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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
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, 2005
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, 2005 there were 63,642,996 shares of Common Stock
outstanding. The aggregate market value of shares of such Common Stock (based
upon the last sale price of $1.82 per share as reported for August 23, 2005 on
the NASDAQ National Market) held by non-affiliates was approximately
$115,000,000.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Proxy Statement to be used in
connection with Registrant's 2005 Annual Meeting of Stockholders scheduled to be
held on October 18, 2005 are incorporated by reference in Part III hereof.
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CONCURRENT COMPUTER CORPORATION
2005 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I PAGE
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ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 21
ITEM 3. LEGAL PROCEEDINGS 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21
ITEM X. OFFICERS OF THE REGISTRANT 22
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUE PURCHASES OF EQUITY SECURITIES 23
ITEM 6. SELECTED FINANCIAL DATA 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 38
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 38
Report of Independent Registered Public Accounting Firm 46
Management Report on Internal Control Over Financial Reporting 47
Report of Independent Registered Public Accounting Firm on Internal Control Over
Financial Reporting 48
Consolidated Balance Sheets 49
Consolidated Statements of Operations 50
Consolidated Statements of Stockholders' Equity and Comprehensive Income (loss) 51
Consolidated Statements of Cash Flows 52
Notes to Consolidated Financial Statements 53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE 38
ITEM 9A. CONTROLS AND PROCEDURES 39
ITEM 9B. OTHER INFORMATION 39
PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 40
ITEM 11. EXECUTIVE COMPENSATION 40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 40
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 40
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 40
PART IV
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 41
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 and the real-time operating systems/productivity
tools market. Prior to January 2005, we serviced these markets through two
distinct divisions - a VOD division and an Integrated Solutions division, or
ISD. We merged these two divisions to eliminate duplicative costs and take
advantage of in-house talent to serve the customers in both markets. Thus, we
now approach the two markets as one company with two product lines, on-demand
and real-time.
Our on-demand products consist of hardware and software as well as
integration services, sold primarily to broadband companies that have upgraded
their networks to support interactive, digital services. These on-demand
systems enable broadband telecommunication providers, mainly cable television
systems, 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
on-demand systems to 110 markets. We provided the on-demand 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. and abroad have begun deploying on-demand services to their
residential markets.
Our real-time products consist of real-time operating systems and
diagnostic software tools combined, in most cases, with off-the-shelf hardware
and services sold to a wide variety of companies seeking high-performance,
real-time computer systems for use in a multitude of applications requiring
low-latency response such as simulation, image generation and data acquisition.
These real-time products are specially designed for use with applications that
acquire, process, store, analyze and display large amounts of rapidly changing
information in real time - that is, with microsecond response times as changes
occur. We have over 39 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, financial, 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 website located at www.ccur.com, 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 website located at www.ccur.com. Copies will be
furnished 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 product lines is included in Note 12 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 broadband companies to deliver
on-demand services to their digitally enabled subscribers. These systems
include forward and reverse path bandwidth capability and digital equipment
throughout the network.
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These digitally upgraded systems are capable of carrying a larger quantity of
signals with greatly improved quality. As of January 2005, according to the
National Cable Television Association, there were 109,590,170 households with
televisions in the United States and approximately 108,200,000 of these homes
had access to cable. Of these homes, approximately 73,200,000 were basic cable
subscribers, with approximately 25,000,000 of these basic subscribers also being
digital subscribers. Digital content from major movie studios, major television
networks, premium channel providers, and other program and content creators may
be viewed with our on-demand systems.
We believe these and other advancements have opened the door for our
on-demand systems to serve the home video entertainment market. Our on-demand
systems offer the following improvements over traditional home video services:
- Convenience Without Late Fees. On-demand products eliminate travel to
obtain and return rentals and eliminate late charges.
- Interactivity. On-demand products enable a subscriber to view content at
any time with interactive capabilities such as play, rewind, fast-forward
and pause and this service is not limited by the availability of analog
channel frequencies for delivering content.
- Greater Content. On-demand products enable our customers to make large
amounts of content available to their subscribers. Our customers utilize
both free on-demand and subscription on-demand services. These offerings
help create awareness and understanding of on-demand television. Further,
they are compelling services that cannot be duplicated by satellite
broadcasters, and thus, reduce subscriber churn.
- No Special Subscriber Box Necessary. 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. On-demand
products do not require subscribers to pre-plan recording, purchase or rent
a DVR device, install and maintain the device, update the device and learn
how to operate the device. Additionally, since on-demand 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. Finally, and perhaps most importantly, DVRs are expensive devices
that are inconsistent, we believe, with the broadband companies' long-range
plans for the availability of on-demand services.
- Advertising. On-demand products have enabled interactive long-format
advertising and have the potential to enable broadband companies to target
advertising and offer a further enhanced interactive advertising
experience.
We believe that on-demand is a key strategic competitive initiative for
broadband 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 on-demand will provide cable and other
telecommunication companies' access to new revenue generating opportunities,
increase subscriber satisfaction and reduce subscriber churn.
We believe that on-demand also will be a strategic differentiator for
telephone companies as they seek to expand services beyond the delivery of
voice. Cable companies are 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 on-demand products for the
same reasons that cable companies have.
THE REAL-TIME COMPUTING MARKETS
Our real-time products offer unique solutions for a wide-range of
applications that require state-of-the-art, time-critical software and hardware
technology. The operating systems we provide typically offer high-performance
computation and high data throughput, with predictable and repeatable responses
to time-critical events. Our real-time products are currently used in host,
client-server, and embedded and distributed computing solutions. End uses of
our operating system and diagnostic tools include the following:
- Simulation and Training. 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
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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.
- Data Acquisition. Applications that perform 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.
- Image Generation. Image generation applications requiring scalable,
commercial-off-the-shelf graphics technology for the highest levels of
computer-generated image quality and fidelity, compatibility with the
latest industry-standard components from leading graphics suppliers and
improved customer value versus proprietary solutions.
- 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. We have recently expanded our focus to include other markets
that require a low-latency, time-critical backbone such as medical imaging,
air traffic control, financial trading and telecommunications test systems.
BUSINESS STRATEGY
ON-DEMAND PRODUCT LINE
Our on-demand strategy is comprised of the following primary initiatives:
- North American Cable. We have been selected to supply on-demand systems for
87 North American cable markets. Our primary 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 Vid otron Lt e. 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 companies need
to succeed. It is our goal to provide the highest quality products and
support so that we enable our customers to succeed with their customers.
- International Cable. The rollout of residential on-demand service
internationally over cable television systems is progressing well. We have
been deployed in 14 international cable markets in Japan, Korea and Spain.
We believe we offer the only on-demand services available to subscribers in
Korea and Japan. We have been commercially deployed in Spain by Telefonica,
in Korea by Broadband Solutions, Inc., Cable and Multimedia Communications
Ltd. and Korea Digital Cable Media Center Co., Ltd. and in Japan by Jupiter
Telecommunications, Inc. We will continue to pursue relationships with
international cable companies.
- Telecommunications Markets. We believe the international rollout of
residential VOD services over DSL-based networks is progressing well. We
have been deployed in 8 international telco markets by 5 international
telcos, including Telecom Italia, Austria Telecom, and Cyta Telecom (in
Cypress). Additionally, we have sold our on-demand products to several
other international telcos, bringing the total international telco
customers to 8. These opportunities have been obtained through an agreement
with Alcatel pursuant to which we are Alcatel's preferred on-demand
solution on their platform for resale throughout the world. Although we
have been integrated with the Alcatel platform since January 2005, Alcatel
recently announced an agreement with Microsoft Corp. that we believe may
affect our long term relationship with Alcatel. However, we intend to
pursue relationships with other integrators and international
telecommunication companies in order to take advantage of opportunities as
they arise.
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Additionally, we are currently pursuing North American DSL opportunities
that we expect will begin to deploy on-demand services within the next
year.
- Innovate to Improve the On-Demand Viewing Experience. We intend to continue
to focus on the development of future on-demand technologies to remain a
technology leader by improving streaming, storage and content ingest
flexibility, asset management, the subscriber's navigation experience,
encryption techniques, network based digital video recorder applications,
business analytics, advertising applications, and functionality such as
compatibility with high definition television.
REAL-TIME PRODUCT LINE
Our real-time strategy is comprised of the following primary initiatives:
- Establish RedHawk as the DeFacto Real-Time Operating System. 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. The market for open
software has grown dramatically and we believe we can position RedHawk as
the standard open software real-time operating system. We are seeking to
accomplish this by partnering with established industry providers of both
software and hardware to resell RedHawk as a software-only product.
- Partner with Third-Parties to Reach New Markets. In the last year, we have
begun to utilize channel partners to expand the reach of our sales
organization to sell to new markets. We have entered into numerous channel
partner agreements to accomplish this goal. These channel partners
typically possess knowledge and experience that enable them to reach new
markets. We will continue to seek new partners interested in reselling our
real-time products to new markets.
- Real-Time Operating System Sales on Commercial-Off-The-Shelf Hardware
Platforms. 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 Xeon(R) and AMD Opteron(TM)
integrated computer system solutions. These operating systems are generally
sold on our iHawk family of hardware platforms. Our 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. 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
- NightStar(R) Tool Suite. Our NightStar Tool Suite is a collection of
software products that enable our customers to perform diagnostic tests on
the applications they have developed for use on our open source and
proprietary real-time operating systems. We intend to continue to license
the NightStar Tool Suite to our typical customers and port the suite so it
may be used for diagnostic testing on other platforms.
PRODUCTS AND SERVICES
Our products fall into two principal groups, on-demand systems and
real-time systems. In addition, we provide technical support to all of our
customers. The percentage of total revenue contributed by our on-demand and our
real-time 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.
ON-DEMAND PRODUCTS
For the majority of our deployments, our on-demand system may be located at
the network operator's headend or hub in a distributed or centralized
architecture with a small software module 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 broadband 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 broadband company's billing system.
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Our on-demand systems integrate video streaming technology, content
management, back-office software and readily available commercial hardware
platforms to provide interactive, on-demand capabilities. Our on-demand systems
include the following:
- MediaHawk(R) 4G On-Demand Platform. Our MediaHawk 4G On-Demand Platform is
based on our extensive software running on commercial-off-the-shelf
hardware sourced from leading Original Equipment Manufacturers ("OEMs")
suppliers. It consists of the MediaHawk 4000 Video Server, the Media Store
1000 storage system and the Media Matrix switching fabric. We 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 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, 2005, we had shipped a total of
2,664 MediaHawk servers with a total capacity of 753,721 streams in 110
deployments serving 24.4 million basic subscribers.
- Resource Manager. Our resource manager is a software component that
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.
- Business Management System. Our Business Management System is a 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 is software that 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 on-demand
subscriber information via the internet, at their convenience from anywhere
in the world. Operators can obtain customized reports on their network and
information on on-demand 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 to bypass the failed component, and to notify the cable
company that maintenance is required.
- Integration Options. Our on-demand systems are compatible with a wide range
of equipment and software employed by broadband companies to deliver
digital television service, including digital set-top boxes from
Scientific-Atlanta, Motorola, Pioneer, Sony, Pace Micro, Samsung, Humax,
and Matsushita and transport topologies such as IP, DSL, Gigabit Ethernet,
DVB-ASI, ATM, and 64 and 256 QAM IF or RF. Further, since our on-demand
technology allows us to perform functionality in the server rather than in
the digital set-top box, we can overcome the challenge of providing
on-demand 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
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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 on-demand 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 on-demand systems enable broadband
companies to automate the movement of content from one storage location to
another based upon demand and other network requirements. This feature
enables the most efficient streaming and storage of content. We have
applied for a patent to protect our developments in this area.
REAL-TIME PRODUCTS
Our principle real-time products are:
- RedHawk(TM) Linux. RedHawk Linux 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.
- iHawk(TM). Our iHawk Intel Xeon 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 VersModular Eurocard (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 CPU versions.
- 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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SERVICES
Customer Support. We offer worldwide hardware and software maintenance and
support services for our products. Services include installation, integration,
training, on-site maintenance, 24x7 telephone support, return-to-factory
warranty, depot repair, and software support update service. Our integration
and support offerings are an essential piece of successfully deploying and
maintaining our products. An on-demand 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
on-demand services. Typically we provide support services at no additional
charge during the warranty period and charge for the services 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
additional onsite services. Over the past 15 to 20 years, we have routinely
offered and delivered long-term service and support of our products, under
maintenance contracts, for additional fees.
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 channel partners (resellers, value added
resellers, systems integrators, etc.). As of June 30, 2005, we had 83 employees
in our sales and marketing force, which includes sales, sales support,
marketing, strategic communications, product management, program management, and
business development. Our sales force has significant experience in on-demand
and real-time operating systems. Outside North America, we utilize a direct
sales force out of our facilities in France, England, Germany, Australia, Hong
Kong and Japan. Further, our direct sales forces are augmented by our channel
partners that are able to introduce our products to new markets.
CUSTOMERS
We derive revenue from a limited number of customers. As a result, the
loss of, or reduced demand for products or related services from any of our
major customers could adversely affect our business, financial condition and
results of operations. Our products are typically manufactured and shipped in
the same quarter the purchase order is received. Accordingly, we do not believe
backlog is a meaningful indicator of future level of sales. Our backlog for
real-time and on-demand systems at June 30, 2005 and 2004 totaled $3.2 million
and $2.6 million, respectively. In addition, we had deferred revenue of $9.0
million and $14.8 million at June 30, 2005 and 2004, 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 currently require minimum purchases of our products except for our
agreement with Lockheed-Martin. As a result, sales to specific customers tend
to, and are expected to continue to, vary from year-to-year, depending on such
customers' budgets for capital expenditures and new product introductions.
A significant portion of our on-demand revenue has come from, and is
expected to continue to come from, sales to the large broadband companies. The
customers accounting for more than 10% of total revenue consisted of Comcast
(14%) for the fiscal year ended June 30, 2005; Comcast (32%) and Cox (10%) for
the fiscal year ended June 30, 2004; and Time Warner (16%) and Comcast (10%) for
the fiscal year ended June 30, 2003. No other customer of our on-demand
products accounted for more than 10% of total revenue during the last three
fiscal years.
Although we sell our real-time products to large customers, the customer
base is more diversified than our on-demand business. Thus, only one customer,
Lockheed-Martin, accounted for more than 10% of total revenues for the last
three years. Specifically, Lockheed-Martin accounted for 18%, 13%, and 16% of
total revenues in the
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fiscal years ended June 30, 2005, 2004, and 2003, respectively.
We derive a significant portion of our revenues from the supply of products
to U.S. government prime contractors and agencies of the U.S. government. The
supplied systems include configurations from the RedHawk, 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 years ended
June 30, 2005 and 2004, we recorded $19.9 million and $14.2 million in revenues
to U.S. government prime contractors and agencies of the U.S. government,
representing 25% and 18% 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, financial condition and results of operations.
NEW PRODUCT DEVELOPMENT
We are committed to the development of new technology and rapid innovation
in the evolving markets in which we compete. Research and development costs are
expensed when incurred and aggregated $18.7 million, $20.0 million, and $18.8
million in fiscal years 2005, 2004, and 2003, respectively.
Our research and development strategies with respect to our on-demand
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.
- Quality Monitoring. Now that there are substantial VOD deployments, we
believe that a key differentiator for us will be the quality of our
products. In order to measure that quality, we are working on developing
software measurement tools for our customers.
- 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 Everstream Holdings, Inc ("Everstream")
will allow our on-demand 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.
- Interactive Menus. We have developed an interactive menu environment for
on-demand service that we call the Interactive Media Solution. 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 '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. Such content requires substantially
greater streaming and storage capacity, which in turn, will require more
On-demand 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
8
consumes approximately five times the storage and approximately five times
the streaming capacity.
Our real-time product development will be focused on the following:
- iHawk. We continue to plan to offer systems based on Intel 32-bit processor
technology and will expand our offering with new AMD Opteron 64-bit
processor technology in addition to systems based on new Intel and AMD
dual-core processors. 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. We are also investigating opportunities to sell this
operating system as a software only, independent product through partners.
- RT-LAB RLX Simulation. We have entered into an engineering alliance with
Opal-RT whereby Opal-RT has made their MATLAB/Simulink(TM) data acquisition
testing product available on our RedHawk Linux based systems. Our product
is called RT-LAB RLX and allows 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 developed this PC-based
product based on visual software from Multigen-Paradigm Inc. These image
generation systems directly address the requirements of the simulation and
training and other markets. This new product allows 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 on-demand and real-time products are sold into highly-competitive
environments, driven by rapid technological innovation. Both product groups
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 on-demand product line currently include the
following:
SeaChange International, Inc. and C-COR Inc. (f.k.a. nCUBE Corp.).
Additionally, there are a number of other entities in the market, including
Microsoft Corporation, Kasenna, Inc., Broadbus Technologies, Inc., Tandberg
Television (f.k.a. 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 real-time product line 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;
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- 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., LynuxWorks, 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 on-demand and
real-time systems, our strategic partners have not agreed to refrain from
competing against us. Increased competition could result in price reductions
that would adversely affect our business, financial condition and results of
operations. Many of our 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 that
typically 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. However, some of our products utilize open
source that provides little copyright protection. 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 or with respect to open
source code utilized in our products. 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 nine pending abroad and have
obtained patent licenses to the portfolios owned by Everstream Holdings, Inc. (3
U.S. patents and multiple 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-part, extensions, reissues, and foreign counterparts thereof).
These patents cover multiple interactive television, targeted advertising, and
on-demand 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, Curtiss-Wright Controls, Inc., Sanmina-SCI Corporation, Seagate
Technology, Inc., Tyco Electronics Corporation, GE Fanuc and Xyratex Technology
Limited. In most
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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 revenue, expenses and operating results
from quarter to quarter in our on-demand and real-time businesses, and it is
possible that these variations will continue. We believe that fluctuations in
the number of orders for our on-demand 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 real-time products are dictated
by buying cycles of the government and large government contractors. In
addition, for both product lines, 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 on-demand business is dependent upon the
continued growth of the digital television industry in the United States and
internationally. Broadband 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 broadband 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 broadband 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, Florida, facility. As a result,
we are subject to federal and state environmental protection and community
right-to-know laws. These laws could have the effect of limiting our capital
expenditures and thus could have a material adverse effect on our business,
financial condition and results of operations. Violations of such laws 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, 2005, we had 366 employees worldwide. Of these employees,
304 were located in the United States and 62 were located internationally.
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, 2005, 2004, and 2003 is presented in Note 12 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
11
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 37.
RISKS RELATED TO OUR BUSINESS
A SIGNIFICANT PORTION OF OUR REVENUE HAS BEEN, AND IS EXPECTED TO CONTINUE TO
BE, CONCENTRATED IN A SMALL NUMBER OF CUSTOMERS. 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, 2005, Lockheed-Martin and Comcast
accounted for approximately 18% and 14%, respectively, of our revenues. If we
are unsuccessful in maintaining and expanding key relationships with these and
other existing customers, our business will be materially adversely affected.
Further, if we are unsuccessful in establishing relationships with other large
companies or experience problems in any of our systems, our ability to attract
new customers and sell additional products to existing customers will be
materially adversely affected.
Over the last twelve months, our relationship with Charter Communications
has deteriorated resulting in Charter's decision to swap our on-demand products
out of a number of sites. Over the course of the year, the number of Charter
sites using our products to provide on-demand service dropped from eight to two.
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 contractual service and
product obligations and our failure to adequately perform under these contracts
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 Lockheed-Martin, we do not have written
agreements that require customers to purchase fixed minimum quantities of our
products. Our sales to specific customers tend to, and are expected to continue
to, vary from year-to-year, depending on such customers' budgets for capital
expenditures and new product introductions.
WE INCURRED NET LOSSES IN THE PAST AND MAY INCUR FURTHER LOSSES IN THE FUTURE.
We incurred net losses of $7.7, $5.7 and $24.6 million in fiscal years
ended June 30, 2005, 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, 2005, we had an accumulated deficit of approximately
($136.5) 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.
12
Further, a defect, error or performance problem with our on-demand 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 ON-DEMAND SYSTEMS; AND OUR BROADBAND COMPANY CUSTOMERS
MAY ENTER INTO ARRANGEMENTS WITH OUR COMPETITORS ANY OF WHICH COULD MATERIALLY
AND ADVERSELY AFFECT OUR BUSINESS.
In order for our on-demand business to succeed, broadband companies,
particularly the largest North American broadband companies, must successfully
market VOD to their television subscribers. None of our 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 broadband 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 competitors.
The growth and future success of our on-demand business depends largely
upon our ability to penetrate markets and sell our systems to digitally-upgraded
domestic and international broadband companies. 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.
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 if we fail to
participate 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, financial condition and results of
operations.
WE UTILIZE OPEN SOURCE SOFTWARE WHICH COULD ENABLE OUR CUSTOMERS OR COMPETITORS
TO GAIN ACCESS TO OUR SOURCE CODE AND DISTRIBUTE IT WITHOUT PAYING ANY LICENSE
FEE TO CONCURRENT.
Key components of both our real-time and on-demand products utilize open
source software on Linux platforms. Some open source software, especially that
provided under the GNU Public License, is provided pursuant to licenses that
limited the restrictions that may be placed on the distribution and copying of
the provided code. Thus, it is possible that customers or competitors could
copy our software and freely distribute it. This could substantially impact our
business and the ability to protect future business.
WE HAVE A SIGNIFICANT BASE OF DEPLOYED PRODUCTS THAT OUR CUSTOMERS, OVER TIME,
MAY DECIDE TO SWAP FOR NEWER PRODUCTS FROM OTHER COMPANIES WITH IMPROVED
FUNCTIONALITY.
Although the VOD market is young in the view of most subscribers, a
significant number of our on-demand products have been deployed for several
years and may be facing obsolescence. When our customers evaluate replacing
those older products, they may choose to try a different vendor. If that were
to occur, we would lose future revenue opportunities from expansion as well as
maintenance.
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.
13
A LOSS OF OUR GOVERNMENT CONTRACTS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS.
We also derive a significant portion of our real-time revenues from the
supply of systems under government contracts. For the fiscal year ended June
30, 2005, we recorded $19.9 million in sales to U.S. government prime
contractors and agencies of the U.S. government. This amount represents
approximately 25% 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.
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 broadband
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.
WE CURRENTLY HAVE STRATEGIC RELATIONSHIPS WITH ALCATEL, SCIENTIFIC-ATLANTA AND
MOTOROLA, 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. For example, Alcatel recently announced an
agreement with Microsoft Corp. that we believe may jeopardize our long term
relationship with Alcatel. 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.
TRENDS IN OUR 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 business, and it is possible
that these variations will continue. We believe that fluctuations in the
14
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 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 on-demand is extremely competitive. Our primary competitor,
SeaChange International, is well funded and has been very successful in the VOD
market. Additionally, some smaller competitors are private and have been funded
by some of our broadband customers. This intense competition may severely
impact our success and ability to expand our on-demand deployments. The market
for our real-time products 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 real-time market with better, more appropriate
products. A list of the competitors faced by both of our markets 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 FAIL TO DEVELOP AND MARKET NEW PRODUCTS AND PRODUCT ENHANCEMENTS IN A
TIMELY MANNER, OUR BUSINESS COULD BE ADVERSELY AFFECTED.
Our future success is dependent on our development and marketing of
additional products that achieve market acceptance and enhance our current
products. 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. There can be
no assurance that we will be successful in pursuing any new products or
enhancements to existing products.
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. Further, we have indemnification
obligations with numerous customers that could require us to become involved in
IP litigation. 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.
15
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, Macrolink, Inc., Metal Form, Inc., Qlogic
Corporation, Curtiss-Wright Controls, Inc., Sanmina-SCI Corporation, Seagate
Technology, Inc., Tyco Electronics Corporation, GE Fanuc 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.
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
new key employees or to attract or retain other highly qualified personnel. In
the last eighteen months we have lost persons in the following positions: Chief
Executive Officer, President of the VOD division, President of the ISD division,
Chief Financial Officer, VP of sales for both the VOD and ISD divisions, VP of
product management, other key individuals in sales 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.
INTERNATIONAL SALES ACCOUNTED FOR APPROXIMATELY 33%, 18%, AND 14% OF OUR REVENUE
IN FISCAL YEARS 2005, 2004, AND 2003, RESPECTIVELY AND IS EXPECTED TO INCREASE.
ACCORDINGLY, OUR BUSINESS IS SUSCEPTIBLE TO NUMEROUS RISKS ASSOCIATED WITH
INTERNATIONAL OPERATIONS.
We are subject to a number of risks associated with international business
activities that could increase our costs, lengthen our sales cycle and require
significant management attention. These risks include:
16
- compliance with, and unexpected changes in, regulatory requirements
resulting in unanticipated costs and delays;
- difficulties in compliance with export and re-export regulations
governing U.S. goods and goods from our international subsidiaries;
- 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. 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.
On August 19, 2005, we entered into a definitive agreement to acquire
Everstream. Everstream is a leader in business intelligence software currently
focused on the cable industry. Everstream is valued at approximately $15 million
and we currently own the equivalent of $500,000 of Everstream stock. The
acquisition will be paid in Concurrent stock. The closing of this transaction is
expected to occur in our second quarter of fiscal 2006. We cannot assure that
this transaction will occur, nor can we assure that we can successfully
integrate Everstream's business, products, technologies and personnel into our
business. 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.
Real-time and on-demand 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.
17
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 ON-DEMAND BUSINESS.
We sell our on-demand products to cable companies that have upgraded their
networks to support interactive, digital services. However, the cable industry
has received negative publicity regarding cable companies' lack of sufficient
free cash flow to fund capital expenditures and debt service requirements after
years of significant capital spending to upgrade their cable plants to digital,
two-way interactive capability. As a result, certain cable companies have
communicated their intent to reduce capital spending to accelerate the point at
which they will generate free cash flow and improve their financial stability.
This may adversely impact the speed at which these cable companies deploy VOD in
their cable markets. Other factors contributing to the uncertainty in the cable
industry is the bankruptcy of Adelphia Communications Corporation.
THE SUCCESS OF OUR ON-DEMAND 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 subscribers and other industry participants, including
broadband companies, content providers, set-top box manufacturers, and
educational institutions. The future growth of our on-demand 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 ON-DEMAND 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 ON-DEMAND 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 on-demand 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 are 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 on-demand system orders, which
would adversely affect our on-demand business.
18
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 on-demand and real-time 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 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 PRODUCT LINES 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 on-demand and real-time product lines. The television industry is
subject to extensive regulation in the United States and other countries. Our
on-demand business is dependent upon the continued growth of the digital
television industry in the United States and internationally. Broadband
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 broadband
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 broadband customers, and thereby materially adversely affect our business,
financial condition and results of operations. Our real-time business 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 BROADBAND COMPANIES, IS MISUSED.
Our on-demand systems allow broadband 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 on-demand 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 ON-DEMAND BY BROADBAND COMPANIES MAY BE DELAYED DUE TO LIMITED
BANDWIDTH OR OTHER TECHNOLOGY INITIATIVES THAT COULD REQUIRE BROADBAND COMPANIES
TO FURTHER UPGRADE THEIR NETWORKS.
Bandwidth is a limited resource. On-demand 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 broadband companies' network bandwidth and may
require the cable companies to increase their bandwidth capabilities by further
upgrading their networks and therefore delaying on-demand deployments.
OTHER RISKS
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.
19
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 on June 30, 2002 to $22.9 million on
June 30, 2005. We expect that our working capital may continue to decrease
during fiscal year 2006. If our 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.
WE HAVE IMPLEMENTED CERTAIN ANTI-TAKEOVER PROVISIONS THAT COULD MAKE IT MORE
DIFFICULT FOR A THIRD PARTY TO ACQUIRE US.
Provisions of Delaware law and our restated certificate of incorporation,
amended and restated bylaws, and rights plan could make it more difficult for a
third party to acquire us, even if doing so would be beneficial to our
stockholders.
We are subject to certain Delaware anti-takeover laws regulating corporate
takeovers. These anti-takeover laws prevent a Delaware corporation from engaging
in a business combination involving a merger or sale of more than 10% of our
assets with any stockholder, including affiliates and associates of the
stockholder, who owns 15% or more of the outstanding voting stock, for three
years following the date that the stockholder acquired 15% or more of the
corporation's stock except under limited circumstances.
There are provisions in our restated certificate of incorporation and our
amended and restated bylaws that also may delay, deter or impede hostile
takeovers or changes of control.
In addition, we have a rights plan, also known as a poison pill. The
rights plan has the potential effect of significantly diluting the ownership
interest in us of any person that acquires beneficial ownership of 15% or more
of our common stock or commences a tender offer that would result in a person or
group owning 15% or more of our common stock.
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, 2005, the high and low prices reported on the NASDAQ
National Market were $2.95 and $1.35, respectively. Further, as of August 23,
2005, the price as reported on the NASDAQ National Market was $1.82. 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 on-demand market in general;
- changes in market valuations of similar companies;
- 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,
20
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, 2005, 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
In addition to the facilities listed above, we also lease space in various
domestic and international industrial centers for use as sales and service
offices and warehousing.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our ordinary course of business. We are not presently involved in
any material litigation, but have the following matters pending:
- Vicor, Inc. v. Concurrent Computer Corporation, Essex Superior Court,
-----------------------------------------------
Massachusetts, Civil Action No. C5-1437A. This suit was filed August
18, 2005 requesting declaratory relief regarding a contractual dispute
between the parties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
21
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, 2005:
NAME POSITION AGE
- ---- -------- ---
T. Gary Trimm President and Chief Executive Officer 57
Warren Neuburger Chief Operating Officer 51
Gregory S. Wilson Chief Financial Officer 40
Kirk L. Somers Vice President Investor Relations and General Counsel & Secretary 40
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 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 serves on the board
of directors of OpVista.
Warren Neuburger, Chief Operating Officer. Mr. Neuburger joined Concurrent
in June 2004 as President of the Integrated Solutions Division. In January
2005, as part of the integration of the VOD and Integrated Solutions divisions,
he became Chief Operating Officer. 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.
Gregory S. Wilson, Chief Financial Officer. Mr. Wilson joined Concurrent
in February 2000 as the company's corporate controller. In January 2005, he was
promoted to Chief Financial Officer. Prior to joining Concurrent, from 1998 to
2000, Mr. Wilson served as the Manager of Financial Planning and Analysis at LHS
Group Inc., a publicly traded global provider of operating support system
software and services to the communications industry. From 1997 to 1998, Mr.
Wilson served as a consultant for BAAN Corporate Office Solutions. From 1994 to
1997, Mr. Wilson served as Director of Planning and Analysis for a division of
Turner Broadcasting. From 1990 to 1994, he worked for Oppenheimer Capital where
his financial responsibilities included internal financial reporting, quarterly
and annual filings with the SEC, and financial planning and analysis. Mr. Wilson
began his career with Ernst and Young of Atlanta in 1987.
Kirk L. Somers, Vice President, Investor Relations, General Counsel and
Secretary. Mr. Somers has served as General Counsel since November 2001 and was
appointed Secretary in August 2004. He was made a vice president and placed in
charge of Investor Relations in January 2005. 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.
22
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 2005
QUARTER ENDED: HIGH LOW
----- -----
September 30, 2004 $2.00 $1.35
December 31, 2004 $2.95 $1.40
March 31, 2005 $2.94 $1.69
June 30, 2005 $2.31 $1.48
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
As of August 23, 2005, there were 63,642,996 shares of Common Stock
outstanding, held by approximately 18,750 stockholders with a closing price on
the NASDAQ National Market of $1.82.
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.
23
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."
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED JUNE 30,
--------------------------------------------------------------------
INCOME STATEMENT DATA 2005 2004 2003 2002 2001
- --------------------- ------------- -------- --------- ------- --------
Net sales $ 78,685 $79,235 $ 75,453 $89,369 $72,821
Gross margin 38,776 38,722 36,423 44,566 33,020
Operating income (loss) (7,457) (8,540) (11,429) (3) 3,679 (5,591)
Net income (loss) (7,729) (1) (5,725) (2) (24,552) (4) 4,383 (6,189)
Net income (loss) per share
Basic $ (0.12) (1) $ (0.09) (2) $ (0.40) (4) $ 0.07 $ (0.11)
Diluted $ (0.12) (1) $ (0.09) (2) $ (0.40) (4) $ 0.07 $ (0.11)
AT JUNE 30,
--------------------------------------------------------------------
BALANCE SHEET DATA 2005 2004 2003 2002 2001
- ------------------ ------------- -------- --------- ------- --------
Cash, cash equivalents and
short-term investments $ 19,880 $27,928 $ 30,697 $30,519 $ 9,460
Working capital 22,911 26,378 30,180 43,545 14,824
Total assets 63,977 74,542 77,839 98,688 57,052
Stockholders' equity 38,353 45,726 43,458 69,224 33,283
<FN>
(1) Net loss for the year ended June 30, 2005 includes $0.4 million impairment
charge related to our investment in Everstream, net of a $0.1 million
recovery of a previously recognized impairment charge related to our
investment in Thirdspace.
(2) 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.
(3) Operating loss for the year ended June 30, 2003 includes a restructuring
charge of $1.6 million.
(4) 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.
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
During the year ended June 30, 2005, we used approximately $8.5 million in
cash and cash equivalents from operations, and ended the fiscal year with $19.9
million in cash and cash equivalents, after borrowing $3.0 million in the form
of a term loan. During the year ended June 30, 2004, we used $2.4 million in
cash and cash equivalents from operations, and ended the year with $27.9
million. The increased use of cash from operations during the twelve months
ended June 30, 2005 compared to the twelve months ended June 30, 2004 is
primarily due to changes in working capital and continued operating losses
during the year. Also, our cash usage increased due to
24
the recognition of revenue during fiscal year 2005 on shipments for which
approximately $4.0 million in cash was received in the prior fiscal year. In an
attempt to reduce the cash used in operating activities and reduce our breakeven
point, we undertook actions during this fiscal year to reduce operating expenses
that included reducing our workforce by approximately 14% and reducing our
capital expenditures. See further discussions in the "Liquidity and Capital
Resources" section of this document. During the year, we have seen a shift in
on-demand revenue from large, new North American on-demand deployments to a mix
of new international deployments, and expansions of streams, ingest, and storage
with smaller, new North American on-demand deployments.
In this fiscal year, we recorded costs associated with Sarbanes-Oxley
Section 404 compliance. For the year ended June 30, 2005, we spent approximately
$0.9 million and invested significant personnel hours.
During fiscal year 2005, we changed our management structure. We are now
operating as a united company by consolidating the real-time and on-demand
operating divisions. The divisional structure was officially consolidated under
a functional organization with real-time and on-demand product lines. In
accordance with SFAS 131, "Disclosure about Segments of an Enterprise and
Related Information", we operate in three segments: on-demand systems, real-time
systems, and services.
On May 4, 2005, our Board of Directors, upon recommendation of the Board's
Compensation and Audit Committees, approved the accelerated vesting of all
unvested and "out-of-the-money" options priced above $2.10 held by current
employees and officers. The Board did not accelerate vesting of any options
held by the Chief Executive Officer or any directors. The Board fully vested
approximately 1.3 million shares of the Company's common stock that would
otherwise have vested at various times within the next four years. The options
have a range of exercise prices of $2.12 to $14.85. This acceleration of
vesting period was considered a modification of the stock option award and
resulted in the need to determine if any compensation expense should be recorded
on the modification date. As the intrinsic value at the date of modification was
$0, we recorded no compensation expense for this modification.
On June 22, 2005, our Board of Directors, upon recommendation of the
Board's Compensation Committee, approved the grant of an aggregate of 2.1
million shares of the Company's common stock, with an exercise price of $2.15,
to all current employees. These options were fully vested on the date of grant,
but the shares issued upon the exercise of the options may not be transferred or
encumbered until certain transfer restrictions lapse. This one-time initiative
was undertaken by the Compensation Committee to provide a retention incentive to
general employees and to motivate them to approach their jobs from the
perspective of shareholders while providing a traditional long-term incentive to
senior management.
Our decisions to initiate the accelerated vesting of options on May 4, 2005
and to subsequently grant fully vested stock options with limits on
transferability on June 22, 2005 were made primarily to limit compensation
expense that would be expected to be recorded in future periods following the
Company's adoption on July 1, 2005 of SFAS No. 123, "Share-Based Payment
(revised 2004)" ("SFAS 123(R)"). We currently account for stock-based
compensation using the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," under which we have not recognized
any compensation expense for our stock option grants. SFAS 123(R) will require
us to record compensation expense equal to the fair value of all equity-based
compensation over the vesting period of each such award. As a result of the
Board's decisions discussed above, we believe we reduced our aggregate
compensation expense by a total of approximately $6.8 million, net of taxes over
the next four years (the vesting period for the accelerated options).
Over the last twelve months, our relationship with Charter Communications
has deteriorated resulting in Charter's decision to swap our on-demand products
out of a number of sites. Over the course of the year, the number of Charter
sites using our products to provide on-demand service dropped from eight to two.
RECENT EVENTS
On August 19, 2005, we entered into a definitive agreement to acquire
Everstream. Everstream is a leader in business intelligence software currently
focused on the cable industry. Everstream is valued at approximately $15
million and Concurrent currently owns the equivalent of $500,000 of Everstream
stock (4.9% of outstanding shares). The acquisition will be paid in Concurrent
stock. The closing of this transaction is expected to occur in our second
quarter of fiscal 2006.
25
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
We recognize revenue 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. 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.
Software and Hardware Sales
- ------------------------------
On-demand (formerly "VOD") and real-time (formerly "Integrated Solutions")
product revenues are recognized based on the guidance in American Institute of
Certified Public Accountants Statement of Position ("SOP") 97-2, "Software
Revenue Recognition" ("SOP 97-2") and related amendments, SOP 98-4, "Deferral of
the Effective Date of a Provision of SOP 97-2, Software Revenue Recognition",
and SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions". Our standard contractual arrangements with our
customers generally include the delivery of a hardware and software system,
certain professional services that typically involve installation and training,
and ongoing software and hardware maintenance. The software component of the
arrangement is considered to be essential to the functionality of the hardware.
Therefore, in accordance with Emerging Issues Task Force No. 03-5,
"Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables
in an Arrangement Containing More-Than-Incidental Software", the hardware and
the hardware maintenance components are considered software related and the
provisions of SOP 97-2 apply to all elements of the arrangement. Under multiple
element arrangements, we allocate revenue to the various elements based on
vendor-specific objective evidence ("VSOE") of fair value. Our VSOE of fair
value is determined based on the price charged when the same element is sold
separately. If VSOE of fair value does not exist for all elements in a multiple
element arrangement, 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.
Professional Services
- ----------------------
Professional services revenue is primarily generated from integration of
third party software interfaces, training, and hardware installation. These
services are typically completed within 90 days from the receipt of the order.
Under multiple element arrangements, we allocate revenue to the various elements
based on VSOE of fair value. We determine VSOE of fair value for the services
based on the standard rate per hour or fixed fee used when similar services are
sold separately. Revenues from these services are recognized when the services
are performed.
In certain instances, our customers require significant customization of
both the software and hardware products. In these situations, the services are
considered essential to the functionality of the software and, therefore, the
revenue from the arrangement, with the exception of maintenance, is recognized
in conformity with Accounting Research Bulletin ("ARB") No. 45, "Long Term
Construction Type Contracts" and SOP 81-1, "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts." We record the value
of the entire arrangement (excluding maintenance) as the project progresses
based on actual costs incurred compared to the total costs expected to be
incurred through completion. Revisions in profit estimates are charged to
income in the period in which the facts that give rise to the revision become
known.
26
Hardware and Software Maintenance
- ---------------------------------
We recognize revenue from maintenance services in accordance with SOP 97-2.
Depending upon the specific terms of the customer agreement, we may include
warranty as part of the purchase price. In accordance with SOP 97-2 and,
depending upon the specific terms of the customer agreement, we either accrues
the estimated costs to be incurred in performing maintenance services at the
time of revenue recognition and shipment of product, or we defer revenue
associated with the maintenance services to be provided during the warranty
period based upon the value for which we have sold such services separately when
they are renewed by existing customers. For those arrangements in which the
warranty period is less than or equal to one year, we accrue the estimated costs
to be incurred in providing services. In accordance with paragraph 59 of SOP
97-2, we have determined that the warranty fee is part of the initial license
fee, the warranty period is for one year or less, the estimated cost of
providing the services are immaterial, and upgrades and enhancements offered
during maintenance arrangements historically have been and are expected to
continue to be minimal and infrequent. Actual costs are then charged against
the warranty accrual as they are incurred. For those arrangements in which the
warranty period is greater than one year, we defer revenue based upon the value
for which we have sold such services separately. This revenue is then
recognized on a straight line basis over the warranty period.
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 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, 2005, we had $10.7 million of goodwill. 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, 2005 and 2004, 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
27
goodwill during the twelve months ended June 30, 2005. 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, 2005 and June 30, 2004,
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.
Stock-Based Compensation
We have stock-based employee compensation plans and account for these plans
using Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees", and related interpretations. During fiscal 2005, we issued
restricted stock awards, a portion of which is part of a multi-year restricted
stock performance plan. Because a portion of this restricted stock plan is
performance based, that portion must be accounted for using variable accounting,
requiring interim estimates of compensation. Interim measures of compensation
are based on a combination of the fair-value of the stock as of the end of the
reporting period and an assessment of whether the performance criteria will
ultimately be met. To the extent that the fair value of our stock fluctuates
and our assessments of achieving the performance criteria change, cost of sales
and operating expenses may be positively or negatively impacted.
Effective July 1, 2005, we will adopt SFAS 123(R) which requires that the
cost resulting from all share-based payment transactions be recognized in the
financial statements and requires all entities to apply a fair-value-based
measurement method in accounting for share-based payment transactions with
employees. Concurrent anticipates the expected additional compensation expense
resulting from adoption of SFAS 123(R) to be $180,000 for fiscal year 2006,
based on unvested options as of June 30, 2005. Assumptions used to estimate
compensation expense from issuance of share-based compensation are based, to
some extent, on historical experience and expectation of future conditions. To
the extent we issue additional share-based compensation, or assumptions
regarding previously issued share-based compensation change, our future
share-based compensation expense may be positively or negatively impacted.
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,
-----------------------
2005 2004 2003
------ ------ -------
Revenues (% of total sales):
Product 72.5 % 71.9 % 72.2 %
Service 27.5 28.1 27.8
------ ------ -------
Total sales 100.0 100.0 100.0
Cost of sales (% of respective sales category):
Product 47.4 49.3 47.1
Service 59.5 55.7 63.6
------ ------ -------
Total cost of sales 50.7 51.1 51.7
Gross margin 49.3 48.9 48.3
Operating expenses
Sales and marketing 22.6 21.8 24.0
Research and development 23.8 25.2 24.9
General and administrative 12.4 12.7 12.4
Restructuring charge - - 2.1
Gain on liquidation of foreign subsidiary - (0.1) -
------ ------ -------
Total operating expenses 58.8 59.6 63.4
------ ------ -------
Operating loss (9.5) (10.7) (15.1)
Recovery (impairment) of minority investment (0.4) 3.9 (17.2)
Interest income - net 0.3 0.4 0.8
Other expense - net (0.6) (0.2) (0.2)
------ ------ -------
Loss before income taxes (10.2) (6.6) (31.7)
Provision (benefit) for income taxes (0.4) 0.6 0.8
------ ------ -------
Net loss (9.8)% (7.2)% (32.5)%
====== ====== =======
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 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
enhancement and development, cost of outside contractors engaged to
29
perform software development services, and software certification costs.
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.
FISCAL YEAR 2005 IN COMPARISON TO FISCAL YEAR 2004
The following table sets forth summarized consolidated financial
information for each of the two fiscal years ended June 30, 2005 and 2004 as
well as comparative data showing increases and decreases between periods.
YEAR ENDED JUNE 30,
---------------------
$ %
(DOLLARS IN THOUSANDS) 2005 2004 CHANGE CHANGE
---------- ---------- -------- --------
Product sales $ 57,070 $ 56,947 $ 123 0.2%
Service sales 21,615 22,288 (673) (3.0%)
---------- ---------- -------- --------
Total sales 78,685 79,235 (550) (0.7%)
Product cost of sales 27,053 28,091 (1,038) (3.7%)
Service cost of sales 12,856 12,422 434 3.5%
---------- ---------- -------- --------
Total cost of sales 39,909 40,513 (604) (1.5%)
---------- ---------- -------- --------
Product gross margin 30,017 28,856 1,161 4.0%
Service gross margin 8,759 9,866 (1,107) (11.2%)
---------- ---------- -------- --------
Total gross margin 38,776 38,722 54 0.1%
Operating expenses:
Sales and marketing 17,785 17,302 483 2.8%
Research and development 18,748 20,000 (1,252) (6.3%)
General and administrative 9,717 10,071 (354) (3.5%)
Restructuring charge (17) - (17) NM(1)
Gain on liquidation of foreign subsidiary - (111) 111 NM(1)
---------- ---------- -------- --------
Total operating expenses 46,233 47,262 (1,029) (2.2%)
---------- ---------- -------- --------
Operating loss (7,457) (8,540) 1,083 (12.7%)
Recovery (impairment) of minority investment (313) 3,103 (3,416) (110.1%)
Other income (expense) - net (231) 184 (415) (225.5%)
---------- ---------- -------- --------
Loss before provision for income taxes (8,001) (5,253) (2,748) 52.3%
Provision (benefit) for income taxes (272) 472 (744) (157.6%)
---------- ---------- -------- --------
Net loss $ (7,729) $ (5,725) $(2,004) 35.0%
========== ========== ======== ========
(1) NM denotes percentage is not meaningful
Product Sales. Total product sales for fiscal year 2005 were $57.1
million, an increase of approximately $0.2 million from $56.9 million in fiscal
year 2004. The increase in product sales resulted from an $8.6 million, or
48.8%, increase in real-time product sales to $26.1 million during fiscal year
2005, from $17.6 million during fiscal year 2004. The increase in real-time
product sales is due to an increase in product volume to both domestic and
international customers. Domestic and international real-time product revenues
increased $7.6 million and $1.0 million, respectively, from fiscal year 2004 to
fiscal year 2005.
Partially offsetting the increase in real-time products, on-demand product
sales decreased approximately $8.4 million, or 21.5%, to $31.0 million during
fiscal year 2005 from $39.4 million during fiscal year 2004. The decrease in
on-demand product sales was due to fewer products sold in the North American
market during 2005, as
30
compared to the same period of the prior year. This reduction in domestic
on-demand product revenue was partially offset by an increase in international
sales volume during fiscal year 2005 that resulted in a $10.0 million increase
in international on-demand product revenue, compared to fiscal year 2004.
Fluctuation in on-demand product 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. We believe that we will be able to maintain
or increase our share of the North American cable market and also capture a
share of the video-over-DSL market in both the United States and
internationally. We also anticipate that the price erosion that has occurred
over the past 5 years will not exceed the decline in cost of goods sold.
Service Revenue. Service revenue decreased $0.7 million, or 3.0%, to $21.6
million for fiscal year 2005 from $22.3 million in fiscal year 2004. Service
revenue associated with on-demand products increased approximately $2.4 million,
or 35.3%, to $9.1 million during fiscal year 2005 from $6.7 million in fiscal
year 2004, as we continue to recognize maintenance, installation, and training
revenue on our expanding base of on-demand market deployments. As the warranty
agreements that typically accompany the initial sale and installation of our
on-demand systems expire, we expect to sell new, long-term maintenance
agreements. Because of these anticipated new agreements and our expanding
deployment base, we expect service sales related to on-demand products to
continue to increase.
The increase in service revenue associated with on-demand product was
partially offset by a $3.1 million, or 19.6%, decrease in service revenue
associated with real-time product to $12.5 million during fiscal year 2005 from
$15.6 million in the same period of the prior fiscal year. Real-time related
service revenue continued to decline primarily due to the expiration of
maintenance contracts as legacy machines were removed from service and, to a
lesser extent, from customers purchasing our new products that produce
significantly less service revenue. We expect this trend of declining real-time
service revenue to continue into the foreseeable future.
Product Gross Margin. Product gross margin was $30.0 million for fiscal
year 2005, an increase of $1.2 million, or 4.0%, from $28.8 million for fiscal
year 2004. Product gross margin as a percentage of product sales increased to
52.6% in fiscal year 2005 from 50.7% in fiscal year 2004, primarily because the
gross margin on sales of real-time product increased to 60.6% in fiscal year
2005 from 58.9% in fiscal year 2004. The increase in real-time product gross
margin is due to a favorable product mix, as compared to the same period of the
prior fiscal year. On-demand product gross margin decreased to 45.8% from 47.0%
of on-demand product revenue in fiscal 2004. On-demand product gross margin was
higher in fiscal year 2004 primarily due to the 3.4% favorable impact on margins
in that year resulting from a $1.3 million expense reversal for warrants
previously accrued for Scientific Atlanta, Inc. Partially offsetting this,
current year margins were favorably impacted by $0.8 million lower provision for
inventory reserves, as a significant portion of older generation on-demand
inventory was reserved in the prior fiscal year.
Service Gross Margin. The gross margin on service sales decreased $1.1
million, or 11.2%, to $8.8 million, or 40.5% of service revenue in fiscal 2005
from $9.9 million, or 44.3% of service revenue in fiscal year 2004. The decline
in service margins is primarily due to severance expense incurred in the current
year. Severance expense of $0.6 million recorded to service cost of sales in
fiscal year 2005 resulted from a reduction in domestic and international service
personnel as we have scaled down our infrastructure necessary to fulfill
declining real-time contractual service obligations. Additionally, the service
margins were brought down by lower revenues from the expiration of maintenance
contracts as legacy machines are removed from service and replaced with machines
that are simpler to maintain. We will continue to scale down the real-time
service infrastructure in response to this trend of declining real-time
contractual service obligations. In addition, we expect to realize increased
efficiencies from the combination of our on-demand and real-time service groups.
Sales and Marketing. Sales and marketing expenses increased $0.5 million,
or 2.8%, to $17.8 million during fiscal year 2005 from $17.3 million in fiscal
year 2004, primarily due to an additional $0.7 million of commissions resulting
from sales growth in Europe and Asia. In addition, we incurred $0.5 million of
severance expense related to a reduction in force initiative during the current
fiscal year. The increases in severance and international commission expense
were partially offset by a $0.3 million decrease in salaries, wages and benefits
and a $0.2 million decrease in sales facilities, trade show, and other marketing
costs, all due to the reduction in force and cost savings initiative in the
current fiscal year. In addition, we reduced depreciation expense associated
with demonstration equipment by $0.3 million from fiscal year 2004 to 2005 by
exercising greater discipline over expenditures on such equipment.
Research and Development. Research and development expenses decreased $1.3
million, or 6.3%, to $18.7 million during fiscal 2005 from $20.0 million in
fiscal year 2004. During fiscal year 2005, we incurred $1.2 million
31
less expense from development engineers and subcontractors that had previously
been used to meet software development requirements. In addition to the
decreasing personnel costs, we also incurred $0.4 million less in product
certification costs during fiscal year 2005, compared to fiscal year 2004.
These decreasing costs were partially offset by $0.2 million of additional
severance expense associated with the reduction in development personnel after
meeting development objectives. We expect that software development costs will
continue to stabilize and flatten over the next few years, as we reduce our
number of software platforms and improve the stability of our software in the
field.
General and Administrative. General and administrative expenses decreased
$0.4 million, or 3.5%, to $9.7 million during fiscal year 2005 from $10.1
million in fiscal year 2004. This decrease in general and administrative
expense is primarily due to reduced current year expenses and prior year non
recurring expense activity. During fiscal year 2004, we incurred $0.6 million in
non-recurring legal fees resulting primarily from the successful defense of a
lawsuit brought by SeaChange International alleging defamation. In fiscal year
2004 we also incurred $0.6 million of severance resulting from the resignation
of our former president and CEO. Partially offsetting these fiscal year 2004
costs, we reversed $0.6 million of bad debt reserve related to specific
receivables that were ultimately collected. In addition to this prior year,
non-recurring activity, during fiscal year 2005 we incurred an additional $0.6
million in accounting services. These services related to the additional
internal and external audit work required for compliance with the Sarbanes-Oxley
Act of 2002. Partially offsetting the fiscal year 2005 increase in accounting
fees, we reduced administrative staff resulting in a $0.3 million reduction in
salaries wages and benefits, and reduced fees and expenses incurred by the Board
of Directors by approximately $0.2 million, both as a result of the company-wide
cost savings initiative during fiscal year 2005.
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.
Recovery (Impairment Loss) of Minority Investment. During fiscal year
2005, we became aware of circumstances that provide evidence of an "other than
temporary" impairment of our investment in Everstream. Based upon an evaluation
of the investment in Everstream during this period, we recorded an impairment
charge of $413,000 and reduced our "Investment in minority owned company" to
$140,000.
During fiscal year 2004 we received $3.1 million in cash from continued
monetization of the Thirdspace assets and settlement of its liabilities. An
additional $0.1 million recovery of Thirdspace assets was recognized in fiscal
year 2005, partially offsetting the $413,000 Everstream impairment charge.
Interest Expense. Interest expense increased $0.2 million to $0.2 million
in fiscal year 2005 from fiscal year 2004 as we entered into a three year $3
million term loan during the second quarter of fiscal year 2005. As of June 30,
2005, we recorded approximately $0.2 million of interest expense associated with
this loan.
Other expense. Other expenses increased $0.4 million to $0.5 million in
fiscal year 2005 from $0.1 million in fiscal 2004 primarily due to $0.2 million
in realized currency translation losses on settlement of foreign transactions
and $0.2 million on losses from the write-off of fixed assets that are no longer
of use.
Provision for Income Taxes. We recorded an income tax benefit for our
domestic and foreign subsidiaries of $272,000 during fiscal year 2005. Of this
amount, $264,000 relates to income tax contingency reserves that we determined
were no longer required and were reversed as an income tax benefit. The
remainder of the benefit relates primarily to a tax benefit recognized by one of
our international subsidiaries that utilized a net operating loss carryback in
fiscal year 2005. In fiscal year 2004, we recorded income tax expense for our
domestic and foreign subsidiaries, which was related primarily to income earned
in foreign locations, which cannot be offset by net operating loss
carryforwards.
Net loss. The net loss for fiscal year 2005 was $7.7 million or $0.12 per
basic and diluted share compared to net loss for fiscal year 2004 of $5.7
million or $.09 per basic and diluted share.
32
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.
YEAR ENDED JUNE 30,
-------------------
$ %
(DOLLARS IN THOUSANDS) 2004 2003 CHANGE CHANGE
-------- --------- -------- --------
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 loss (8,540) (11,429) 2,889 (25.3%)
Recovery (impairment) of minority investment 3,103 (12,951) 16,054 (124.0%)
Other income (expense) - net 184 417 (233) (55.9%)
-------- --------- -------- --------
Loss before provision for income taxes (5,253) (23,963) 18,710 (78.1%)
Provision for income taxes 472 589 (117) (19.9%)
-------- --------- -------- --------
Net 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
on-demand 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 on-demand
product sales was due to an increase in volume of on-demand system sales due to
new on-demand 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 on-demand 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
on-demand products sold was partially offset by change in product mix,
continuing declines in average price, 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 on-demand revenue is often
due to the fact that we have a small base of large customers making periodic
large purchases that account for a significant percentage of revenue.
Partially offsetting the increase in on-demand product sales, real-time
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 real-time product sales is primarily due to our customers' plans to control
inventory and manage cash flow. The decline in domestic real-time sales was
partially offset by an increase in international revenue, particularly from
strong sales in Europe and Japan.
33
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. On-demand
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 we continued to recognize
deferred maintenance revenue and expand our on-demand customer base requiring
additional installation, training, technical support, and software and hardware
maintenance services.
The increase in on-demand service revenue was partially offset by a $1.9
million, or 10.9%, decrease in real-time service revenue to $15.6 million in
fiscal year 2004 from $17.5 million in fiscal year 2003. Real-time 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 newer products that produce significantly less
service revenue.
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. On-demand product gross margin decreased to 47.0% of on-demand product
revenue for fiscal year 2004 from 49.1% for fiscal year 2003. The decrease in
on-demand product gross margin is due to changes in product mix and continued
declines in average price. 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 sales
price, revenue reduction related to Comcast warrants, and additional on-demand
inventory reserves and warranty cost were partially offset by the favorable
impact from the Scientific Atlanta, Inc. 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 on-demand 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.
The gross margin on sales of real-time product decreased to 58.9% of
real-time product revenue in fiscal year 2004 from 59.7% of real-time 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 on-demand
service margin in fiscal year 2004. On-demand service margins increased to
42.0% of on-demand service revenue in fiscal year 2004 compared to 16.0% in the
prior year as the on-demand division continues to build its on-demand customer
base and the fixed costs associated with our customer support activities are
being spread over a larger revenue base. Although our on-demand 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. Real-time service gross margin
increased to 45.3% of real-time 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.
Sales and Marketing. Sales and marketing 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 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. We
also reduced salaries, wages and benefits by $0.3 million in fiscal year 2004 as
we were 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. Offsetting these expense
reductions, we incurred an additional $0.2 million of depreciation expense from
loaner and demo equipment, primarily related to our Media Hawk 4000 on-demand
systems.
Research and Development. Research and development 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
$1.5 million for additional software development staff in fiscal year 2004. In
fiscal year 2004 we 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
34
increases in both our customer base and deployment base. We also added
development staff to focus on developing and expanding our Linux data
acquisition products such as Lab Workbench to better position us to target the
data acquisition market. In addition to the increase in personnel costs, we
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 on-demand software development and consulting
expenses, compared to the same period of the prior year.
General and Administrative. General and administrative 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 to
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.
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.
Recovery (Impairment 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 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 (impairment 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
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.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity is dependent on many factors, including sales volume,
operating profit and the efficiency of asset use and turnover. Our future
liquidity will be affected by, among other things:
- the rate of growth, if any, of new on-demand market deployments and the
pace at which domestic and international cable companies and telephone
companies implement on-demand technology;
- the rate of growth, if any, of expansions of previously deployed on-demand
systems and our ability to retain markets where our on-demand systems were
originally deployed;
- the actual versus anticipated decline in revenue from maintenance of
real-time proprietary systems;
- revenues from real-time systems;
35
- ongoing cost control actions and expenses, including for example, research
and development and capital expenditures;
- the margins on our on-demand and real-time businesses;
- our ability to raise additional capital, if necessary;
- our ability to obtain additional bank financing, if necessary;
- our ability to meet the covenants contained in our Credit Agreement;
- timing of product shipments which occur primarily during the last month of
the quarter;
- the percentage of sales derived from outside the United States where there
are generally longer accounts receivable collection cycles; and
- the number of countries in which we operate, which may require maintenance
of minimum cash levels in each country and, in certain cases, may restrict
the repatriation of cash, such as cash held on deposit to secure office
leases.
Uses and Sources of Cash
We used $8.5 million and $2.4 million of cash from operating activities
during fiscal years 2005 and 2004, respectively, compared to providing cash of
$7.1 million during fiscal year 2003. The decrease in cash from operations was
primarily due to funding of net operating losses in fiscal years 2005 and 2004.
The increase in operating cash flows in fiscal year 2003 was primarily due to
favorable changes in working capital, specifically accounts receivable in 2003.
Until our revenue increases and stabilizes, it is likely that we will continue
to use cash from operating activities.
We invested $2.0 million in property, plant and equipment during fiscal
year 2005 compared to $4.9 million during fiscal year 2004 and $5.6 million in
fiscal year 2003. Capital additions during fiscal years 2005, 2004 and 2003
relate primarily to product development and testing equipment, demonstration
equipment and equipment loans to our customers. We expect a similar mix and
cost of capital during the upcoming year, as we continue to focus on further
development of our technology. However, we will continue exercising greater
discipline over capital expenditures on capital equipment.
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 $58,000, $1.2 million, and $0.6 million from the issuance of
common stock to employees and directors who exercised stock options during
fiscal years 2005, 2004 and 2003, respectively.
During the quarter ended December 31, 2004, we executed a Loan and Credit
Agreement with Silicon Valley Bank. The Credit Agreement provides for a two year
$10 million revolving credit line and a three year $3 million term loan. As of
June 30, 2005, we had no amounts drawn under the Revolver and had drawn down the
entire $3.0 million term loan, of which $463,000 has been repaid, under the Term
Loan. Interest on all outstanding amounts under the Revolver is payable monthly
at the prime rate (6.00% at June 30, 2005) plus 0.50% per annum, and interest on
all outstanding amounts under the Term Loan is payable monthly at a rate of 8.0%
per annum. The Term Loan is repayable in 36 equal monthly principal and interest
installments of $94,000 and any outstanding principal of the Revolver is due on
December 23, 2006, unless the Revolver is terminated earlier in accordance with
its terms.
In addition, the Credit Agreement contains certain financial covenants,
including required minimum quick ratio and minimum tangible net worth, and
customary restrictive covenants concerning our operations. As of June 30, 2005,
we were in compliance with these covenants. Based on the borrowing formula and
our financial position as of June 30, 2005, $5.3 million would have been
available to us under the Revolver.
At June 30, 2005, we had working capital of $22.9 million and had no
material commitments for capital
36
expenditures compared to working capital of $26.4 million and $30.2 million at
June 30, 2004 and 2003, respectively. We believe that existing cash balances
will be sufficient to meet our anticipated working capital and capital
expenditure requirements for the next 12 months; however, until our revenue
increases and stabilizes, it is likely that we will continue to use cash from
operating activities. As part of our cost reduction initiative implemented
during the current fiscal year, we anticipate reducing our breakeven point. If
revenues do not reach these breakeven levels or our cost reduction efforts are
not as successful as planned, then we will continue to use cash. Our working
capital has declined from $43.5 million at June 30, 2002 to $22.9 million at
June 30, 2005, which includes $3.0 million drawn under our new Credit Agreement.
If our on-demand revenue does not increase and stabilize in future periods, we
will continue to use cash in operating activities, which will cause working
capital to further decline. If this situation continues, we may need to raise
additional funds through an offering of stock or debt, in addition to our Credit
Agreement. We cannot be certain that we will be able to obtain additional
financing on favorable terms, if at all.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table summarizes our significant contractual obligations and
commitments:
PAYMENTS DUE BY FISCAL YEAR
----------------------------------------------------------
(DOLLARS IN THOUSANDS)
CONTRACTUAL OBLIGATIONS TOTAL 2006 2007-2008 2009-2010 THEREAFTER
- --------------------------------------- ----------------------------------------------------------
Operating leases $ 2,846 $ 1,459 $ 1,294 $ 93 $ -
Term note obligation 2,537 954 1,583 - -
Interest payments related to term note 275 171 104 - -
Pension plan 2,083 158 393 438 1,094
Non-binding purchase commitment (a) 575 575 - - -
----------------------------------------------------------
TOTAL $ 8,316 $ 3,317 $ 3,374 $ 531 $ 1,094
==========================================================
<FN>
(a) This is a purchase commitment with a supplier for Concurrent to pay
for nonrecurring customization costs. If the supplier does not
complete the work by a specific date then Concurrent is not obligated
to pay the entire amount.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 20 in the "Notes to the Consolidated Financial Statements" for
recently issued accounting pronouncements.
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, our future performance, market share,
and new market growth, as well as our expectations, beliefs, plans, estimates,
or projections relating to the future, are forward-looking statements within the
meaning of these laws. Examples of our forward-looking statements in this
quarterly report include, but are not limited to, our pricing trends, our
expected cash position, our expectations of market share and growth, and our
international opportunities with Alcatel. 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 concentration of our
customers; failure to effectively manage growth; delays in testing and
introductions of new products; rapid technology changes; system errors or
failures; reliance on a limited number of suppliers and failure of components
provided by those suppliers;
37
uncertainties associated with international business activities, including
foreign regulations, trade controls, taxes, and currency fluctuations; the
highly competitive environment in which we operate and predatory pricing
pressures; failure to effectively service the installed base; the entry of new
well-capitalized competitors into our markets; the success of new on-demand and
real-time products; financing for working capital needs; the availability of
Linux software in light of issues raised by SCO Group; capital spending patterns
by a limited customer base; and customer obligations that could impact revenue
recognition.
Other important risk factors are discussed under the heading "Risk
Factors".
Our forward-looking statements are based on current expectations and speak
only as of the date of such statements. Concurrent undertakes no obligation to
publicly update or revise any forward-looking statement, whether as a result of
future events, new information or otherwise.
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.
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
Management Report on Internal Control Over Financial Reporting 47
Report of Independent Registered Public Accounting Firm 48
Consolidated Balance Sheets as of June 30, 2005 and 2004 49
Consolidated Statements of Operations for each of the three years
in the period ended June 30, 2005 50
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
for each of the three years in the period ended June 30, 2005 51
Consolidated Statements of Cash Flows for each of the three years in the period
ended June 30, 2005 52
Notes to Consolidated Financial Statements 53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
38
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF CONTROLS AND PROCEDURES
As required by Securities and Exchange Commission rules, we have evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report. This evaluation
was carried out under the supervision and with the participation of our
management, including our principal executive officer and principal financial
officer. Based on this evaluation, these officers have concluded that the
design and operation of our disclosure controls and procedures are effective.
There were no significant changes to our internal control over financial
reporting during the period covered by this report that materially affected, or
are reasonably likely to materially affect, our internal controls over financial
reporting.
Our disclosure controls and procedures are designed to provide a reasonable
level of assurance of reaching our desired disclosure control objectives and are
effective in reaching that level of reasonable assurance.
CHANGES IN INTERNAL CONTROL
There were no significant changes to our internal control over financial
reporting during the quarter ended June 30, 2005 that materially affected, or
are reasonably likely to material affect, our internal controls over financial
reporting.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management's report on internal control over financial reporting and the
attestation report of our independent registered public accountants are included
in Part II, Item8 "Financial Statements and Supplementary Data" of this report
under the captions entitled "Management's Report on Internal Control Over
Financial Reporting" and "Report of Independent Registered Public Accounting
Firm" and are on pages 47 and 48 and incorporated herein by reference.
ITEM 9B. OTHER INFORMATION
None.
39
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 18, 2005 ("Registrant's 2005 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 2005 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 Committee" in the
Registrant's 2005 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 2005 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 2005 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 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 "Principal Accountant Fees and Services" in
Registrant's 2005 Proxy Statement.
40
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements Filed As Part Of This Report:
Report of Independent Registered Public Accounting Firm
Management Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of June 30, 2005 and 2004
Consolidated Statements of Operations for each of the three years in
the period ended June 30, 2005
Consolidated Statements of Stockholders' Equity and Comprehensive
Income (Loss) for each of the three years in the period ended June 30,
2005
Consolidated Statements of Cash Flows for each of the three years in
the period ended June 30, 2005
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Schedule II Valuation and Qualifying Accounts
All other financial statements and schedules not listed have been
omitted since the required information is included in the Consolidated
Financial Statements or the Notes thereto, or is not applicable,
material or required.
(3) Exhibits
EXHIBIT DESCRIPTION OF DOCUMENT
- ------- -----------------------
3.1 --Restated Certificate of Incorporation of the Registrant
(incorporated by reference to the Registrant's Registration Statement
on Form S-2 (No. 33-62440)).
3.2 --Amended and Restated Bylaws of the Registrant (incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q for the
period ended March 31, 2003).
3.3 --Certificate of Correction to Restated Certificate of Incorporation
of the Registrant (incorporated by reference to the 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
41
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, 2004 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, 2004).
4.10 --Warrant to purchase 5,261 shares of common stock of the Registrant
dated March 22, 2004 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, 2004).
4.11 --Warrant to purchase 27,332 shares of common stock of the Registrant
dated March 22, 2004 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, 2004).
4.12 --Warrant to purchase 6 shares of common stock of the Registrant dated
March 22, 2004 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, 2004).
4.13 --Warrant to purchase 63,145 shares of common stock of the Registrant
dated June 4, 2004 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, 2004).
4.14 --Warrant to purchase 50,000 shares of common stock of the Registrant
dated June 4, 2004 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, 2004).
10.1 --Loan and Security Agreement (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q filed on February 4, 2005).
10.2 --Schedule of Officers who have entered into the Form Indemnification
Agreement (incorporated by reference to the Registrant's Quarterly
report on Form 10-Q for the quarter ended December 31, 2004).
10.3 --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).
10.4 --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)).
10.5 --Concurrent Computer Corporation 2001 Stock Option Plan (incorporated
by reference to Annex II to the Registrant's Proxy Statement dated
September 19, 2001).
42
10.6 --Concurrent Computer Corporation Amended and Restated 2001 Stock
Option Plan (incorporated by reference to the Registrant's
Registration Statement on Form S-8 (No. 333-125974)).
10.7 --Form of Option agreement with transfer restrictions (incorporated by
reference to the Registrant's Current Report on Form 8-K dated June
24, 2005).
10.8 --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)).
10.9 --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).
10.10 --Summary of Performance Grants (incorporated by reference to the
Registrant's Current Report on Form 8-K filed March 3, 2005).
10.11 --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).
10.12 --Employment Agreement dated as of February 1, 2005 between the
Registrant and Greg Wilson (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q filed on February 4, 2005).
10.13 --Protective Agreement dated as of February 1, 2005 between the
Registrant and Greg Wilson (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q filed on February 4, 2005).
10.14 --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).
10.15 --Employment Agreement dated as of June 24, 2004 between the
Registrant and T. Gary Trimm (incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 2004).
10.16 --Employment Agreement dated as of June 24, 2004 between the
Registrant and Warren Neuburger (incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 2004).
10.17 --Video-on-demand Purchase Agreement, dated March 29, 2001, by and
between Concurrent Computer Corporation and Comcast Cable
Communications of Pennsylvania, Inc. (portions of the exhibit have
been omitted pursuant to a request for confidential treatment)
(incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 2001).
10.18 -- Entry into a Material Definitive Agreement between the Registrant
and Stream Acquisitions, Inc. to acquire Everstream Holdings, Inc.
(incorporated by reference to the Registrant's Current Report on Form
8-K filed on August 25, 2005).
10.19 -- Amendment of Material Definitive Agreement between the Registrant
and Stream Acquisitions, Inc. to acquire Everstream Holdings, Inc.
(incorporated by reference to the Registrant's Current Report on Form
8-K filed on August 31, 2005).
14.1 --Code of Ethics for Senior Executives & Financial Officers
(incorporated by reference to the Registrant's Proxy for the 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
43
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2* --Certification of Chief Financial Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
* Included herewith.
44
CONCURRENT COMPUTER CORPORATION
ANNUAL REPORT ON FORM 10-K
ITEM 8
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
YEAR ENDED JUNE 30, 2005
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 (the "Company") as of June 30, 2005 and
2004, 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, 2005. Our audits also included the
consolidated financial statement schedule 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 the Company as of June 30, 2005
and 2004, and the results of its operations and its cash flows for each of the
three years in the period ended June 30, 2005, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such consolidated financial statement schedule, 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 4 to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities,"
effective December 1, 2002.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of June 30, 2005 based on
the criteria established in Internal Control - Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated September 2, 2005 expressed an unqualified opinion on management's
assessment of the effectiveness of the Company's internal control over financial
reporting and an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
September 2, 2005
46
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Concurrent Computer Corporation's management is responsible for
establishing and maintaining adequate internal control over financial reporting.
Pursuant to the rules and regulations of the Securities and Exchange Commission,
internal control over financial reporting is a process designed by, or under the
supervision of, Concurrent's principal executive and principal financial
officers to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles and includes those
policies and procedures that:
- Pertain to the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of the assets of
Concurrent;
- Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of
Concurrent are being made only in accordance with authorizations of
management and directors of Concurrent; and
- Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of Concurrent's assets that
could have a material effect on the financial statements.
Management has evaluated the effectiveness of its internal control over
financial reporting as of June 30, 2005 based on the control criteria
established in a report entitled Internal Control-Integrated Framework, issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on such evaluation, we have concluded that Concurrent's internal control over
financial reporting is effective as of June 30, 2005.
The registered independent public accounting firm of Deloitte & Touche LLP,
as auditors of Concurrent's consolidated financial statements, has issued an
attestation report on management's assessment of Concurrent's internal control
over financial reporting, which report is included herein.
/s/ T. Gary Trimm /s/ Gregory S. Wilson
- ------------------ ---------------------
T. Gary Trimm Gregory S. Wilson
President and Chief Executive Officer Chief Financial Officer
47
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Concurrent Computer Corporation:
We have audited management's assessment, included in the accompanying
Management Report on Internal Control Over Financial Reporting, that Concurrent
Computer Corporation and subsidiaries (the "Company") maintained effective
internal control over financial reporting as of June 30, 2005, based on
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion
on management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the 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
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process designed
by, or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's Board of Directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of June 30, 2005, is
fairly stated, in all material respects, based on the criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of June 30, 2005, based on the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated financial
statements and consolidated financial statement schedule as of and for the year
ended June 30, 2005 of the Company and our report dated September 2, 2005
expressed an unqualified opinion on those consolidated financial statements and
consolidated financial statement schedule.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
September 2, 2005
48
CONCURRENT COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
JUNE 30,
----------------------
2005 2004
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 19,880 $ 27,928
Accounts receivable, less allowance for doubtful accounts
of $200 at June 30, 2005 and at June 30, 2004 16,577 10,192
Inventories - net 5,071 9,617
Deferred tax asset - net 226 517
Prepaid expenses and other current assets 858 861
---------- ----------
Total current assets 42,612 49,115
Property and equipment - net 8,319 11,569
Purchased developed computer software - net 823 1,013
Goodwill 10,744 10,744
Investment in minority owned company 140 553
Other long-term assets - net 1,339 1,548
---------- ----------
Total assets $ 63,977 $ 74,542
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 12,055 $ 12,069
Notes payable to bank, current portion 954 -
Deferred revenue 6,692 10,668
---------- ----------
Total current liabilities 19,701 22,737
Long-term liabilities:
Deferred revenue 2,349 4,117
Notes payable to bank, less current portion 1,583 -
Deferred tax liability - 278
Pension liability 1,705 1,372
Other 286 312
---------- ----------
Total liabilities 25,624 28,816
Commitments and contingencies (Note 19)
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;
63,642,646 and 62,817,029 issued and outstanding at June 30, 2005
and 2004, respectively 637 628
Capital in excess of par value 175,769 174,338
Accumulated deficit (136,455) (128,712)
Treasury stock, at cost; 19,323 shares at June 30, 2004 - (42)
Unearned compensation (1,562) (351)
Accumulated other comprehensive loss (36) (135)
---------- ----------
Total stockholders' equity 38,353 45,726
---------- ----------
Total liabilities and stockholders' equity $ 63,977 $ 74,542
========== ==========
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
49
CONCURRENT COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED JUNE 30,
-----------------------------
2005 2004 2003
-------- -------- ---------
Revenues:
Product $57,070 $56,947 $ 54,456
Service 21,615 22,288 20,997
-------- -------- ---------
Total revenues 78,685 79,235 75,453
Cost of sales:
Product 27,053 28,091 25,668
Service 12,856 12,422 13,362
-------- -------- ---------
Total cost of sales 39,909 40,513 39,030
-------- -------- ---------
Gross margin 38,776 38,722 36,423
Operating expenses:
Sales and marketing 17,785 17,302 18,081
Research and development 18,748 20,000 18,775
General and administrative 9,717 10,071 9,393
Restructuring charge (17) - 1,603
Gain on liquidation of foreign subsidiary - (111) -
-------- -------- ---------
Total operating expenses 46,233 47,262 47,852
-------- -------- ---------
Operating loss (7,457) (8,540) (11,429)
Recovery (impairment loss) of minority investment (313) 3,103 (12,951)
Interest income 403 335 592
Interest expense (163) (11) (30)
Other expense - net (471) (140) (145)
-------- -------- ---------
Loss before income taxes (8,001) (5,253) (23,963)
Provision (benefit) for income taxes (272) 472 589
-------- -------- ---------
Net loss $(7,729) $(5,725) $(24,552)
======== ======== =========
Net loss per share
Basic $ (0.12) $ (0.09) $ (0.40)
======== ======== =========
Diluted $ (0.12) $ (0.09) $ (0.40)
======== ======== =========
<FN>
The accompanying notes are an integral part of the consolidated
financial statements.
50
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, 2005
COMMON STOCK ACCUMULATED
-------------------- CAPITAL IN OTHER
PAR EXCESS OF ACCUMULATED UNEARNED COMPREHENSIVE
SHARES VALUE PAR VALUE DEFICIT COMPENSATION INCOME (LOSS)
----------- ------- ----------- ------------- -------------- ---------------
Balance at June 30, 2002 61,856,993 $ 618 $ 172,929 $ (98,377) - $ (5,888)
Sale of common stock under stock plans 226,988 2 548
Issuance of common stock related to
investment in minority owned company (17)
Issuance of restricted stock 283,468 3 598 (601)
Amortization of unearned compensation 25
Performance warrants 338
Comprehensive income (loss):
Net loss (24,552)
Foreign currency translation adjustment 915
Minimum pension liability adjustment (3,025)
Total comprehensive loss
----------- ------- ----------- ------------- -------------- ---------------
Balance at June 30, 2003 62,367,449 623 174,396 (122,929) (576) (7,998)
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)
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)
Sale of common stock under stock plans 116,105 1 57
Issuance of restricted stock 1,040,632 10 1,936 (1,946)
Retirement of restricted stock (331,120) (2) (683) 685
Revaluation of restricted stock 119 (119)
Amortization of unearned compensation 169
Acquisition of treasury stock
Disposition of treasury stock 2 (14)
Comprehensive income (loss):
Net loss (7,729)
Foreign currency translation adjustment 200
Minimum pension liability adjustment (101)
Total comprehensive income
----------- ------- ----------- ------------- -------------- ---------------
Balance at June 30, 2005 63,642,646 $ 637 $ 175,769 $ (136,455) $ (1,562) $ (36)
=========== ======= =========== ============= ============== ===============
TREASURY STOCK
----------------
SHARES COST TOTAL
-------- ------ ---------
Balance at June 30, 2002 (840) $ (58) $ 69,224
Sale of common stock under stock plans 550
Issuance of common stock related to
investment in minority owned company (17)
Issuance of restricted stock -
Amortization of unearned compensation 25
Performance warrants 338
Comprehensive income (loss):
Net loss (24,552)
Foreign currency translation adjustment 915
Minimum pension liability adjustment (3,025)
---------
Total comprehensive loss (26,662)
-------- ------ ---------
Balance at June 30, 2003 (840) (58) 43,458
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 -
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
Sale of common stock under stock plans 58
Issuance of restricted stock -
Retirement of restricted stock -
Revaluation of restricted stock -
Amortization of unearned compensation 169
Acquisition of treasury stock (2,946) (5) (5)
Disposition of treasury stock 22,269 47 35
Comprehensive income (loss):
Net loss (7,729)
Foreign currency translation adjustment 200
Minimum pension liability adjustment - (101)
---------
Total comprehensive income (7,630)
-------- ------ ---------
Balance at June 30, 2005 - $ - $ 38,353
======== ====== =========
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
51
CONCURRENT COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED JUNE 30,
-----------------------------
2005 2004 2003
-------- -------- ---------
Cash flows provided by (used in) operating activities:
Net loss $(7,729) $(5,725) $(24,552)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Impairment loss (recovery) on minority investment 313 (3,103) 12,951
Accrual of (reversal of) non-cash warrants - (1,119) 338
Pension settlement and curtailment - (1,482) -
Depreciation and amortization 5,259 5,404 4,824
Provision for inventory reserves 11 924 317
Provision for (reversal of) bad debts - (601) 28
Amortization of stock compensation 169 107 25
Other non-cash expenses 376 502 (13)
Decrease (increase) in assets:
Accounts receivable, net (6,385) 780 13,495
Inventories, net 4,535 (3,367) (669)
Prepaid expenses and other current assets, net 73 18 2
Other long-term assets, net 341 (149) (1,624)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses, net (14) (2,575) (870)
Short-term deferred revenue (3,976) 5,373 1,240
Long-term liabilities, net (1,513) 2,627 1,607
-------- -------- ---------
Net cash provided by (used in) operating activities (8,540) (2,386) 7,099
Cash flows provided by (used in) investing activities:
Additions to property and equipment (2,031) (4,876) (5,595)
Repayment of note receivable from
minority owned company - 3,103 471
Note receivable from minority owned company - - (3,000)
-------- -------- ---------
Net cash used in investing activities (2,031) (1,773) (8,124)
Cash flows provided by (used in) financing activities:
Proceeds from note payable to bank, net of issuance expenses 2,930 - -
Repayment of note payable to bank (463) - -
Sale (purchase) of treasury stock 30 (42) -
Repayment of capital lease obligation (49) (93) (85)
Proceeds from sale and issuance of common stock 58 1,184 550
-------- -------- ---------
Net cash provided by financing activities 2,506 1,049 465
Effect of exchange rates on cash and cash equivalents 17 341 738
-------- -------- ---------
Increase (decrease) in cash and cash equivalents (8,048) (2,769) 178
Cash and cash equivalents - beginning of year 27,928 30,697 30,519
-------- -------- ---------
Cash and cash equivalents - end of year $19,880 $27,928 $ 30,697
======== ======== =========
Cash paid during the period for:
Interest $ 64 $ 14 $ 20
======== ======== =========
Income taxes (net of refunds) $ 327 $ 527 $ 474
======== ======== =========
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
52
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. The computer systems
and software fall under two product lines: on-demand (formerly "VOD") and
real-time (formerly "Integrated Solutions")
Concurrent's on-demand product line provides on-demand 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 real-time product line 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 ($162,000), $8,000 and
($27,000) for the years ended June 30, 2005, 2004 and 2003, 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 value, 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 and Equipment
Property 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.
53
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Goodwill
At July 1, 2005 and 2004, Concurrent's annual testing day, and in
accordance with the requirements under Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("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 Policy
The Company recognizes revenue when persuasive evidence of an arrangement
exists, the system has been shipped, the fee is fixed or determinable and
collectibility of the fee is probable.
Software and Hardware Sales
------------------------------
On-demand and real-time product revenues are recognized based on the
guidance in 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". The Company's standard contractual arrangements with
its customers generally include the delivery of a hardware and software system,
certain professional services that typically involve installation and training,
and ongoing software and hardware maintenance. The software component of the
arrangement is considered to be essential to the functionality of the hardware.
Therefore, in accordance with Emerging Issues Task Force No. 03-5,
"Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables
in an Arrangement Containing More-Than-Incidental Software", the hardware and
the hardware maintenance components are considered software related and the
provisions of SOP 97-2 apply to all elements of the arrangement. Under multiple
element arrangements, the Company allocates revenue to the various elements
based on vendor-specific objective evidence ("VSOE") of fair value. The
Company's VSOE of fair value is determined based on the price charged when the
same element is sold separately. If VSOE of fair value does not exist for all
elements in a multiple element arrangement, the Company recognizes revenue using
the residual method. Under the residual method, the fair value of the
undelivered elements is deferred and the remaining portion of the arrangement is
recognized as revenue.
Professional Services
----------------------
Professional services revenue is primarily generated from integration of
third party software interfaces, training, and hardware installation. These
services are typically completed within 90 days from the receipt of the order.
Under multiple element arrangements, the Company allocates revenue to the
various elements based on VSOE of fair value. The Company determines VSOE of
fair value for the services based on the standard rate per hour or fixed fee
used when similar services are sold separately. Revenues from these services
are recognized when the services are performed.
In certain instances, the Company's customers require significant
customization of both the software and hardware products. In these situations,
the services are considered essential to the functionality of the software and,
therefore, the revenue from the arrangement, with the exception of maintenance,
is recognized in conformity with Accounting Research Bulletin ("ARB") No. 45,
"Long Term Construction Type Contracts" and SOP 81-1, "Accounting for
Performance of Construction-Type and Certain Production-Type Contracts." The
Company records the value of the entire arrangement (excluding maintenance) as
the project progresses based on actual costs incurred compared to the total
costs expected to be incurred through completion.
Hardware and Software Maintenance
------------------------------------
The Company recognizes revenue from maintenance services in accordance with
SOP 97-2. Depending upon the specific terms of the customer agreement, the
Company may include warranty as part of the purchase price. In accordance with
SOP 97-2 and, depending upon the specific terms of the customer agreement, the
Company
54
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
either accrues the estimated costs to be incurred in performing maintenance
services at the time of revenue recognition and shipment of product, or the
Company defers revenue associated with the maintenance services to be provided
during the warranty period based upon the value for which the Company has sold
such services separately when they are renewed by existing customers. For those
arrangements in which the warranty period is less than or equal to one year, the
Company accrues the estimated costs to be incurred in providing services. In
accordance with paragraph 59 of SOP 97-2, the Company has determined that the
warranty fee is part of the initial license fee, the warranty period is for one
year or less, the estimated cost of providing the services are immaterial, and
upgrades and enhancements offered during maintenance arrangements historically
have been and are expected to continue to be minimal and infrequent. Actual
costs are then charged against the warranty accrual as they are incurred. For
those arrangements in which the warranty period is greater than one year, the
Company defers revenue based upon the value for which the Company has sold such
services separately. This revenue is then recognized on a straight line basis
over the warranty period.
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. For contracts extending beyond
one year, deferred revenue related to the contract period extending beyond
twelve months is classified among long-term liabilities.
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, 2005 and 2004.
Concurrent has not incurred costs related to the development of internal
use software.
Research and Development
Research and development expenditures are expensed as incurred.
Basic and Diluted Net Loss per Share
Basic net loss per share is computed in accordance with SFAS No. 128,
"Earnings Per Share," by dividing net loss by the weighted average number of
common shares outstanding during each year. Diluted net loss per share is
computed by dividing net 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 6,403,000, 6,002,000 and
6,131,000 for the years ended June 30, 2005, 2004, and 2003, respectively, were
excluded from the calculation as their effect was antidilutive. The following
table presents a reconciliation of the numerators and denominators of basic and
diluted loss per share for the periods indicated:
55
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED JUNE 30,
(DOLLARS AND SHARE DATA IN THOUSANDS, -----------------------------
EXCEPT PER SHARE AMOUNTS) 2005 2004 2003
-------- -------- ---------
Basic and diluted EPS calculation:
Net loss $(7,729) $(5,725) $(24,552)
======== ======== =========
Basic weighted average number of shares outstanding 62,737 62,392 61,944
Effect of dilutive securities:
Employee stock options - - -
Warrants - - -
-------- -------- ---------
Diluted weighted average number of shares outstanding 62,737 62,392 61,944
======== ======== =========
Basic EPS $ (0.12) $ (0.09) $ (0.40)
======== ======== =========
Diluted EPS $ (0.12) $ (0.09) $ (0.40)
======== ======== =========
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 have 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. For long-lived assets held
and used, Concurrent recognizes impairment only if their carrying amount is not
recoverable through undiscounted cash flows. Long-lived assets held for sale are
reported at the lower of cost or fair value, less costs to sell. As a result of
these reviews, Concurrent has not recorded any impairment losses related to
long-lived assets, except those related to the restructuring activities in
fiscal year 2003.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable,
inventories, prepaid expenses, accounts payable and short term debt approximate
fair value because of the short maturity of these instruments. The carrying
amount of long-term debt also approximates fair value, as the interest rate on
the term note approximates market and the remaining term of the note is less
than three years.
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
56
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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, 2005, 2004, and 2003, Concurrent recognized $169,000, $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 2005, 2004, and 2003 for stock options issued.
Concurrent issued 1,041,000 shares of restricted stock for the year ended June
30, 2005 and initially recorded $1,946,000 of unearned compensation as a
contra-equity account, which will be amortized over the vesting period. A
portion of the restricted stock vests over time and a portion vests based upon
performance criteria. Because a portion of this restricted stock plan is
performance based, that portion must be accounted for using variable accounting,
requiring interim estimates of compensation expense. Interim measures of
compensation expense for performance based restricted stock are based on a
combination of the fair-value of the stock as of the end of the reporting period
and an assessment of whether the performance criteria will ultimately be met.
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 loss and 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,
2005 2004 2003
----------------- ----------------- -----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net loss as reported $ (7,729) $ (5,725) $ (24,552)
Deduct: Total stock-based employee compensation
expense determined under the fair value method,
net of related taxes (8,519) (3,993) (6,458)
----------------- ----------------- -----------------
Pro forma net loss $ (16,248) $ (9,718) $ (31,010)
================= ================= =================
Basic- as reported $ (0.12) $ (0.09) $ (0.40)
================= ================= =================
Basic-pro forma $ (0.26) $ (0.16) $ (0.50)
================= ================= =================
Diluted-as reported $ (0.12) $ (0.09) $ (0.40)
================= ================= =================
Diluted-pro forma $ (0.26) $ (0.16) $ (0.50)
================= ================= =================
Refer to Note 13 for assumptions used in calculation of fair value. Also,
refer to Note 13 for discussion of Concurrent's Board of Directors' fiscal year
2005 decisions to accelerate vesting of certain unvested and "out-of-the-money"
options and to subsequently grant fully vested stock options to certain
employees and executives. These decisions were made primarily to limit
compensation expense that would be expected to be recorded in future periods
following Concurrent's adoption on July 1, 2005 of SFAS No. 123, "Share-Based
Payment (revised 2004)" ("SFAS 123(R)"). As of June 30, 2005, total compensation
costs related to unvested options not yet recognized is approximately $530,000.
Concurrent expects to recognize this cost on a straight-line basis over the next
four years as part of operating expense, beginning July 1, 2005, upon adoption
of SFAS 123(R).
57
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Comprehensive Income (Loss)
Concurrent reports comprehensive income (loss) in addition to net 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:
ACCUMULATED
FOREIGN CURRENCY OTHER
TRANSLATION MINIMUM COMPREHENSIVE
ADJUSTMENTS PENSION LIABILITY INCOME (LOSS)
------------------ ------------------- ---------------
(DOLLARS IN THOUSANDS)
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)
Other comprehensive income (loss) 200 (101) 99
------------------ ------------------- ---------------
Balance at June 30, 2005 $ 116 $ (152) $ (36)
================== =================== ===============
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.
3. INVESTMENTS IN MINORITY OWNED COMPANIES
In March 2002, Concurrent purchased a 14.4% equity ownership interest in
Thirdspace Living Limited ("Thirdspace"). Concurrent invested $4.0 million in
cash and the equivalent of $3.0 million in its common stock in exchange for
1,220,601 series C shares of Thirdspace. In addition to the equity investment,
Concurrent also loaned Thirdspace $6.0 million in exchange for two $3 million
long-term notes receivable. In fiscal year 2003, Concurrent recorded a $13.0
million net impairment charge due to an "other-than-temporary" decline in the
market value of the investment in Thirdspace. In May 2003, Thirdspace sold the
majority of its assets to Alcatel Telecom Ltd. As a result of the sale of these
certain assets, Concurrent received proceeds in fiscal 2004 and fiscal 2005 that
were recorded as reductions to the impairment loss in the line item "Recovery
(impairment loss) of minority investment."
In fiscal year 2005 and fiscal year 2004, Concurrent recorded in the
aggregate, $100,000 and $3.1 million, respectively, in proceeds as a result of
the sale of certain assets of Thirdspace. Thirdspace's only significant
remaining asset is a right to 40% of amounts recovered by nCube Corporation, now
part of C-Cor, Incorporated ("C-Cor"), if any, from the lawsuit brought by C-Cor
against SeaChange International, Inc., alleging patent infringement. The
likelihood of collecting this asset, and the amount and timing of such
collection is uncertain and as a result Concurrent has not recorded the gain
contingency. Pursuant to the sale of the assets of Thirdspace to Alcatel,
Concurrent believes that it has the right to the first approximately $3.0
million of such recovery, if any. Beyond any such recovery, Concurrent does not
anticipate further cash proceeds related to the liquidation of Thirdspace's
remaining assets. As of June 30, 2005 and 2004, Concurrent had no amounts
recorded as investments in or
58
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
receivables from Thirdspace.
In April 2002, Concurrent invested cash of $553,000 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, operations and data
warehousing software and related integration services. Concurrent is accounting
for its investment in the Series C Preferred stock of Everstream using the cost
method because Concurrent does not believe it exercises significant influence on
Everstream. During fiscal year 2005, Concurrent became aware of circumstances
that provide evidence of an "other than temporary" impairment of Concurrent's
investment in Everstream, in accordance with EITF 03-01, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments".
Based upon an evaluation of the investment in Everstream during this period,
Concurrent recorded an impairment charge of $413,000 in the Statement of
Operations, under the line item, "Recovery (impairment loss) of minority
investment", and reduced its "Investment in minority owned company" to $140,000.
Should there be evidence of further impairment in the future, Concurrent will
record additional impairment charges related to this investment. However, as of
June 30, 2005, Concurrent is not aware of any events or changes in circumstances
that have a significant adverse effect on the recorded value of the investment.
See Note 21, "Subsequent Event", for further discussion of Everstream.
4. 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 Concurrent'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 former Integrated Solutions and on-demand
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, 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.
59
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Restructuring related reserves are summarized as follows (in thousands):
WORKFORCE LEASE TOTAL
REDUCTION TERMINATION RESTRUCTURING
COSTS COSTS OTHER CHARGE
--------------- --------------- --------------- ---------------
Restructuring charges $ 1,057 $ 319 $ 227 $ 1,603
Non-cash charges - (72) (202) (274)
Cash payments (191) (49) - (240)
Restructuring reserve --------------- --------------- --------------- ---------------
at June 30, 2003: 866 198 25 1,089
Fiscal 2004 cash payments (809) (138) (25) (972)
Restructuring reserve --------------- --------------- --------------- ---------------
at June 30, 2004: 57 60 - 117
Fiscal 2005 cash payments (40) (60) - (100)
Reversal of excess accrual (17) - - (17)
Restructuring reserve --------------- --------------- --------------- ---------------
at June 30, 2005: $ - $ - $ - $ -
=============== =============== =============== ===============
Fiscal year 2003 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 accrued liability at June 30, 2004 is 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 and all remaining cash payments were completed by the end of
fiscal year 2005.
5. DISSOLUTION OF SUBSIDIARIES
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 ofthe pension plan occurred in 2004. All assets,
liabilities, and additional minimum pension liabilities related to the
60
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
pension plan have been removed from the balance sheet in 2004, which resulted in
a gain of $111,000, net of related legal 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 were 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 (See Note 11).
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.
6. INVENTORIES
Inventories consist of the following:
JUNE 30,
-------------------------
2005 2004
------------ -----------
(DOLLARS IN THOUSANDS)
Raw materials, net $ 3,599 $ 7,361
Work-in-process 864 1,229
Finished goods 608 1,027
------------ -----------
$ 5,071 $ 9,617
============ ===========
At June 30, 2005 and 2004, some portion of Concurrent's inventory was in
excess of the current requirements based upon the planned level of sales for
future years. Accordingly, Concurrent had inventory valuation allowances for
raw materials of $2.0 million and $3.0 million to reduce the value of the
inventory to its estimated net realizable value at both June 30, 2005 and 2004,
respectively.
7. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
JUNE 30,
--------------------------
2005 2004
------------- -----------
(DOLLARS IN THOUSANDS)
Leasehold improvements $ 3,216 $ 3,204
Machinery, equipment and customer support spares 16,426 38,531
------------- -----------
19,642 41,735
Less: Accumulated depreciation (11,323) (30,166)
------------- -----------
$ 8,319 $ 11,569
============== ===========
For the years ended June 30, 2005, 2004 and 2003, depreciation and
amortization expense for property, plant
61
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
and equipment amounted to $5,069,000, $5,214,000 and $4,590,000, respectively.
During fiscal year 2005, Concurrent recorded a $19,100,000 entry to write-off
fully depreciated spare parts determined to be no longer of service.
8. 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 2005, 2004, and 2003, and there has not been any impairment
charge as a result of these assessments.
The goodwill balance as of June 30, 2005 and 2004 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, 2005, 2004, and 2003. Therefore, there have been no changes in
the goodwill balance as of June 30, 2005 and 2004.
A summary of Concurrent's other intangible assets is as follows (in
thousands):
INTANGIBLE ASSETS
--------------------------------------------------------
AS OF JUNE 30, 2005 AS OF JUNE 30, 2004
--------------------------- ---------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
------------ ------------- ------------ -------------
AMORTIZED INTANGIBLE ASSETS
Purchased developed computer software $ 1,773 $ (950) $ 1,773 $ (760)
The aggregate amortization expense for the years ended June 30, 2005, 2004,
and 2003 was $190,000, $190,000, and $234,000, respectively. The estimated
amortization expense for the next five fiscal years for intangible assets is
$190,000 during the next four years and $63,000 in the fifth year for purchased
developed software with an original amortizable life of 10 years. Concurrent
does not have any other unamortized intangible assets.
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
JUNE 30,
-------------------------
2005 2004
------------ -----------
(DOLLARS IN THOUSANDS)
Accounts payable, trade $ 4,727 $ 3,487
Accrued payroll, vacation and
other employee expenses 4,143 5,420
Warranty accrual 702 1,122
Restructuring reserve - 117
Other accrued expenses 2,483 1,923
------------ -----------
$ 12,055 $ 12,069
============ ===========
Our estimate of warranty obligations is based on historical experience and
expectation of future conditions.
62
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The changes in the warranty accrual during fiscal year 2005 consist of the
following (in thousands):
Balance at June 30, 2004 $1,122
Charged to costs and expenses 392
Charges against accrual (812)
-------
Balance at June 30, 2005 $ 702
=======
10. INCOME TAXES
The domestic and foreign components of loss before provision for income
taxes are as follows:
YEAR ENDED JUNE 30,
-------------------------------
2005 2004 2003
---------- -------- ---------
(DOLLARS IN THOUSANDS)
United States $ (5,598) $(4,393) $(18,374)
Foreign (2,403) (860) (5,589)
---------- -------- ---------
$ (8,001) $(5,253) $(23,963)
========== ======== =========
The components of the provision for income taxes are as follows:
YEAR ENDED JUNE 30,
------------------------------
2005 2004 2003
--------- --------- --------
(DOLLARS IN THOUSANDS)
Current:
Federal $ (264) $ - $ -
State 34 310 17
Foreign (credit) (22) 119 572
--------- --------- --------
Total (252) 429 589
--------- --------- --------
Deferred:
Federal - - -
Foreign (20) 43 -
--------- --------- --------
Total (20) 43 -
--------- --------- --------
Total $ (272) $ 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. Concurrent made partial payments towards this settlement during
fiscal year 2004 and made final payments towards this settlement in fiscal year
2005. During fiscal year 2005, Concurrent reversed $264,000 of income tax
contingency reserves that Concurrent determined are no longer required and were
reversed as an income tax benefit.
63
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A reconciliation of the income tax (benefit) expense computed using the
federal statutory income tax rate to Concurrent's provision for income taxes is
as follows:
YEAR ENDED JUNE 30,
---------------------------------
2005 2004 2003
--------- ----------- ---------
(DOLLARS IN THOUSANDS)
Loss before provision for
income taxes $ (8,001) $ (5,253) $(23,963)
--------- ----------- ---------
Benefit at Federal statutory rate (2,720) (1,786) (8,147)
Change in valuation allowance (8,838) 2,396 8,980
Dividend from subsidiary 1,201 - 541
Permanent differences 291 (125) 297
Net operating loss expiration 7,429 188 -
Change in statutory rates 1,739 - (1,776)
Release of tax contingency reserves (264) - -
Foreign, net 775 176 456
Other 115 (377) 238
--------- ----------- ---------
Provision for income taxes $ (272) $ 472 $ 589
========= =========== =========
As of June 30, 2005 and 2004, Concurrent's deferred tax assets and
liabilities were comprised of the following:
JUNE 30,
--------------------------
2005 2004
------------- -----------
(DOLLARS IN THOUSANDS)
Gross deferred tax assets related to:
U.S. and foreign net operating loss carryforwards $ 71,122 $ 74,919
Book and tax basis differences for reporting purposes - 248
Bad debt, warranty and inventory reserves 1,549 2,067
Accrued compensation - 777
Impairment loss on minority investment 3,786 3,536
Deferred revenue 1,882 2,844
Stock warrants 700 682
Capital loss carryforward 801 780
Other - 1,883
------------- -----------
Total gross deferred tax assets 79,840 87,736
Valuation allowance (78,381) (87,219)
------------- -----------
Total deferred tax asset 1,459 517
Gross deferred tax liabilities related to
property and equipment/other 1,200 278
------------- -----------
Total gross deferred tax liability 1,200 278
------------- -----------
Deferred income taxes $ 259 $ 239
============= ===========
64
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
As of June 30, 2005, Concurrent has U.S. Federal Tax net operating loss
carryforwards of approximately $170 million for income tax purposes which expire
at various dates through 2025. 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 $37 million of the net
operating loss carryforwards originated prior to Concurrent's
quasi-reorganization in 1991.
Under Section 382 of the Internal Revenue Code, future benefits
attributable to the net operating loss carryforwards and tax credits which
originated prior to Concurrent's quasi-reorganization are limited to $1.0
million per year. Tax net operating losses in the amount of approximately $5
million that originated subsequent to Concurrent's quasi-reorganization through
the date of Concurrent's July, 1993 comprehensive refinancing ("1993
Refinancing") are limited to approximately $1.9 million per year. To the extent
that the unused tax net operating loss carryforwards can not be used in a given
year, whether limited or not, the unused amount can be carried forward and used
in future years until they expire.
The tax benefits associated with nonqualified stock options and
disqualifying dispositions of incentive stock options increased the federal net
operating loss carryforward by approximately $22,000 and $296,000 for the years
ended June 30, 2005 and 2004, 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, 2005 and
2004 was approximately $78.4 million and $87.2 million, respectively. The net
change in the total valuation allowance for the year ended June 30, 2005 was a
decrease of approximately $8.8 million. The net increase in the total valuation
allowance for the year ended June 30, 2004 was approximately $2.4 million and
the net increase in the total valuation allowance for the year ended June 30,
2003 was approximately $8.7 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 a significant
portion of these deferred tax assets will not be realized.
65
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
Concurrent maintains a retirement savings plan (the "Plan"), available to
U.S. employees, that qualifies as a defined contribution plan under Section
401(k) of the Internal Revenue Code. For fiscal year 2005, the plan allowed for
a discretionary matching contribution up to 100% of the first 4% of employees'
contributions during the first six months of the year, and 3% of employees'
contributions during the second six months. For fiscal year 2004, the plan
allowed a discretionary matching contribution up to 100% of the first 4% of
employees' contributions. For fiscal year 2003, the plan allowed a discretionary
matching contribution up to 100% of the first 6% of employees' contributions.
For the years ended June 30, 2005, 2004 and 2003, Concurrent matched 100% of the
allowable discretionary matching percentage of the employees' Plan
contributions.
Concurrent's matching contributions under the Plan were as follows:
2005 2004 2003
------- ---------- --------
(DOLLARS IN THOUSANDS)
Matching contribution $ 830 $ 990 $ 1,424
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
2005, 2004 and 2003, the Company made total contributions to the stakeholder
plan of $540,000, $90,000 and $25,000, respectively.
Certain foreign subsidiaries of Concurrent maintain pension plans for their
employees that conform to the 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 in 2004 resulted in the settlement and
curtailment gains included in the changes in benefit obligation and fair value
of plan assets below (see Note 5). As of June 30, 2005 and 2004, only the
defined benefit pension plan in Germany remained, due to the effects of the
liquidation of the Company's UK subsidiary. The measurement date used to
determine benefit information for the plans that make up the majority of plan
assets and benefit obligations for the year ended June 30, 2005 was June 15,
2005. 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:
66
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Reconciliation of Funded Status
JUNE 30,
--------------------------
2005 2004
------------- -----------
(DOLLARS IN THOUSANDS)
Change in benefit obligation:
Benefit obligation at beginning of year $ 3,715 $ 21,501
Service cost 25 353
Interest cost 205 1,111
Plan participants' contributions - 58
Actuarial loss (gain) 362 (34)
Foreign currency exchange rate change (37) 1,972
Settlement - (19,607)
Curtailment - (1,037)
Benefits paid (114) (602)
------------- -----------
Benefit obligation at end of year $ 4,156 $ 3,715
============= ===========
Change in plan assets:
Fair value of plan assets at beginning of year $ 2,396 $ 12,889
Actual return on plan assets 76 1,354
Employer contributions 28 358
Plan participants' contributions - 58
Benefits paid (88) (570)
Settlement - (12,833)
Foreign currency exchange rate change (17) 1,140
------------- -----------
Fair value of plan assets at end of year $ 2,395 $ 2,396
============= ===========
Funded status $ (1,761) $ (1,319)
Unrecognized actuarial loss 208 (160)
Unrecognized net transition cost 127 158
------------- -----------
Net amount recognized $ (1,426) $ (1,321)
============= ===========
Amounts Recognized in the Consolidated Balance Sheet
JUNE 30,
--------------------------
2005 2004
------------- -----------
(DOLLARS IN THOUSANDS)
Accrued pension cost, net $ (1,705) $ (1,372)
Intangible asset 127 -
Accumulated other comprehensive loss 152 51
------------- -----------
Net amount recognized $ (1,426) $ (1,321)
============= ===========
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 $4.2 million, $4.1 million and $2.4 million,
respectively, as of June 30, 2005, and $3.7 million, $3.7 million and $2.4
million, respectively, as of June 30, 2004.
67
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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, 2005, 2004 and 2003:
Components of Net Periodic Benefit Cost
YEAR ENDED JUNE 30,
-------------------------------
2005 2004 2003
---------- --------- --------
(DOLLARS IN THOUSANDS)
Service cost $ 25 $ 353 $ 303
Interest cost 205 1,111 1,036
Expected return on plan assets (88) (767) (737)
Amortization of unrecognized net transition obligation (asset) 32 (65) (67)
Amortization of unrecognized prior service cost - 24 24
Settlement gain - (387) -
Curtailment loss - 177 -
Recognized actuarial loss 3 375 188
---------- --------- --------
Net periodic benefit cost $ 177 $ 821 $ 747
========== ========= ========
Additional Information
YEAR ENDED JUNE 30,
-------------------------------
2005 2004 2003
---------- --------- --------
(DOLLARS IN THOUSANDS)
Decrease (increase) in minimum liability included
in other comprehensive income $ (101) $ 7,376 $(3,025)
Pension expense for fiscal years 2005, 2004 and 2003 related to the UK
defined benefit pension plan was $0, $805,000, and $709,000. 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,
------------
2005 2004
----- -----
Discount rate 4.50% 5.35%
Expected return on plan assets 3.50% 3.50%
Compensation increase rate 2.50% 2.50%
The following table sets forth the assumptions used to determine net periodic
benefit cost:
YEAR ENDED JUNE 30,
-----------------------------------------
2005 2004 2003
--------- -------------- --------------
Discount rate 5.35% 5.25% to 5.50% 5.75% to 6.25%
Expected return on plan assets 3.50% 6.00% 5.75% to 6.00%
Compensation increase rate 2.50% 1.00% to 4.25% 3.50% to 4.25%
68
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Plan Assets
Concurrent's pension plan weighted-average asset allocations at June 30,
2005 and 2004, by asset category are as follows:
PLAN ASSETS AT JUNE 30,
--------------------------
2005 2004
------------ ------------
ASSET CATEGORY $ % $ %
- ----------------- ------ ---- ------ ----
Equity securities 2,395 100% 2,396 100%
------ ---- ------ ----
Total 2,395 100% 2,396 100%
====== ==== ====== ====
Plan assets as of June 30, 2005 and 2004 are comprised primarily of
investments in managed funds consisting of German life insurance equity funds.
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 $100,000 to its one remaining defined
benefit pension plan in fiscal year 2006.
Estimated future benefit payments
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid (dollars in thousands):
PENSION BENEFITS
----------------
2006 $158
2007 190
2008 203
2009 213
Years 2010 to 2015 $1,319
12. SEGMENT INFORMATION
During fiscal year 2005, Concurrent changed its management structure.
Concurrent is now operating as a united company by consolidating the real-time
and on-demand operating divisions. The divisional structure was officially
consolidated under a functional organization with real-time and on-demand
product lines. In accordance with SFAS 131, "Disclosure about Segments of an
Enterprise and Related Information", Concurrent operates in three segments:
on-demand systems, real-time systems, and services.
69
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following summarizes the revenues, costs of sales, and margins by
product line and service for the twelve months ended June 30, 2005, June 30,
2004 and June 30, 2003, respectively (dollars in thousands):
YEAR ENDED JUNE 30,
----------------------------
2005 2004 2003
-------- -------- --------
Revenues:
Real-time systems $26,148 $17,568 $19,417
On-demand systems 30,922 39,379 35,039
Service 21,615 22,288 20,997
-------- -------- --------
Total revenues 78,685 79,235 75,453
Cost of sales:
Real-time systems 10,301 7,228 7,817
On-demand systems 16,752 20,863 17,851
Service 12,856 12,422 13,362
-------- -------- --------
Total cost of sales 39,909 40,513 39,030
Gross margin:
Real-time system gross margin 15,847 10,340 11,600
On-demand system gross margin 14,170 18,516 17,188
Service gross margin 8,759 9,866 7,635
-------- -------- --------
Total gross margin $38,776 $38,722 $36,423
Gross margin
Real-time system margin 60.6% 58.9% 59.7%
On-demand system margin 45.8% 47.0% 49.1%
Service margin 40.5% 44.3% 36.4%
-------- -------- --------
Total gross margin 49.3% 48.9% 48.3%
A summary of Concurrent's financial data by geographic area follows
(dollars in thousands):
YEAR ENDED JUNE 30,
-------------------------
2005 2004 2003
------- ------- -------
United States $52,898 $64,792 $56,781
Japan 10,562 4,208 2,003
Other Asia Pacific countries 3,394 2,836 2,915
------- ------- -------
Asia Pacific 13,956 7,044 4,918
Europe 8,575 5,737 5,484
Other foreign countries 3,256 1,662 8,270
------- ------- -------
Total revenue $78,685 $79,235 $75,453
======= ======= =======
70
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30,
--------------------------
2005 2004
------------- -----------
(DOLLARS IN THOUSANDS)
Long lived assets:
United States $ 18,712 $ 22,018
Europe 1,476 2,071
Japan 901 1,104
Other Asia/Pacific 244 234
Other 32 -
------------- -----------
Total $ 21,365 $ 25,427
============= ===========
13. 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 of the Board of Directors
(the "Board") 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 authorize 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.
The Compensation Committee approved and Concurrent issued 1,041,000 shares
of restricted stock during fiscal year 2005 and initially recorded $1,946,000 of
unearned compensation as a contra-equity account, which will be amortized over
the vesting period. A portion of this restricted stock issuance vests over time
and a portion vests based upon performance criteria. Because a portion of this
restricted stock plan is performance based, that portion must be accounted for
using variable accounting, requiring interim estimates of compensation expense.
During the fourth quarter of fiscal year 2005, Concurrent determined that the
performance criteria were no longer anticipated to be met and therefore
reassessed the total expected compensation expense from these restricted shares.
This reassessment resulted in the reversal of $81,000 of stock compensation
expense recorded in the first three quarters of fiscal year 2005 and a $119,000
reduction of unearned compensation. Interim measures of compensation expense are
based on a combination of the fair-value of the stock as of the end of the
reporting period and an assessment of whether the performance criteria will
ultimately be met. In fiscal 2003, the Compensation Committee approved the
issuance of 283,000 restricted shares of common stock to certain executives. The
restrictions on these shares 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 $601,000 and was initially recorded as unearned compensation as a
contra-equity account, which will be expensed over the period during which the
restrictions lapse. Concurrent recorded compensation expense of $169,000,
$107,000, and $25,000 for the years ended June 30, 2005, 2004 and 2003,
respectively, which is recorded in the Consolidated Statements of Operations.
During fiscal year 2005, Concurrent retired $685,000 of restricted stock issued
to employees that left Concurrent prior to vesting of their restricted stock
awards.
Options issued under the Stock Option Plans prior to May 4, 2005 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 Amended and
Restated 2001 Stock Option Plan terminates on October 31, 2011. Stockholders
have authorized the issuance of up to 20,889,000 shares under these plans and at
June 30, 2005 and 2004 there were 1,550,000 and 680,000 shares available for
future grants, respectively.
On May 4, 2005, the Board of Concurrent, upon recommendation of the Board's
Compensation and Audit Committees, approved the accelerated vesting of certain
unvested and "out-of-the-money" options held by current
71
employees and officers (the "Acceleration"). The Board did not accelerate
vesting of any options held by the Chief Executive Officer or any directors. The
accelerated options had been granted under the Company's 1991 Restated Stock
Option Plan and the Company's Amended and Restated 2001 Stock Option Plan
(collectively, the "Plans"). As a result of the Acceleration, the affected
unvested options are those which had exercise prices of greater than $2.10 per
share. The closing sales price of the Company's common stock on the NASDAQ
National market on May 4, 2005, the effective date of the Acceleration, was
$1.68. Pursuant to the Acceleration, options granted under the Plans to purchase
approximately 1.3 million shares of the Company's common stock that would
otherwise have vested at various times within the next four years became fully
vested. The options have a range of exercise prices of $2.12 to $14.85. As a
result of the Board's decision to approve the Acceleration, each agreement for
options subject to the Acceleration is deemed to be amended to reflect the
Acceleration as of the effective date, but all other terms and conditions of
each such option agreement remain in full force and effect. This acceleration of
vesting period was considered a modification of the stock option award that
impacted 217 employees and resulted in the determination of any compensation
expense to be recorded on the modification date. As the intrinsic value at the
date of modification was $0, Concurrent recorded no compensation expense for
this modification.
On June 22, 2005, the Compensation Committee of the Board of Concurrent
Computer Corporation granted options to purchase an aggregate of 2,065,000
shares of the Company's common stock, with an exercise price of $2.15 per share
to current employees and executive officers pursuant to the Company's Amended
and Restated 2001 Stock Option Plan. The options were fully vested on the date
of grant, but the shares issued upon the exercise of the options may not be
transferred or encumbered until certain transfer restrictions lapse. For most
employees, the transfer restrictions allow 50% of the shares underlying the
options to be transferable on each one year anniversary of the date of grant.
For senior management, the transfer restrictions allow 25% of the shares
underlying the options to be transferable on each one year anniversary of the
date of grant. The options granted to senior management have a 10 year term
whereas all other options granted have a 4 year term. This option grant differs
from prior grants in that all employees were granted options and the restriction
schedules and option terms differ for distinct groups of employees. This
one-time initiative was undertaken by the Compensation Committee to provide a
retention incentive to general employees and to motivate them to approach their
jobs from the perspective of shareholders while providing a traditional
long-term incentive to senior management.
The decisions to initiate the Acceleration under the Plans on May 4, 2005
and to subsequently grant fully vested stock options with limits on
transferability on June 22, 2005, which Concurrent believes to be in the best
interest of the Company and its shareholders, were made primarily to limit
compensation expense that would be expected to be recorded in future periods
following the Company's adoption on July 1, 2005 of SFAS 123(R). Concurrent
currently accounts for stock-based compensation using the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," under which Concurrent has not recognized any compensation expense
for its stock option grants. SFAS 123(R) will require Concurrent to record
compensation expense equal to the fair value of all equity-based compensation
over the vesting period of each such award. As a result of the Board's decisions
discussed above, Concurrent expects to reduce its aggregate compensation expense
by a total of approximately $6.8 million, net of taxes over the next four years
(the vesting period for the accelerated options). Refer to Note 2 where this
$6.8 million is included in the $8.5 million of pro forma fiscal year 2005
stock-based employee compensation expense used to calculate pro forma net loss
and earnings per share in accordance with SFAS 148. This estimate is subject to
change and is based on approximated fair value calculations using the
Black-Scholes methodology. Concurrent has disclosed the pro forma effect of this
compensation expense in Note 2 to the financial statements, as permitted under
the transition guidance provided by the FASB.
72
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Changes in options outstanding under the plan during the years ended June
30, 2005, 2004, and 2003 are as follows:
2005 2004 2003
----------------------- ---------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------ --------- ----------- --------- ----------- ---------
Outstanding at beginning of year 5,111,262 $ 6.98 5,842,348 $ 6.92 5,803,144 $ 7.11
Granted 3,313,178 $ 2.03 755,950 $ 3.83 530,815 $ 2.22
Exercised (115,980) $ 0.51 (505,706) $ 2.34 (225,228) $ 2.44
Forfeited (1,431,398) $ 7.10 (981,330) $ 6.61 (266,383) $ 5.33
------------ ----------- -----------
Outstanding at year end 6,877,062 $ 4.68 5,111,262 $ 6.98 5,842,348 $ 6.92
============ =========== ==========
Options exercisable at year end 6,183,062 3,554,531 3,834,886
============ =========== ==========
Weighted average fair value of
options granted during
the year $ 1.55 $ 3.22 $ 1.87
============ =========== ==========
The weighted-average assumptions used for the years ended June 30, 2005,
2004 and 2003 were: expected dividend yield of 0.0% for all periods; risk-free
interest rate of 3.8%, 3.4% and 3.0%, respectively; expected life of 4 to 6
years for all periods; and an expected volatility of 87.3%, 110.0%, and 111.4%,
respectively.
73
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes information about stock options outstanding and
exercisable at June 30, 2005:
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 2005 PRICE 2005 PRICE
- --------------------------------------------------- ---------------------
$ 0.37 - $ 0.99 2.74 38,924 0.37 38,924 0.37
$ 1.00 - $ 1.99 8.50 896,772 1.61 202,772 1.84
$ 2.00 - $ 2.99 6.28 3,484,227 2.18 3,484,227 2.18
$ 3.00 - $ 3.99 8.00 110,325 3.08 110,325 3.08
$ 4.00 - $ 4.99 8.38 302,400 4.61 302,400 4.61
$ 5.00 - $ 5.99 3.78 192,750 5.05 192,750 5.05
$ 6.00 - $ 6.99 6.65 334,000 6.82 334,000 6.82
$ 7.00 - $ 7.99 5.57 116,000 7.00 116,000 7.00
$ 8.00 - $ 8.99 4.17 68,664 8.01 68,664 8.01
$ 9.00 - $ 9.99 6.07 2,000 9.26 2,000 9.26
$10.00 - $10.99 4.53 62,500 10.13 62,500 10.13
$11.00 - $11.99 6.07 369,500 11.06 369,500 11.06
$12.00 - $12.99 5.25 707,000 12.35 707,000 12.35
$13.00 - $13.99 4.65 20,000 13.75 20,000 13.75
$14.00 - $14.99 6.41 32,000 14.10 32,000 14.10
$17.00 - $17.99 5.19 25,000 17.83 25,000 17.83
$18.00 - $18.99 4.95 105,000 18.53 105,000 18.53
$19.00 - $19.99 4.70 10,000 19.63 10,000 19.63
----------- -----------
6.42 6,877,062 4.68 6,183,062 5.03
========== ===========
14. 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 on-demand products. As part
of that agreement Concurrent agreed to issue warrants to purchase shares of its
common stock based upon the volume of purchases of Concurrent's products.
Through March 31, 2004, the expiration date of the agreement, Comcast
earned a total of 168,543 warrants, which have all been issued and expire at
various dates through June 4, 2008. These warrants are exercisable over a four
year term and have exercise prices between $2.62 and $15.02. All of these
warrants were outstanding as of June 30, 2005.
Concurrent recognized the value of the warrants over the term of the
agreement as Comcast purchased additional on-demand servers from Concurrent and
made the service available to its customers. As this agreement expired during
fiscal 2004, Concurrent did not recognize any increase in, or reduction to,
revenue during the twelve months ended June 30, 2005. For fiscal years 2004 and
2003, Concurrent recognized $202,000 and $62,000, respectively, as a reduction
in revenue for the warrants that were earned during those respective periods.
The exercise prices of the warrants are subject to adjustment for stock
splits, combinations, stock dividends, mergers, and other similar
recapitalization events. The exercise prices are also subject to adjustment for
74
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
issuance of additional equity securities at a purchase price less than the then
current fair market value of Concurrent's common stock. The exercise prices 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. 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, 2005. These warrants expire on April 1, 2006.
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 warrants under the agreement regarding the second $30 million threshold,
and accordingly, reversed $1.3 million of expense in the twelve months ended
June 30, 2004, which had been previously accrued in anticipation of reaching the
next $30 million threshold. This reversal was recorded in on-demand product
cost of sales.
15. TERM LOAN AND REVOLVING CREDIT FACILITY
On December 23, 2004, Concurrent executed a Loan and Security Agreement
("Credit Agreement") with Silicon Valley Bank ("SVB"). The Credit Agreement
provides for a two year maximum of $10,000,000 revolving credit line
("Revolver") and a three year $3,000,000 term loan ("Term Loan") and is secured
by substantially all of the assets of Concurrent. Based on the borrowing formula
and Concurrent's financial position as of June 30, 2005, $5.3 million would have
been available to Concurrent under the Revolver. The Revolver and the Term Loan
expire on December 23, 2006, and December 23, 2007, respectively. Both
agreements can be terminated earlier upon a default, as defined in the Credit
Agreement. As of June 30, 2005, Concurrent had no amounts drawn under the
Revolver and the balance of the Term Loan was as follows:
JUNE 30,
2005
---------
Term note $ 2,537
Less current portion 954
---------
Total long-term debt $ 1,583
=========
Interest on all outstanding amounts under the Revolver is payable monthly
at the prime rate (6.00% at June 30, 2005) plus 0.50% per annum, and interest on
all outstanding amounts under the Term Loan is payable monthly at a rate of 8.0%
per annum. The Term Loan is repayable in 36 equal monthly principal and
interest installments of $94,000 and the outstanding principal of the Revolver
is due on December 23, 2006, unless the Revolver is terminated earlier in
accordance with its terms.
In addition, the Credit Agreement contains certain financial covenants,
including required minimum quick ratio and a minimum tangible net worth, and
customary restrictive covenants concerning Concurrent's operations. Concurrent
was in compliance with these covenants during all periods for which the debt was
outstanding.
75
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
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
$25,787,000, $14,443,000 and $18,672,000 for the years ended June 30, 2005, 2004
and 2003, respectively, which amounts represented 33%, 18% and 25% of total
sales for the respective fiscal years.
Sales to the U.S. government, prime contractors and agencies of the U.S.
government amounted to approximately $19,940,000, $14,186,000 and $18,183,000
for the years ended June 30, 2005, 2004 and 2003, respectively, which amounts
represented 25%, 18% and 24% of total sales for the respective fiscal years.
Sales to two commercial customers amounted to $13,939,000 or 18% of total
sales, and $10,820,000 or 14% of total sales, respectively, for the year ended
June 30, 2005. 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. There were no other customers during fiscal years
2005, 2004 or 2003 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 $3,219,000 or 19% of trade receivables and
$1,974,054 or 12% of trade receivables, at June 30, 2005. 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.
Concurrent sometimes purchases product components from a single supplier in
order to obtain the required technology and the most favorable price and
delivery terms. For the year ended June 30, 2005, purchases from 3 suppliers
were in excess of 10% of Concurrent's total purchases. These three suppliers
accounted for 24.6%, 24.5% and 10.4% of Concurrent's purchases during fiscal
2005. Also, for the year ended June 30, 2004, purchases from 3 suppliers were
in excess of 10% of Concurrent's total purchases. These three suppliers
accounted for 30.1%, 24.7% and 17.6% of Concurrent's purchases during fiscal
2004.
76
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
18. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of quarterly financial results for the years
ended June 30, 2005 and 2004:
THREE MONTHS ENDED
------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
2004 2004 2005 2005
------------ -------------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2005
Net sales $ 17,330 $ 20,024 $ 19,849 $ 21,482
Gross margin $ 7,139 $ 9,896 $ 10,970 $ 10,771
Operating loss $ (5,024) $ (1,138) $ (173) $ (1,122)
Net loss $ (5,021) $ (1,447) (1) $ (177) $ (1,084) (2)
Net income (loss) per share-basic $ (0.08) $ (0.02) (1) $ - $ (0.02) (2)
Net income (loss) per share-diluted $ (0.08) $ (0.02) (1) $ - $ (0.02) (2)
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) (6)
Net income (loss) $ 612 (3) $ 1,213 (4) $ (63) (5) $ (7,487) (6)
Net income (loss) per share-basic $ 0.01 (3) $ 0.02 (4) $ - (5) $ (0.12) (6)
Net income (loss) per share-diluted $ 0.01 (3) $ 0.02 (4) $ - (5) $ (0.12) (6)
(1) The net income for the quarter ended December 31, 2004 includes an
impairment charge for the Everstream investment of $0.4 million, partially
offset by a partial recovery of the previously recognized impairment charge
for the Thirdspace investment of $0.1 million.
(2) The net income for the quarter end June 30, 2005 includes a reversal of tax
contingency reserves of $0.3 million that Concurrent determined were no
longer required and were reversed as an income tax benefit
(3) 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.
(4) 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.
(5) 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.
(6) 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.
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 2010 and generally provide for the payment of taxes, insurance and
maintenance costs. Additionally, certain leases contain escalation clauses that
provide for increased rents
77
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
resulting from the pass through of increases in operating costs, property taxes
and consumer price indexes.
At June 30, 2005, future minimum lease payments for the years ending June
30 are as follows (dollars in thousands):
2006 $1,459
2007 896
2008 398
2009 92
2010 1
2011 and thereafter -
------
$2,846
======
Rent expense under all operating leases amounted to $4,006,000, $3,851,000
and $3,825,000 for the years ended June 30, 2005, 2004 and 2003, 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.
Concurrent has entered into an agreement with a vendor in which the vendor
will perform nonrecurring customization services. Concurrent may be obligated
to pay as much as $750,000 for the completion of these services. As of June 30,
2005, Concurrent had made payments to this vendor totaling $175,000. This
amount is recorded in the line item "Prepaid expenses and other current assets"
at June 30, 2005. This asset will be amortized over the estimated life of the
new product and amortization will begin when the product is ready for release to
customers.
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, 2005, the maximum contingent liability under these agreements is
approximately $1.8 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 November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
Amendment of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends ARB 43,
Chapter 4, to clarify that abnormal amounts of idle facility expense, freight,
handling costs, and wasted materials (spoilage) should be recognized as current
period expenses. In addition, SFAS 151 requires that allocation of fixed
production overhead to the costs of conversion be based upon the normal capacity
of the production facilities. The provisions of SFAS 151 are effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. The
adoption of this Statement is not expected to have a material impact on
Concurrent's financial position or results of operations.
In December 2004, the FASB issued SFAS 123(R). SFAS 123(R) applies to all
share-based payment transactions in which an entity acquires goods and services
by issuing its shares, share options, or other equity instruments or by
incurring liabilities to an employee or other supplier (a) in amounts based, at
least in part, on the price of the entity's shares or other equity instruments
or (b) that require settlement by the issuing entity's equity shares or other
equity instruments. SFAS 123(R) requires that the cost resulting from all
share-based payment
78
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
transactions be recognized in the financial statements and requires all entities
to apply a fair-value-based measurement method in accounting for share-based
payment transactions with employees. SFAS 123(R) will be effective for annual
periods beginning after June 15, 2005. Concurrent anticipates the expected
additional compensation expense resulting from adoption of SFAS 123(R) to be
$180,000 for fiscal year 2006, based on unvested options as of June 30, 2005.
In December 2004, the FASB issued FASB Staff Position ("FSP") 109-1,
"Application of FASB Statement No. 109" ("FSP 109-1"), and "Accounting for
Income Taxes, to the Tax Deduction on Qualified Production Activities provided
by the American Jobs Creation Act of 2004" (the "Jobs Act"). FSP 109-1 requires
that the generation deduction be accounted for as a special tax deduction rather
than as a tax rate reduction. Concurrent is currently assessing the Jobs Act
and this pronouncement, as well as the related regulatory treatment, but
currently does not expect a material impact on Concurrent's consolidated
financial statements.
In December 2004, the FASB issued FSP No.109-2, "Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004" ("FSP109-2"). FSP 109-2 provides guidance under SFAS
109 with respect to recording the potential impact of the repatriation
provisions of the Jobs Act on enterprises' income tax expense and deferred tax
liability. The Jobs Act was enacted on October 22, 2004. FSP 109-2 states that
an enterprise is allowed time beyond the financial reporting period of enactment
to evaluate the effect of the Jobs Act on its plan for reinvestment or
repatriation of foreign earnings for purposes of applying SFAS 109. Concurrent
has not yet completed its evaluation of the impact of the repatriation
provisions of the Jobs Act. Accordingly, as provided for in FSP 109-2,
Concurrent has not adjusted its income tax provision or deferred tax liabilities
to reflect the repatriation provisions of the Jobs Act.
In December 2004, the FASB issued SFAS 153, "Exchange of Non-monetary
Assets" ("SFAS" 153"). SFAS 153 addresses the measurement of exchanges of
non-monetary assets. The guidance in APB Opinion No. 29, "Accounting for
Non-monetary Transactions" ("APB 29"), is based on the principle that exchanges
of non-monetary assets should be measured based on the fair value of the assets
exchanged. The guidance in APB 29, however, included certain exceptions to that
principle. SFAS 153 amends APB 29 to eliminate the exception for non-monetary
exchanges of similar productive assets and replaces it with a general exception
for exchanges of non-monetary assets that do not have commercial substance. A
non-monetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. This
Statement is effective for financial statements for fiscal years beginning after
June 15, 2005. The adoption of this statement is not expected to have a
material impact on Concurrent's consolidated financial statements.
In May 2005, the FASB issued SFAS 154, "Accounting Changes and Error
Corrections - A replacement of APB Opinion No. 20 and FASB Statement No. 3"
("SFAS 154"). The FASB issued SFAS 154 to provide guidance on the accounting for
and reporting of error corrections. Unless otherwise impracticable, it
establishes retrospective application as the required method for reporting a
change in accounting principle in the absence of explicit transition
requirements specific to the newly adopted accounting principle. SFAS 154 also
provides guidance for determining whether retrospective application is
impracticable and for reporting an accounting change when retrospective
application is impracticable. Furthermore, this statement addresses the
reporting of a correction of an error in previously issued financial statements
by restating previously issued financial statements. This Statement is effective
for financial statements for fiscal years beginning after December 15, 2005. The
adoption of this statement is not expected to have a material impact on
Concurrent's consolidated financial statements.
21. SUBSEQUENT EVENT
On August 19, 2005, Concurrent entered into a definitive agreement to
acquire Everstream. Everstream is a leader in business intelligence software
currently focused on the cable industry. Everstream is valued at approximately
$15 million and Concurrent currently owns the equivalent of $500,000 of
Everstream stock. The acquisition will be paid in Concurrent common stock. The
closing of this transaction is expected to occur in Concurrent's second quarter
of fiscal 2006. At June 30, 2005, Concurrent had a 4.9% ownership interest in
Everstream. See Note 3 for additional information related to Concurrent's
investment in Everstream.
79
Schedule II
CONCURRENT COMPUTER CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 2005, 2004 AND 2003
(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:
2005
- ----
Reserve for inventory obsolescence
and shrinkage $ 2,956 $ 11 $ (1,006) $ 1,961
Allowance for doubtful accounts 200 - - 200
Warranty accrual 1,122 392 (812) 702
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
<FN>
(a) Charges and adjustments to the reserve accounts for write-offs and credits
issued during the year.
80
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CONCURRENT COMPUTER CORPORATION
By: /s/ T. Gary Trimm
---------------------------------------
T. Gary Trimm
President and Chief Executive Officer
Date: September 2, 2005
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 2, 2005.
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
Chief Financial Officer
/s/ Gregory S. Wilson (Principal Financial and Accounting Officer)
- -------------------------
Gregory S. Wilson
/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
81
EXHIBIT DESCRIPTION OF DOCUMENT
3.1 --Restated Certificate of Incorporation of the Registrant
(incorporated by reference to the Registrant's Registration Statement
on Form S-2 (No. 33-62440)).
3.2 --Amended and Restated Bylaws of the Registrant (incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q for the
period ended March 31, 2003).
3.3 --Certificate of Correction to Restated Certificate of Incorporation
of the Registrant (incorporated by reference to the 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, 2004 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, 2004).
4.10 --Warrant to purchase 5,261 shares of common stock of the Registrant
dated March 22, 2004 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, 2004).
82
4.11 --Warrant to purchase 27,332 shares of common stock of the Registrant
dated March 22, 2004 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, 2004).
4.12 --Warrant to purchase 6 shares of common stock of the Registrant dated
March 22, 2004 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, 2004).
4.13 --Warrant to purchase 63,145 shares of common stock of the Registrant
dated June 4, 2004 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, 2004).
4.14 --Warrant to purchase 50,000 shares of common stock of the Registrant
dated June 4, 2004 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, 2004).
10.1 --Loan and Security Agreement (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q filed on February 4, 2005).
10.2 --Schedule of Officers who have entered into the Form Indemnification
Agreement (incorporated by reference to the Registrant's Quarterly
report on Form 10-Q for the quarter ended December 31, 2004).
10.3 --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).
10.4 --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)).
10.5 --Concurrent Computer Corporation 2001 Stock Option Plan (incorporated
by reference to Annex II to the Registrant's Proxy Statement dated
September 19, 2001).
10.6 --Concurrent Computer Corporation Amended and Restated 2001 Stock
Option Plan (incorporated by reference to the Registrant's
Registration Statement on Form S-8 (No. 333-125974)).
10.7 --Form of Option agreement with transfer restrictions (incorporated by
reference to the Registrant's Current Report on Form 8-K dated June
24, 2005).
10.8 --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)).
10.9 --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).
10.10 --Summary of Performance Grants (incorporated by reference to the
Registrant's Current Report on Form 8-K filed March 3, 2005).
10.11 --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).
10.12 --Employment Agreement dated as of February 1, 2005 between the
Registrant and Greg Wilson (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q filed on February 4, 2005).
10.13 --Protective Agreement dated as of February 1, 2005 between the
Registrant and Greg Wilson (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q filed on February 4, 2005).
10.14 --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).
83
10.15 --Employment Agreement dated as of June 24, 2004 between the
Registrant and T. Gary Trimm (incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 2004).
10.16 --Employment Agreement dated as of June 24, 2004 between the
Registrant and Warren Neuburger (incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 2004).
10.17 --Video-on-demand Purchase Agreement, dated March 29, 2001, by and
between Concurrent ComputerCorporation and Comcast Cable
Communications of Pennsylvania, Inc. (portions of the exhibit have
been omitted pursuant to a request for confidential treatment)
(incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 2001).
10.18 -- Entry into a Material Definitive Agreement between the Registrant
and Stream Acquisitions, Inc. to acquire Everstream Holdings, Inc.
(incorporated by reference to the Registrant's Current Report on Form
8-K filed on August 25, 2005).
10.19 -- Amendment of Material Definitive Agreement between the Registrant
and Stream Acquisitions, Inc. to acquire Everstream Holdings, Inc.
(incorporated by reference to the Registrant's Current Report on Form
8-K filed on August 31, 2005).
14.1 --Code of Ethics for Senior Executives & Financial Officers
(incorporated by reference to the Registrant's Proxy for the 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.
* Included herewith.
84