ended June 30, 2004 was an
increase of approximately $2.4 million. The net increase in the total valuation
allowance for the year ended June 30, 2003 was approximately $8.7 million and
the net increase in the total valuation allowance for the year ended June 30,
2002 was approximately $1.3 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.
12. 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. For fiscal year 2004, the plan allowed a
discretionary matching contribution up to 100% of the first 4% of employees'
contributions. For fiscal years 2003 and 2002, the plan allowed a discretionary
matching contribution up to 100% of the first 6% of employees' contributions.
For the years ended June 30, 2004, 2003 and 2002, Concurrent matched 100% of the
employees' Plan contributions up to 4%, 6% and 6%, respectively.
Concurrent's matching contributions under the Plan were as follows:
2004 2003 2002
-------- --------- --------
(DOLLARS IN THOUSANDS)
Matching contribution $ 990 $ 1,424 $ 1,243
Concurrent also maintains a defined contribution plan ("the Stakeholder
Plan") for its UK based employees. The stakeholder plan provides for
discretionary matching contributions of between 4% and 7% of the employee's
salary. The Company also has agreements with certain of its UK based employees
to make supplementary contributions to the plan over the next five years,
contingent upon their continued employment with the Company. For fiscal years
2004, 2003 and 2002, the Company made total contributions to the stakeholder
plan of $90,000, $25,000 and $13,000, respectively.
Certain foreign subsidiaries of Concurrent maintain pension plans for their
employees that conform to the
63
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
common practice in their respective countries. As of June 30, 2003, the Company
maintained two defined benefit pension plans covering certain current and former
employees in the UK and in Germany. The liquidation of the UK subsidiary
resulted in the settlement and curtailment gains included in the changes in
benefit obligation and fair value of plan assets below. As of June 30, 2004,
only the defined benefit pension plan in Germany remained, due to the effects of
the liquidation of the Company's UK subsidiary. The related changes in benefit
obligation and fair value of plan assets and the amounts recognized in the
consolidated balance sheets are presented in the following tables:
Reconciliation of Funded Status
JUNE 30,
--------------------------
2004 2003
------------- -----------
(DOLLARS IN THOUSANDS)
Change in benefit obligation:
Benefit obligation at beginning of year $ 21,501 $ 16,987
Service cost 353 303
Interest cost 1,111 1,036
Plan participants' contributions 58 56
Actuarial loss (gain) (34) 1,632
Foreign currency exchange rate change 1,972 1,677
Settlement (19,607) -
Curtailment (1,037) -
Benefits paid (602) (190)
------------- -----------
Benefit obligation at end of year $ 3,715 $ 21,501
============= ===========
Change in plan assets:
Fair value of plan assets at beginning of year $ 12,889 $ 12,001
Actual return on plan assets 1,354 (550)
Employer contributions 358 394
Plan participants' contributions 58 56
Benefits paid (570) (157)
Settlement (12,833) -
Foreign currency exchange rate change 1,140 1,145
------------- -----------
Fair value of plan assets at end of year $ 2,396 $ 12,889
============= ===========
Funded status $ (1,319) $ (8,612)
Unrecognized actuarial loss (160) 7,518
Unrecognized prior service cost - 190
Unrecognized net transition liability 158 69
------------- -----------
Net amount recognized $ (1,321) $ (835)
============= ===========
Amounts Recognized in the Consolidated Balance Sheet
JUNE 30,
--------------------------
2004 2003
------------- -----------
(DOLLARS IN THOUSANDS)
Accrued pension cost, net $ (1,372) $ (8,452)
Intangible asset - 190
Accumulated other comprehensive loss 51 7,427
------------- -----------
Net amount recognized $ (1,321) $ (835)
============= ===========
64
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 $3.7 million, $3.7 million and $2.4 million,
respectively, as of June 30, 2004, and $21.5 million, $20.7 million and $12.9
million, respectively, as of June 30, 2003.
The following tables provide the components of net periodic pension cost
recognized in earnings and pension related components of other comprehensive
income for the fiscal years ended June 30, 2004, 2003 and 2002:
Components of Net Periodic Benefit Cost
YEAR ENDED JUNE 30,
--------------------------------
2004 2003 2002
--------- ---------- ---------
(DOLLARS IN THOUSANDS)
Service cost $ 353 $ 303 $ 276
Interest cost 1,111 1,036 909
Expected return on plan assets (767) (737) (750)
Amortization of unrecognized net transition obligation (65) (67) (63)
Amortization of unrecognized prior service benefit 24 24 22
Settlement gain (387) - -
Curtailment loss 177 - -
Recognized actuarial loss 375 188 71
--------- ---------- ---------
Net periodic benefit cost $ 821 $ 747 $ 465
========= ========== =========
Additional Information
YEAR ENDED JUNE 30,
--------------------------------
2004 2003 2002
--------- ---------- ---------
(DOLLARS IN THOUSANDS)
Decrease (increase) in minimum liability included
in other comprehensive income $ 7,376 $ (3,025) $ (1,599)
Pension expense for fiscal years 2004, 2003 and 2002 related to the UK
defined benefit pension plan was $805,000, $709,000, and $434,000. The Company
does not anticipate any further contributions or any further pension expense
related to this plan, subsequent to June 30, 2004.
Assumptions
The following table sets forth the assumptions used to determine benefit
obligations:
JUNE 30,
---------------------
2004 2003
----- --------------
Discount rate 5.35% 5.25% to 5.50%
Expected return on plan assets 3.50% 6.00%
Compensation increase rate 2.50% 1.00% to 4.25%
65
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table sets forth the assumptions used to determine net periodic
benefit cost:
YEAR ENDED JUNE 30,
----------------------------------------------
2004 2003 2002
-------------- -------------- --------------
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 4.25%
Plan Assets
Concurrent's pension plan weighted-average asset allocations at June 30,
2004 and 2003, by asset category are as follows:
PLAN ASSETS AT JUNE 30,
----------------------------------
2004 2003
---------------- ----------------
ASSET CATEGORY $ % $ %
- ----------------- ------- ------- ------- -------
Equity securities $ 2,396 100.00% 10,637 82.53%
Debt securities - 0.00% 1,914 14.85%
Real estate - 0.00% 338 2.62%
------- ------- ------- -------
Total $ 2,396 100.00% $12,889 100.00%
======= ======= ======= =======
Plan assets as of June 30, 2004 are comprised primarily of investments in
managed funds consisting of German life insurance equity funds. Plan assets as
of June 30, 2003 are comprised primarily of managed funds consisting of common
stock, German life insurance funds, money market and real estate investments.
In estimating the expected return on plan assets, Concurrent considers past
performance and future expectations for the fund. Plan assets are heavily
weighted toward dividend yielding equity investments that yield consistent,
dependable dividends. The Company utilizes an active management strategy
through third-party investment managers to minimize risk and maximize return.
Contributions
Concurrent expects to contribute $108,000 to its one remaining defined
benefit pension plan in fiscal year 2005.
Estimated future benefit payments
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
PENSION
BENEFITS
---------
2005 $ 116
2006 119
2007 133
2008 174
Years 2009 to 2014 1,336
66
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
13. SEGMENT INFORMATION
Concurrent operates its business in two divisions: Integrated Solutions and
VOD, in accordance with SFAS 131. Concurrent's Integrated Solutions Division is
a leading provider of high-performance, ISD 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 VOD 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 inter-segment sales or transfers. For the year ended June 30, 2004,
one customer accounted for approximately 31% of total ISD revenue and three
customers accounted for approximately 55%, 18% and 14% of total VOD revenue,
respectively. For the year ended June 30, 2003, one customer accounted for
approximately 34% of total ISD 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 ISD revenue and two customers accounted for approximately 57% and 24% of
the total VOD revenue, respectively. There were no other customers in fiscal
years 2004, 2003 and 2002 that accounted for more than 10% of the revenue for
either division. The following summarizes the operating income (loss) by
segment for the years ended June 30, 2004, 2003 and 2002, respectively.
Corporate costs include costs related to the offices of the Chief Executive
Officer, Chief Financial Officer, General Counsel, Investor Relations, Human
Resources, Accounting and other administrative costs including annual audit and
tax fees, board of director fees and similar costs.
YEAR ENDED JUNE 30, 2004
-------------------------------------------
ISD VOD CORPORATE TOTAL
------- --------- ----------- ----------
(DOLLARS IN THOUSANDS)
Revenues:
Product sales $17,568 $ 39,379 $ - $ 56,947
Service 15,566 6,722 - 22,288
------- --------- ----------- ----------
Total 33,134 46,101 - 79,235
Cost of sales:
Product sales 7,228 20,863 - 28,091
Service 8,521 3,901 - 12,422
------- --------- ----------- ----------
Total 15,749 24,764 - 40,513
------- --------- ----------- ----------
Gross margin 17,385 21,337 - 38,722
Operating expenses
Sales and marketing 7,896 8,994 412 17,302
Research and development 5,892 14,108 - 20,000
General and administrative 1,451 1,251 7,369 10,071
Gain on liquidation of foreign subsidiary (111) - - (111)
------- --------- ----------- ----------
Total operating expenses 15,128 24,353 7,781 47,262
------- --------- ----------- ----------
Operating income (loss) $ 2,257 ($3,016) ($7,781) ($8,540)
======= ========= =========== ==========
67
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED JUNE 30, 2003
-------------------------------------------
ISD VOD 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)
======= ========= =========== ==========
YEAR ENDED JUNE 30, 2002
-------------------------------------------
ISD VOD 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
======= ========= =========== ==========
68
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Summarized financial information for fiscal years 2004, 2003 and 2002,
respectively, is as follows:
AS OF AND FOR THE YEAR ENDED JUNE 30, 2004
-----------------------------------------------------
ISD VOD CORPORATE TOTAL
--------------- ---------- ----------- --------------
(DOLLARS IN THOUSANDS)
Net sales $ 33,134 $ 46,101 $ - $ 79,235
Operating income (loss) 2,257 (3,016) (7,781) (8,540)
Identifiable assets 14,454 35,905 24,183 74,542
Depreciation and amortization 1,339 3,728 337 5,404
Capital expenditures 655 3,808 413 4,876
AS OF AND FOR THE YEAR ENDED JUNE 30, 2003
--------------------------------------------------------
ISD VOD 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
--------------------------------------------------------
ISD VOD 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
14. 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 Compensation Committee administers the Stock Option
Plans. Under the plans, the Compensation Committee may award, in addition to
stock options, shares of Common Stock on a restricted basis. The plans also
specifically provide 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 $107,000 and $25,000 for the years ended June
30, 2004 and 2003, respectively, which is recorded in the Consolidated
Statements of Operations as an operating expense. For fiscal year 2002, there
was no restricted stock granted or outstanding. Options issued under the Stock
Option Plans
69
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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, 2004
and 2003 there were 679,797 and 1,133,925 shares available for future grants,
respectively.
Changes in options outstanding under the plan during the years ended June
30, 2004, 2003, and 2002 are as follows:
2004 2003 2002
---------------------- ---------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- --------- ----------- --------- ------------ ---------
Outstanding at beginning of year 5,842,348 $ 6.92 5,803,144 $ 7.11 5,388,161 $ 6.00
Granted 755,950 $ 3.83 530,815 $ 2.22 1,750,000 $ 8.23
Exercised (505,706) $ 2.34 (225,228) $ 2.44 (1,105,089) $ 3.21
Forfeited (981,330) $ 6.61 (266,383) $ 5.33 (229,928) $ 8.35
----------- ----------- ------------
Outstanding at year end 5,111,262 $ 6.98 5,842,348 $ 6.92 5,803,144 $ 7.11
=========== =========== ============
Options exercisable at year end 3,554,531 3,834,886 3,149,444
=========== =========== ============
Weighted average fair value of
options granted during
the year $ 3.22 $ 1.87 $ 6.91
=========== =========== ============
The weighted-average assumptions used for the years ended June 30, 2004,
2003 and 2002 were: expected dividend yield of 0.0% for all periods; risk-free
interest rate of 3.4%, 3.0% and 4.3%, respectively; expected life of 6 years for
all periods; and an expected volatility of 110.0%, 111.4%, and 108.9%,
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, 2004:
OUTSTANDING OPTIONS OPTIONS EXERCISABLE
--------------------------------------- ---------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL AT JUNE 30, EXERCISE AT JUNE 30, EXERCISE
PRICES LIFE 2004 PRICE 2004 PRICE
- -------------------------------------------------------- ---------------------------
$ 0.37 - $0.99 3.20 144,599 0.37 144,599 0.37
$ 1.00 - $1.99 7.44 231,693 1.86 129,830 1.80
$ 2.00 - $2.99 4.90 950,273 2.22 704,988 2.24
$ 3.00 - $3.99 9.03 179,700 3.10 10,500 3.22
$ 4.00 - $4.99 9.40 406,150 4.65 65,000 4.56
$ 5.00 - $5.99 6.85 612,750 5.04 407,750 5.04
$ 6.00 - $6.99 7.69 501,750 6.83 269,250 6.81
$ 7.00 - $7.99 6.57 119,600 7.00 98,450 7.00
$ 8.00 - $8.99 5.16 104,664 8.00 104,164 8.00
$ 9.00 - $9.99 7.07 2,000 9.26 1,000 9.26
$10.00 - $10.99 5.36 486,833 10.13 486,833 10.13
$11.00 - $11.99 7.08 422,250 11.06 238,417 11.06
$12.00 - $12.99 6.25 727,000 12.36 692,750 12.36
$13.00 - $13.99 5.65 20,000 13.75 20,000 13.75
$14.00 - $14.99 7.41 32,000 14.10 16,000 14.10
$15.00 - $15.99 7.45 10,000 15.92 5,000 15.92
$17.00 - $17.99 6.19 25,000 17.83 25,000 17.83
$18.00 - $18.99 5.90 125,000 18.54 125,000 18.54
$19.00 - $19.99 5.70 10,000 19.63 10,000 19.63
---------------- ----------------
6.49 5,111,262 6.98 3,554,531 7.68
================ ================
15. 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 a warrant to purchase 50,000 shares of its Common Stock
on March 29, 2001, exercisable at $5.196 per share over a four-year term. This
warrant is referred to as the "Initial Warrant". 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 this warrant.
Concurrent was 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 were measured by the
number of Comcast basic cable subscribers that had 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". Through
June 30, 2004, Concurrent issued to Comcast various performance warrants
totaling 168,543 shares. These performance warrants are exercisable over a four
year term and have exercise prices between $2.62 and $15.02. All of these
warrants are outstanding as of June 30, 2004.
71
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 was also obligated to 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
exceeded specified threshold levels. These warrants are referred to as the
"Cliff Warrants". On June 4, 2004, Concurrent issued to Comcast a cliff warrant
to purchase 50,000 shares. This cliff warrant is exercisable over a four year
term and has an exercise price of $3.68. This warrant is outstanding as of June
30, 2004.
Concurrent recognized the value of the Performance Warrants and the Cliff
Warrants over the term of the agreement as Comcast purchased additional VOD
servers from Concurrent and made the service available to its customers.
Concurrent has recognized $202,000, $62,000, and $398,000 in the Consolidated
Statements of Operations for the years ended June 30, 2004, 2003, and 2002,
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, 2004,
2003, and 2002: expected dividend yield of 0% for all three periods; risk-free
interest rate of 2.5%, 2.1% and 3.7%, respectively; expected life of 4 years in
all three periods; and an expected volatility of 111%, 113% and 117%,
respectively.
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. The exercise price of
the warrants issued to Comcast equaled 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. As the agreement with
Comcast expired on March 31, 2004, Concurrent is no longer obligated to issue
any additional warrants to Comcast. The warrants issued to Comcast did not
exceed 1% of Concurrent's outstanding shares of Common Stock.
Scientific Atlanta, Inc. Warrants
In accordance with a five year definitive agreement with Scientific
Atlanta, Inc. ("SAI") executed in August of 1998, Concurrent agreed to issue
warrants to SAI upon achievement of pre-determined revenue targets. The value
of these warrants could not exceed 5% of applicable revenue and the number of
shares of Concurrent common stock related to the warrants was 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. The
Black-Scholes value of these warrants could not impact gross margin by more than
$1.5 million per $30 million of applicable revenue. Concurrent accrued for this
cost as a part of cost of sales at the time of recognition of applicable
revenue. Concurrent issued warrants to purchase 261,164 of its common stock to
SAI upon reaching the first $30 million threshold on April 1, 2002, exercisable
at $7.106 per share over a four-year term, all of which are still outstanding as
of June 30, 2004.
The five year definitive agreement with SAI expired on August 17, 2003, and
at that time Concurrent had not reached the second $30 million threshold of
revenue using the SAI platform. As a result, Concurrent was not obligated to
issue a warrant under the agreement regarding the second $30 million threshold,
and accordingly, reversed $1.3 million of expense in the first quarter of fiscal
year 2004, which had been previously accrued in anticipation of reaching the
next $30 million threshold. This reversal was recorded in VOD product cost of
sales in the Consolidated Statements of Operations. Concurrent previously
recognized charges of $275,000 and $1,825,000 in the Consolidated Statements of
Operations for the years ended June 30, 2003 and 2002, respectively,
representing the fair market value of the warrants earned during each year.
72
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
16. 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.
17. CONCENTRATION OF RISK
A summary of Concurrent's financial data by geographic area follows:
YEAR ENDED JUNE 30,
2004 2003 2002
--------- ---------- ----------
(DOLLARS IN THOUSANDS)
Net sales:
United States $ 65,962 $ 64,586 $ 76,352
Intercompany 3,858 3,121 3,528
--------- ---------- ----------
69,820 67,707 79,880
--------- ---------- ----------
Europe 5,737 5,484 6,650
Intercompany 36 - -
--------- ---------- ----------
5,773 5,484 6,650
--------- ---------- ----------
Asia/Pacific 7,044 4,918 5,899
Intercompany 4 13 -
--------- ---------- ----------
7,048 4,931 5,899
--------- ---------- ----------
Other 492 465 468
--------- ---------- ----------
83,133 78,587 92,897
Eliminations (3,898) (3,134) (3,528)
--------- ---------- ----------
Total $ 79,235 $ 75,453 $ 89,369
========= ========== ==========
Operating income (loss):
United States $ (6,851) $ (6,109) $ 5,734
Europe (1,990) (3,684) (1,711)
Asia/Pacific 40 (1,841) (453)
Other 261 205 59
Eliminations - - 50
--------- ---------- ----------
Total $ (8,540) $ (11,429) $ 3,679
========= ========== ==========
73
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30,
--------------------------
2004 2003
------------- -----------
(DOLLARS IN THOUSANDS)
Identifiable assets:
United States $ 102,167 $ 105,884
Europe 6,893 11,239
Asia/Pacific 10,348 10,244
Other 699 1,171
Eliminations (45,565) (50,699)
------------- -----------
Total $ 74,542 $ 77,839
============= ===========
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
$14,443,000, $18,672,000 and $13,433,000 for the years ended June 30, 2004, 2003
and 2002, respectively, which amounts represented 18%, 25% and 15% of total
sales for the respective fiscal years.
Sales to the U.S. government and its agencies amounted to approximately
$14,186,000, $18,183,000 and $19,723,000 for the years ended June 30, 2004, 2003
and 2002, respectively, which amounts represented 18%, 24% and 22% of total
sales for the respective fiscal years.
Sales to three commercial customers amounted to $25,219,000 or 32% of total
sales, $10,283,000 or 13% of total sales, and $8,231,000, or 10% of total sales,
respectively, for the year ended June 30, 2004. 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. There were no other customers during fiscal years 2004, 2003 or 2002
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 two customers that accounted for $2,715,000 or 26% of trade receivables and
$1,089,000 or 10% of trade receivables, at June 30, 2004. 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.
18. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of quarterly financial results for the years
ended June 30, 2004 and 2003:
THREE MONTHS ENDED
----------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
2003 2003 2004 2004
-------------- --------------- -------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2004
Net sales $ 18,902 $ 22,626 $ 23,611 $ 14,096
Gross margin $ 10,950 $ 11,419 $ 10,896 $ 5,457
Operating income (loss) $ 33 $ 110 $ (1,110) $ (7,573) (4)
Net income (loss) $ 612 (1) $ 1,213 (2) $ (63) (3) $ (7,487) (4)
Net income (loss) per share-basic $ 0.01 (1) $ 0.02 (2) - (3) $ (0.12) (4)
Net income (loss) per share-diluted $ 0.01 (1) $ 0.02 (2) - (3) $ (0.12) (4)
74
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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) (7)
Net income (loss) $ 620 $ (4,665) (5) $ (14,260) (6) $ (6,247) (7)
Net income (loss) per share-basic $ 0.01 $ (0.08) (5) $ (0.23) (6) $ (0.10) (7)
Net income (loss) per share-diluted $ 0.01 $ (0.08) (5) $ (0.23) (6) $ (0.10) (7)
(1) The net income for the quarter ended September 30, 2003 includes a
partial recovery of the previously recognized impairment charge for
the Thirdspace investment of $1.1 million.
(2) The net income for the quarter ended December 31, 2003 includes a
partial recovery of the previously recognized impairment charge for
the Thirdspace investment of $1.7 million.
(3) The net loss for the quarter ended March 31, 2004 includes a partial
recovery of the previously recognized impairment charge for the
Thirdspace investment of $0.3 million.
(4) The operating loss and the net loss for the quarter ended June 30,
2004, includes a gain on liquidation of a foreign subsidiary of $0.1
million, net of related expenses.
(5) The net loss for the quarter ended December 31, 2002 includes an
impairment charge for the Thirdspace investment of $2.9 million.
(6) 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.
(7) The operating loss and net loss for the quarter ended June 30, 2003,
includes a restructuring charge of $1.6 million.
19. 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 that
provide for increased rents resulting from the pass through of increases in
operating costs, property taxes and consumer price indexes.
At June 30, 2004, future minimum lease payments for the years ending June
30 are as follows:
CAPITAL OPERATING
LEASES LEASES TOTAL
--------- ---------- --------
(DOLLARS IN THOUSANDS)
2005 $ 51 $ 2,702 2,753
2006 - 2,339 2,339
2007 - 2,246 2,246
2008 - 1,534 1,534
2009 - 940 940
2010 and thereafter - 731 731
--------- ---------- --------
51 $ 10,492 $ 10,543
========== ========
Amount representing interest (1)
---------
Present value of minimum
capital lease payments $ 50
=========
75
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Rent expense under all operating leases amounted to $3,851,000, $3,825,000
and $3,612,000 for the years ended June 30, 2004, 2003 and 2002, 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 period from 6 to 12 months, depending on the officer, in an
annualized amount equal to the respective employee's base salary then in effect.
At June 30, 2004, the maximum contingent liability under these agreements is
approximately $1.4 million. Concurrent's employment agreements with certain of
its officers contain certain offset provisions, as defined in their respective
agreements.
20. NEW ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity"
("SFAS 150"). SFAS 150 clarifies the definition of a liability as currently
defined in FASB Concepts Statement No. 6, "Elements of Financial Statements," as
well as other planned revisions. This statement requires a financial instrument
that embodies an obligation of an issuer to be classified as a liability. In
addition, the statement establishes standards for the initial and subsequent
measurement of these financial instruments and disclosure requirements. SFAS
150 became effective for Concurrent on July 1, 2003. The adoption of this
standard did not have a material impact on Concurrent's consolidated financial
statements.
In December 2003, the FASB issued FIN 46(R), "Consolidation of Variable
Interest Entities." FIN 46(R) replaced FIN 46, "Consolidation of Variable
Interest Entities" (issued in January 2003), and expands and clarifies FIN 46,
as well as updates the effective date and transition guidance. This
interpretation clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," in determining whether a reporting entity
should consolidate certain legal entities, including partnerships, limited
liability companies, or trusts, among others, collectively defined as variable
interest entities. This interpretation applies to variable interest entities
created or obtained after January 31, 2003, and as of July 1, 2003, to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. The FASB subsequently issued FASB Staff
Position FIN 46-6, which defers the effective date for applying the provisions
of FIN 46 to financial statements for (1) interests held by public entities in
variable interest entities or potential variable interest entities created
before February 1, 2003 and (2) non-registered investment companies. Concurrent
does not have any variable interest entities; therefore, management believes
this statement will not have a material impact on Concurrent's consolidated
financial statements.
In December 2003, the FASB issued SFAS 132(R) "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This Statement revises employers'
disclosures about pension plans and other postretirement benefit plans. The
provisions of this Statement do not change the measurement and recognition
provisions of FASB Statements No. 87, "Employers' Accounting for Pensions", No.
88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits", and No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions". Statement 132(R) replaces
FASB Statement No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits", and adds additional disclosures. It requires
additional disclosures to those in the original Statement 132 about assets,
obligations, cash flows, and net periodic benefit cost of defined benefit
pension plans and other defined benefit postretirement plans. The required
information should be provided separately for pension plans and for other
postretirement benefit plans. The additional disclosure requirements are
included in Note 12 to the financial statements.
76
SCHEDULE II
CONCURRENT COMPUTER CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 2004, 2003 AND 2002
(DOLLARS IN THOUSANDS)
CHARGED
BALANCE AT TO COSTS BALANCE AT
BEGINNING AND DEDUCTIONS END OF
DESCRIPTION OF YEAR EXPENSES (a) YEAR
----------- ---------- ------------ -----------
Reserves and allowances deducted
from asset accounts:
2004
- ----
Reserve for inventory obsolescence
and shrinkage $ 3,004 $ 924 $ (972) $ 2,956
Allowance for doubtful accounts 868 (601) (67) 200
Warranty accrual 2,131 668 (1,677) 1,122
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
(a) Charges and adjustments to the reserve accounts for write-offs and credits
issued during the year.
77
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/ T. Gary Trimm
------------------------------------------
T. Gary Trimm
President and Chief Executive Officer
Date: September 7, 2004
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 7, 2004.
NAME TITLE
- ---- -----
/s/ Steve G. Nussrallah Chairman of the Board and Director
- -----------------------
Steve G. Nussrallah
President, Chief Executive Officer and Director
/s/ T. Gary Trimm (Principal Executive Officer)
- -----------------------
T. Gary Trimm
Executive Vice President and Chief Financial Officer
/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/ C. Shelton James Director
- -----------------------
C. Shelton James
78
EXHIBIT DESCRIPTION OF DOCUMENT
(a) Exhibits:
3.1 --Restated Certificate of Incorporation of the Registrant
(incorporated by reference to the Registrant's Registration Statement
on Form S-2 (No. 33-62440)).
3.2 --Amended and Restated Bylaws of the Registrant (incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q for the
period ended March 31, 2003).
3.3 --Certificate of Correction to Restated Certificate of Incorporation
of the Registrant (incorporated by reference to the Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 2002).
3.4 --Amended Certificate of Designations of Series A Participating
Cumulative Preferred Stock (incorporated by reference to the Form
8-A/A, dated August 9, 2002).
3.5 --Amendment to Amended Certificate of Designations of Series A
Participating Cumulative Preferred Stock (incorporated by reference to
the Form 8-A/A, dated August 9, 2002).
4.1 --Form of Common Stock Certificate (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the period ended March
31, 2003).
4.2 --Form of Rights Certificate (incorporated by reference to the
Registrant's Current Report on Form 8-K/A filed on August 12, 2002).
4.3 --Amended and Restated Rights Agreement dated as of August 7, 2002
between the Registrant and American Stock Transfer & Trust Company, as
Rights Agent (incorporated by reference to the Registrant's Current
Report on Form 8-K/A filed on August 12, 2002).
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).
4.9* --Warrant to purchase 14,355 shares of common stock of the Registrant
dated March 22, 2024 issued to Comcast Concurrent Holdings, Inc.
4.10* --Warrant to purchase 5,261 shares of common stock of the Registrant
dated March 22, 2004 issued to Comcast Concurrent Holdings, Inc.
4.11* --Warrant to purchase 27,332 shares of common stock of the Registrant
dated March 22, 2004 issued to Comcast Concurrent Holdings, inc.
79
4.12* --Warrant to purchase 6 shares of common stock of the Registrant dated
March 22, 2004 issued to Comcast Concurrent Holdings, Inc.
4.13* --Warrant to purchase 63,145 shares of common stock of the Registrant
dated June 4, 2004 issued to Comcast Concurrent Holdings, Inc.
4.14* --Warrant to purchase 50,000 shares of common stock of the Registrant
dated June 4, 2004 issued to Comcast Concurrent Holdings, Inc.
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 --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).
10.7 --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).
10.8 --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).
10.9 --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).
10.10 --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).
10.11* --Employment Agreement dated as of June 24, 2004 between the
Registrant and T. Gary Trimm.
10.12* --Employment Agreement dated as of June 24, 2004 between the
Registrant and Warren Neuburger.
10.13 --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).
14.1 -- Code of Ethics for Senior Executives & Financial Officers
(incorporated by reference to the Registrant's Proxy for fiscal year
ended June 30, 2003).
21.1* --List of Subsidiaries.
80
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.
* Filed herewith.
81