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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2002
COMMISSION FILE NUMBER 0-13150
CONCURRENT COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-2735766
(State of Incorporation) (I.R.S. Employer Identification Number)
4375 RIVER GREEN PARKWAY, DULUTH, GEORGIA, 30096 (678) 258-4000
(Address and telephone number of principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock (par value $0.01 per share)
Preferred Stock Purchase Rights
Indicate by check mark whether Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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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]
As of September 17, 2002, there were 61,861,543 shares of Common Stock
outstanding. The aggregate market value of shares of such Common Stock (based
upon the last sale price of $2.94 per share as reported for September 17, 2002
on the Nasdaq National Market) held by non-affiliates was approximately
$180,905,000.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Registrant's Proxy Statement to be used in connection
with Registrant's 2002 Annual Meeting of Stockholders scheduled to be held on
October 25, 2002 are incorporated by reference in Part III hereof.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Concurrent Computer Corporation ("Concurrent") is a leading provider of
computer systems for both the emerging video-on-demand, or VOD, market through
its Xstreme division and real-time applications through its Real-Time division.
Concurrent provides VOD servers and related software, its VOD systems, primarily
to residential cable television operators, also known as multiple system
operators (MSOs), that have upgraded their networks to support interactive,
digital services. Concurrent's real-time business provides high-performance,
real-time computer systems used primarily for simulations and data acquisition
applications. Concurrent markets its real-time computer systems to U.S.
government prime contractors, agencies of the U.S. government and commercial
markets where the immediate capture and delivery of information is critical.
Although almost all of Concurrent's revenues prior to fiscal 2000 were derived
from its Real-Time division, Concurrent expects in the near term that a majority
of its future revenue growth will come from its Xstreme division, which began
commercial sales in 1999.
Concurrent's VOD systems consist of digital video servers and related
software that enable cable systems that have two-way capability to deliver VOD
to subscribers served through digital set-top boxes. Concurrent has been
selected to supply its VOD system for 39 commercial launches. Of these, 24 have
been publicly announced by MSOs, including the first commercial deployment at
AOL Time Warner's Oceanic regional division in Oahu, Hawaii and the largest
system-wide commercial deployment at AOL Time Warner's Tampa Bay regional
division in Florida. All of the eight largest MSOs have begun deploying VOD
services in one or more residential markets. Concurrent believes it is well
positioned to be a provider of choice to these MSOs.
Initially, Concurrent focused its VOD business on the development of VOD
systems designed to be compatible with Scientific-Atlanta, Inc. digital cable
equipment. In October 1999, Concurrent acquired Vivid Technology, Inc. and
obtained certain server technology compatible with Motorola, Inc. digital cable
equipment. Since September of 2000, Concurrent has been selling VOD systems
that are compatible with both Scientific-Atlanta and Motorola headend equipment,
initially with its MediaHawk Model 2000 and since January 2002 with its
MediaHawk Model 3000.
Concurrent's primary VOD focus is on digitally equipped North American
MSOs. Concurrent also intends to focus on VOD opportunities in the domestic and
international cable, internet protocol (IP) and digital subscriber line, Telco
or DSL, and educational markets. Although delivery of VOD to the home over DSL
and IP currently is not practical in the United States, Concurrent has several
of these deployments in the international market and has made the DSL market a
strategic initiative recently with its investment in Thirdspace Living Limited
in March 2002.
Concurrent's real-time computer systems and software are specially designed
to acquire, process, store, and display large amounts of rapidly changing
information in real time - that is, with millisecond or microsecond response as
changes occur. Concurrent has over 35 years of experience in real-time systems,
including specific expertise in systems, applications software, productivity
tools, and networking. Its systems and software support real-time applications
in the hardware in-the-loop simulations, man in-the-loop simulations, data
acquisition, and industrial control systems markets.
Concurrent was incorporated in Delaware in 1981 under the name
Massachusetts Computer Company.
Financial information about Concurrent's industry segments is included in
Note 16 to the consolidated financial statements included herein.
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THE VOD MARKET
VOD technology addresses the home video entertainment, time-shifted
programming, and ad insertion markets. Concurrent believes that emerging VOD
technology will enable cable providers to generate incremental revenue from the
large home entertainment markets, such as home video rentals and traditional
pay-per-view or near video-on-demand (NVOD), network based personal video
recorder technology, and ad insertion by combining many of their best features
and addressing their primary limitations. The limitations include:
- Home video rentals have the greatest number of title selections but are the
most inconvenient home video entertainment option. Limitations of home
video rental include frequently out-of-stock popular titles, lack of
convenience due to rental pickup and return requirements and late fee
penalties.
- Pay-per-view and NVOD are more convenient options than store rentals but
have limited titles and viewing times and no interactive capabilities.
Pay-per-view, or PPV, allows the user to order specific programs at fixed
times. NVOD is basically PPV available at successive shorter intervals.
Limitations of PPV and NVOD include a limited selection of titles available
for viewing, restrictions on viewing times and no VCR functionality, such
as play, rewind, fast-forward and pause.
- PPV/NVOD coupled with a personal video recorder has limited content and
currently requires a significant up-front investment by the user. A
personal video recorder (PVR) is an additional set-top device or an
enhanced set-top device that enables a user to "pause" and save live
programming, and then resume while using VCR functionality on the saved
content. Even when coupled with an NVOD or PPV service, a personal video
recorder does not overcome certain limitations of PPV or NVOD, such as
limited content availability. In addition, users currently are required to
make a significant up-front expenditure to purchase the personal video
recorder box and then spend time learning how to operate the device.
- Advertising is not targeted to specific households and does not include
interactive opportunities for the viewers. MSOs have the capability to
insert advertisements, but those advertisements are not tailored to
specific demographics because all viewers within a system would view the
same ad. Further, the advertisements do not include options to allow
viewers to request additional information on the fly or at a later date
after the program on an interactive basis.
Ongoing technological developments have laid the groundwork for digitally
upgraded, two-way capable networks that enable MSOs to deliver VOD services to
their digitally enabled subscribers. These upgrades include:
- Cable system digital upgrades. MSOs have been upgrading their networks to
enable the delivery of digital content on an interactive basis. MSOs are
upgrading traditional, one-way, low bandwidth, coaxial systems into
two-way, high bandwidth, hybrid-fiber coaxial transmission systems. These
new systems include additional fiber optic bandwidth capability and digital
equipment at the systems' headend and other locations in the network. These
digitally upgraded systems are capable of carrying a larger quantity of
signals at a faster rate. The two-way upgrade allows for the introduction
of new interactive services, including VOD.
- Digital set-top boxes. A variety of companies, including Motorola,
Scientific-Atlanta, Pioneer, Pace Micro and Sony, have introduced new
digital television set-top boxes with processing power similar to a
personal computer. These digital set-top boxes allow the cable provider to
offer a greater selection of digital services, such as VOD, advanced
program guides, personal video recorders, and interactive electronic
commerce to homes with access to two-way capable cable services.
- Content digitization. Digitization is the process by which entertainment
content is converted from an analog to a digital format. Digital content is
a sequence of tiny digital pieces, or "bits", which can be stored on disks
and transmitted in the form of electronic signals. With the benefit of the
latest digital compression technologies, digital content now requires even
less storage space and more content can be simultaneously transmitted over
the cable system, thus reducing the storage and transmission costs of
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delivering content to consumers. Many major movie studios, major television
networks, premium channel providers, and other program and content creators
are converting their most popular titles into a digital format.
In the near term, Concurrent expects North American MSOs will continue to
comprise the majority of its VOD system customer base. Concurrent believes that
VOD is one of the key strategic competitive initiatives for MSOs as it provides
an opportunity to leverage recent investments in their digitally upgraded
infrastructure. Concurrent believes the VOD application provides MSOs with the
ability to differentiate their service offering in an effort to reduce
subscriber turnover and gain access to new revenue generating opportunities from
subscribers, advertisers and electronic commerce initiatives.
THE REAL-TIME MARKET
Concurrent's Real-Time division focuses on real-time computer systems that
concurrently acquire, analyze, store, display, and control data to provide
critical information within a predictable time as real world events occur.
Compared to general purpose computer systems, these unique real-time
capabilities are applicable to a wide range of application requirements,
including higher performance processing, higher data throughput, predictable and
repeatable response times, reliably meeting required deadlines, consistently
handling peak loads, and better balancing of system resources.
Concurrent has over 35 years of real-time systems experience, including
specific design, development, and manufacturing expertise in system
architectures, system software, application software, productivity tools, and
networking. Concurrent's real-time systems and software are currently used in
host, client server, and distributed computing solutions, including
software-controlled configurations to provide fault tolerance. Concurrent sells
its systems worldwide through its direct sales force in North America, Europe,
Japan, China, and Australia and through distributors in certain Asian
territories. End uses of Concurrent's products include simulation and training
systems, data acquisition systems, and industrial process control systems.
- Simulation. Concurrent is a recognized leader in developing real-time
systems for simulation applications. Primary applications include
trainers/simulators for operators in commercial and military aviation,
vehicle operation and power plants, mission planning and rehearsal and
engineering design simulation for avionics and automotive labs. An
additional segment of this market for Concurrent is
Hardware-In-The-Loop applications in which accurate simulations are
constructed to verify hardware designs, thereby minimizing or
eliminating entirely the need for expensive prototypes. Concurrent
offers software applications that provide a real-time advantage to its
customers and integrates these applications to provide complete
solutions.
- Data Acquisition. Concurrent is a leading supplier of systems for
radar control, data fusion and weather analysis applications, all of
which require the ability to gather, analyze, and display continuous
flows of information from simultaneous sources. Primary applications
include environmental analysis and display, engine testing, range and
telemetry systems, weather satellite data acquisitions and
forecasting, intelligence data acquisition and analyses and command
and control products.
- Industrial Process Control Systems. Concurrent manufactures systems to
collect, control, analyze, and distribute test data from multiple
high-speed sources for industrial automation systems, product test
systems (particularly engine tests), supervisory control and data
acquisition systems and instrumentation systems. Concurrent's strategy
to serve this market involves the employment of third-party software
applications to provide a unique solution for its customers.
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BUSINESS STRATEGY
XSTREME DIVISION
Concurrent's business objective is to become the leading provider of high
quality VOD systems to cable and DSL providers worldwide. Concurrent's VOD
strategy is comprised of the following primary initiatives:
Maintain Existing, and Establish New, Relationships with Top Domestic MSOs.
The market for providing VOD solutions to MSOs is rapidly evolving. Concurrent
has been selected to supply VOD systems for 39 markets, of which 24 have been
publicly announced. Concurrent has sold its VOD systems to AOL Time Warner,
Blue Ridge Communications, Cablevision, Cox Communications, Comcast, Charter
Communications, Cogeco Cable, and Mediacom. These launches include the
industry's first system-wide commercial deployment at AOL Time Warner's Oceanic
regional division in Oahu, Hawaii and the largest system-wide commercial
deployment at AOL Time Warner's Tampa Bay regional division in Florida.
Concurrent's VOD sales team will continue to directly target these large MSOs.
Concurrent believes that maintaining and expanding existing MSO relationships
and establishing new MSO relationships will be important in developing and
maintaining its share of the VOD market.
Develop Partnerships Enabling Incremental Revenue Opportunities for MSOs.
With the evolution of the television viewing experience, Concurrent believes
there will be opportunities for its customers to increase incremental revenues
with other product offerings complementary to VOD services. To that end,
Concurrent has invested in and formed a strategic partnership with Everstream
Holdings, Inc., a company specializing in the delivery of digitized and targeted
advertising. Concurrent believes that this relationship will open opportunities
for increased revenues to MSOs while simultaneously driving demand for VOD
services to support the advertising.
Expand Operations Internationally. The rollout of residential VOD service
internationally is expected to occur over both cable television systems and
DSL-based telephone networks. Concurrent is currently focusing on building its
relationships with companies seeking to provide VOD services over cable or DSL
networks in Europe, Asia and Australia. To that end, in March, 2002, Concurrent
invested in and formed a strategic partnership with Thirdspace Living Limited, a
private company headquartered in the United Kingdom that is focused on
delivering interactive television services, including VOD, via DSL enabled
telephone networks. Concurrent's international sales strategy is to focus on
three key customer segments: cable companies; telephone companies; and
alternative IP-based streaming media applications like hospitality, distance
learning, education, and corporate training.
Maintain a Technological Leadership Position in VOD Server Systems.
Concurrent has developed its VOD technology through internal research and
development, acquisitions and relationships with third-party technology
providers. Concurrent intends to continue to focus on the development of future
VOD technologies in order to remain a technology leader by creating higher
stream density, intelligent asset management, new encryption techniques, SVOD,
network based personal video recorder applications, time shifted programming,
and product enhancements for international markets.
Identify and Pursue New Market Opportunities. Concurrent believes that its
VOD technology can provide benefits to industries other than cable system
providers. For instance, Concurrent believes the growth in intranet and
distance learning provides a significant opportunity for deployment of VOD
systems. Generally, Concurrent expects to address these additional markets
through relationships with market-specific value added resellers, or VARs.
REAL-TIME DIVISION
As the real-time computer market shifted in end-user demand to open
systems, Concurrent developed a strategy to adjust its real-time service
offerings to those more appropriate for open systems, while maintaining support
for its proprietary systems. Concurrent's strategy also strikes a balance
between appropriate upgrades for proprietary system offerings while
predominantly investing in its real-time operating system and integrated
computer system solutions. In the first half of calendar 2001, Concurrent
introduced its PowerWorks Linux development environment (PLDE) based on the
popular Linux open operating system. Following that development path,
Concurrent announced its RedHawk(TM) Linux(R) operating system software on its
iHawk(TM) platform in April 2002. PLDE allows users on a Linux PC or
workstation to develop applications for any Concurrent PowerPC-based real-time
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computer system, offering a convenient and economical way to utilize the
extensive features of Concurrent compilers and real-time graphical user
interface (GUI) tools. RedHawk(TM) Linux(R) is a real-time operating system
based on the popular Red Hat(TM) Linux distribution, but incorporating a number
of changes to the Linux kernel that make it a more powerful real-time, symmetric
multi processing operating system while retaining the third-party software
compatibility of the open-source Red Hat distribution. The iHawk family is a
line of Intel servers available in single, dual, quad, and 8-way processor
models featuring a wide-range of configurations combined with Concurrent's
proprietary real-time clock and interrupt module as well as the optional
NightStar tool suite. Concurrent expects that the introduction of a wide-range
of Intel-based servers running RedHawk Linux will allow it to compete for a
broader range of opportunities.
CUSTOMERS
Concurrent has been publicly selected by AOL Time Warner, Cox
Communications, Comcast Cable, Charter Communications, Mediacom, and one other
unnamed MSO, six of the eight largest MSOs in the country, for commercial VOD
system deployments. Each of these operators has deployed Concurrent's VOD
systems for use with digital set-top boxes manufactured by various manufacturers
including Scientific-Atlanta, Motorola, Sony, Pioneer and Pace Micro.
Concurrent also has been selected by Blue Ridge Communications for its
deployment in Northeast Pennsylvania and Cogeco Cable Inc., a Canadian cable
operator, for two VOD deployments.
Concurrent believes it is a leading provider of video-on-demand systems
based on the number of its commercial deployments. To date, Concurrent has been
awarded 39 markets for deployment of VOD systems, of which 24 have been publicly
announced. These markets are composed of over 10.3 million basic subscribers
and over 3 million digital subscribers that will have access to nearly 200,000
Concurrent video streams.
AOL TIME WARNER
Concurrent has sold its VOD systems to 16 markets within AOL Time Warner,
of which eight are publicly announced. These 16 markets serve over 5.2 million
basic subscribers via more than 110,000 video streams. Of the 16 markets, 15
are using Scientific-Atlanta digital platforms and one is using Motorola. The
announced markets are Oahu, Hawaii; Tampa, Florida; Columbia, South Carolina;
Summerville, South Carolina; Myrtle Beach, South Carolina; Cincinnati, Ohio;
Central Florida; and Houston, Texas.
BLUE RIDGE COMMUNICATIONS
Concurrent has sold its VOD systems to Blue Ridge Communications, serving
approximately 170,000 basic subscribers via more than 1,000 video streams in
Northeast Pennsylvania using the Scientific-Atlanta digital platform.
CHARTER COMMUNICATIONS
Concurrent has sold its VOD systems to six markets within Charter
Communications, all of which are publicly announced, serving over 880,000 basic
subscribers via more than 13,000 video streams. The digital platform for these
systems is Motorola equipment. The markets are St. Louis, Missouri; Slidell,
Louisiana; Asheville, North Carolina; Hickory, North Carolina;
Greenville/Spartanburg, South Carolina; and Duluth, Georgia.
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COGECO CABLE
In May 2001, Concurrent entered into an arrangement with Cogeco to provide
VOD systems to two markets in Canada: Ontario and Quebec. The digital platform
for these systems is Motorola. These two markets serve approximately 1,000,000
basic subscribers and 105,000 digital subscribers. Cogeco plans to begin
deploying service to its customers during the first half of fiscal 2003.
COMCAST
Concurrent has sold its VOD systems to nine markets within Comcast Cable
Corporation, of which four are publicly announced, serving over 835,000 basic
subscribers via more than 30,000 video streams. Of the nine markets, two are
using Scientific-Atlanta digital platforms and seven are using Motorola. The
announced markets are Lower Merion, Pennsylvania; Savannah, Georgia; Mobile,
Alabama; and Willow Grove, Pennsylvania.
COX COMMUNICATIONS
Concurrent has sold its VOD systems to five markets within Cox
Communications, of which three are publicly announced, serving over 2.1 million
basic subscribers via more than 38,000 video streams. Of the five markets, four
are using Scientific-Atlanta digital platforms and one is using Motorola. The
announced markets are San Diego, California; Phoenix, Arizona; and Hampton
Roads, Virginia.
In June 2002, Cox and Concurrent executed a non-exclusive contract with a
five (5) year term that provides for Concurrent to be Cox' primary source for
VOD products.
MEDIACOM
In March 2002, Mediacom selected Concurrent's VOD system for a commercial
launch in Mobile, Alabama. The system serves approximately 40,000 basic
subscribers via approximately 1,000 video streams.
This is the industry's first commercial deployment of VOD over Motorola's
National Authorization Service. This technology allows interactive content to
be propagated and managed over satellite and transmitted to Mediacom's complex
Headend in the Sky (HITS) based headends and then distributed to their broadband
customers. This technology allows for any HITS supported cable system to cost
effectively deploy VOD.
PRODUCTS AND TECHNOLOGY
XSTREME DIVISION
Concurrent's VOD system allows MSOs to deliver VOD services over their high
bandwidth two-way hybrid fiber coax cable infrastructure. Concurrent's VOD
system is capable of being distributed over certain portions of this
infrastructure, including the headend, hub or hubs, and digital set-top boxes in
subscribers' homes, centralized at the main headend, or a combination of both.
- Headend. The headend is a cable system's main network operations center
where the cable company receives incoming programming for distribution over
its network. The components of Concurrent's VOD system typically located at
the digitally-upgraded system operator's headend include a network manager,
one or more video servers, back-office software suite and system management
and maintenance software. In centralized applications, Concurrent's video
servers are all located at the system headend.
- Hub. The hub typically is a smaller facility serving a limited number of
homes, containing the system operator's network transmission equipment for
video delivery and control. The components of Concurrent's VOD system
typically located at the system operator's hubs include one or more
additional video servers.
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- Digital set-top box. The digital set-top box is located in the subscriber's
home and is designed to receive transmissions from, and transmit data to,
the system operator's network. Concurrent's client software is run by the
digital set-top box.
When a subscriber selects a movie, a video session is established between
Concurrent's video server and the digital set-top box in the subscriber's home
via the network manager over the cable operator's network. The selected movie
is accessed from the video server where it is stored at either a headend or a
hub. The purchase is captured by Concurrent's back-office software creating a
billing and royalty record for the cable provider's billing system.
Product. Concurrent's VOD systems integrate its core VOD technology, asset
management and back-office software and readily available commercial hardware
platforms to provide interactive, VOD capabilities. Concurrent generally
markets its VOD products to MSOs as an end-to-end VOD solution. Concurrent also
markets the individual components of its VOD systems to VARs and systems
integrators for inclusion in their VOD solutions and, on occasion, to MSOs who
prefer to purchase only individual components. Concurrent's VOD systems include
the MediaHawk(R) video server, network manager, MediaHawk Back Office Business
Management System, Personal Video Channel(TM) (pVC(TM)) software, system
management and maintenance software and client software. The components of
Concurrent's system are described below:
- MediaHawk(R) Model 3000 Video Server. Concurrent's MediaHawk video servers
are high-performance computer systems designed for the demanding
requirements of interactive video-on-demand applications. The MediaHawk
video server includes multiple content storage devices, stream processors
and input/output interfaces.
- Network Manager. Concurrent's network manager or resource manager
establishes the network connection that allows the video to be streamed to
the home over the cable operator's network. The network manager is designed
to route video streams in the most efficient manner available at any given
time.
- MediaHawk Back Office Business Management System. Concurrent's business
management system is an industry standard relational database supporting
subscriber and provider data management. Concurrent's back-office
applications include customer access management, content distribution
management, order management, royalty management, billing interfaces and
marketing analysis.
- Personal Video Channel(TM)(pVC(TM)) Software. Concurrent's pVC is recently
released software that empowers consumers to watch television programs
contained in a package whenever they desire, thus, time-shifting the
viewing experience. Thus, this product enables an MSO to record programming
on the Concurrent servers, for example local news, that may then be
accessed by consumers at any time with full VCR functionality. The recorded
programs may be available for any amount of time as determined by the MSO.
- Client. Concurrent's client allows the subscriber to select the content on
demand and maintain complete interactive control; the subscriber can pause,
fast forward, rewind or stop the movie having the same control as if they
were using a VCR. This is also referred to as the user interface.
- System Management and Maintenance Software. Concurrent's system management
and maintenance software is designed to detect failed components and
re-route video streams bypassing the failed component. The monitoring
software is also capable of providing system level status that notifies the
cable operator that a maintenance activity is required.
Product Discriminators. Concurrent believes its key VOD system
discriminators include:
- Multiple integration options. Concurrent's VOD systems have been designed
to be compatible with a wide range of equipment and software employed by
cable operators to deliver digital television service, including:
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- Various digital set-top boxes. Concurrent's VOD systems are
compatible with digital set-top boxes manufactured by each of the
major domestic digital set-top box producers, including
Scientific-Atlanta, Motorola, Pioneer, Sony and Pace Micro. This
compatibility allows Concurrent's customers to purchase
Concurrent's systems without concern about their current or
future selection of a set-top box producer. Furthermore,
Concurrent's system is capable of accommodating multiple
headends, source content, navigators and workstation platforms.
- Existing and next-generation equipment. Although newer
generations of digital set-top boxes have expanded memory
capability allowing subscribers to interact with and access VOD
services, older digital set-top boxes may have limited memory
capability. Concurrent's VOD technology allows Concurrent to
perform some of the functionality in the server rather than in
the actual digital set-top box which overcomes the major obstacle
in providing VOD services through older generation digital
set-top boxes. Thus, deployment of Concurrent's VOD system is not
contingent on the upgrading of currently deployed digital set-top
boxes.
- Transport topologies. Concurrent's VOD systems are compatible
with numerous transport topologies supporting delivery of VOD
services over Gigabit Ethernet, DVB-ASI, asynchronous transfer
mode, 64 and 256 QAM, and RF up-conversion.
- Billing systems. Both the existing and the emerging billing
systems currently employed by MSOs can be used with Concurrent's
VOD systems.
- Ad Insertion Software. Concurrent has established strategic
relationships with both Everstream Holdings, Inc. and Navic
Networks that provide ad-insertion software that will enable MSOs
to insert advertisements into streamed video.
- Support for Both Distributed and Centralized Architectures. Concurrent's
systems are designed to function equally well with distributed networks
that minimize fiber optic bandwidth usage or centralized networks that
support high-density populations that minimize facility requirements.
- Highly Scalable Systems. Concurrent's systems are modular and therefore
easily scalable. Utilizing Concurrent's dual chassis, multiple cabinet
designs, Concurrent's customers can scale both video storage and stream
capacity in various increments to allow for significant flexibility.
- MediaHawk Back Office Business Management System. In addition to content
management, order management, provider account management, customer access
management, marketing analysis and billing functions, Concurrent's
back-office business management system also supports e-commerce
applications and subscriber data collection which enhances the
revenue-generation capabilities of the VOD service provider.
- Subscription VOD Technology. Concurrent's VOD systems are designed with
SVOD services. SVOD is a complementary service to VOD, enabling impulse
viewing of premium network programming with VCR-like functionality
including fast forward, pause, and rewind, and with simple flat fees. In
addition to these advantages, SVOD also provides an opportunity for
subscription programming providers, such as Starz-Encore, HBO, and
Showtime, to build additional market share with this new value-added
service. SVOD is not a service that can be offered by direct broadcast
satellite and we believe it will provide the cable operators a strategic
competitive advantage and build greater subscriber satisfaction and
retention. Concurrent video servers are streaming SVOD content, including
HBO and Starz-Encore in multiple markets in North America with multiple
MSO's.
- Specialized Video Engine. Concurrent's video engine was designed
specifically for the requirements of providing VOD services. As such,
Concurrent's video engine is capable of creating high stream density
accommodating increasing levels of demand, simultaneous usage and expanding
library content.
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- Fault Tolerant System Designs. Concurrent's VOD systems are designed with
multiple layers of redundancy including fully redundant storage, power and
cooling systems to provide seamless end-user viewing. Thus, system repairs
can be made during delivery without any interruption to the end-user.
- Variable Bit-Rate Technology. Concurrent's variable bit-rate technology
minimizes storage and bandwidth while maximizing video fidelity. Concurrent
believes that this technology will become a key technology discriminator as
higher-fidelity requirements such as high-definition television emerge.
MediaHawk Model 3000 Product. Concurrent began shipments of its MediaHawk
Model 3000 video server in January 2002. Through Concurrent's internal research
and development efforts and its technological strategic relationships,
Concurrent has integrated new technologies that Concurrent believes will further
enhance the attractiveness of its VOD solution into Concurrent's new MediaHawk
video server. Concurrent's MediaHawk Model 3000 VOD servers and software are
designed to allow a single product to work in conjunction with cable equipment
and digital set-top boxes produced by multiple vendors.
Customer Service Plans and Support. The basic customer service plans and
support options offered to Concurrent's VOD customers include software patches
to correct problems in existing software, 24-hour parts replacement, product
service training classes, limited onsite services and preventative maintenance
services. These services are provided at no additional charge during the
warranty period and are available for additional fees under maintenance
agreements after the warranty period. In addition to these basic service and
support options, Concurrent also offers, for additional fees, software upgrades
and onsite hardware maintenance services. To date, customer service and support
revenues from Concurrent's VOD business have not been material.
REAL-TIME DIVISION
Concurrent's real-time systems are applicable to a wide range of
application requirements, including high performance processing, high data
throughput, predictable and repeatable response times, reliably meeting required
deadlines, consistently handling peak loads, and better balancing of system
resources. End uses of Concurrent's real-time systems include product design
and testing, simulation and training systems, test stands, range and telemetry
systems, weather satellite data acquisition and forecasting, and intelligence
data acquisition and analysis.
Concurrent designs, manufactures, sells and supports real-time
standards-based open computer systems and proprietary computer systems. It also
offers worldwide hardware and software maintenance and support services for its
products and for the products of other computer and peripheral suppliers. The
services are provided at no additional charge during the warranty period.
Concurrent has routinely offered and delivered long-term service and support of
its products for as long as 15 to 20 years under maintenance contracts for
additional fees, although we anticipate this source of revenue to decline over
time given the change in Real-Times' product strategies. In addition, Concurrent
customizes systems with both specialized hardware and software to meet unique
customer requirements. Frequently in demand, these special support services have
included system integration, performance and capacity analysis, and application
migration.
Products. Concurrent's Real-Time division designs, develops and
manufactures real-time computer systems and services for mission-critical
applications. The real-time computer systems are specially designed to acquire,
process, store, and display large amounts of rapidly changing information in
real-time with microsecond or millisecond response time. Concurrent's real-time
products facilitate symmetric multiprocessing for a wide range of real-time
applications including simulation, data acquisition and industrial process
control systems.
The principal products sold by Concurrent's Real-Time division are:
- Power Hawk 700. Power Hawk 700 is Concurrent's family of highly-scalable,
advanced technology 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 700 line is
designed around the MPC74xx PowerPC processor, and is available in single,
dual and quad central processing unit (CPU) versions.
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- PowerMAXION. The PowerMAXION is Concurrent's mid-level VME 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 processor, and is available in
one-to-eight CPU configurations.
- Model 3200-2000. The Model 3200-2000 is the most recent addition to
Concurrent's Series 3200 family of high-performance proprietary platforms.
Model 3200-2000 provides an upgrade to processing power and system
throughput required by the most demanding Series 3200 real-time
applications. Model 3200-2000 runs Concurrent's optimized OS/32 real-time
operating system,
- PowerMAX Operating System. The PowerMAX Operating System (OS) is
Concurrent's highly-deterministic real-time UNIX-based POSIX-compatible
operating system. PowerMAX OS runs on the PowerHAWK 700, PowerMAXION and
various legacy product lines.
- NightStar Analysis and Debugging Tools. The NightStar development tools are
designed to optimize, debug and trace application software running under
the PowerMAX and RedHawk Linux operating systems.
- iHawk. Concurrent plans to begin shipment of its iHawk line of Intel-based
servers featuring its RedHawk Linux real-time operating system and
real-time clock and interrupt module in September 2002. It is anticipated
that this product line will be deployed in simulation, data acquisition and
industrial process control applications, and satisfy scientific and other
complex computing requirements.
Customer Service and Support Plans. Concurrent offers a variety of service
and support programs to meet the customer's maintenance needs for both its
hardware and software products. Concurrent also offers contract service for
selected third party equipment. The service and support programs offered by
Concurrent include rental exchanges, diagnostic and repair service, on-call and
time and materials service, and preventive maintenance. Concurrent offers
long-term service and support of its products for, in some cases, as long as 15
to 20 years.
Custom Engineering and Integration Services. Concurrent provides custom
engineering and integration services in the design of special hardware and
software to help its customers with their specific applications. This may
include custom modifications to Concurrent's products or integration of third
party interfaces or devices into Concurrent's systems. Many customers use these
services to migrate existing applications from earlier generations of
Concurrent's or competitors' systems to Concurrent's state-of-the-art systems.
These services also include classroom and on-site training, system and site
performance analysis, and multiple vendor support planning. Although the total
revenues associated with any single service may be small in comparison to total
revenues, increased customer satisfaction is an integral part of Concurrent's
business plan.
STRATEGIC RELATIONSHIPS
Scientific-Atlanta. In August 1998, Concurrent entered into a five year
agreement with Scientific-Atlanta to jointly develop and market a VOD system.
Under this agreement, Concurrent was able to receive early development releases
from Scientific-Atlanta. In addition, the companies have jointly developed a
system architecture that is compliant with the AOL Time Warner VOD architecture
requirements, known as Pegasus. In exchange for Scientific-Atlanta's technical
and marketing contributions, Concurrent issued Scientific-Atlanta a warrant to
purchase 2,000,000 shares of Concurrent's Common Stock, exercisable at $5 per
share over a four-year term. This warrant expired unexercised on August 17,
2002. In addition, Scientific-Atlanta may in certain circumstances have the
right to receive additional warrants to purchase up to a maximum of 8,000,000
additional shares of Concurrent's Common Stock. The granting of these additional
warrants will be based upon performance goals measured by the revenue Concurrent
receives from sales of equipment to systems employing Scientific-Atlanta's
equipment. On April 1, 2002, based upon these performance goals, Concurrent
issued one warrant to purchase 261,164 shares of Concurrent's Common Stock,
exercisable at $7.11 per share over a four year term.
The agreement with Scientific-Atlanta provides that each party will own the
intellectual property that is created solely by its own employees as a part of
the development process. Intellectual property that is developed by employees of
both Scientific-Atlanta and Concurrent will be owned by Concurrent if the
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intellectual property represents an improvement upon Concurrent's products or
will be owned by Scientific-Atlanta if the intellectual property represents an
improvement upon Scientific-Atlanta's products.
Motorola. Concurrent and Motorola jointly developed a specific return path
protocol that allowed VOD services to be provided via Motorola older-generation
digital set-top boxes currently deployed by several MSOs. As a result of this
relationship, Concurrent can offer a complete end-to-end VOD system compatible
with the currently-deployed Motorola digital set-top boxes.
Prasara Technologies. Under a joint development agreement with Prasara
Technologies, a software company owned by PowerTV, a majority owned subsidiary
of Scientific-Atlanta specializing in delivery of on-demand information,
Concurrent and Prasara jointly developed interactive and back-office VOD
software specifically designed to meet the needs of MSOs. This software is
integrated with Concurrent's MediaHawk video servers. The joint development
agreement with Prasara provides for Concurrent to have exclusive ownership of
most of the software modules that make up the back-office software suite that
accompanies the MediaHawk VOD server. Prasara has joint ownership with
Concurrent of certain of the modules that make up the back-office software
suite. Each of Concurrent and Prasara must pay royalties to the other for their
respective sales of products containing any of these jointly-owned software
modules.
Intertainer. Concurrent has worked with Intertainer, a VOD content
provider seeking to market an end-to-end VOD solution, in integrating
Concurrent's VOD server into Intertainer's turnkey solution.
Cisco Systems, Inc. Concurrent is a partner in the Cisco Service Provider
Solutions Ecosystem Program which is designed to provide a vehicle for
systematically bringing new technologies to the Service Provider Marketplace.
The Cisco Service Provider Solutions Ecosystem brings together qualified
developers of hardware and software applications that interoperate with Cisco's
products, vendors of complementary network enabling technologies, and deployment
partners in order to best serve the mutual service providers. Some of the key
benefits the Cisco Service Provider Solutions Ecosystem Program is intended to
provide to partners include: long-term business level relationship with Cisco;
increased Cisco commitment; enhanced market credibility based on Cisco
relationship; marketing and sales development opportunities; improved operations
efficiency; and new service/technology creation.
Liberate. On April 11, 2001, Concurrent announced a strategic alliance with
Liberate Technologies, a leading provider of software for the delivery of
interactive television, under which Concurrent combined its technologies into an
integrated interactive TV and VOD offering for the growing digital video market.
The strategic agreement was reached under the Liberate(R) PopTV(TM) Program, in
which Concurrent is a "preferred infrastructure partner."
Microsoft TV (MSTV). On June 28, 2002, Concurrent entered into a strategic
alliance with Microsoft TV, a provider of a complete family of software products
for the television industry. Concurrent and MSTV have entered into an agreement
to jointly develop the combined platform for delivery of interactive services.
We believe the MSTV platform will be closely integrated and will work with our
video servers to deliver VOD and an enhanced interactive television experience
to the end-customer.
Thirdspace. On March 19, 2002, Concurrent entered into a strategic alliance
with Thirdspace Living Limited, an international supplier of video server system
software designed primarily for DSL environments. In the strategic alliance,
Concurrent and Thirdspace will jointly develop and market an integrated
end-to-end solution to enable broadband telecommunications carriers to provide
broadcast television, interactive television (iTV), and VOD services to
subscribers on DSL transport networks. In addition to entering into the
strategic alliance, Concurrent joined Alcatel and Oracle as a strategic investor
in Thirdspace. Concurrent invested cash of $4 million and issued 291,461 shares
of its common stock in exchange for 1,220,601 series C shares of Thirdspace,
giving Concurrent a 14.4% ownership interest in all shares outstanding as of the
investment date. As part of the investment, Thirdspace licensed its patent and
patent application portfolio - currently, 13 patented technologies and 25
patents pending - to Concurrent. In exchange for its investment, Concurrent also
received a warrant for 400,000 series C shares of Thirdspace. The warrant is
exercisable beginning December 19, 2002. Concurrent also loaned Thirdspace $6
million in two installments on March 19 and September 3, 2002, in exchange for a
long-term convertible note receivable, bearing interest at 8% annually, with
interest payments first due December 31, 2002, and semi-annually, thereafter.
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Concurrent has a security interest in all of the assets of Thirdspace, which is
subject to a prior lien on Thirdspace's intellectual property securing an
obligation of $5 million. Other than the prior lien on Thirdspace's intellectual
property, Concurrent's security interest ranks ratably with those of other
secured creditors.
Everstream. On April 17, 2002, Concurrent entered into a strategic alliance
and made a $500,000 cash investment in Everstream Holdings, Inc. The partnership
allows Concurrent to offer to its customers Everstream's patented ad insertion
solutions for digital cable advertising. Concurrent and Everstream created a
joint interface that will enable Everstream's latest ad insertion software to
easily install and communicate with the Concurrent's MediaHawk Video Servers.
Everstream's patented software for advertising campaign management and delivery
will enable Concurrent's Personal TV (pTV(TM)) system and MediaHawk video server
platform to provide advertising opportunities in real time to the multiple video
streams it currently delivers on demand.
SALES
Concurrent sells its systems in key markets worldwide through its direct
field sales and support offices, as well as through VARs and systems
integrators. As of June 30, 2002, Concurrent had 90 employees in its sales and
marketing force which also includes sales support, corporate communications,
application engineering, field sales, and sales administration.
XSTREME DIVISION
Concurrent's VOD sales strategy primarily focuses on maintaining and
expanding existing relationships, and developing new relationships, with
domestic MSOs and international cable and DSL providers. Concurrent's domestic
sales force has significant experience as either employees of, or service
providers to, the largest domestic MSOs.
In Concurrent's non-broadband markets on both the domestic and
international fronts, Concurrent also intends to continue working with VARs and
systems integrators who are seeking to integrate Concurrent's VOD products into
end-to-end or turnkey solutions sold into their target markets.
As of June 30, 2002, Concurrent employed 37 people worldwide as part of its
Xstreme sales and marketing team.
REAL-TIME DIVISION
Concurrent sells its real-time systems in key markets worldwide through
direct field sales and support offices, as well as through VARs and systems
integrators. As of June 30, 2002, Concurrent employed 38 people worldwide as
part of its real-time sales and marketing team.
CUSTOMERS
XSTREME DIVISION
A significant portion of Concurrent's VOD revenue has come from, and is
expected to continue to come from, sales to the large MSOs. For the year ended
June 30, 2002, two customers, AOL Time Warner and Cox Communications, accounted
for 57% and 24% of total VOD revenue, respectively. All of the top eight MSO's
in North America have initiatives underway to offer VOD in various cable markets
operated by the MSOs. Concurrent has sold VOD systems to six of the top eight
MSO's in North America.
REAL-TIME DIVISION
Concurrent currently derives a significant portion of its real-time revenue
from a limited number of customers. As a result, the loss of, or reduced demand
for products or related services from any of Concurrent's major customers could
adversely affect its business, financial condition and results of operations.
In the fiscal year ended June 30, 2002, one customer, Lockheed-Martin, accounted
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for approximately 25% of the total real-time revenue. No other customer
accounted for more than 10% of real-time revenue for the period.
Concurrent derives a significant portion of its revenues from the supply of
integrated computer systems to U.S. Government prime contractors and agencies of
the U.S. Government. The supplied systems include configurations from the
PowerMAXION, PowerHAWK, and TurboHAWK product lines, with certain systems
incorporating custom enhancements requested by the customer. Examples of prime
contractors to whom we sell these integrated computer systems include Boeing,
Lockheed-Martin, and Raytheon. For example, Lockheed-Martin purchased integrated
computer systems from Concurrent to be used by the U.S. Navy in data acquisition
applications. Concurrent also supplies spare parts, upgrades, and engineering
consulting services and both hardware and software maintenance. For the fiscal
year ended June 30, 2002, Concurrent recorded $19.7 million in revenues to U.S.
Government prime contractors and agencies of the U.S. Government, representing
22% of total sales for the period. Government business is subject to many risks,
such as delays in funding, audits, 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 Concurrent's business, results of
operations and financial condition.
Concurrent does not have written continuing purchase agreements with any of
its customers and does not have written agreements that require customers to
purchase fixed minimum quantities of Concurrent's products. 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.
NEW PRODUCT DEVELOPMENT
XSTREME DIVISION
Concurrent's research and development strategies with respect to its VOD
solutions will focus on network personal video recorder technology, software
features that will drive stream usage while expanding revenue opportunities for
our customers, higher stream density, encryption techniques, interactive client
applications and product enhancements for international markets.
Network Personal Video Recorder Technology. Concurrent continues to enhance
its personal video channel (pVC(TM)) capability of its current residential cable
VOD system. The personal video channel will allow the subscriber to pause and
rewind time-shifted programming, effectively providing "TV on demand."
Concurrent expects this server capability will have advantages over traditional
personal home video recorders by providing more storage capacity and the ability
to record multiple channels simultaneously. This will also allow Concurrent
servers to replicate the functionality of PVR devices equipped with hard disk
drives and eventually evolve to pausing and rewinding live broadcast TV.
Interactive and Targeted Advertising. Concurrent is in the process of
developing the infrastructure and key relationships for this new advertising
medium. Interactive Long Format Advertising is already being deployed by Cox
Communications in its San Diego, California system. Earlier this year Concurrent
entered into a strategic partnership and invested in Everstream Holdings, Inc.,
a private company with core intellectual property and technology in targeted
advertising. Targeted advertising technology allows Concurrent's VOD system to
insert different television commercials into the video streams for different
consumers. This technology will allow the advertiser to closely "target" product
advertisements to consumers most likely to buy, rather than broadcasting the
same advertisements to everyone.
Asset Management. Concurrent continues to enhance its asset management
technology. As VOD matures as an industry, it is anticipated that demand for
stored content will increase from a few hundred hours to many thousands of
hours. Concurrent continues to enhance its system to intelligently and
automatically manage the distribution and lifecycle of the stored content, thus,
increasing quantity of video hours. This tool supports multiple services such as
SVOD, VOD, and PVR, and multiple providers such as In-demand, HBO, Starz-Encore,
and Showtime and is capable of distributing and optimizing content based on
actual consumer usage patterns.
Resource Management. Concurrent has developed an advanced distributed
resource management system that will allow on-demand systems to grow into the
"everything on demand" environment that the cable industry is now envisioning.
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Concurrent has leveraged its heritage in real-time distributed systems to
architect a highly scalable resource management system. The Concurrent resource
manager is a highly optimized database driven system which quickly and
accurately determines the resources a subscriber launching an on-demand service
can utilize. The Concurrent resource manager supports multiple services and
enables true interactive television
Increased Stream Density. Concurrent believes it is the only provider of
VOD systems currently employing fibre channel technology. Fibre channel provides
the highest bandwidth/connectivity technology that is commercially available.
Concurrent intends to continue leveraging techniques that allow this technology
to create higher stream density and superior connectivity. Concurrent expects
this will result in even more efficient distributed and centralized VOD system
implementations.
Encryption Techniques. Encryption techniques will need to become integral
to Concurrent's VOD system to maintain a high level of security designed to
discourage content piracy and encourage content providers, such as movie
studios, to provide market windows that will gradually become more consistent
with the movie rental distribution channel. Concurrent is developing and
trialing an open encryption system to support various encryption methodologies.
Integrated QAMs and Upconverters. Concurrent has developed Quadrature
Amplitude Modulation (QAM) and signal upconversion technology. QAM is a highly
efficient means of modulating or representing digital information using an
analog signal. Our QAMs output a signal that accurately changes the amplitude
and phase of the signal to correspond with the appropriate digital pattern. Our
integrated upconverters take the modulated signal and map it into a channel line
up. By integrating QAM and upconversion technology into the MediaHawk server,
Concurrent is able to provide customers significant cost savings when compared
to standalone alternatives.
Gigabit Ethernet. Consistent with MSOs' interest and expected rapid
development of gigabit ethernet transport networks, Concurrent has developed the
requisite interfaces to such network elements. This work will continue to be
refined to meet specific performance requirements as cable network architectures
continue to evolve to support additional interactive television applications.
International Markets. Concurrent's strategy is to leverage its domestic
success and add capability to the existing VOD system that will enable it to
market its VOD system to international cable and DSL providers. Enhancements
will include network equipment integration, billing system integration,
conditional access integration and set-top box integration. Specific integration
tasks and partnerships will be opportunity driven as the international market
develops.
REAL-TIME
Concurrent's real-time product development strategies with respect to its
computer systems solutions will focus on higher-performance and cost-effective
scalable architectures to allow for a greater degree of flexibility to the
customer. New product development in real-time includes new hardware, software
and integration services that will add new features and enhancements to the
Power Hawk line of computers and the NightStar software development tools as
well as the introduction of the Intel-based iHawk line running the RedHawk Linux
real-time operating system built on the popular Red Hat distribution. Red Hawk
and iHawk development will be focused on improving the real-time performance of
the operating system.
Higher performance computer systems. Concurrent has upgraded the Power Hawk
computer line with the new Series 700 computer system. The Series 700's PowerPC
utilizes Motorola's MPC7410 (G4) processor, the first microprocessor that can
deliver sustained performance of over one billion floating point operations per
second. The G4 can process data in 128-bit segments rather than the 32-bit or
64-bit segments of traditional processors. The G4's AltiVec vector instruction
set performs 16 calculations in a single cycle providing IEEE floating point
performance four times faster than non-vector processors.
Cost effective scalable cluster architectures. The dual and quad-CPU Series
700 processor boards are true symmetric multiprocessors that run a single copy
of Concurrent's PowerMAX OS real-time operating system. All CPUs on a board are
linked by a high-speed PowerPC processor bus and have direct, cache-coherent
access to all of the available on-board main memory. Two or more Power Hawk
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Series 700 processor boards can be combined through the high speed P0-PCI bus to
create closely-coupled multiprocessor configurations of up to 32 CPUs.
PowerWorks Linux Development Environment (PLDE). The PLDE allows users to
develop applications for any Concurrent PowerPC-based real-time computer system
on an Intel PC running the open source Linux operating system. Application
programs are compiled and debugged directly on a Linux PC while targeted to a
system running Concurrent's PowerMAX operating system, freeing production
systems from the need to be involved in the development process. As Concurrent's
real-time customers recognize the growing importance of Linux as a real-time
solution resource, Concurrent plans to continue to enhance its operating system
and tool set offerings to take full advantage of this development.
Power Hawk Series 700 software development tools supporting Linux open
system solutions. Concurrent plans to provide its customers the opportunity to
develop and debug complex multiprocessing applications utilizing Concurrent's
integrated software environment while taking advantage of the Intel based Linux
open source operating system. Users will have the option of developing their
real-time applications under PowerMAX OS or Linux using the same comprehensive
suite of NightStar GUI development tools. As our real-time customers recognize
the growing importance of Linux as a key real-time operating system, Concurrent
expects that there may be a large demand for Linux-ready applications that can
meet the workload demands of today's real-time environment. As the Linux open
source solution market demand develops, Concurrent plans to continue enhancing
its software operating system and development environment to take full advantage
of the broad range of software, hardware and integration opportunities available
in the Linux marketplace.
The iHawk family of products. Concurrent will continue its Linux strategy
with the introduction in September, 2002 of the iHawk product family. Based on
Intel/Pentium Xeon servers available in single, dual, quad and 8-way processor
configurations, each model will include the open-source RedHawk real-time
operating system based on the Red Hat distribution. The product will include the
company's real-time clock and interrupt module and the leading NightStar tool
suite as an option. It is anticipated that the wide range of third party
software available for Red Hat Linux will significantly increase the appeal of
this product offering. As with Concurrent's PowerMAX/Power PC real-time
solutions, iHawk product may be customized to precisely fit any customer's
application needs.
COMPETITION
Both Concurrent's Xstreme and Real-Time divisions operate in
highly-competitive environments, driven by rapid technological innovation. Due
in part to the range of performance and applications capabilities of
Concurrent's products, Concurrent competes in various markets against a number
of companies.
In the VOD market, Concurrent's major competitors currently include the
following:
- in the worldwide cable and DSL markets: SeaChange International Inc.,
nCUBE, Kasenna, Inc., and Silicon Graphics, Inc.; and
- in the education market: Silicon Graphics, Inc., Cisco Systems, Inc. and
International Business Machines Corp., as well as local systems
integrators.
Concurrent also competes with a number of companies in its real-time
business. Concurrent's major competitors can be categorized as follows:
- major computer companies that participate in the real-time business by
layering specialized hardware and software on top of, or as an extension
of, their general purpose product platforms, including Sun Microsystems and
Hewlett Packard Corporation;
- other computer companies that provide solutions for applications that
address specific characteristics of real time, such as fault tolerance or
high performance graphics, including Silicon Graphics Inc. and Hewlett
Packard Corporation;
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- general purpose computing companies that provide a platform on which
third-party vendors add real-time capabilities, including International
Business Machines Corp. and Sun Microsystems, Inc.; and
- single board computer companies that provide board-level processors that
are typically integrated into a customer's computer system, including Force
Computers, Inc. and Motorola, Inc.
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 Concurrent's markets, thereby further intensifying
competition. Concurrent's future competitors also may include one or more of the
parties with which it currently has a strategic relationship. Although
Concurrent has proprietary rights with respect to much of the technology
incorporated in Concurrent's VOD and real-time systems, Concurrent's strategic
partners have not agreed to refrain from competing against Concurrent. Many of
Concurrent's current and potential future competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources than Concurrent, and greater brand name recognition. In addition, many
of Concurrent's competitors have well-established relationships with
Concurrent's current and potential customers and have extensive knowledge of
Concurrent's markets.
INTELLECTUAL PROPERTY
Concurrent relies on a combination of contracts and copyright, trademark
and trade secret laws to establish and protect its proprietary rights in its
technology. Concurrent distributes its products under software license
agreements which grant customers perpetual licenses to Concurrent's products and
which contain various provisions protecting its ownership and confidentiality of
the licensed technology. The source code of Concurrent's products is protected
as a trade secret and as an unpublished copyright work. In addition, in limited
instances, Concurrent licenses its products under licenses that give licensees
limited access to the source code of certain of Concurrent's products,
particularly in connection with its strategic alliances.
Despite precautions taken by Concurrent, however, there can be no assurance
that Concurrent's 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. Concurrent believes that, due to the rapid pace of innovation within
its industry, factors such as the technological and creative skills of
Concurrent's personnel are more important to establishing and maintaining a
technology leadership position within the industry than are the various legal
protections for Concurrent's technology. Concurrent does not own any material
patents. However, Concurrent has one patent application pending in the United
States and abroad and has obtained patent licenses to the portfolios owned by
Thirdspace Living Limited (13 patents and 25 patent applications) and Everstream
Holdings, Inc. (4 patents and 6 patent applications). The patents so licensed
cover multiple interactive television, targeted advertising, and VOD
technologies and include U.S. Patent No. 5,805,804 which nCube alleged was
infringed by SeaChange International's products.
Concurrent has entered into licensing agreements with several third-party
software developers and suppliers. Generally, such agreements grant Concurrent
non-exclusive, worldwide licenses with respect to certain software provided as
part of computers and systems marketed by Concurrent and terminate on varying
dates.
GOVERNMENTAL REGULATION
Concurrent is subject to various international, U.S. federal, state and
local laws affecting its business. Any finding that Concurrent has been or is in
noncompliance with such laws could result in, among other things, governmental
penalties. Further, changes in existing laws or new laws may adversely affect
Concurrent's business.
The television industry is subject to extensive regulation in the United
States and other countries. Concurrent's VOD business is dependent upon the
continued growth of the digital television industry in the United States and
internationally. Cable television operators are subject to extensive government
regulation by the Federal Communications Commission and other federal and state
regulatory agencies. These regulations could have the effect of limiting capital
expenditures by cable television operators and thus could have a material
adverse effect on Concurrent's business, financial condition and results of
operations. The enactment by federal, state or international governments of new
16
laws or regulations could adversely affect Concurrent's cable operator
customers, and thereby materially adversely affect Concurrent's business,
financial condition and results of operations.
ENVIRONMENTAL MATTERS
Concurrent purchases, uses, and arranges for certified disposal of
chemicals used in the manufacturing process at its Pompano Beach facility. As a
result, Concurrent is subject to federal and state environmental protection and
community right-to-know laws. Violations of such laws, in certain circumstances,
can result in the imposition of substantial remediation costs and penalties.
Concurrent believes it is in compliance with all material environmental laws and
regulations.
EMPLOYEES
As of June 30, 2002, Concurrent had 436 employees worldwide. Approximately
345 of these employees were in the United States. Concurrent had 129 employees
in its Xstreme division and 193 employees in its Real-Time division. The
remaining employees include administrative, marketing and communications, and
manufacturing personnel that are shared between the two divisions. Concurrent's
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 Concurrent's foreign and domestic
operations for the fiscal years ended June 30, 2002, 2001 and 2000,
respectively, is presented at Note 20 to the consolidated financial statements
included herein. Financial information about Concurrent's foreign operations is
included in Note 20 to the consolidated financial statements included herein.
RISK FACTORS
The following are risk factors of Concurrent.
RISKS RELATED TO CONCURRENT'S BUSINESS
IT IS DIFFICULT TO EVALUATE CONCURRENT'S BUSINESS AND PROSPECTS BECAUSE OF
DECLINES IN ITS REAL-TIME BUSINESS AND THE EMERGING NATURE OF THE VOD MARKET.
CONCURRENT'S NET SALES OF REAL-TIME SYSTEMS AND SERVICES HAVE DECREASED
SIGNIFICANTLY OVER THE PAST FIVE YEARS.
Prior to the fiscal year ended June 30, 1997, Concurrent focused solely on
providing real-time computer systems and related services. Over the last five
full fiscal years, Concurrent has experienced a decline in real-time net sales
from $82.2 million for the fiscal year ended June 30, 1998 to $41.4 million for
the fiscal year ended June 30, 2002. Although almost all of Concurrent's
revenues prior to fiscal 2000 were derived from its Real-Time division,
Concurrent expects in the near term that a majority of its future revenue growth
will come from its Xstreme division, which began commercial sales in 1999.
Revenues for video-on-demand systems have increased from $1.2 million for the
fiscal year ended June 30, 1999 to $48.0 million for the fiscal year ended June
30, 2002. Concurrent is working to stabilize its real-time revenue.
Concurrent's real-time systems are specially designed to acquire, process,
store and display large amounts of rapidly changing information in real time,
that is with microsecond response as changes occur. Concurrent's real-time
systems are used for a number of applications, including trainers/simulators for
operators in commercial and military aviation, vehicle operation and power
plants, mission planning and rehearsal and engineering design simulation for
avionics and automotive labs. Over the past several years, the real-time
computer industry has seen a significant shift in demand from high-priced,
proprietary real-time systems to lower-priced, open server systems. High
performance processing in the past required a large, expensive computer with
significant proprietary and customized software. Today, these requirements are
often met by much smaller and less expensive computers with off-the-shelf
computer hardware and software. This shift in demand has resulted in the
significant decreases in Concurrent's revenues from real-time products and
services over the last several years.
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This decline in Concurrent's real-time revenue together with the emerging
nature of the video-on-demand market make it difficult to evaluate its current
business and prospects or to accurately predict it's future revenue or results
of operations. Concurrent will encounter risks and difficulties in its
video-on-demand business frequently encountered by companies in emerging
markets. Concurrent may not successfully address any of these risks. If
Concurrent does not successfully address these risks, Concurrent's business,
financial condition and results of operations would be adversely affected.
THE VIDEO-ON-DEMAND MARKET MAY NOT GAIN BROAD MARKET ACCEPTANCE; CONCURRENT'S
CUSTOMERS MAY NOT CONTINUE TO PURCHASE CONCURRENT'S VIDEO-ON-DEMAND SYSTEMS; AND
CONCURRENT'S CABLE OPERATOR CUSTOMERS MAY ENTER INTO ARRANGEMENTS WITH
CONCURRENT'S COMPETITORS ANY OF WHICH COULD MATERIALLY AND ADVERSELY AFFECT ITS
BUSINESS.
Concurrent is focusing much of its initial video-on-demand sales efforts on
North American cable television providers that have upgraded some or all of
their cable systems to support digital, two-way service. Therefore, in order
for its video-on-demand business to succeed, cable system operators,
particularly the ten largest North American cable operators, must successfully
market video-on-demand to their cable television subscribers. To date,
Concurrent has been publicly selected by six of the eight largest North American
cable operators for commercial video-on-demand deployments. However, none of
Concurrent's cable system customers are contractually obligated to introduce,
market or promote video-on-demand, nor are any of its customers bound to achieve
any specific product introduction schedule. Accordingly, even if a system
operator initiates a customer trial using Concurrent's system, that operator is
under no obligation to continue its relationship with Concurrent or to launch a
full-scale commercial introduction using its technology. Further, Concurrent
does not have exclusive arrangements with system operators. Therefore, system
operators may enter into arrangements with one or more of Concurrent's current
or future competitors.
The growth and future success of Concurrent's video-on-demand business
depends largely upon its ability to penetrate new markets and sell its systems
to digitally-upgraded domestic and international cable system operators,
international digital subscriber line operators, educational institutions and
others. If these potential customers determine that video-on-demand 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 Concurrent's competitors, Concurrent's business, financial
condition and results of operations will be significantly adversely affected.
A SIGNIFICANT PORTION OF CONCURRENT'S VIDEO-ON-DEMAND REVENUE HAS COME FROM, AND
IS EXPECTED TO CONTINUE TO COME FROM, SALES TO THE LARGE, NORTH AMERICAN CABLE
OPERATORS. IF CONCURRENT IS UNSUCCESSFUL IN MAINTAINING AND EXPANDING
RELATIONSHIPS WITH THESE CUSTOMERS OR LOSES ANY OF THESE CUSTOMERS, ITS BUSINESS
WILL BE ADVERSELY AFFECTED.
For the fiscal year ended June 30, 2002, AOL Time Warner and Cox
Communications accounted for approximately 57% and 24% of Concurrent's
video-on-demand revenues, respectively. Many cable operators are currently
evaluating the extent and pace of their video-on-demand deployment plans. If
Concurrent is unsuccessful in maintaining and expanding these key relationships
with cable operators, its video-on-demand business will be adversely affected.
Further, if Concurrent is unsuccessful in establishing relationships with other
operators or experiences problems in any of its video-on-demand system
commercial launches, its ability to attract new cable operator customers and
sell additional products to existing customers will be materially adversely
affected.
CONCURRENT INCURRED NET LOSSES IN THE PAST AND MAY INCUR FURTHER LOSSES IN THE
FUTURE.
While Concurrent had net income of $4.4 million in the fiscal year ended
June 30, 2002, it incurred net losses of $6.2 million in the fiscal year ended
June 30, 2001. On a pro forma basis after giving effect to the acquisition of
Vivid Technology, it incurred net losses of $24.7 million in the fiscal year
ended June 30, 2000. Concurrent's actual net loss of $23.7 million and its pro
forma net loss of $24.7 million for the fiscal year ended June 30, 2000 includes
a $14.0 million non-cash charge related to the write-off of research and
development acquired in the Vivid Technology acquisition. As of June 30, 2002,
Concurrent had an accumulated deficit of approximately $98.4 million, after
eliminating accumulated deficit of approximately $81.8 million at December 31,
1991, the date of its quasi-reorganization. Concurrent may incur additional net
losses in the future.
18
CONCURRENT'S OPERATING RESULTS MAY CONTINUE TO BE VOLATILE AND DIFFICULT TO
PREDICT, AND IN SOME FUTURE QUARTERS, ITS OPERATING RESULTS MAY FALL BELOW ITS
EXPECTATIONS AND THE EXPECTATIONS OF SECURITIES ANALYSTS AND INVESTORS, WHICH
COULD RESULT IN MATERIAL DECLINES OF ITS STOCK PRICE.
Concurrent's quarterly operating results may vary depending on a number of
factors, including:
- demand for its video-on-demand and real-time systems and services;
- delay in customer orders based on, among other reasons, capital
expenditure restraints or the availability of content for
video-on-demand and pending completion of negotiations for content
between the cable operators 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 its products;
- actions taken by its competitors, including new product introductions
and enhancements;
- changes in its price or the prices of its competitors;
- its ability to develop and introduce new products and to deliver new
services and enhancements that meet customer requirements in a timely
manner;
- the length of the sale cycle for its products;
- its ability to control costs;
- technological changes in its markets;
- deferrals of customer orders in anticipation of product enhancements
or new products;
- customer budget cycles and changes in these budget cycles; and
- general political and economic conditions in the United States and
abroad, including, but not limited to, terrorist activity.
SEASONAL TRENDS IN CONCURRENT'S VIDEO-ON-DEMAND BUSINESS MAY CAUSE ITS QUARTERLY
OPERATING RESULTS TO FLUCTUATE; THEREFORE, PERIOD-TO-PERIOD COMPARISONS OF ITS
OPERATING RESULTS MAY NOT NECESSARILY BE MEANINGFUL.
Concurrent has experienced significant variations in the revenue, expenses
and operating results from quarter to quarter in its video-on-demand business,
and it is possible that these variations will continue. Concurrent believes
that fluctuations in the number of orders for its video-on-demand systems being
placed from quarter to quarter are principally attributable to the buying
patterns and budgeting cycles of cable operators. In addition, contracts for
orders are often not finalized until the end of a quarter. As a result, its
results of operations have in the past and will possibly continue, at least in
the near future, to fluctuate in accordance with this purchasing activity.
Therefore, period-to-period comparisons of its operating results may not
necessarily be meaningful. In addition, because these factors are difficult for
Concurrent to forecast, its 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 its stock price.
THE VIDEO-ON-DEMAND AND REAL-TIME MARKETS IN WHICH CONCURRENT OPERATE ARE HIGHLY
COMPETITIVE, AND CONCURRENT MAY BE UNABLE TO COMPETE SUCCESSFULLY AGAINST ITS
CURRENT AND FUTURE COMPETITORS, WHICH WOULD ADVERSELY AFFECT ITS BUSINESS.
The market for video-on-demand systems is an emerging market. Given that
there have been limited commercial deployments of video-on-demand systems to
date, the respective market shares of companies competing in the video-on-demand
market are uncertain. Concurrent believes that the long-term primary factors
influencing competition in the video-on-demand market include the flexibility of
the video-on-demand system, product quality and reliability and established
relationships with providers of interactive television services, including cable
operators. In the video-on-demand market, Concurrent's competitors currently
include the following:
- in the worldwide cable and digital subscriber line market principally,
SeaChange International Inc., nCUBE Corporation, Kasenna, Inc. and
Silicon Graphics, Inc.; and
- in the education market principally, Silicon Graphics, Inc., Cisco
Systems, Inc. and International Business Machines Corp., as well as
other third parties.
19
Concurrent also competes with a number of companies in its real-time
market. These competitors can be categorized as follows:
- major computer companies that add specialized hardware and software to
their general purpose product platforms, including principally
Hewlett-Packard Corporation;
- other computer companies that provide applications that address
specific characteristics of real-time, such as redundancy or high
performance graphics, including Silicon Graphics, Inc. and
Hewlett-Packard Corporation;
- general purpose computing companies that provide a platform on which
third-party vendors add real-time capabilities, including
International Business Machines Corp. and Sun Microsystems, Inc.; and
- single board computer companies that provide board-level processors
that are typically integrated into a customer's computer system,
including Force Computers, Inc. and Motorola, Inc.
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 Concurrent's markets, thereby further intensifying
competition. Concurrent's future competitors also may include one or more of the
parties with which Concurrent currently has a strategic relationship. Although
Concurrent has proprietary rights with respect to much of the technology
incorporated in its video-on-demand and real-time systems, its strategic
partners have not agreed to refrain from competing against Concurrent. Increased
competition could result in price reductions that would adversely affect its
business, financial condition and results of operations. Many of its current and
potential future competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources than Concurrent, and
greater brand name recognition. In addition, many of Concurrent's competitors
have well-established relationships with its current and potential customers and
have extensive knowledge of its industries.
IF CONCURRENT DOES NOT MANAGE ITS ANTICIPATED GROWTH IN ITS VIDEO-ON-DEMAND
OPERATIONS, IT MAY NOT BE ABLE TO OPERATE ITS BUSINESS EFFECTIVELY. CONCURRENT'S
FAILURE TO MANAGE GROWTH COULD DISRUPT ITS OPERATIONS AND ADVERSELY AFFECT ITS
BUSINESS.
Concurrent anticipates growth in its video-on-demand operations and that a
majority of its future revenue growth will come from its video-on-demand
operations. Its anticipated growth could place a strain on its management
systems and other resources. Concurrent's ability to successfully implement its
business plan in a rapidly evolving market will require an effective planning
and management process. Concurrent cannot assure you that it will be able to
successfully manage its anticipated expansion. If Concurrent fails to manage its
anticipated growth, its operations may be disrupted and its business may be
adversely affected. Concurrent must continue to improve and effectively utilize
its existing operational, management, marketing and financial systems and
successfully recruit, hire, train and manage personnel, which Concurrent may be
unable to do. Further, Concurrent must maintain close coordination among its
technical, finance, marketing, sales and production staffs.
CONCURRENT'S FUTURE SUCCESS WILL REQUIRE THAT IT DEVELOP AND MARKET ADDITIONAL
PRODUCTS THAT ACHIEVE MARKET ACCEPTANCE AND ENHANCE ITS CURRENT PRODUCTS. IF
CONCURRENT FAILS TO DEVELOP AND MARKET NEW PRODUCTS AND PRODUCT ENHANCEMENTS IN
A TIMELY MANNER, ITS BUSINESS COULD BE ADVERSELY AFFECTED.
Concurrent's 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 affect
on its business, financial condition and results of operations. Concurrent
recently completed the development of its MediaHawk Model 3000 video on demand
server. Although Concurrent has shipped and installed the new system, it may
experience unexpected problems. Although delivery of video-on-demand over
digital subscriber lines currently is not practical in the United States,
Concurrent will look for opportunities in the domestic market as digital
subscriber line technology continues to advance. There can be no assurance that
Concurrent will be successful in pursuing any domestic digital subscriber line
opportunities.
SYSTEM ERRORS, FAILURES, OR INTERRUPTIONS COULD CAUSE DELAYS IN SHIPMENTS OR
REQUIRE DESIGN MODIFICATIONS, WHICH MAY HAVE A NEGATIVE IMPACT ON CONCURRENT'S
BUSINESS AND DAMAGE ITS REPUTATION AND CUSTOMER RELATIONSHIPS.
20
System errors or failures may adversely affect Concurrent's business,
financial condition and results of operations. Despite Concurrent's testing and
testing by current and potential customers, all errors or failures may not be
found in its 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 its
competitive position. Concurrent's reputation may also suffer if its customers
view its products as unreliable, whether based on actual or perceived errors or
failures in its products.
Further, a defect, error or performance problem with Concurrent's
video-on-demand systems could cause its customers' cable television systems to
fail for a period of time. Any such failure would cause customer service and
public relations problems for Concurrent's customers. As a result, any failure
of its customers' systems caused by Concurrent's technology could result in
delayed or lost revenue due to adverse customer reaction, negative publicity
regarding Concurrent and its products and services and claims for substantial
damages against Concurrent, regardless of its responsibility for such failure.
Any claim could be expensive and require Concurrent to spend a significant
amount of resources, regardless of whether Concurrent prevails.
A SIGNIFICANT PORTION OF CONCURRENT'S REAL-TIME REVENUE HAS BEEN, AND IS
EXPECTED TO CONTINUE TO BE, CONCENTRATED IN A SMALL NUMBER OF CUSTOMERS,
INCLUDING THE U.S. GOVERNMENT. FOR EXAMPLE, IN THE FISCAL YEAR ENDED JUNE 30,
2002, LOCKHEED-MARTIN ACCOUNTED FOR APPROXIMATELY 25% OF CONCURRENT'S TOTAL
REAL-TIME REVENUE. IF CONCURRENT LOSES ONE OR MORE SIGNIFICANT REAL-TIME
CUSTOMERS, ITS BUSINESS MAY BE ADVERSELY AFFECTED.
Concurrent currently derives, and expects to continue to derive, a
significant portion of its real-time revenue from a limited number of customers.
As a result, the loss of, or reduced demand for products or related services
from one or more of its major customers could adversely affect its business,
financial condition and results of operations.
Concurrent also derives a significant portion of its revenues from the
supply of systems under government contracts. For the fiscal year ended June 30,
2002, Concurrent recorded $19.7 million in sales to U.S. government prime
contractors and agencies of the U.S. Government. These amounts represent
approximately 48% of Concurrent's total Real-Time 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 Concurrent's business,
results of operations and financial condition.
Concurrent does not have written purchase agreements with any of its
customers and does not have written agreements that require customers to
purchase fixed minimum quantities of its products. Concurrent's 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.
CONCURRENT RELIES ON A COMBINATION OF CONTRACTS AND COPYRIGHT, TRADEMARK, AND
TRADE SECRET LAWS TO ESTABLISH AND PROTECT ITS PROPRIETARY RIGHTS IN ITS
TECHNOLOGY. CONCURRENT DOES NOT OWN ANY SIGNIFICANT PATENTS DIRECTLY; HOWEVER,
CONCURRENT HAS OBTAINED PATENT LICENSES TO THE PORTFOLIOS OWNED BY THIRDSPACE
LIVING LIMITED (13 PATENTS AND 25 PATENT APPLICATIONS) AND EVERSTREAM HOLDINGS,
INC. (4 PATENTS AND 6 PATENT APPLICATIONS). IF CONCURRENT IS UNABLE TO PROTECT
ITS INTELLECTUAL PROPERTY RIGHTS, ITS COMPETITIVE POSITION COULD BE HARMED OR IT
COULD BE REQUIRED TO INCUR EXPENSES TO ENFORCE ITS RIGHTS. CONCURRENT'S BUSINESS
ALSO COULD BE ADVERSELY AFFECTED IF CONCURRENT IS FOUND TO INFRINGE ON THE
INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
Concurrent typically enters into confidentiality or license agreements with
its employees, consultants, customers and vendors, in an effort to control
access to and distribution of its proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use its proprietary technology without authorization. The steps Concurrent
takes may not prevent misappropriation of its intellectual property, and the
agreements it enters into may not be enforceable. In addition, effective
copyright and trade secret protection may be unavailable or limited in some
foreign countries. Other companies, including its competitors, may currently
own or obtain patents or other proprietary rights that might prevent, limit or
interfere with its ability to make, use or sell its products. As a result,
Concurrent may be found to infringe on the intellectual property rights of
21
others. In the event of a successful claim of infringement against Concurrent
and its failure or inability to license the infringed technology, its business
and operating results could be adversely affected.
Any litigation or claims, whether or not valid, could result in substantial
costs and diversion of Concurrent's resources. Intellectual property litigation
or claims could force Concurrent to do one or more of the following:
- cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;
- obtain a license from the holder of the infringed intellectual
property right, which license may not be available on reasonable
terms, if at all; and
- redesign products or services that incorporate the disputed
technology.
If Concurrent is forced to take any of the foregoing actions, it could face
substantial costs and its business could be seriously harmed. Although
Concurrent carries general liability insurance, its insurance may not cover
potential claims of this type or be adequate to indemnify it for all liability
that may be imposed.
Concurrent may initiate claims or litigation against third parties in the
future for infringement of its proprietary rights or to determine the scope and
validity of its proprietary rights or the proprietary rights of competitors.
These claims could result in costly litigation and the diversion of its
technical and management personnel. As a result, Concurrent's operating results
could suffer and its financial condition could be harmed.
IN SOME CASES, CONCURRENT RELIES 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.
Concurrent sometimes purchases 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. Concurrent purchases product
components from the following single suppliers: Seagate, Intel, Qlogic, VME
Micro System, Corporation, Interphase, Precision Analog, Macrolink, Symbios,
National Instruments, Synergy, Peritek, Unipower Corporation, Vicor Corporation,
Wall Industries, Crystal Semiconductor and Vitesse. In most cases, comparable
products are available from other sources, but would require significant
reengineering to conform to Concurrent's system specifications. Historically,
Concurrent has not experienced any major disruption in manufacturing its
products due to problems with, or defective products from, a single supplier,
but its 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 its business, results of operations and financial condition.
Concurrent estimates that a lead time of 16-24 weeks may be necessary to switch
to an alternative supplier of certain custom application specific integrated
circuits 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 Concurrent of certain products. Where alternative sources are
available, qualification of the alternative suppliers and establishment of
reliable supplies of components from such sources may also result in delays.
Shipping delays may also result in a delay in revenue recognition, possibly
outside the fiscal period originally planned, and, as a result, may adversely
affect Concurrent's financial results for that particular period.
CONCURRENT'S BUSINESS MAY BE ADVERSELY AFFECTED IF IT FAILS TO RETAIN ITS
CURRENT KEY PERSONNEL, MANY OF WHOM WOULD BE DIFFICULT TO REPLACE, OR FAIL TO
ATTRACT ADDITIONAL QUALIFIED PERSONNEL.
Concurrent's future performance depends on the continued service of its
senior management and its engineering, sales and marketing and manufacturing
personnel. Competition for qualified personnel is intense, and Concurrent may
fail to retain its key employees or to attract or retain other highly qualified
personnel. Concurrent does not carry key person life insurance on any of its
employees. The loss of the services of one or more of its key personnel could
seriously impact its business. Concurrent's future success also depends on its
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.
22
CONCURRENT CURRENTLY HAS STRATEGIC RELATIONSHIPS WITH SCIENTIFIC-ATLANTA,
MOTOROLA, PRASARA TECHNOLOGIES, INC., LIBERATE TECHNOLOGIES, INTERTAINER, INC.,
CISCO SYSTEMS, INC., MICROSOFT CORPORATION, THIRDSPACE LIVING LIMITED AND
EVERSTREAM HOLDINGS, INC., AMONG OTHERS. CONCURRENT MAY BE UNSUCCESSFUL IN
MAINTAINING THESE STRATEGIC RELATIONSHIPS, OR ESTABLISHING NEW STRATEGIC
RELATIONSHIPS, THAT WILL BE AN IMPORTANT PART OF ITS FUTURE SUCCESS. IN EITHER
EVENT, ITS BUSINESS COULD BE ADVERSELY AFFECTED.
The success of Concurrent's business is and will continue to be dependent
in part on its 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;
- Concurrent will be able to find additional strategic partners; or
- Concurrent will be able to negotiate terms acceptable to it with
potential strategic partners.
Concurrent 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 Concurrent's technology, either on their
own or in collaboration with others, including Concurrent's competitors. These
alternative technologies or products may be in direct competition with
Concurrent's technologies or products and may significantly erode the benefits
of Concurrent's strategic relationships and adversely affect its business,
financial condition and results of operations.
INTERNATIONAL SALES ACCOUNTED FOR APPROXIMATELY 15% AND 24% OF CONCURRENT'S
REVENUE IN FISCAL YEARS 2002 AND 2001, RESPECTIVELY. ACCORDINGLY, CONCURRENT'S
BUSINESS IS SUSCEPTIBLE TO NUMEROUS RISKS ASSOCIATED WITH INTERNATIONAL
OPERATIONS.
Although the anticipated revenue growth in the near term is expected to
occur primarily in North America, Concurrent expects its international
operations to grow in the long-term as DSL and digital cable technology is more
widely deployed in Europe and Asia. As a result, Concurrent is subject to a
number of risks associated with international business activities that could
increase its costs, lengthen its sales cycle and require significant management
attention. These risks include:
- compliance with, and unexpected changes in, regulatory requirements
resulting in unanticipated costs and delays;
- lack of availability of trained personnel in international locations;
- tariffs, export controls and other trade barriers;
- longer accounts receivable payment cycles than in the United States;
- potential difficulty of enforcing agreements and collecting
receivables in some foreign legal systems;
- potential difficulty in enforcing intellectual property rights in
certain foreign countries;
- potentially adverse tax consequences, including restrictions on the
repatriation of earnings;
- the burdens of complying with a wide variety of foreign laws;
- general economic conditions in international markets; and
- currency exchange rate fluctuations.
CONCURRENT MAY ENGAGE IN FUTURE ACQUISITIONS THAT DILUTE THE OWNERSHIP INTEREST
OF ITS STOCKHOLDERS, CAUSE IT TO INCUR DEBT OR ASSUME CONTINGENT LIABILITIES OR
PRESENT OTHER CHALLENGES, SUCH AS INTEGRATION ISSUES, FOR ITS BUSINESS, WHICH IF
NOT SUCCESSFULLY RESOLVED WOULD ADVERSELY AFFECT ITS BUSINESS.
As part of Concurrent's business strategy, it reviews acquisition prospects
that would complement its current product offerings, enhance its technical
capabilities or otherwise offer growth opportunities. While Concurrent currently
has no agreements with respect to any acquisition, it periodically reviews
investments in new businesses, and it may acquire businesses, products or
technologies in the future. In the event of any future acquisitions, Concurrent
could issue equity securities which would dilute current stockholders'
percentage ownership, incur substantial debt, or assume contingent liabilities.
These actions could materially adversely affect Concurrent's 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;
23
- adverse effects on existing business relationships;
- risks associated with entering markets in which Concurrent has no or
limited prior experience; and
- potential loss of key employees of acquired companies.
Concurrent cannot assure that it will be able to successfully integrate any
business, products, technologies or personnel that it might acquire in the
future. Concurrent's failure to do so could materially adversely affect its
business, operating results and financial condition.
CONCURRENT MAY EXPERIENCE DECREASING PRICES FOR ITS PRODUCTS AND SERVICES, WHICH
MAY IMPAIR ITS ABILITY TO ACHIEVE PROFITABILITY.
Concurrent may experience decreasing prices for its products and services
due to competition, the purchasing leverage of its customers and other factors.
If Concurrent is required to decrease prices, its results of operations will be
adversely affected. Concurrent may reduce prices in the future to respond to
competition and to generate increased sales volume.
IMPLEMENTATION OF CONCURRENT'S PRODUCTS IS COMPLEX, TIME CONSUMING AND
EXPENSIVE, AND IT FREQUENTLY EXPERIENCES LONG SALES AND IMPLEMENTATION CYCLES.
CONSEQUENTLY, ITS QUARTERLY REVENUES, EXPENSES AND OPERATING RESULTS MAY VARY
SIGNIFICANTLY IN THE FUTURE, PERIOD-TO-PERIOD COMPARISONS OF ITS RESULTS OF
OPERATIONS MAY NOT NECESSARILY BE MEANINGFUL, AND THESE COMPARISONS SHOULD NOT
BE RELIED UPON AS INDICATIONS OF FUTURE PERFORMANCE.
Real-time and video-on-demand products are relatively complex, and their
purchase generally involves a significant commitment of capital, with the delays
frequently 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 Concurrent's products are
typically lengthy and subject to a number of significant risks, including
customers' budgetary constraints and internal acceptance reviews, over which
Concurrent has little or no control.
RISKS RELATED TO CONCURRENT'S INDUSTRIES
THE CURRENT UNCERTAINTY AND FINANCIAL INSTABILITY OF THE CABLE INDUSTRY MAY
ADVERSELY IMPACT THE SUCCESS OF CONCURRENT'S VIDEO-ON-DEMAND BUSINESS.
Concurrent sells its video-on-demand products to the MSOs that have
upgraded their networks to support interactive, digital services. However,
recently, the cable industry has received negative publicity regarding the MSOs
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 MSOs
have communicated their intent to reduce capital spending over the next 12 to 18
months 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 MSOs deploy video-on-demand in their cable markets. Another factor
contributing to the uncertainty in the cable industry was the bankruptcy filing
by Adelphia Communications Corp. and the delisting of their stock by the Nasdaq
National Market. Although Adelphia was not a customer of Concurrent, its
bankruptcy has reverberated throughout the industry. Further, AT&T Cable and
Comcast have announced a definitive agreement for Comcast to acquire AT&T Cable.
This acquisition may impact the speed of any roll-out of video-on-demand by AT&T
Cable and Comcast as the two companies contend with the integration of their
respective corporations.
THE SUCCESS OF CONCURRENT'S VIDEO-ON-DEMAND BUSINESS IS DEPENDENT UPON THE
EMERGING DIGITAL VIDEO MARKET, WHICH MAY NOT GAIN BROAD MARKET ACCEPTANCE. ANY
FAILURE BY THE MARKET TO ACCEPT DIGITAL VIDEO TECHNOLOGY WILL HAVE A MATERIAL
ADVERSE EFFECT ON CONCURRENT'S BUSINESS.
Video-on-demand is an emerging technology, and Concurrent cannot assure you
that it will attract widespread demand or market acceptance. Further, the
potential size of the video-on-demand market and the timing of its development
are uncertain. Concurrent's success in the video-on-demand market will depend
24
upon the commercialization and broad acceptance of video-on-demand by
residential cable subscribers and other industry participants, including cable
system operators, content providers, set-top box manufacturers, and educational
institutions.
Cable television operators historically have relied on traditional analog
technology for video management, storage and distribution. Interactive
technology installation, which is necessary to provide video-on-demand, requires
a significant initial investment of capital. The future growth of Concurrent's
video-on-demand business will depend on the pace of the installation of
interactive digital cable and digital set-top boxes, the rate at which
television operators deploy digital infrastructure and the rate at which digital
video technology expands to additional market segments.
THE SUCCESS OF CONCURRENT'S VIDEO-ON-DEMAND BUSINESS IS DEPENDENT ON THE
AVAILABILITY OF, AND THE DISTRIBUTION WINDOWS FOR, MOVIES, PROGRAMS AND OTHER
CONTENT. IF SUFFICIENT VIDEO-ON-DEMAND CONTENT IS NOT AVAILABLE ON A TIMELY
BASIS, ITS VIDEO-ON-DEMAND BUSINESS WILL BE ADVERSELY AFFECTED.
The success of video-on-demand will largely be dependent on the
availability of a wide variety and substantial number of movies, subscription
based content from providers such as HBO, Showtime, and Starz-Encore, specialty
programs and other material, which Concurrent refers to as content, in digital
format. Concurrent does not provide digital video-on-demand content. Therefore,
the future success of Concurrent's video-on-demand business is dependent in part
on content providers, such as traditional media and entertainment companies,
providing significant content for video-on-demand. Further, Concurrent is
dependent in part on other third parties to convert existing analog content into
digital content so that it may be delivered via video-on-demand.
In addition, Concurrent believes that the ultimate success of
video-on-demand will depend in part on the timing of the video-on-demand
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, video-on-demand, 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. Concurrent believes the success of
video-on-demand will depend in part on movies being available for
video-on-demand distribution either simultaneously with, or shortly after, they
are available for video rental distribution. The order, length and exclusivity
of each window for each distribution channel is determined solely by the studio
releasing the movie. Given the size of the home video rental industry, the
studios have a significant interest in maintaining that market. Concurrent
cannot assure you that favorable changes, if any, will be made relating to the
length and exclusivity of the video rental and television distribution windows.
A number of the major studios have entered into agreements with certain
cable operators and content aggregators to provide digital movies for
distribution through video-on-demand. However, not all of the major studios have
reached agreements regarding the content for video-on-demand. If studios fail to
reach agreements regarding content or cancel existing agreements, Concurrent's
customers could delay or cancel video-on-demand system orders, which would
adversely affect its video-on-demand business.
CONCURRENT CANNOT ASSURE YOU THAT ITS PRODUCTS AND SERVICES WILL KEEP PACE WITH
TECHNOLOGICAL DEVELOPMENTS AND EMERGING INDUSTRY STANDARDS, ADDRESS THE CHANGING
NEEDS OF ITS CUSTOMERS OR ACHIEVE MARKET ACCEPTANCE, ANY OF WHICH COULD
MATERIALLY ADVERSELY AFFECT ITS BUSINESS.
The markets for Concurrent's products are characterized by rapidly changing
technology, evolving industry standards and new product introductions and
enhancements. There can be no assurance that Concurrent will be successful in
enhancing its real-time or video-on-demand 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 Concurrent's 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 its solutions or reduce the cost of
existing products or services. Concurrent's future success will depend on its
ability to continue to enhance its existing products, including development of
new applications for its technology, and to develop and introduce new products
25
to meet and adapt to changing customer requirements and emerging technologies.
Further, announcements of currently planned or other new product offerings by
Concurrent's competitors may cause customers to defer purchase decisions or to
fail to purchase its existing solutions. Concurrent's failure to respond to
rapidly changing technologies could adversely affect its business, financial
condition and results of operations.
CONCURRENT IS SUBJECT TO GOVERNMENTAL REGULATION, AS IS THE TELEVISION INDUSTRY.
ANY FINDING THAT IT HAS BEEN OR IS IN NONCOMPLIANCE WITH SUCH LAWS COULD RESULT
IN, AMONG OTHER THINGS, GOVERNMENTAL PENALTIES. FURTHER, CHANGES IN EXISTING
LAWS OR NEW LAWS MAY ADVERSELY AFFECT ITS BUSINESS.
Concurrent is subject to various international, U.S. federal, state and
local laws affecting its video-on-demand and real-time businesses. The
television industry is subject to extensive regulation in the United States and
other countries. Concurrent's video-on-demand business is dependent upon the
continued growth of the digital television industry in the United States and
internationally. Television operators 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 television operators and thus could have a material
adverse effect on its business, financial condition and results of operations.
The enactment by federal, state or international governments of new laws or
regulations could adversely affect its cable operator customers, and thereby
materially adversely affect its business, financial condition and results of
operations.
CONCURRENT MAY BE SUBJECT TO LIABILITY IF PRIVATE INFORMATION SUPPLIED TO ITS
CUSTOMERS, INCLUDING CABLE OPERATORS, IS MISUSED.
Concurrent's video-on-demand systems allow cable operators 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 Concurrent's customers, and potentially Concurrent, and might deter
potential video-on-demand viewers. Concurrent has no control over the policy of
its customers with respect to the access to this data and the release of this
data to third parties.
OTHER RISKS
CONCURRENT HAS IMPLEMENTED CERTAIN ANTI-TAKEOVER PROVISIONS THAT COULD MAKE IT
MORE DIFFICULT FOR A THIRD PARTY TO ACQUIRE IT.
Provisions of Delaware law and Concurrent's restated certificate of
incorporation, amended and restated bylaws, and rights plan could make it more
difficult for a third party to acquire it, even if doing so would be beneficial
to its stockholders.
Concurrent is 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 its 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 Concurrent's restated certificate of incorporation
and Concurrent's amended and restated bylaws that also may delay, deter or
impede hostile takeovers or changes of control.
In addition, Concurrent has a rights plan, also known as a poison pill.
The rights plan has the potential effect of significantly diluting the ownership
interest in Concurrent of any person that acquires beneficial ownership of 15%
or more of Concurrent's common stock or commences a tender offer that would
result in a person or group owning 15% or more of Concurrent's common stock.
26
IN THE FUTURE, CONCURRENT MAY NEED TO RAISE ADDITIONAL CAPITAL. THIS CAPITAL
MAY NOT BE AVAILABLE ON ACCEPTABLE TERMS, IF AT ALL. IF CONCURRENT CANNOT RAISE
FUNDS ON ACCEPTABLE TERMS, IF AND WHEN NEEDED, IT MAY NOT BE ABLE TO DEVELOP OR
ENHANCE ITS PRODUCTS AND SERVICES, TAKE ADVANTAGE OF FUTURE OPPORTUNITIES, GROW
ITS BUSINESS OR RESPOND TO COMPETITIVE PRESSURES OR UNANTICIPATED REQUIREMENTS.
Concurrent believes that its existing cash balances, available credit
facility and funds generated by operations will be sufficient to meet its
anticipated working capital and capital expenditure requirements for the next
twelve months. After that, Concurrent may need to raise additional funds.
Concurrent cannot be certain that it will be able to obtain additional financing
on favorable terms, if at all.
TERRORIST ATTACKS AND THE POSSIBILITY OF WIDER ARMED CONFLICT MAY HAVE AN
ADVERSE EFFECT ON CONCURRENT'S BUSINESS AND OPERATING RESULTS.
Terrorist attacks and other acts of violence or war, such as those that
took place on September 11, 2001, could have a material adverse effect on
Concurrent's business and operating results. There can be no assurance that
there will not be further terrorist attacks against the United States or its
interests. Future terrorist attacks could result in political and social
turmoil that could put further pressure on economic conditions in the United
States and worldwide. These political, social and economic conditions could
make it difficult for Concurrent, its vendors and its customers to accurately
forecast and plan future business activities and could have a material adverse
effect on its business and results of operations. Finally, further terrorist
acts could cause the United States to enter into a wider armed conflict which
could further impact Concurrent's business and results of operations.
CONCURRENT'S STOCK PRICE HAS BEEN VOLATILE IN THE PAST AND MAY BE VOLATILE IN
THE FUTURE.
Concurrent's common stock is traded on the Nasdaq National Market. For the
fiscal year ended June 30, 2002, the high and low prices reported on the Nasdaq
National Market were $17.68 and $4.25, respectively. Further, as of September
17, 2002, the price as reported on the Nasdaq National Market was $2.94. The
market price of Concurrent's common stock may fluctuate significantly in the
future in response to various factors, some of which are beyond Concurrent's
control, including the following and the other risks discussed under the heading
"Risk Factors:"
- variations in its quarterly operating results;
- changes in securities analysts' estimates of its financial
performance;
- the development of the video-on-demand market in general;
- changes in market valuations of similar companies;
- announcement by Concurrent or its competitors of significant
contracts, acquisitions, strategic partnerships, joint ventures or
capital commitments;
- loss of a major customer or failure to complete significant
transactions; and
- additions or departures of key personnel.
In addition, in recent years the stock market in general, and the Nasdaq
National Market and the market for technology companies in particular, have
experienced extreme price and volume fluctuations. In some cases, these
fluctuations have been unrelated or disproportionate to the operating
performance of these companies. These market and industry factors may
materially and adversely affect Concurrent's stock price, regardless of its
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. Concurrent 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
Concurrent's business, financial condition and results of operations.
27
ITEM 2. PROPERTIES
Concurrent's principal facilities as of June 30, 2002, are listed below.
All of the principal facilities are leased. Management considers all facilities
listed below to be suitable for the purpose(s) for which they are used,
including manufacturing, research and development, sales, marketing, service,
and administration.
EXPIRATION APPROX.
LOCATION PRINCIPAL USE DATE OF LEASE FLOOR AREA
-------------------------- -------------------------------- -------------- -----------
(SQ. FEET)
4375 River Green Parkway Corporate Headquarters, August 2006 33,000
Suite 100 Administration, Research &
Duluth, Georgia Development, Sales and Marketing
2800 Gateway Drive Manufacturing and Service December 2004 30,000
Pompano Beach, Florida
2881 Gateway Drive Administrative and Sales and December 2004 30,000
Pompano Beach, Florida Marketing
3535 Route 66 Repair and Service Depot May 2009 17,000
Bldg. 3
Neptune, NJ
Concurrent House Sales, Service and Research & February 2003 13,000
Railway Terrace Development
Slough, Berkshire, England
100 Highpoint Drive Research & Development December 2006 16,500
Chalfont, PA
Except for the Chalfont, Pennsylvania facility, which is used exclusively
for the Xstreme division, and the Administrative and Sales and Marketing offices
at 2881 Gateway Drive, which is used exclusively for the Real-Time division,
Concurrent's facilities are used for both divisions. In addition to the
facilities listed above, Concurrent also leases 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, Concurrent may be involved in litigation relating to
claims arising out of its ordinary course of business. Concurrent is not
presently involved in any material litigation, but has the following matters
pending:
- SeaChange International, Inc. v. Putterman, et al, Arkansas Court of
---------------------------------------------------
Appeals, Case No. CA 01-1126. The suit was filed on June 14, 1999
alleging that Concurrent defamed SeaChange International, Inc.
("SeaChange"). On June 14, 2000, Concurrent counterclaimed against
SeaChange alleging that SeaChange defamed Concurrent. On January 4,
2001, the court granted Concurrent's motion to dismiss all claims
against it. SeaChange subsequently appealed and said appeal is
currently pending.
- Eason v. Concurrent Computer Corp, et al., Superior Court of New
----------------------------------------------
Jersey, Case Mon-L-3284-94. This suit arose out of personal injury
claim filed in 1994 alleging that plaintiff was injured when a lamp
post in Concurrent's parking lot fell. The case against Concurrent was
dismissed in 1995, but in 2000 the plaintiff amended the cause of
action and refiled against Concurrent alleging spoliation of evidence.
The plaintiff obtained a default judgment for $119,800 in December
2001 which was vacated in August 2002. Plaintiff subsequently refiled
and Concurrent is seeking to have the case dismissed.
28
Concurrent is involved in various other legal proceedings. Management of
Concurrent believes that any liability to Concurrent which may arise as a result
of these proceedings, including the proceedings specifically discussed above,
will not have a material adverse effect on Concurrent's financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM X. OFFICERS OF THE REGISTRANT
Officers of Concurrent 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
Concurrent's executive officers as of September 17, 2002:
NAME POSITION AGE
-------------------- ---------------------------------------------------------------- ---
Jack A. Bryant President, Chief Executive Officer, and Director 44
Stephen K. Necessary President, Xstreme Division 46
Paul C. Meyer President, Real-Time Division 55
Steven R. Norton Executive Vice President, Chief Financial Officer and Secretary 41
Robert E. Chism Vice President, Development and Chief Technical Officer, Xstreme 49
Division
Robert T. Menzel Vice President, Sales & Marketing, Real-Time Division 49
David Nicholas Vice President, Worldwide Sales, Xstreme Division 48
Kirk L. Somers General Counsel 37
Jack A. Bryant, President, Chief Executive Officer, and Director. Mr.
Bryant has served as the President and Chief Executive Officer since October
2000. Mr. Bryant served as President of the Xstreme division from July 2000 to
October 2000. Mr. Bryant was named a Director in January 2001. Since May 2002,
Mr. Bryant has also served as a director for Thirdspace Living Ltd. Prior to
joining Concurrent, he held a number of positions at Arris Corporation (f.k.a.
Antec Corporation), a communications technology company that specializes in
hybrid-fiber-coax-based networks, from 1991 to June 2000. The positions
included, from March 1998 to June 2000, President of the Network Technologies
Group, from January 1996 to March 1998, President of the Digital Systems
Division, and from January 1995 to January 1996, Vice President of Marketing.
Before joining Antec, Mr. Bryant held various product marketing and sales
positions at General Instrument and Scientific-Atlanta.
Steve Necessary, President, Xstreme Division. Mr. Necessary has served as
President of the Xstreme division since June 2002. From January 2000 to June
2002, Mr. Necessary was the President, CEO, and a Director of PowerTV, Inc, a
software subsidiary of Scientific-Atlanta. From April 1998 to January 2000, Mr.
Necessary served as the corporate Vice President and Vice President of marketing
at Scientific-Atlanta. From June 1982 to February 1991 and then from October
1995 to April 1998, he also held a number of other positions with
Scientific-Atlanta, including Vice President and General Manager of analog video
systems. Mr. Necessary also spent several years at Arris Corporation (f.k.a.
Antec Corporation), where his final position was president of the products
group. Earlier in his career, he was a team manager for Procter & Gamble.
Paul C. Meyer, President, Real-Time Division. Mr. Meyer has served as
President of the Real-Time division since December 2000. Immediately prior to
joining Concurrent, he was the President of ASM Associates, Inc., a consulting
firm that provides interim senior management services. From 1994 to 1996, he
served as the Executive Vice President and General Manager of Viacom New Media.
From 1988 to 1994, he served as President of his own consulting firm, Paul C.
Meyer & Associates, Ltd., leading a small team of professionals in consulting
assignments involving turnaround, restructuring, and crisis management. Before
forming his own firm, he served in various positions with Coleco Industries,
Inc.
29
Steven R. Norton, Executive Vice President, Chief Financial Officer and
Secretary. Mr. Norton has served as the Executive Vice President and Chief
Financial Officer since October 1999. From March 1996 to April 1999, Mr. Norton
was Vice President of Finance and Administration for LHS Group, Inc., a formerly
publicly held provider of services to communications services providers and
Chief Financial Officer for one of its subsidiaries, LHS Communications Systems,
Inc. Prior to his employment with LHS, he was an Audit Senior Manager for Ernst
&Young and KPMG LLP.
Robert E. Chism, Vice President, Development and Chief Technology Officer,
Xstreme Division. Mr. Chism has served as Vice President, Development of the
Xstreme division since April 1999 and was named Chief Technology Officer in
February 2002. From June 1996 to April 1999, he served as the Vice President,
Development. From October 1994 through June 1996, he served as Vice President,
Technical and Production Operations of Harris Computer Systems Corporation. In
June 1993, he joined the Harris Computer Systems Division of Harris Corporation
as Director, Simulation Business Area. Before joining the Harris Computer
Systems Division, he held diverse engineering, program management and marketing
assignments in computer and related industries with General Electric Company, a
diversified industrial corporation, and from May 1978 to June 1993 he was
Subsection Manager of Satellite Command and Data Handling.
Robert T. Menzel, Vice President, Sales & Marketing, Real-Time Division.
Mr. Menzel has served as Vice President, Sales & Marketing of the Real-Time
division since April 1999. He served as the Vice President, real-time systems
from June 1997 to March 1999, and the Vice President, North American Sales, from
June 1996 to February 1997. From June 1996 to June 1997, he was the Vice
President, Interactive Video-on-Demand. Mr. Menzel was Vice President, General
Manager of the Trusted Systems Division of Harris Computer Systems Corporation
from April 1995 to June 1996, and he served as Vice President, National Sales of
Harris Computer Systems Corporation from October 1994 to April 1995.
David M. Nicholas, Vice President, Worldwide Sales, Xstreme Division. Mr.
Nicholas has served as Vice President, Sales, of the Xstreme division since
March 1999 and was named Vice President, Worldwide Sales in July 2001. From
September 1995 to February 1999, he served as Executive Vice President of
Pioneer New Media Technologies, Inc., a provider of audio video products. From
August 1993 to August 1995, he served as Vice President and General Manager of
Texscan Network Systems, a privately held provider of advertising insertion
solutions. Prior to that time, he served in various positions at Pioneer
Communications of America, Panasonic Industrial, and Magnavox.
Kirk L. Somers, General Counsel. Mr. Somers has served as General Counsel
since November 2001. Immediately prior to joining Concurrent, from December 1998
to November 2001, Mr. Somers was the Assistant General Counsel for divine, inc.
(f.k.a. eshare communication, Inc.) where he was responsible for corporate-wide
development and enforcement of the company's intellectual property portfolio as
well as commercial contracts and other corporate matters. From December 1995 to
December 1998, Mr. Somers was a partner in the law firm of Marshall & Melhorn in
Toledo, Ohio practicing in the area of litigation. Prior to that, Mr. Somers
spent four years as an attorney for the U.S.A.F., specializing in
litigation.
30
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is currently traded under the symbol "CCUR" on The Nasdaq
National Market. The following table sets forth the high and low sale
information for the Common Stock for the periods indicated, as reported by The
Nasdaq National Market.
FISCAL YEAR 2002
QUARTER ENDED: HIGH LOW
------ ------
September 30, 2001 $12.70 $ 5.76
December 31, 2001 $16.99 $ 7.25
March 31, 2002 $17.68 $ 7.11
June 30, 2002 $ 9.23 $ 4.25
FISCAL YEAR 2001
QUARTER ENDED: HIGH LOW
------ ------
September 30, 2000 $21.75 $10.19
December 31, 2000 $20.38 $ 3.88
March 31, 2001 $ 8.38 $ 3.88
June 30, 2001 $ 9.13 $ 4.77
As of September 17, 2002, there were 61,861,543 shares of Common Stock
outstanding, held of record by approximately 1,379 stockholders with a closing
price on the Nasdaq National Market of $2.94.
Concurrent has never declared or paid any cash dividends on its capital
stock. Concurrent's present policy is to retain all available funds and any
future earnings to finance the operation and expansion of its business, and no
change in the policy is currently anticipated. In addition, the terms of
Concurrent's credit facility prohibits the payment of cash dividends.
On July 19, 2001, Concurrent closed the sale of 5,400,000 shares of Common
Stock to private investors at a price of $4.80 per share. Net proceeds to
Concurrent, after fees and expenses, were approximately $24 million. Raymond
James & Associates, Inc. acted as placement agent in the sale. The sale was a
privately negotiated sale to selected institutional investors and other
accredited investors. The shares were exempt from registration under the
Securities Act of 1933 pursuant to Section 4(2) thereof and Rule 506 of
Regulation D promulgated thereunder. Concurrent intends to use the proceeds for
working capital, sales and marketing activities, product development and
support, potential acquisitions and investments, capital expenditures and
general corporate purposes. On May 17, 2001, Concurrent filed a Form S-3
registration statement registering the resale of the shares (No. 333-61172),
which was declared effective on July 19, 2001.
Concurrent sold 291,461 shares of common stock to Thirdspace pursuant to a
Share Purchase and Warrant Issuance Agreement, whereby Concurrent invested $7
million in C ordinary shares of Thirdspace through a $4 million cash payment and
the issuance of the 291,461 shares of common stock which were valued at
approximately $3 million. The shares were exempt from registration under the
Securities Act of 1933 pursuant to Section 4(2) thereof and Rule 506 of
Regulation D promulgated thereunder. On June 7, 2002, Concurrent filed a Form
S-3 registration statement registering the resale of the shares (File No.
333-90056) that was declared effective on June 20, 2002 by the Securities and
Exchange Commission. Concurrent also entered into a Strategic Alliance
Agreement under which it agreed to jointly develop and market an integrated
end-to-end solution to enable broadband telecommunications carriers to provide
broadcast television, interactive television, and video-on-demand services to
subscribers on digital subscriber line transportation networks. In exchange for
its investment, Concurrent also received a warrant for 400,000 series C shares
of Thirdspace. The warrant is exercisable beginning December 19, 2002.
Concurrent also loaned Thirdspace $6 million in two installments on March 19 and
September 3, 2002, in exchange for a long-term convertible note receivable,
bearing interest at 8% annually, with interest payments first due December 31,
2002, and semi-annually, thereafter. Concurrent has a security interest in all
31
of the assets of Thirdspace, which is subject to a prior lien on Thirdspace's
intellectual property securing an obligation of $5 million. Other than the
prior lien on Thirdspace's intellectual property, Concurrent's security interest
ranks ratably with those of other secured creditors.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data which has been derived from Concurrent's 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, Concurrent's 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 2002 2001 2000 1999 1998
---------------------------- ------------ -------- ------------- -------- -------
Net sales $ 89,369 $72,821 $ 68,090 $69,963 $82,215
Gross margin 44,566 33,020 31,743 35,337 40,390
Operating income (loss) 3,679 (5,591) (23,987)(1) (1,289) 3,311
Net income (loss) 4,383 (6,189) (23,715)(1) (1,665) 3,414
Net income (loss) per share
Basic $ 0.07 $ (0.11) $ (0.46)(1) $ (0.03) $ 0.07
Diluted $ 0.07 $ (0.11) $ (0.46)(1) $ (0.03) $ 0.07
AT JUNE 30,
--------------------------------------------------------
BALANCE SHEET DATA 2002 2001 2000 1999 1998
---------------------------- ------------ -------- ------------- -------- -------
Cash and cash equivalents $ 30,519 $ 9,460 $ 10,082 $ 6,872 $ 5,733
Working capital 43,545 14,824 15,383 14,694 13,652
Total assets 98,688 57,052 57,078 40,569 46,235
Stockholders' equity 69,224 33,283 38,271 26,011 25,510
Book value per share $ 1.12 $ 0.60 $ 0.71 $ 0.54 $ 0.54
(1) In October 1999, Concurrent acquired Vivid Technology. In connection with
the acquisition, management placed a value of $14.0 million on in-process
research and development based on valuation methods it deemed appropriate.
This entire amount was written off as required by the purchase accounting
rules.
32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and the notes thereto which appear elsewhere herein. The following
discussion contains forward-looking statements that reflect Concurrent's plans,
estimates and beliefs. Concurrent's 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
Concurrent operates its business as two distinct divisions, the Xstreme
division and the Real-Time division. Concurrent created the Xstreme division to
capitalize on the increasing opportunities in the emerging digital television
services market and focus on the development and sale of digital VOD systems to
cable providers that are upgrading their networks to support digital services.
Although almost all of Concurrent's revenues prior to fiscal 2000 were derived
from its Real-Time division, Concurrent expects in the near term that a majority
of its growth will come from its Xstreme division. VOD revenues result from the
sale of VOD systems and related services primarily to cable television providers
in North America, and to a lesser extent, to DSL service providers and cable
service providers, internationally.
In October 1999, Concurrent acquired one of its competitors, Vivid
Technology, for 2,233,699 shares of Common Stock and options to purchase 378,983
shares of Common Stock. The acquisition resulted in a $14.0 million non-cash
one-time charge for the write-off of in-process research and development related
to acquired computer software technology. The acquisition was treated as a
purchase for accounting purposes, and accordingly, the assets and liabilities
acquired were recorded based on their fair values at the date of acquisition.
In 1996, Concurrent acquired the real-time computer division of Harris
Computer Systems Corporation, creating one of the largest real-time computer
systems companies in the country. Over the past several years, the real-time
computer processing industry has seen a significant shift in demand from
high-priced, proprietary real-time systems to lower-priced, open server systems.
High performance processing in the past required a large, expensive computer
system with significant proprietary and customized software. Today, these
requirements are often met by much smaller and less expensive computers with
off-the-shelf computer hardware and software. As a result, Concurrent's
revenues from both real-time products and services have been declining.
Real-Time revenues consist of real-time computer system sales to prime
contractors, domestic and foreign government agencies, commercial corporations,
and fees for maintenance and other services provided to Concurrent's real-time
customers.
Concurrent recognizes revenue from customer service plans ratably over the
term of each plan, typically one year.
Custom engineering and integration services performed by the Real-Time
division are typically completed within 90 days from receipt of an order.
Revenues from these services are recognized upon completion and delivery of the
software solution to the customer.
Cost of sales consists of the cost of the computer systems sold, including
labor, material, overhead and third party product costs. Cost of sales also
includes the salaries, benefits and other costs of the maintenance, service and
help desk personnel associated with product installation and support activities.
Sales and marketing expenses consist primarily of the salaries, benefits
and travel expenses of Concurrent employees responsible for acquiring new
business and maintaining existing customer relationships, as well as marketing
expenses related to trade publications, advertisements and trade shows.
Management expects these expenses to increase as Concurrent continues to expand
its VOD business and attract new customers.
Research and development expenses are comprised of salaries and benefits of
Concurrent employees involved in hardware and software product and enhancement
development. All development costs are expensed as incurred. Management expects
to increase the development staff to investigate and develop follow-on
33
VOD offerings, including next generation products, as well as new software
applications.
General and administrative expenses consist primarily of salaries and
benefits of management and administrative personnel, general office
administration expenses such as rent and occupancy costs, telephone expenses and
fees for legal, accounting and other professional services. Management
anticipates that administrative costs will increase as Concurrent expands its
VOD business.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Revenue Recognition
Video-on-demand and real-time system revenues are recognized based on the
guidance in American Institute of Certified Public Accountants Statement of
Position 97-2, "Software Revenue Recognition". Concurrent recognizes revenue
from video-on-demand and real-time systems when: (1) persuasive evidence of an
arrangement exists; (2) the system has been shipped; (3) the fee is fixed or
determinable; and (4) collectibility of the fee is probable. Under multiple
element arrangements, Concurrent allocates revenue to the various elements based
on vendor-specific objective evidence ("VSOE") of fair value. Concurrent's VSOE
of fair value is determined based on the price charged when the same element is
sold separately. Determination of criteria (3) and (4) are based on management's
judgements regarding the fixed nature of the fee charged for products and
services delivered and the collectibility of those fees. Should changes in
conditions cause management to determine these criteria are not met for certain
future transactions, revenue recognized for any reporting period could be
adversely affected.
In certain instances, Concurrent's customers require significant
customization of both software and hardware products and, therefore, revenues
are recognized as long term contracts using the percentage-of-completion method,
which relies on estimates of total expected contract revenue and costs.
Concurrent follows this method since reasonably dependable estimates of the
revenue and costs applicable to various stages of a contract can be made.
Recognized revenues and profit are subject to revisions as the contract
progresses to completion. Revisions in profit estimates are charged to income in
the period in which the facts that give rise to the revision become known.
Valuation and Accrual of Non-Cash Warrants
Concurrent entered into a three-year definitive purchase agreement with
Comcast Cable in March of 2001, providing for the sale of VOD equipment. As part
of that agreement, Concurrent agreed to issue three types of warrants (See Note
18 to the consolidated financial statements).
Concurrent recognized the value of the Initial Warrant as a reduction of
revenue in the quarter ended March 31, 2001. Concurrent recognizes the value of
Performance Warrants and Cliff Warrants as an adjustment to revenue over the
term of the agreement as Comcast purchases additional VOD servers from
Concurrent and makes the service available to its customers.
The value of the warrants is determined using the Black-Scholes valuation
model. The weighted assumptions used for the quarter ended June 30, 2002 were:
expected dividend yield - 0%; risk free interest rate - 3.7%; expected life - 4
years; expected volatility - 117%. Concurrent adjusts the value of the earned
but unissued warrants on a quarterly basis using the valuation option-pricing
model until the warrants are actually issued. The value of the new warrants
earned and any adjustments in value for warrants previously earned is determined
using the Black-Scholes valuation model and recognized as part of revenue on a
quarterly basis. To the extent the above assumptions change on a periodic basis,
or the number of subscribers capable of receiving VOD increases or decreases,
revenue and gross margins may be positively or negatively impacted.
In accordance with a five-year definitive agreement with Scientific
Atlanta, Inc. ("SAI") executed in August of 1998, Concurrent agreed to issue
warrants to SAI upon achievement of pre-determined revenue targets. The value of
these warrants cannot exceed 5% of applicable revenue and the number of shares
related to the warrant are determined using the Black-Scholes valuation model
and cannot exceed 888,888 shares for every $30 million of revenue from the sale
of VOD servers using the SAI platform. The value of these warrants cannot impact
gross margin by more than $1.5 million per $30 million of applicable revenue.
34
Concurrent accrues for this cost as a part of cost of sales at the time of
recognition of applicable revenue.
Warranty Accrual/Maintenance Revenue Deferral
Concurrent either accrues the estimated costs to be incurred in performing
warranty services at the time of revenue recognition and shipment of the
servers, or defers revenue associated with the maintenance services to be
provided during the warranty period based upon the value for which Concurrent
would sell such services separately, depending upon the specific terms of the
customer agreement. Concurrent's estimate of costs to service its warranty
obligations is based on historical experience and expectation of future
conditions. To the extent Concurrent experiences increased warranty claim
activity or increased costs associated with servicing those claims, its warranty
accrual will increase resulting in decreased gross margin.
Inventory Valuation Reserves
Concurrent provides 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 by management, or if next generation products are
released earlier than anticipated, additional inventory write-downs may be
required.
Impairment of Goodwill
At June 30, 2002, Concurrent had $10.7 million of goodwill. In assessing
the recoverability of Concurrent's goodwill, Concurrent must make assumptions
regarding estimated future cash flows and other factors to determine the fair
value of the respective assets. If the estimates or their related assumptions
change in the future, Concurrent may be required to record impairment charges
for these assets not previously recorded. In connection with the adoption of
SFAS 142, Concurrent was required to perform an impairment assessment within six
months of its July 1, 2001 adoption. Concurrent completed this transitional
impairment test during its quarter ended September 30, 2001 and deemed that no
impairment loss was necessary. Any subsequent impairment losses, if any, will be
reflected in operating income in the income statement.
Valuation of Deferred Tax Assets
In assessing the realizability of deferred tax assets, management considers
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, 2002 and June
30, 2001, 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.
Investment In and Receivable from Minority Owned Company
At June 30, 2002, Concurrent had a $7 million minority interest in
Thirdspace, as well as a $3 million long-term note receivable due from
Thirdspace. The fair value of the long-term investment in and note receivable
from Thirdspace is dependent on the performance of Thirdspace, as well as the
volatility inherent in the external markets for Thirdspace. In assessing
potential impairment for this investment and note receivable, Concurrent will
consider these factors as well as forecasted financial performance of
Thirdspace. If actual results do not meet previous forecasts, if substantial
changes in forecasts occur, or if the market in which Thirdspace competes
deteriorates significantly, Concurrent may have to record impairment charges.
SELECTED OPERATING DATA AS A PERCENTAGE OF NET SALES
The following table sets forth selected operating data as a percentage of
total revenue for certain items in Concurrent's consolidated statements of
operations for the periods indicated.
35
YEAR ENDED JUNE 30,
-----------------------
2002 2001 2000
------ ------ -------
Revenues:
Product sales
Real-time systems 24.2% 35.3% 39.8%
Video-on-demand systems 53.7 32.7 17.6
------ ------ -------
Total product sales 77.9 68.0 57.4
Service and other 22.1 32.0 42.6
------ ------ -------
Total 100.0 100.0 100.0
Cost of sales (% of respective sales category)
Product sales
Real-time systems 39.7 54.8 45.5
Video-on-demand systems 51.4 55.0 65.0
------ ------ -------
Total product sales 47.7 54.9 51.5
Service and other 58.5 54.2 56.0
------ ------ -------
Total 50.1 54.7 53.4
------ ------ -------
Gross margin 49.9 45.3 46.6
Operating expenses:
Sales and marketing 19.0 22.1 29.8
Research and development 17.1 15.9 14.4
General and administrative 9.7 15.0 13.6
Cost of purchased in-process research and
development - - 20.6
Relocation and restructuring - - 3.5
------ ------ -------
Total operating expenses 45.8 53.0 81.8
------ ------ -------
Operating income (loss) 4.1 (7.7) (35.2)
Interest expense (0.1) (0.3) (0.2)
Interest income 1.0 0.4 0.5
Other non-recurring items - - 1.1
Other income (expense) - net (0.1) (0.1) (0.1)
------ ------ -------
Income (loss) before provision for income taxes 4.9 (7.7) (33.9)
Provision for income taxes - 0.8 0.9
------ ------ -------
Net income (loss) 4.9% (8.5)% (34.8)%
====== ====== =======
36
RESULTS OF OPERATIONS
FISCAL YEAR 2002 IN COMPARISON TO FISCAL YEAR 2001
Product Sales. Total product sales for fiscal year 2002 were $69.6 million,
an increase of $20.0 million or 40.4% from fiscal year 2001. The increase is the
result of the $24.2 million increase in sales of VOD systems to $48.0 million in
fiscal year 2002 from $23.8 million in fiscal year 2001. The increase in VOD
product sales is primarily due to the increase in VOD server purchases from AOL
Time Warner and Cox Communications, which accounted for approximately 57.1% and
24.0%, respectively, of VOD system revenue during the fiscal year ended June 30,
2002. These increased server purchases are directly related to the increase in
the number of cable markets where VOD is being deployed, combined with increased
digital penetration in markets where VOD was previously deployed. Partially
offsetting the increase in VOD product sales is the continued decline in sales
of real-time computer systems. Sales of real-time products decreased 16.1% to
$21.6 million in fiscal year 2002 from $25.7 million in fiscal year 2001,
primarily due to the non-recurring revenue recognized in fiscal 2001 from a
contract with Hamilton-Sunstrand, a United Technology Company, for testing of
aircraft power subsystems, which included production and development systems and
engineering and training services.
Service and Other Sales. Service and other sales decreased 14.9% to $19.8
million in fiscal year 2002 from $23.3 million in fiscal year 2001. The decline
results primarily from customers switching from proprietary real-time systems to
Concurrent's open systems which are less expensive to maintain, and from the
cancellation of other proprietary computer maintenance contracts as the machines
are removed from service.
Gross Margin. The gross margin increased by $11.6 million to $44.6 million
in fiscal year 2002 from $33.0 million in fiscal year 2001. The gross margin as
a percentage of sales increased to 49.9% in fiscal year 2002 from 45.3% in
fiscal year 2001. VOD product gross margins increased to 48.6% for fiscal year
2002 from 45.0% for fiscal year 2001 due to (1) a cost reduction in the
MediaHawk 3000 video server, (2) an increase in sales volume and certain fixed
customer service and support costs being spread over higher sales, and (3) a
more favorable product mix resulting from sales of more fully configured video
servers with higher video stream capacity. The gross margin on sales of
real-time products increased to 60.3% of sales in fiscal year 2002 from 45.2% in
fiscal year 2001 primarily as a result of the reduction in large-scale
integration projects with lower gross margins and an increase in demand for the
higher margin PowerMAXION hardware and software products. The gross margin on
service and other sales declined to 41.5% for fiscal year 2002 from 45.8% for
fiscal year 2001 because, as service revenues continue to decline, service
expenses have been reduced on a less than pro-rata basis to ensure quality
service and to fulfill contractual agreements.
Sales and Marketing. Sales and marketing expenses decreased as a
percentage of sales to 19.0% for fiscal year 2002 from 22.1% for fiscal year
2001. These expenses increased 5.4% to $17.0 million in fiscal year 2002 from
$16.1 million in fiscal year 2001, primarily due to a $0.9 million increase in
domestic VOD sales and marketing personnel costs, as well as a $0.2 million
increase in VOD sales and marketing department travel expenses. This increase
was partially offset by a $0.4 million decrease in domestic real-time sales
commissions that were generated by sales to a single real-time customer in
fiscal year 2001.
Research and Development. Research and development expenses increased as a
percentage of sales to 17.1% in fiscal year 2002 from 15.9% in fiscal year 2001.
These expenses increased 32.1% to $15.3 million in fiscal year 2002 from $11.6
million in fiscal year 2001 due to personnel additions in both the real-time and
VOD research and development departments. The Real-Time division's research and
development expense increased $1.9 million, primarily due to additional
resources required for development of the new Linux based real-time operating
system. The Xstreme division also added new development staff in fiscal year
2002 to focus on TV Guide integrations, targeted and interactive advertising
integration, development of Concurrent's personal video channel (pVC(TM))
technology, and next generation server and server architectures. The additional
VOD research and development personnel resulted in a $1.6 million increase in
VOD research and development expenses in fiscal 2002 compared to the prior year.
General and Administrative. General and administrative expenses decreased
as a percentage of sales to 9.6% in fiscal 2002 from 15.0% in fiscal 2001. These
37
expenses decreased to $8.6 million in fiscal year 2002 from $10.9 million in
fiscal year 2001, primarily due to a non-recurring $1.2 million severance charge
recorded in fiscal year 2001. In addition, after the July 1, 2001 implementation
of SFAS 142, goodwill relating to the acquisition of Vivid Technology, Inc. is
no longer amortized. Discontinuation of this goodwill amortization expense
decreased VOD general and administrative expense by $1.3 million for fiscal year
2002 compared to the prior year. Furthermore, accounting related costs decreased
$0.2 million due to consolidation of accounting departments that existed in both
Duluth, GA and Ft. Lauderdale, FL during part of fiscal year 2001. These
decreases were partially offset by a $0.4 million increase in insurance expense
and $0.2 million increase in bad debt expense for fiscal year 2002 compared to
fiscal year 2001.
Interest income. Interest income increased $0.5 million to $0.8 million in
fiscal 2002 from $0.3 million in fiscal 2001 primarily due to the earnings from
investing the net proceeds from the private placement of 5.4 million shares of
common stock that was completed in July 2001.
Income Taxes. No income tax provision was recorded in fiscal year 2002 on
pretax income of $4.4 million due to the utilization of previously unrecognized
tax net operating loss carryovers.
Net Income (Loss). The net income for fiscal year 2002 was $4.4 million or
$0.07 per basic and diluted share compared to a net loss of $6.2 million or
$0.11 per basic and diluted share in fiscal year 2001.
FISCAL YEAR 2001 IN COMPARISON TO FISCAL YEAR 2000
Product Sales. Total product sales for fiscal year 2001 were $49.6 million,
an increase of $10.5 million or 26.8% from fiscal year 2000. The increase is the
result of the $11.8 million increase in sales of VOD systems to $23.8 million in
fiscal year 2001 from $12.0 million in fiscal year 2000. The increase in VOD
product sales is primarily due to the increase in VOD server purchases from two
domestic cable operators, which respectively accounted for approximately 42.6%
and 27.2% of VOD system revenue during the fiscal year ended June 30, 2001.
Partially offsetting this increase is the continued decline in sales of
real-time computer systems. Sales of real-time products decreased 5.1% to $25.7
million in fiscal year 2001 from $27.1 million in fiscal year 2000 due to the
continued decline in sales volume.
Service and Other Sales. Service revenues decreased 19.8% to $23.3 million
in fiscal year 2001 from $29.0 million in fiscal year 2000. The decline
resulted from customers switching from proprietary real-time systems to
Concurrent's open systems which are less expensive to maintain, and due to the
cancellation of other proprietary computer maintenance contracts as the machines
are removed from service.
Gross Margin. Gross margin increased 4.0% to $33.0 million in fiscal year
2001 from $31.7 million in fiscal year 2000. The gross margin as a percentage
of sales decreased to 45.3% in fiscal year 2001 from 46.6% in fiscal year 2000
due primarily to the lower real-time product margins in fiscal year 2001.
Real-time product margins decreased to 45.2% in fiscal year 2001 from 54.5% in
fiscal year 2000 because of lower margins from a large real-time customer
contract which required integration of third-party equipment and service and
support resources at lower gross margins, and due to the competitive bid to
secure the contract from the customer. Partially offsetting lower real-time
margins, VOD product margins increased to 45.0% in fiscal year 2001 from 35.0%
in fiscal year 2000 due to certain fixed customer service and support costs
being spread over higher revenues.
Sales and Marketing. Sales and marketing expenses decreased as a
percentage of sales to 22.1% in fiscal year 2001 from 29.8% in fiscal year 2000.
These expenses decreased 20.7% to $16.1 million in fiscal year 2001 from $20.3
million in fiscal year 2000. The decrease is primarily the result of
deliberate, worldwide cost reduction efforts in the Real-Time division of $3.9
million.
Research and Development. Research and development expenses increased as a
percentage of sales to 15.9% in fiscal year 2001 from 14.4% in fiscal year 2000.
These expenses increased 18.5% to $11.6 million in fiscal year 2001 from $9.8
million in fiscal year 2000. This increase is primarily due to a $2.2 million
increase in VOD research and development personnel costs related to VOD server
hardware and software development. This increase is offset by $0.7 million of
deliberate, worldwide cost reduction efforts in the Real-Time division.
38
General and Administrative. General and administrative expenses increased
as a percentage of sales to 15.0% in fiscal year 2001 from 13.6% in fiscal year
2000. These expenses increased 17.7% to $10.9 million in fiscal year 2001 from
$9.3 million in fiscal year 2000 primarily due to a $1.2 million severance
charge, $0.7 million of additional costs from the growth of Xstreme division
management and other corporate executive and administrative personnel, $0.4
million increase in goodwill amortization and $0.3 million of additional bad
debt expense. This increase is offset by $1.1 million of deliberate, worldwide
cost reduction efforts in the Real-Time division.
Other. Included in operating expenses in fiscal year 2000 is a $14.0
million non-cash charge for the write-off of in-process research and development
in connection with the acquisition of Vivid Technology and a $2.4 million
restructuring and relocation provision for personnel reduction costs in the
Real-Time division and the relocation of the corporate headquarters and Xstreme
division offices to Atlanta, Georgia.
Included in other non-recurring items in fiscal year 2000 is a $0.8 million
gain related to the sale of the stock of Concurrent Vibrations, one of
Concurrent's French subsidiaries, to Data Physics, Inc.
Income Taxes. Income tax expense of $0.6 million was recorded in fiscal
year 2001 on a pre-tax loss of $5.6 million due to the inability to recognize
the tax benefit of the current period net operating loss and the non-deductible
amortization of goodwill and other assets received in the acquisition of Vivid
Technology.
Net Loss. The net loss for fiscal year 2001 was $6.2 million or $0.11 per
share compared to a net loss of $23.7 million or $0.46 per share in fiscal year
2000.
ACQUISITION OF VIVID TECHNOLOGY, INC.
On October 28, 1999, Concurrent acquired Vivid Technology, a former
competitor in the VOD industry. Vivid Technology's interactive stand-alone
video-on-demand system ("Vivid VOD system") was specifically being designed to
integrate with the most popular digital set-top boxes manufactured by Motorola.
The Vivid VOD system was also expected to be compatible with the digital set-top
boxes manufactured by other leading cable operators such as Philips, Panasonic
and Sony. The Vivid VOD system was based on a cluster of Microsoft Windows NT
computers with proprietary hardware and software added to provide high video
streaming capacity and fault tolerance. The Vivid VOD system was also being
designed to eventually provide VOD service including pause, rewind, and fast
forward VCR-like functions. The Vivid VOD system would also provide necessary
back-office support software for video content management, video selection
graphical user interface, subscriber management, purchase management, billing
interfaces, content provider account settlement and consumer marketing feedback.
In addition, the Vivid VOD system was being designed to support other
interactive applications such as on-line banking, home shopping, merchandising
and on-demand/addressable advertising.
The in-process research and development acquired was estimated to be 80%
complete at the date of acquisition and was estimated to cost an additional
$650,000 to complete the VOD system technology project in December of 2000. A
variety of tasks were yet to be completed which would be required in order for
the Vivid Technology VOD system to be deployed on a commercial basis:
- The Content Manager, which is used to load movies from content providers,
did not have the functionality necessary to create a royalty payment
affidavit which is required for the cable operators to pay the required
royalties to the content providers. Also, the Content Manager, which has
been implemented, using a SQL database, needed to be ported to other
relational databases such as Oracle to support high end database
applications.
- The Resource Manager had been alpha tested; however, an advanced beta test
had not been completed which would validate its ability to scale up to the
required number of subscribers or connections in an actual commercial
deployment.
- The Subscriber Manager, which had been implemented using a SQL database,
needed to be ported to other relational databases such as Oracle to support
high end data base applications.
- The Set Top VOD Application needed to be tested under advanced beta test
conditions to ensure that the back channel key stroke system performance
can fulfill operational requirements.
39
- The Hub Server, or video pump, needed to be tested under full load in an
operational environment to ensure stability over an extended period of
time. The random conditions resulting from the in home use of tens of
thousands of subscribers can only be simulated in an advanced beta test
which had yet to be performed.
The method used to allocate the purchase consideration to in-process
research and development ("IPR&D") was the modified income approach. Under the
income approach, fair value reflects the present value of the projected free
cash flows that will be generated by the IPR&D project and that is attributable
to the acquired technology, if successfully completed. The modified income
approach takes the income approach, modified to include the following factors:
- Analysis of the stage of completion of each project;
- Exclusion of value related to research and development yet-to-be completed
as part of the on-going IPR&D projects; and
- The contribution of existing products/technologies.
The projected revenues used in the income approach were based upon the
incremental revenues likely to be generated upon completion of the project and
the beginning of commercial sales of the Vivid VOD system, as estimated by
management to begin in the quarter ended December 31, 2000. The projections
assumed that the Vivid VOD system would be successful and the products'
development and commercialization were as set forth by management. The discount
rate used in this analysis was an after-tax rate of 28%.
Subsequent to the acquisition date, Concurrent decided to merge the Vivid
VOD system and the Concurrent VOD system into one standard VOD platform.
Concurrent began shipping the new hardware platform at the end of the quarter
ended September 30, 2000. Initially, the new hardware platform had two software
alternatives, one which is compatible with digital set-top boxes manufactured by
Motorola, using core software technology developed by and purchased from Vivid,
and one which is compatible with digital set-top boxes manufactured by
Scientific-Atlanta, Inc.
LIQUIDITY AND CAPITAL RESOURCES
Concurrent's liquidity is dependent on many factors, including sales
volume, operating profit and the efficiency of asset use and turnover.
Concurrent's future liquidity will be affected by, among other things:
- The actual versus anticipated decline in sales of real-time proprietary
systems and service maintenance revenue;
- Revenues from open real-time systems;
- Revenue growth from VOD systems and the pace at which MSOs implement VOD
technology;
- Ongoing cost control actions and expenses, including for example, research
and development and capital expenditures;
- The margins on the VOD and real-time businesses;
- The ability to raise additional capital, if necessary;
- Timing of product shipments which occur primarily during the last month of
the quarter;
- The percentage of sales derived from outside the United States where there
are generally longer accounts receivable collection cycles and which
receivables are not included in the borrowing base of the revolving credit
facility; and
- The number of countries in which Concurrent operates, which may require
maintenance of minimum cash levels in each country and, in certain cases,
may restrict the repatriation of cash, such as cash held on deposit to
secure office leases.
Concurrent provided cash of $5.8 million from operating activities in
fiscal year 2002 compared to using cash of $0.2 million in fiscal year 2001,
primarily due to the smaller operating loss generated by the VOD business during
40
fiscal year 2002. Concurrent has available a $5 million revolving credit
facility with Wachovia Bank which expires December 31, 2002. Borrowings under
the facility are limited to 85% of eligible accounts receivable and bear
interest at between prime plus .75% or between LIBOR plus 2.25% and LIBOR plus
3.00% depending on Concurrent's ratio of Consolidated Funded Debt (as defined in
the credit facility) to EBITDA. Concurrent has pledged substantially all of its
assets as collateral for the facility. No borrowings were outstanding under the
credit facility at June 30, 2002. The credit facility contains financial
covenants which limit the ratio of total liabilities to tangible net worth, the
ratio of funded debt to EBITDA, and which require Concurrent to achieve on a
quarterly basis minimum EBITDA in each of Concurrent's operating divisions.
Concurrent was in compliance with these covenants as of June 30, 2002.
Concurrent intends to investigate the extension of its line of credit prior to
its expiration.
Concurrent invested $4.5 million in property, plant and equipment during
fiscal year 2002 compared to $3.8 million during fiscal year 2001. Current year
capital expenditures relate primarily to product development, testing and
demonstration equipment for Concurrent's Xstreme division, and for real-time and
VOD manufacturing equipment in Fort Lauderdale, FL. In March 2002, Concurrent
made a $4.0 million cash investment for a minority interest in Thirdspace Living
Limited and loaned Thirdspace $3.0 million in exchange for a long-term note
receivable. Thirdspace is based in London, England and is a closely-held,
software and services business offering interactive and on-demand television
solutions for DSL and other broadband networks. Concurrent completed its
obligation of providing an additional $3 million loan to Thirdspace in September
of 2002. Both notes have a four year term and bear interest at 8% per annum,
with interest payments commencing on December 31, 2002, and semi-annually,
thereafter. Concurrent also made a cash investment of $0.5 million for a
minority interest in Everstream, Inc., which specializes in broadband
advertising systems, software, infrastructure, and related integration services.
Concurrent received $24.0 million in net proceeds from a private placement
of 5.4 million shares of common stock on July 19, 2001, such shares having
subsequently been registered with the Securities and Exchange Commission in a
filing on Form S-3.
Concurrent also received $3.5 million and $3.9 million from the issuance of
common stock to employees and directors who exercised stock options during
fiscal years 2002 and 2001, respectively.
At June 30, 2002, Concurrent had working capital of $43.5 million and had
no material commitments for capital expenditures. Management of Concurrent
believes that the existing cash balances including the proceeds from the private
placement, available credit facility and funds generated by operations will be
sufficient to meet the anticipated working capital and capital expenditure
requirements for the next 12 months.
NEW ACCOUNTING STANDARDS NOT YET ADOPTED
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations" ("SFAS 143"). SFAS 143 establishes financial
accounting and reporting obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. SFAS 143 requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. The liability is accreted
to its present value each period while the cost is depreciated over its useful
life. Concurrent will adopt SFAS 143 for our fiscal year beginning July 1, 2002.
Management believes the adoption of the provisions of this statement will not
have a material impact on Concurrent's consolidated financial statements.
In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" ("SFAS 144"), which superseded the accounting
and reporting provisions of SFAS 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 will
adopt SFAS 144 for our fiscal year beginning July 1, 2002. Management believes
the adoption of the provisions of this statement will not have a material impact
on Concurrent's consolidated financial statements. Through the end of fiscal
2002, Concurrent evaluated long-lived assets for impairment in accordance with
SFAS 121.
41
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Costs covered by the standard include lease termination costs and certain
employee severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. This statement is
to be applied prospectively to exit or disposal activities initiated after
December 31, 2002. Management believes the adoption of the provisions of this
statement will not have a material effect on Concurrent's consolidated financial
statements.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Concurrent's only significant contractual obligations and commitments
relate to certain operating leases for sales, service and manufacturing
facilities in the United States, Europe and Asia.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements made or incorporated by reference in this Report on Form
10-K may constitute "forward-looking statements" within the meaning of the
federal securities laws. When used or incorporated by reference in this
prospectus, the words "believes," "expects," "estimates" and similar expressions
are intended to identify forward-looking statements. Statements regarding
future events and developments and our future performance, as well as our
expectations, beliefs, plans, estimates or projections relating to the future,
are forward-looking statements within the meaning of these laws. All
forward-looking statements are subject to certain risks and uncertainties that
could cause actual events to differ materially from those projected. The risks
and uncertainties which could affect Concurrent's financial condition or results
of operations include, without limitation:
- availability of video-on-demand content;
- delays or cancellations of customer orders;
- changes in product demand;
- economic conditions;
- various inventory risks due to changes in market conditions;
- uncertainties relating to the development and ownership of
intellectual property;
- uncertainties relating to our ability and the ability of other
companies to enforce their intellectual property rights;
- the pricing and availability of equipment, materials and inventories;
- the limited operating history of our video-on-demand segment;
- the concentration of our customers;
- failure to effectively manage growth;
- delays in testing and introductions of new products;
- rapid technology changes;
- demand shifts from high-priced, proprietary real-time systems to
low-priced, open server systems;
- system errors or failures;
- reliance on a limited number of suppliers;
- uncertainties associated with international business activities,
including foreign regulations, trade controls, taxes, and currency
fluctuations;
- the highly competitive environment in which we operate; and
- the entry of new well-capitalized competitors into our markets.
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.
42
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Concurrent is exposed to market risk from changes in interest rates and
foreign currency exchange rates. Concurrent is exposed to the impact of interest
rate changes on its short-term cash investments, which are backed by U.S.
government obligations, and other investments in respect of institutions with
the highest credit ratings, all of which have maturities of three months or
less. These short-term investments carry a degree of interest rate risk.
Concurrent believes that the impact of a 10% increase or decline in interest
rates would not be material to its investment income.
Concurrent conducts business in the United States and around the world. The
most significant foreign currency transaction exposures relate to the United
Kingdom, those Western European countries that use the Euro as a common
currency, Australia, and Japan. Concurrent does not hedge against fluctuations
in exchange rates and believes that a hypothetical 10% upward or downward
fluctuation in foreign currency exchange rates relative to the United States
dollar would not have a material impact on future earnings, fair values, or cash
flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements and supplementary data for
Concurrent are included herein.
PAGE
----
Independent Auditors' Report 49
Consolidated Balance Sheets as of June 30, 2002 and 2001 50
Consolidated Statements of Operations for each of the three years 51
in the period ended June 30, 2002
Consolidated Statements of Stockholders' Equity and Comprehensive Income 52
(Loss) for each of the three years in the period ended June 30, 2002
Consolidated Statements of Cash Flows for each of the three years 53
in the period ended June 30, 2002
Notes to Consolidated Financial Statements 54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Registrant hereby incorporates by reference in this Form 10-K certain
information contained under the caption "Election of Directors" in Registrant's
Proxy Statement to be used in connection with its Annual Meeting of Stockholders
to be held on October 25, 2002 ("Registrant's 2002 Proxy Statement").
The Registrant hereby incorporates by reference in this Form 10-K certain
information contained under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in Registrant's 2002 Proxy Statement.
43
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 2002 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 caption "Common Stock Ownership of Management
and Certain Beneficial Owners" in Registrant's 2002 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.
The following table gives information about Concurrent's common stock that
may be issued upon the exercise of options under all of Concurrent's existing
equity compensation plans as of June 30, 2002, including Concurrent's 1991
Restated Stock Option Plan, 2001 Stock Option Plan, 1999 Vivid Stock Option Plan
and 2001 Rifenburgh Stock Option Plan.
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE NUMBER OF SECURITIES
ISSUED UPON EXERCISE OF EXERCISE PRICE OF REMAINING AVAILABLE FOR
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, FUTURE ISSUANCE UNDER
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS EQUITY COMPENSATION PLANS
------------- -------------------------- --------------------- -------------------------
Equity compensation plans
approved by security holders
1991 Restated Stock
Option Plan 4,479,978 $ 7.60 -0-
2001 Stock Option
Plan 1,081,000 $ 6.49 1,919,000
-------------------------- --------------------- -------------------------
5,560,978 $ 7.38 1,919,000
Equity compensation plans not
approved by security holders
1999 Vivid Stock
Option Plan (1) 232,166 $ 0.37 -0-
2001 Rifenburgh
Stock Option Plan (2) 10,000 $ 11.05 -0-
-------------------------- --------------------- -------------------------
242,166 $ 0.81 -0-
-------------------------- --------------------- -------------------------
Total 5,803,144 $ 7.11 1,919,000
========================== ===================== =========================
(1) Relates to options issued in 1999 associated with the acquisition of
Vivid Technology. See Note 3 of our Notes to Consolidated Financial
Statements which discusses Concurrent's acquisition of Vivid
Technology.
(2) Relates to 10,000 options issued to Richard Rifenburgh, a former
director, in connection with his retirement from the Board of
Directors. The option vested immediately and has a ten year term.
44
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Registrant hereby incorporates by reference in this Form 10-K certain
information contained under the caption "Certain Relationships and Related
Transactions" in Registrant's 2002 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements Filed As Part Of This Report:
Independent Auditors' Report
Consolidated Balance Sheets as of June 30, 2002 and 2001
Consolidated Statements of Operations for each of the three years in
the period ended June 30, 2002
Consolidated Statements of Stockholders' Equity and Comprehensive
Income (Loss) for each of the three years in the period ended June 30,
2002
Consolidated Statements of Cash Flows for each of the three years in
the period ended June 30, 2002
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 fiscal quarter ended December 28, 1996).
3.3* -- Certificate of Correction to Restated Certificate of Incorporation of the Registrant
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 Annual
Report on Form 10-K for the fiscal year ended June 30, 1992).
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)
45
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.
4.5* -- Warrant to purchase 4,431 shares of common stock of the Registrant dated October 9, 2001
issued to Comcast Concurrent Holdings, Inc.
4.6* -- Warrant to purchase 261,164 shares of common stock of the Registrant dated April 1, 2002
issued to Scientific-Atlanta, Inc.
4.7* -- Warrant to purchase 52,511 shares of common stock of the Registrant dated January 15, 2002
issued to Comcast Concurrent Holdings, Inc.
4.8* -- Warrant to purchase 1,502 shares of common stock of the Registrant dated August 10, 2002
issued to Comcast Concurrent Holdings, Inc.
10.1 -- 1991 Restated Stock Option Plan (as amended as of October 26, 2000). (Incorporated by
reference Exhibit A to the Registrant's Proxy Statement dated September 18, 2000).
10.2* -- Richard Rifenburgh Non-Qualified Stock Option Plan and Agreement (Incorporated by
reference to the Registrant's Registration Statement on Form S-8 (No. 333-82686).
10.3 -- Concurrent Computer Corporation 2001 Stock Option Plan (Incorporated by reference to
Annex II to the Registrant's Proxy Statement dated September 19, 2001).
10.4 -- Form of Incentive Stock Option Agreement between the Registrant and its executive officers.
(Incorporated by reference to the Registrant's Registration Statement on Form S-1. (No. 33-45871)).
10.5 -- Form of Non-Qualified Stock Option Agreement between the Registrant and its executive
officers. (Incorporated by reference to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 1997).
10.6 -- Form of Employment Agreement between the Registrant and its executive officers.
(Incorporated by reference to of the Registrant's Annual Report on Form 10-K for the fiscal
year ended June 30, 1991).
10.7 -- Amended and Restated Employment Agreement dated as of November 15, 1999 between the
Registrant and Steve G. Nussrallah. (Incorporated by reference to the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended December 31, 1999).
10.8 -- Employment Agreement dated as of October 28, 1999 between the Registrant and Steven R.
Norton. (Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended December 31, 1999).
10.9 -- Employment Agreement dated as of July 10, 2000 between the Registrant and Jack A. Bryant.
(Incorporated by reference to the Registrant's Annual Report on Form 10-K/A for the fiscal
year ended June 30, 2000).
10.10 -- Employment Agreement dated as of December 13, 2000 between the Registrant and Paul C.
Meyer (Incorporated by reference to the Registrant's Annual Report on Form 10-K/A for the
fiscal year ended June 30, 2001).
46
10.11* -- Employment Agreement dated as of November 26, 2001 between the Registrant and Kirk
Somers.
10.12* -- Employment Agreement dated as of June 17, 2002 between the Registrant and Steve
Necessary.
10.13* -- Employment Agreement dated as of June 27, 1996 between the Registrant and Robert T.
Menzel.
10.14* -- Employment Agreement dated as of March 1, 1999 between the Registrant and David
Nicholas.
10.15 -- Loan and Security Agreement between Concurrent Computer Corporation and Wachovia
Bank, N.A., dated November 3, 2000. (Incorporated by reference to the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended September 30, 2000).
10.16 -- Amendment No. 1 to Loan and Security Agreement between Concurrent Computer
Corporation and Wachovia Bank, N.A., dated March 28, 2001 (Incorporated by reference to
the Registrant's Annual Report on Form 10-K/A for the fiscal year ended June 30, 2001).
10.17 -- Amendment No. 2 to Loan and Security Agreement between Concurrent Computer
Corporation and Wachovia Bank, N.A., dated September 14, 2001 (Incorporated by reference
to the Registrant's Annual Report on Form 10-K/A for the fiscal year ended June 30, 2001).
10.18 -- 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).
10.19 -- Registration Rights Agreement, dated March 29, 2001, between the Registrant and Comcast
Concurrent Holdings, Inc. (Incorporated by reference to the Registrant's Registration
Statement on Form S-3 (No. 333-72012).
10.20* -- Letter Amendment, dated October 22, 2001, to Registration Rights Agreement between the
Registrant and Comcast Concurrent Holdings, Inc. dated March 29, 2001.
10.21 -- Registration Rights Agreement, dated March 19, 2002 between Concurrent Computer
Corporation and Thirdspace Living Limited (Incorporated by Reference to the Registrant's
Current Report on Form 8-K filed on March 20, 2002).
10.22 -- Share Purchase and Warrant Agreement, dated March 19, 2002 between Concurrent Computer
Corporation and Thirdspace Living Limited (Incorporated by Reference to the Registrant's
Current Report on Form 8-K filed on March 20, 2002).
10.23 -- Strategic Alliance Agreement, dated March 19, 2002 between Concurrent Computer
Corporation and Thirdspace Living Limited (Incorporated by Reference to the Registrant's
Current Report on Form 8-K filed on March 20, 2002).
21.1* -- List of Subsidiaries.
23.1* -- Consent of Deloitte & Touche LLP.
99.1* -- 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.
47
99.2* -- Certification of Chief Financial Officer, pursuant to 18 U.S.C .Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Included herewith.
(b) Reports On Form 8-K.
The following reports on Form 8-K were filed during the last quarter of the
period covered by this report:
(1) Current Report on Form 8-K filed on April 25, 2002 relating to (i)
the condensed consolidated balance sheets as of March 31, 2002 (unaudited) and
June 30, 2001, (ii) the unaudited condensed consolidated statements of
operations for the three and nine months ended March 31, 2002 and the three and
nine months ended March 31, 2001 and (iii) the unaudited segment data for the
three and nine months ended March 31, 2002 and the three and nine months ended
March 31, 2001.
(2) Current Report on Form 8-K filed on June 7, 2002 relating to
adoption of the Financial Accounting Standards Board Statement No. 142 ("FAS
142) at the beginning of Concurrent's fiscal 2002.
(3) Current Report on Form 8-K filed on June 21, 2002 relating to Steve
Necessary joining the Company as the president of the Xstreme division.
48
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Concurrent Computer Corporation:
We have audited the accompanying consolidated balance sheets of Concurrent
Computer Corporation and subsidiaries as of June 30, 2002 and 2001, 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, 2002. Our audits also included the consolidated financial
statement schedule for each of the three years in the period ended June 30, 2002
listed in the Index at Item 14(a)(2). These consolidated financial statements
and 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 consolidated financial statement schedule
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Concurrent Computer Corporation
and subsidiaries as of June 30, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2002, in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such consolidated financial
statement schedule for each of the three years in the period ended June 30,
2002, 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.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
August 2, 2002
49
CONCURRENT COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
JUNE 30,
---------------------
2002 2001
--------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 30,519 $ 9,460
Accounts receivable, less allowance for doubtful accounts
of $965 at June 30, 2002 and $860 at June 30, 2001 23,894 14,348
Inventories 6,822 7,187
Deferred tax asset 870 -
Prepaid expenses and other current assets 1,009 1,058
--------- ----------
Total current assets 63,114 32,053
Property, plant and equipment - net 10,696 10,484
Purchased developed computer software - net 1,393 1,583
Goodwill 10,744 10,744
Investment in minority owned companies 7,814 -
Note receivable from minority owned company 3,000 -
Deferred tax asset 1,087 1,324
Other long-term assets - net 840 864
--------- ----------
Total assets $ 98,688 $ 57,052
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 15,514 $ 13,929
Deferred revenue 4,055 3,300
--------- ----------
Total current liabilities 19,569 17,229
Long-term liabilities:
Deferred revenue 1,677 1,193
Deferred tax liability 1,634 663
Other 6,584 4,684
--------- ----------
Total liabilities 29,464 23,769
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 $.01; - -
300,000 authorized; none issued
Shares of common stock, par value $.01; 100,000,000 authorized; 61,856,993 and 618 551
55,061,838 issued at June 30, 2002 and 2001, respectively
Capital in excess of par value 172,929 140,352
Accumulated deficit (98,377) (102,760)
Treasury stock, at cost; 840 shares (58) (58)
Accumulated other comprehensive loss (5,888) (4,802)
--------- ----------
Total stockholders' equity 69,224 33,283
--------- ----------
Total liabilities and stockholders' equity $ 98,688 $ 57,052
========= ==========
The accompanying notes are an integral part of the consolidated financial
statements.
50
CONCURRENT COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED JUNE 30,
-----------------------------
2002 2001 2000
-------- -------- ---------
Revenues:
Product sales
Real-time systems $21,601 $25,740 $ 27,122
Video-on-demand systems 47,961 23,814 11,952
-------- -------- ---------
Total product sales 69,562 49,554 39,074
Service and other 19,807 23,267 29,016
-------- -------- ---------
Total 89,369 72,821 68,090
Cost of sales:
Product sales
Real-time systems 8,586 14,102 12,345
Video-on-demand systems 24,629 13,091 7,766
-------- -------- ---------
Total product sales 33,215 27,193 20,111
Service and other 11,588 12,608 16,236
-------- -------- ---------
Total 44,803 39,801 36,347
-------- -------- ---------
Gross margin 44,566 33,020 31,743
Operating expenses:
Sales and marketing 16,984 16,112 20,311
Research and development 15,291 11,579 9,775
General and administrative 8,612 10,920 9,277
Cost of purchased in-process research and
development - - 14,000
Relocation and restructuring - - 2,367
-------- -------- ---------
Total operating expenses 40,887 38,611 55,730
-------- -------- ---------
Operating income (loss) 3,679 (5,591) (23,987)
Interest expense (76) (214) (127)
Interest income 828 302 316
Other non-recurring items - - 761
Other expense - net (48) (86) (78)
-------- -------- ---------
Income (loss) before provision for income taxes 4,383 (5,589) (23,115)
Provision for income taxes - 600 600
-------- -------- ---------
Net income (loss) $ 4,383 $(6,189) $(23,715)
======== ======== =========
Basic net income (loss) per share $ 0.07 $ (0.11) $ (0.46)
======== ======== =========
Diluted net income (loss) per share $ 0.07 $ (0.11) $ (0.46)
======== ======== =========
The accompanying notes are an integral part of the consolidated financial
statements.
51
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, 2002
COMMON STOCK ACCUMULATED
------------------ CAPITAL IN OTHER
PAR EXCESS OF ACCUMULATED COMPREHENSIVE TREASURY STOCK
---------------
SHARES VALUE PAR VALUE DEFICIT INCOME (LOSS) SHARES COST TOTAL
---------- ------ ---------- ---------- -------------- ------- ------ ---------
Balance at June 30, 1999 48,516,527 $ 485 $ 98,916 $ (72,856) $ (476) (840) $ (58) $ 26,011
Sale of common stock under stock plans 3,160,692 31 7,277 7,308
Issuance of common stock related to
acquisition of Vivid Technology 2,233,699 22 28,879 28,901
Performance warrants 322 322
Comprehensive loss:
Net loss (23,715) (23,715)
Foreign currency translation adjustment (556) (556)
--------
Total comprehensive loss (24,271)
---------- ------ ---------- ---------- -------------- ------- ------ ---------
Balance at June 30, 2000 53,910,918 538 135,394 (96,571) (1,032) (840) (58) 38,271
Sale of common stock under stock plans 1,150,920 13 3,903 3,916
Performance warrants 1,055 1,055
Comprehensive loss:
Net loss (6,189) (6,189)
Foreign currency translation adjustment (967) (967)
Minimum pension liability adjustment (2,803) (2,803)
--------
Total comprehensive loss (9,959)
---------- ------ ---------- ---------- -------------- ------- ------ ---------
Balance at June 30, 2001 55,061,838 551 140,352 (102,760) (4,802) (840) (58) 33,283
Sale of common stock under stock plans 1,103,694 10 3,537 3,547
Issuance of common stock in private
placement 5,400,000 54 23,891 23,945
Issuance of common stock for purchase of
investment in minority owned company 291,461 3 2,984 2,987
Performance warrants 2,165 2,165
Comprehensive income (loss):
Net income 4,383 4,383
Foreign currency translation adjustment 513 513
Minimum pension liability adjustment (1,599) (1,599)
--------
Total comprehensive income 3,297
---------- ------ ---------- ---------- -------------- ------- ------ ---------
Balance at June 30, 2002 61,856,993 $ 618 $ 172,929 $ (98,377) $ (5,888) (840) $ (58) $ 69,224
========== ====== ========== ========== ============== ======= ====== =========
The accompanying notes are an integral part of the consolidated
financial statements.
52
CONCURRENT COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED JUNE 30,
------------------------------
2002 2001 2000
--------- -------- ---------
Cash flows provided by (used in) operating activities:
Net income (loss) $ 4,383 $(6,189) $(23,715)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Write-off of in-process research and development - - 14,000
Gain on sale of subsidiary - - (761)
Accrual of non-cash warrants 2,165 1,055 322
Depreciation and amortization 5,008 5,995 6,145
Provision for inventory reserves 343 1,712 550
Stock compensation - - 368
Other non-cash expenses 519 597 289
Decrease (increase) in assets, net of effect of
acquisitions and dispositions:
Accounts receivable (10,030) (2,031) 1,574
Inventories (118) (3,278) (1,530)
Prepaid expenses and other current assets (821) 1,047 (1,959)
Other long-term assets 133 (1,146) 216
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 1,585 632 4,028
Short-term deferred revenue 755 989 (1,170)
Long-term liabilities 1,836 404 1,128
--------- -------- ---------
Net cash provided by (used in) operating activities 5,758 (213) (515)
Cash flows used in investing activities:
Net additions to property, plant and equipment (4,522) (3,761) (4,361)
Investment in minority owned companies (4,827) - -
Note receivable from minority owned company (3,000) - -
Net proceeds from sale of subsidiary - 276 496
Proceeds from sale of facility - - 1,223
Other - - 76
--------- -------- ---------
Net cash used in investing activities (12,349) (3,485) (2,566)
Cash flows provided by financing activities:
Net repayment of debt (85) (71) (33)
Proceeds from sale and issuance of common stock 27,492 3,916 6,940
--------- -------- ---------
Net cash provided by financing activities 27,407 3,845 6,907
Effect of exchange rates on cash and cash equivalents 243 (769) (616)
--------- -------- ---------
Increase (decrease) in cash and cash equivalents 21,059 (622) 3,210
Cash and cash equivalents - beginning of year 9,460 10,082 6,872
--------- -------- ---------
Cash and cash equivalents - end of year $ 30,519 $ 9,460 $ 10,082
========= ======== =========
Cash paid during the period for:
Interest $ 49 $ 277 $ 242
========= ======== =========
Income taxes (net of refunds) $ 413 $ 621 $ 257
========= ======== =========
Non-cash investing/financing activities:
Common stock issued for investment in minority
owned company $ 3,000 $ - $ -
========= ======== =========
Non-cash consideration for acquisition $ - $ - $ 28,900
========= ======== =========
The accompanying notes are an integral part of the consolidated financial
statements.
53
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
1. OVERVIEW OF THE BUSINESS
Concurrent Computer Corporation ("Concurrent") is a leading supplier of
high-performance computer systems, software, and services. In August 1999,
Concurrent's emerging Video-On-Demand ("VOD") division, Xstreme, opened its own
facilities in Duluth, Georgia, separate from its Real-Time division located in
Fort Lauderdale, Florida, in order to maximize the focus in each of these
businesses.
Concurrent's Xstreme division is a leading supplier of digital video server
systems to a variety of markets including the broadband cable and DSL,
education, intranet/distance learning, and other related markets. Based on a
scalable, real-time software architecture, Concurrent's VOD hardware and
software are integrated to deliver fault-tolerant, deterministic streaming video
to a broad spectrum of VOD applications.
Concurrent's Real-Time division is a leading provider of high-performance,
real-time computer systems, solutions, and software for commercial and
government markets with a focus on strategic market areas that include
hardware-in-the-loop and man-in-the-loop simulation, data acquisition,
industrial systems, and software and embedded applications.
A "real-time" system or software is one specially designed to acquire,
process, store, and display large amounts of rapidly changing information in
real-time - that is, with millisecond or microsecond response as changes occur.
Concurrent has over 35 years of experience in real-time systems, including
specific expertise in systems, applications software, productivity tools, and
networking. Its systems and software support real-time applications in the
hardware in-the-loop simulations, man in-the-loop simulations, data acquisition,
and industrial control systems markets.
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 until the entity is
sold or substantially liquidated. Gains or losses resulting from foreign
currency transactions are included in the results 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 ($104,000), $1,000 and
($3,000) for the years ended June 30, 2002, 2001 and 2000, respectively, are
included in other income (expense) - net.
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
54
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
plus accrued interest, which approximates market, and represent cash invested in
U.S. Government securities, bank certificates of deposit, or commercial paper.
Inventories
Inventories are stated at the lower of cost or market, with cost determined
on the first-in, first-out basis. Concurrent establishes excess and obsolete
inventory reserves based upon historical and anticipated usage.
Property, Plant and Equipment
Property, plant and equipment are stated at acquired cost less accumulated
depreciation. Depreciation is provided on a straight-line basis over the
estimated useful lives of assets ranging from one to ten years. Leasehold
improvements are amortized over the shorter of the useful lives of the
improvements or the terms of the related lease. Gains and losses resulting from
the disposition of property, plant and equipment are included in other income
(expense) - net. Expenditures for repairs and maintenance are charged to
operations as incurred and expenditures for major renewals and betterments are
capitalized.
Goodwill
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets"("SFAS 142"). Under SFAS 142, goodwill and intangible
assets with indefinite lives is no longer amortized but is subject to annual
impairment tests. Other intangible assets will continue to be amortized over
their useful lives. SFAS 142 was effective for fiscal years beginning after
December 15, 2001. All goodwill and other intangible assets are in the Xstreme
division. As permitted, Concurrent early-adopted SFAS 142 as of July 1, 2001,
the beginning of its fiscal year.
In connection with the adoption of SFAS 142, Concurrent performed an
impairment assessment and deemed that no impairment loss was necessary. Any
subsequent impairment losses, if any, will be reflected in operating income in
the income statement.
Also in accordance with SFAS 142, Concurrent discontinued the amortization
of goodwill effective July 1, 2001 (see Note 11 to the consolidated financial
statements).
Revenue Recognition and Related Matters
Video-on-demand and real-time system revenues are recognized based on the
guidance in American Institute of Certified Public Accountants Statement of
Position ("SOP") 97-2, "Software Revenue Recognition". Concurrent recognizes
revenue from video-on-demand and real-time systems when persuasive evidence of
an arrangement exists, the system has been shipped, the fee is fixed or
determinable and collectibility of the fee is probable. Under multiple element
arrangements, Concurrent allocates revenue to the various elements based on
vendor-specific objective evidence ("VSOE") of fair value. Concurrent's VSOE of
fair value is determined based on the price charged when the same element is
sold separately.
In certain instances, Concurrent's customers require significant
customization of both the software and hardware products and, therefore, the
revenues are recognized as long term contracts in conformity with Accounting
Research Bulletin ("ARB") No. 45, "Long Term Construction Type Contracts", SOP
81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts" and SOP 97-2, "Software Revenue Recognition". For
long-term contracts, revenue is recognized using the percentage-of-completion
method of accounting based on costs incurred on the project compared to the
total costs expected to be incurred through completion.
Concurrent recognizes revenue from customer service plans ratably over the
term of each plan, typically one year.
55
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Custom engineering and integration services performed by the Real-Time
division are typically completed within 90 days from receipt of an order.
Revenues from these services are recognized upon completion and delivery of such
services to the customer.
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, 2002 and 2001.
Concurrent has not incurred costs related to the development of internal
use software.
Research and Development
Research and development expenditures are expensed as incurred.
Basic and Diluted Net Income (Loss) per Share
Basic net income (loss) per share is computed by dividing net income (loss)
by the weighted average number of common shares outstanding during each year.
Diluted net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of shares including dilutive common share
equivalents. Under the treasury stock method, incremental shares representing
the number of additional common shares that would have been outstanding if the
dilutive potential common shares had been issued are included in the
computation. Common share equivalents of 3,930,000 and 4,548,000 for the years
ended June 30, 2001 and 2000, 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:
56
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
YEAR ENDED JUNE 30,
---------------------------------------
2002 2001 2000
----------- ------------ ------------
(DOLLARS AND SHARE DATA IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Basic EPS calculation:
Net income (loss) $ 4,383 $ (6,189) $ (23,715)
Weighted average number of shares outstanding 60,997 54,683 51,959
----------- ------------ ------------
Basic EPS $ 0.07 $ (0.11) $ (0.46)
=========== ============ ============
Diluted EPS calculation:
Net income (loss) $ 4,383 $ (6,189) $ (23,715)
Weighted average number of shares outstanding 60,997 54,683 51,959
Incremental shares from assumed conversion of stock options 3,091 - -
----------- ------------ ------------
64,088 54,683 51,959
----------- ------------ ------------
Diluted EPS $ 0.07 $ (0.11) $ (0.46)
=========== ============ ============
Impairment of Long-Lived Assets
Concurrent follows the provisions of SFAS No. 121 "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of."
This statement establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used, and for long-lived assets and certain identifiable
intangibles to be disposed of. Concurrent reviews long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable,
inventories, prepaid expenses, accounts payable and short term debt approximate
fair value because of the short maturity of these instruments.
Fair value estimates are made at a specific point in time, based on the
relevant market information and information about the financial instrument.
These estimates are subjective in nature and involve uncertainties and matters
of significant judgement and therefore cannot be determined with precision.
Changes in assumption could significantly affect the estimates.
57
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Income Taxes
Concurrent and its domestic subsidiaries file a consolidated federal income
tax return. All foreign subsidiaries file individual tax returns pursuant to
local tax laws. Concurrent follows the asset and liability method of accounting
for income taxes. Under the asset and liability method, a deferred tax asset or
liability is recognized for temporary differences between financial reporting
and income tax bases of assets and liabilities, tax credit carryforwards and
operating loss carryforwards. A valuation allowance is established to reduce
deferred tax assets if it is more likely than not that such deferred tax assets
will not be realized. Utilization of net operating loss carryforwards and tax
credits, which originated prior to Concurrent's quasi-reorganization effected on
December 31, 1991, are recorded as adjustments to capital in excess of par
value.
Stock-Based Compensation
Concurrent accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB Opinion 25"), and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. SFAS
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS 123 also allows
entities to continue to apply the provisions of APB Opinion 25 and provide pro
forma net income (loss) and pro forma income (loss) per share disclosures for
employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in SFAS 123 had been applied. Concurrent has
elected to continue to apply the provisions of APB Opinion 25 and provide the
pro forma disclosure provisions of SFAS 123.
Segment Information
Concurrent reports its operating results separately for both its Xstreme
division and its Real-Time division.
Comprehensive Income (Loss)
Concurrent reports comprehensive income (loss) in addition to net income
(loss) from operations as required by SFAS No. 130, "Reporting Comprehensive
Income". Comprehensive income (loss) is a more inclusive financial reporting
methodology that includes disclosure of certain financial information that
historically has not been recognized in the calculation of net income (loss).
Comprehensive income (loss) is defined as a change in equity during the
financial reporting period of a business enterprise resulting from non-owner
sources.
58
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Accumulated other comprehensive income (loss) consists of the following
components:
FOREIGN ACCUMULATED
CURRENCY MINIMUM OTHER
TRANSLATION PENSION COMPREHENSIVE
ADJUSTMENTS LIABILITY INCOME (LOSS)
------------- ----------- ---------------
Balance at June 30, 1999 $ (476) $ - $ (476)
Other comprehensive loss (556) - (556)
------------- ----------- ---------------
Balance at June 30, 2000 (1,032) - (1,032)
Other comprehensive loss (967) (2,803) (3,770)
------------- ----------- ---------------
Balance at June 30, 2001 (1,999) (2,803) (4,802)
Other comprehensive income (loss) 513 (1,599) (1,086)
------------- ----------- ---------------
Balance at June 30, 2002 $ (1,486) $ (4,402) $ (5,888)
============= =========== ===============
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain prior years' amounts have been reclassified to conform with the
current year's presentation.
3. ACQUISITION
On October 28, 1999, Concurrent acquired Vivid Technology, Inc. ("Vivid")
for total consideration of $29.4 million, consisting of 2,233,699 shares of
Common Stock valued at $24.7 million, $0.5 million of acquisition costs, and
378,983 shares reserved for future issuance upon exercise of stock options with
a value of $4.2 million. The acquisition was treated as a purchase for
accounting purposes, and, accordingly, the assets and liabilities were recorded
based on their fair values at the date of the acquisition. The purchase price
allocation and the respective useful lives of the intangible assets are as
follows:
ALLOCATION LIFE
------------- ------
(Dollars in
Thousands)
Working capital $ 72 N/A
Fixed assets 257 N/A
Other long-term assets 13 N/A
Developed completed computer software technology 1,900 10 yrs
Other 400 3 yrs
Goodwill 12,808 N/A
In-process research and development 14,000 N/A
59
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Amortization of intangible assets is on a straight-line basis over the assets'
estimated useful life. In accordance with SFAS 142, Concurrent discontinued the
amortization of goodwill effective July 1, 2001. Vivid's operations are
included in the condensed consolidated statements of operations from the date of
acquisition.
At the acquisition date, Vivid had one product under development that had
not demonstrated technological or commercial feasibility. This product was the
Vivid interactive video-on-demand integrated system. The in-process technology
has no alternative use in the event that the proposed product does not prove to
be feasible. This development effort falls within the definition of In-Process
Research and Development ("IPR&D") contained in SFAS No. 2 and was expensed in
the quarter ended December 31, 1999 as a one-time charge.
Consistent with Concurrent's policy for internally developed software,
Concurrent determined the amounts to be allocated to IPR&D based on whether
technological feasibility had been achieved and whether there was any
alternative future use for the technology. As of the date of the acquisition,
Concurrent concluded that the IPR&D had no alternative future use after taking
into consideration the potential for usage of the software in different
products, resale of the software and internal usage.
4. INVESTMENTS IN AND RECEIVABLE FROM MINORITY OWNED COMPANIES
In March 2002, Concurrent invested cash of $4 million and issued 291,461
shares of its common stock (valued at $10.29 per share) in exchange for
1,220,601 series C shares of Thirdspace Living Limited ("Thirdspace"), giving
Concurrent a 14.4% ownership interest in all shares outstanding as of the
investment date. The resale of the 291,461 shares was registered under a resale
registration statement filed with the Securities and Exchange Commission and
declared effective on June 20, 2002. Thirdspace is a closely held United
Kingdom global software services corporation that offers interactive and
on-demand television solutions for DSL (digital subscriber line) and other
broadband networks. In exchange for its investment, Concurrent also received a
warrant for 400,000 series C shares of Thirdspace. The warrant is exercisable
beginning December 19, 2002. If the fair market value of the warrant on the
date of exercise is less than $5.73 per share, then the exercise price will be
the then current fair market value. If the fair market value of the warrant on
the date of exercise is equal to or greater than $5.73 per share, then the
exercise price will be the greater of $5.73 or 85% of the then current fair
market value. Although the fair market value of the Thirdspace series C common
stock and the Thirdspace warrant are not readily determinable, management
believes that its book value approximates the fair value.
Concurrent also loaned Thirdspace $3 million in exchange for a long-term
convertible note receivable, bearing interest at 8% annually, with interest
payments first due December 31, 2002, and semi-annually, thereafter. The note
is convertible into series C shares of Thirdspace, at the option of Concurrent,
beginning six months after the issuance of the note and ending 48 months after
the issuance of the note, and is based on the then fair market value of the
common stock. Concurrent is also obligated, as part of the agreement, to lend
an additional $3 million on September 3, 2002, under the same terms as the
initial $3 million loan. Concurrent has a security interest in all of the
assets of Thirdspace, which is subject to a prior lien on Thirdspace's
intellectual property securing an obligation of $5,000,000. Other than the
prior lien on Thirdspace's intellectual property, Concurrent's security interest
ranks ratably with those of other secured creditors.
Concurrent is accounting for its investment in the common stock and warrant
of Thirdspace using the cost method, as Concurrent does not believe it exercises
significant influence on Thirdspace. The investment is reviewed for impairment
on a quarterly basis. The convertible note is recorded at fair value, in
accordance with SFAS 115, "Accounting for Certain Investments in Debt and Equity
Securities", with changes in fair value recorded as a component of other
comprehensive income.
In the ordinary course of business, Concurrent purchases equipment from
Thirdspace. During fiscal year 2002, Concurrent purchased $90,000 of equipment
from Thirdspace.
60
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
In April 2002, Concurrent invested cash of $500,000 in Everstream Holdings,
Inc. ("Everstream") in exchange for 480,770 shares of Series C Preferred stock
giving Concurrent a 4.9% ownership interest. Everstream is a privately held
company specializing in broadband advertising systems, software, infrastructure
and related integration services. Concurrent is accounting for its investment in
the Series C Preferred stock of Everstream using the cost method, as Concurrent
does not believe it exercises significant influence on Everstream. The
investment will be reviewed for impairment on a quarterly basis.
In the ordinary course of business, Concurrent sells equipment to
Everstream and purchases consulting services from Everstream. During fiscal year
2002, Concurrent sold $49,000 of equipment to Everstream and purchased $75,000
of consulting services from Everstream.
5. PRIVATE PLACEMENT
In July 2001, Concurrent issued 5,400,000 shares of Common Stock in a
private placement. The net proceeds from the private placement were
approximately $24.0 million. The resale of the shares was registered under a
resale registration statement filed with the Securities and Exchange Commission
and declared effective on July 19, 2001.
6. RESTRUCTURING AND RELOCATION
In August 1999, Concurrent relocated its Corporate Headquarters and its
Xstreme division to Duluth, Georgia. In connection with this move, Concurrent
incurred employee relocation costs of $769,000, which is recorded as an
operating expense in the consolidated statement of operations for the year ended
June 30, 2000. All costs were paid during fiscal 2000.
In addition to the Xstreme division relocation discussed above, management
decided in the first quarter of fiscal year 2000 to "right-size" the Real-Time
division to bring its expenses in line with its anticipated revenues. In
connection with these events, Concurrent recorded a $1.6 million operating
expense in the consolidated statement of operations for the year ended June 30,
2000. This expense represents workforce reductions of approximately 38
employees in all areas of Concurrent. All costs were paid during fiscal 2000.
In connection with the acquisition of the Harris Computer Systems
Corporation ("HCSC") Real-Time division, Concurrent recorded a $23.2 million
restructuring provision as of June 30, 1996. Such charge, based on formal
approved plans, included the estimated costs related to the rationalization of
facilities, workforce reductions, asset writedowns and other costs which
represented approximately 44%, 28%, 26%, and 2%, respectively. The
rationalization of facilities included the planned disposition of Concurrent's
Oceanport, New Jersey facility, as well as the closing or downsizing of certain
offices located throughout the world. The workforce reductions included the
termination of approximately 200 employees worldwide, encompassing substantially
all of Concurrent's employee groups. The asset writedowns were primarily
related to the disposition of duplicative machinery and equipment. Cash
expenditures related to this restructuring were $117,000 for the year ended June
30, 2000. As of June 30, 2000, all costs had been paid and there were no
remaining accrued costs.
On May 5, 1992, Concurrent had entered into an agreement with the
Industrial Development Authority (the "IDA") to maintain a presence in Ireland
through April 30, 1998. In connection with the acquisition of the HCSC Real-Time
division, Concurrent closed its Ireland operations in December 1996 and was
required to repay grants to the IDA of approximately $484,000 (360,000 Irish
pounds). During fiscal year 2000, the remaining amount of $90,000 was paid to
the IDA.
7. DISSOLUTION OF SUBSIDIARIES
During the year ended June 30, 2002, Concurrent made the decision to
dissolve its Belgium subsidiary, Concurrent Computer Belgium B.V./S.A. ("CCUR
Belgium") and its Singapore subsidiary, Concurrent Computer Far East Pte. Ltd.
61
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
("CCUR Singapore"). In connection with the decision to dissolve these
subsidiaries, Concurrent recorded a charge of $217,000 for the write off of the
cumulative translation adjustment, the termination of an employee and other
miscellaneous costs. The charge was recorded as an operating expense in the
consolidated statement of operations for the year ended June 30, 2002. The final
dissolution of CCUR Belgium and CCUR Singapore is expected in fiscal year 2003.
During fiscal year 2002, Concurrent made cash payments of $7,000 and had a
remaining accrual of $205,000 at June 30, 2002.
8. SALE OF SUBSIDIARY
On September 8, 1999, Concurrent entered into an agreement to sell the
stock of Concurrent Vibrations, a wholly owned subsidiary of Concurrent Computer
Corporation S.A., to Data Physics, Inc. The transaction, which had an effective
date of August 31, 1999, resulted in a gain of $761,000. This gain is recorded
as other non-recurring items in the consolidated statement of operations for the
year ended June 30, 2000.
9. INVENTORIES
Inventories consist of the following:
JUNE 30,
----------------------
2002 2001
---------- ----------
(DOLLARS IN THOUSANDS)
----------------------
Raw Materials $5,030 $5,709
Work-in-process 1,633 1,178
Finished Goods 159 300
---------- ----------
$6,822 $7,187
========== ==========
At June 30, 2002 and 2001, 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 of $3.3
million and $3.5 million to reduce the value of the inventory to its estimated
net realizable value at June 30, 2002 and 2001, respectively.
62
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
10. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
JUNE 30,
---------------------------
2002 2001
------------ -------------
(DOLLARS IN THOUSANDS)
------------ -------------
Leasehold improvements $ 2,527 $ 2,217
Machinery, equipment and customer support spares 33,228 31,170
------------ -------------
35,755 33,387
Less: Accumulated depreciation (25,059) (22,903)
------------ -------------
$ 10,696 $ 10,484
============ =============
For the years ended June 30, 2002, 2001 and 2000, depreciation and
amortization expense for property, plant and equipment amounted to $4,685,000,
$4,386,000 and $4,148,000, respectively.
11. GOODWILL
In accordance with SFAS 142, Concurrent discontinued the amortization of
goodwill effective July 1, 2001. A reconciliation of previously reported net
income and earnings per share to the amounts adjusted for the exclusion of
goodwill amortization follows:
YEAR ENDED JUNE 30,
--------------------------------
2002 2001 2000
---------- --------- ---------
(DOLLARS IN THOUS ANDS,
EXCEPT PER SHARE AMOUNTS)
Reported net income (loss) $ 4,383 $ (6,189) $(23,715)
Goodwill amortization - 1,281 854
---------- --------- ---------
Adjusted net income (loss) $ 4,383 $ (4,908) $(22,861)
========== ========= =========
Basic income (loss) per share:
Reported net income (loss) $ 0.07 $ (0.11) $ (0.46)
Goodwill amortization - 0.02 0.02
---------- --------- ---------
Adjusted net income (loss) $ 0.07 $ (0.09) $ (0.44)
========== ========= =========
Diluted income (loss) per share:
Reported net income (loss) $ 0.07 $ (0.11) $ (0.46)
Goodwill amortization - 0.02 0.02
---------- --------- ---------
Adjusted net income (loss) $ 0.07 $ (0.09) $ (0.44)
========== ========= =========
Weighted average shares outstanding - basic 60,997 54,683 51,959
========== ========= =========
Weighted average shares outstanding - diluted 64,088 54,683 51,959
========== ========= =========
63
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
12. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
JUNE 30,
-----------------------
2002 2001
----------- ---------
(DOLLARS IN THOUSANDS)
Accounts payable, trade $ 5,351 $ 4,277
Accrued payroll, vacation and
other employee expenses 5,872 6,090
Warranty accrual 2,272 977
Other accrued expenses 2,019 2,585
----------- ---------
$ 15,514 $ 13,929
=========== =========
13. REVOLVING CREDIT FACILITY
Concurrent has a revolving credit facility with a bank that expires on
December 31, 2002 and which provides for borrowings of up to $5 million at an
interest rate at between prime (4.75% at June 30, 2002) plus 0.75% or LIBOR
(1.84% at June 30, 2002) plus 2.25% and LIBOR plus 3.00% depending on
Concurrent's ratio of Consolidated Funded Debt (as defined in the credit
facility) to EBITDA. Concurrent has pledged substantially all of its assets as
collateral for the facility. No borrowings were outstanding at June 30, 2002
under the credit facility. The credit facility contains financial covenants
which limit the ratio of total liabilities to tangible net worth and which
require Concurrent to achieve on a quarterly basis minimum EBITDA in each of
Concurrent's operating divisions. Concurrent was in compliance with these
covenants at June 30, 2002. As of June 30, 2002, Concurrent had available
borrowings of $5 million under this facility.
14. INCOME TAXES
The domestic and foreign components of income (loss) before provision for
income taxes are as follows:
YEAR ENDED JUNE 30,
-------------------------------------
2002 2001 2000
----------- ------------ ----------
(DOLLARS IN THOUSANDS)
United States $ 6,297 $ (5,222) $(22,952)
Foreign (1,914) (367) (163)
----------- ------------ ----------
$ 4,383 $ (5,589) $(23,115)
=========== ============ ==========
64
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The components of the provision for income taxes are as follows:
YEAR ENDED JUNE 30,
--------------------------------
2002 2001 2000
--------- --------- --------
(DOLLARS IN THOUSANDS)
Current:
Federal $ - $ - $ -
Foreign (credit) (338) 600 201
--------- --------- --------
Total (338) 600 201
--------- --------- --------
Deferred:
Federal - - -
Foreign 338 - 399
--------- --------- ---------
Total 338 - 399
--------- --------- ---------
Total $ - $ 600 $ 600
========= ========= ==========
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,
-----------------------------
2002 2001 2000
-------- -------- ---------
(DOLLARS IN THOUSANDS)
Income (loss) before provision for
income taxes $ 4,383 $(5,589) $(23,115)
-------- -------- ---------
Tax (benefit) at Federal statutory rate 1,490 (1,899) (7,859)
Change in valuation allowance (3,733) (2,264) 2,749
Non-deductible in-process research and
development charge - - 4,760
Other permenant differences, net 2,243 4,763 950
-------- -------- ---------
Provision for income taxes $ - $ 600 $ 600
======== ======== =========
65
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
As of June 30, 2002 and 2001, Concurrent's deferred tax assets and
liabilities were comprised of the following:
JUNE 30,
--------------------
2002 2001
--------- ---------
(DOLLARS IN THOUSANDS)
Gross deferred tax assets related to:
U.S. and foreign net operating loss carryforwards $ 70,621 $ 68,872
Book and tax basis differences for reporting purposes 158 169
Other reserves 4,580 5,794
Accrued compensation 531 458
Other 2,171 810
--------- ---------
Total gross deferred tax assets 78,061 76,103
Valuation allowance (76,104) (74,779)
--------- ---------
Total deferred tax asset 1,957 1,324
Gross deferred tax liabilities related to
property and equipment/other 1,634 663
--------- ---------
Total gross deferred tax liability 1,634 663
--------- ---------
Deferred income taxes $ 323 $ 661
========= =========
Any future benefits attributable to the U.S. Federal net operating loss
carryforwards which originated prior to Concurrent's quasi-reorganization are
accounted for through adjustments to capital in excess of par value. 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 and those which originated subsequent to
Concurrent's quasi-reorganization through the date of Concurrent's 1993
comprehensive refinancing ("1993 Refinancing") are limited to approximately $0.3
million per year. Concurrent's U.S. Federal tax net operating loss carryforwards
begin to expire in 2004. As of June 30, 2002, Concurrent has remaining
utilizable U.S. Federal tax net operating loss carryforwards of approximately
$173 million for income tax purposes. Approximately $62 million of these net
operating loss carryforwards originated prior to Concurrent's 1993 Refinancing
and are limited to $300,000 per year.
The tax benefits associated with nonqualified stock options and
disqualifying dispositions of incentive stock options increased the federal net
operating loss carryforward by approximately $3.3 million for the year ended
June 30, 2002. 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
66
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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, 2002 and
2001 was approximately $76 million and $75 million, respectively. The net change
in the total valuation allowance for the year ended June 30, 2002 was an
increase of approximately $1.3 million. The net increase in the total valuation
allowance for the year ended June 30, 2001 was approximately $2.8 million and
the net increase in the total valuation allowance for the year ended June 30,
2000 was approximately $14.6 million. In assessing the realizability of deferred
tax assets, management 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 management considers more likely than not that these deferred
tax assets will not be realized.
15. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
Concurrent maintains a retirement savings plan (the "Plan") available to
U.S. employees which qualifies as a defined contribution plan under Section
401(k) of the Internal Revenue Code. Concurrent may make a discretionary
matching contribution equal to 100% of the first 6% of employees' contributions.
For the years ended June 30, 2002, 2001 and 2000, Concurrent matched 100% of the
employees' Plan contributions up to 6%.
Concurrent's matching contributions under the Plan are as follows:
2002 2001 2000
------ ------ ------
(DOLLARS IN THOUSANDS)
Matching contribution $1,243 $1,120 $1,378
Certain foreign subsidiaries of Concurrent maintain pension plans for their
employees which conform to the common practice in their respective countries.
The related changes in benefit obligation and plan assets and the amounts
recognized in the consolidated balance sheets are presented in the following
tables:
67
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Reconciliation of Funded Status
-------------------------------
JUNE 30,
----------------------------
2002 2001
--------------- -----------
(DOLLARS IN THOUSANDS)
Change in benefit obligation:
Benefit obligation at beginning of year $ 15,361 $ 15,431
Service cost 276 281
Interest cost 909 837
Plan participants' contributions 49 52
Actuarial loss (486) 1,268
Foreign currency exchange rate change 1,493 (1,920)
Benefits paid (615) (588)
--------------- -----------
Benefit obligation at end of year $ 16,987 $ 15,361
=============== ===========
Change in plan assets:
Fair value of plan assets at beginning of year $ 12,426 $ 15,322
Actual return on plan assets (1,268) (793)
Employer contributions 323 114
Plan participants' contributions 49 52
Benefits paid (586) (559)
Foreign currency exchange rate change 1,057 (1,710)
--------------- -----------
Fair value of plan assets at end of year $ 12,001 $ 12,426
=============== ===========
Funded status $ (4,986) $ (2,935)
Unrecognized actuarial loss (income) 4,441 2,720
Unrecognized prior service cost 199 205
Unrecognized net transition asset (13) (85)
--------------- -----------
Net amount recognized $ (359) $ (95)
=============== ===========
Amounts Recognized in the Consolidated Balance Sheet
----------------------------------------------------
JUNE 30,
2002 2001
--------------- -----------
(DOLLARS IN THOUSANDS)
Accrued pension cost, net $ (4,960) $ (3,106)
Intangible asset 199 208
Accumulated other comprehensive loss 4,402 2,803
--------------- -----------
Net amount recognized $ (359) $ (95)
=============== ===========
68
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for pension plans with accumulated benefit obligations in
excess of plan assets were $17.0 million, $16.3 million and $12.0 million,
respectively, as of June 30, 2002, and $15.4 million, $14.9 million and $12.4
million, respectively, as of June 30, 2001.
Plan assets are comprised primarily of investments in managed funds
consisting of common stock, money market and real estate investments.
The assumptions used to measure the present value of benefit obligations
and net periodic benefit cost are shown in the following table:
Significant Assumptions
-----------------------
JUNE 30,
----------------------------------------------
2002 2001 2000
-------------- -------------- --------------
Discount rate 5.75% to 6.25% 6.00% to 6.25% 6.00% to 6.25%
Expected return on plan assets 5.75% to 6.00% 5.75% to 6.00% 6.00%
Compensation increase rate 3.50% to 4.25% 3.50% to 4.50% 3.50% to 4.50%
Components of Net Periodic Benefit Cost
---------------------------------------
YEAR ENDED JUNE 30,
----------------------
2002 2001 2000
------ ------ ------
(DOLLARS IN THOUSANDS)
Service cost $ 276 $ 281 $ 313
Interest cost 909 837 923
Expected return on plan assets (750) (839) (918)
Amortization of unrecognized net transition asset (63) (63) (69)
Amortization of unrecognized prior service cost 22 22 24
Recognized actuarial loss 71 (30) (27)
------ ------ ------
Net periodic benefit cost $ 465 $ 208 $ 246
====== ====== ======
16. SEGMENT INFORMATION
For the years ended June 30, 2002, 2001 and 2000, Concurrent operated its
business in two divisions: Real-Time and Xstreme. Its Real-Time division is a
leading provider of high-performance, real-time computer systems, solutions and
software for commercial and government markets focusing on strategic market
areas that include hardware-in-the-loop and man-in-the-loop simulation, data
acquisition, industrial systems, and software and embedded applications. Its
Xstreme division is a leading supplier of digital video server systems to a wide
range of industries serving a variety of markets, including the broadband cable
and DSL, education, intranet/distance learning, and other related markets.
Customer service and support revenues derived from VOD sales arrangements are
included in Product Sales and are not material. Shared expenses are primarily
allocated based on either revenues or headcount. There were no material
intersegment sales or transfers. For the year ended June 30, 2002, one customer
accounted for approximately 25% of the total Real-Time revenue and two customers
accounted for approximately 57% and 24% of the total VOD revenue, respectively.
For the year ended June 30, 2001, one customer accounted for approximately 12%
69
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
of the Real-Time revenue and three customers accounted for approximately 38%,
34% and 12% of VOD revenue, respectively. For the year ended June 30, 2000, one
customer accounted for approximately 14% of the Real-Time revenue and one
customer accounted for approximately 47% of VOD revenue. There were no other
customers in fiscal years 2002, 2001 and 2000 that accounted for more than 10%
of revenue for either division. The following summarizes the operating income
(loss) by segment for the years ended June 30, 2002, 2001 and 2000,
respectively. Corporate costs include costs related to the offices of the Chief
Executive Officer, Chief Financial Officer, General Counsel, Investor Relations
and other administrative costs including annual audit and tax fees, board of
director fees and similar costs.
70
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
YEAR ENDED JUNE 30, 2002
----------------------------------------------
REAL-TIME VOD CORPORATE TOTAL
---------- ----------- ----------- --------
(DOLLARS IN THOUSANDS)
Revenues:
Product sales $ 21,601 $ 47,961 $ - $69,562
Service and other 19,807 - - 19,807
---------- ----------- ----------- --------
Total 41,408 47,961 - 89,369
Cost of sales:
Product sales 8,586 24,629 - 33,215
Service and other 11,588 - - 11,588
---------- ----------- ----------- --------
Total 20,174 24,629 - 44,803
---------- ----------- ----------- --------
Gross margin 21,234 23,332 - 44,566
Operating expenses
Sales and marketing 6,877 9,521 586 16,984
Research and development 5,409 9,882 - 15,291
General and administrative 1,500 1,795 5,317 8,612
---------- ----------- ----------- --------
Total operating expenses 13,786 21,198 5,903 40,887
---------- ----------- ----------- --------
Operating income (loss) $ 7,448 $ 2,134 $ (5,903) $ 3,679
========== =========== =========== ========
YEAR ENDED JUNE 30, 2001
----------------------------------------------
REAL-TIME VOD CORPORATE TOTAL
---------- ----------- ----------- --------
(DOLLARS IN THOUSANDS)
Revenues:
Product sales $ 25,740 $ 23,814 $ - $49,554
Service and other 23,267 - - 23,267
---------- ----------- ----------- --------
Total 49,007 23,814 - 72,821
Cost of sales:
Product sales 14,102 13,091 - 27,193
Service and other 12,608 - - 12,608
---------- ----------- ----------- --------
Total 26,710 13,091 - 39,801
---------- ----------- ----------- --------
Gross margin 22,297 10,723 - 33,020
Operating expenses
Sales and marketing 7,548 8,007 557 16,112
Research and development 3,493 8,086 - 11,579
General and administrative 1,748 2,635 6,537 10,920
---------- ----------- ----------- --------
Total operating expenses 12,789 18,728 7,094 38,611
---------- ----------- ----------- --------
Operating income (loss) $ 9,508 $ (8,005) $ (7,094) $(5,591)
========== =========== =========== ========
71
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
YEAR ENDED JUNE 30, 2000
---------------------------------------------
REAL-TIME VOD CORPORATE TOTAL
---------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
Revenues:
Product sales $ 27,122 $ 11,952 $ - $ 39,074
Service and other 29,016 - - 29,016
---------- --------- ----------- ---------
Total 56,138 11,952 - 68,090
Cost of sales:
Product sales 12,345 7,766 - 20,111
Service and other 16,236 - - 16,236
---------- --------- ----------- ---------
Total 28,581 7,766 - 36,347
---------- --------- ----------- ---------
Gross margin 27,557 4,186 - 31,743
Operating expenses
Sales and marketing 11,942 8,040 329 20,311
Research and development 4,173 5,602 - 9,775
General and administrative 1,879 1,861 5,537 9,277
Cost of purchased in-process research - 14,000 - 14,000
and development
Relocation and restructuring 1,208 1,159 - 2,367
---------- --------- ----------- ---------
Total operating expenses 19,202 30,662 5,866 55,730
---------- --------- ----------- ---------
Operating income (loss) $ 8,355 $(26,476) $ (5,866) $(23,987)
========== ========= =========== =========
Summarized financial information for fiscal year 2002, 2001 and 2000,
respectively, is as follows:
AS OF AND FOR THE YEAR ENDED JUNE 30, 2002
-----------------------------------------
REAL-TIME VOD CORPORATE TOTAL
---------- ------- ----------- -------
(DOLLARS IN THOUSANDS)
Net sales $ 41,408 $47,961 $ - $89,369
Operating income (loss) $ 7,448 $ 2,134 $ (5,903) $ 3,679
Identifiable assets $ 18,415 $54,198 $ 26,075 $98,688
Depreciation and amortization $ 2,289 $ 2,409 $ 310 $ 5,008
Capital expenditures $ 1,332 $ 3,122 $ 68 $ 4,522
72
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
AS OF AND FOR THE YEAR ENDED JUNE 30, 2001
-------------------------------------------
REAL-TIME VOD CORPORATE TOTAL
---------- -------- ----------- --------
(DOLLARS IN THOUSANDS)
Net sales $ 49,007 $23,814 $ - $72,821
Operating income (loss) $ 9,508 $(8,005) $ (7,094) $(5,591)
Identifiable assets $ 19,179 $31,880 $ 5,993 $57,052
Depreciation and amortization $ 2,631 $ 2,746 $ 618 $ 5,995
Capital expenditures $ 978 $ 2,536 $ 247 $ 3,761
AS OF AND FOR THE YEAR ENDED JUNE 30, 2001
-------------------------------------------
REAL-TIME VOD CORPORATE TOTAL
---------- -------- ----------- --------
(DOLLARS IN THOUSANDS)
Net sales $ 56,138 $ 11,952 $ - $ 68,090
Operating income (loss) $ 8,355 $(26,476) $ (5,866) $(23,987)
Identifiable assets $ 22,610 $ 28,909 $ 5,559 $ 57,078
Depreciation and amortization $ 3,071 $ 2,259 $ 815 $ 6,145
Capital expenditures $ 1,252 $ 2,286 $ 823 $ 4,361
17. 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,
non-employee directors and consultants. The Stock Option Plans are administered
by the Stock Award Committee which is comprised of members of the Compensation
Committee of the Board of Directors or the Board of Directors, as the case may
be. Under the plans, the Stock Award Committee may award, in addition to stock
options, shares of Common Stock on a restricted basis. The plan also
specifically provides for stock appreciation rights and authorizes the Stock
Award 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. No stock appreciation rights have been
granted during the years ended June 30, 2002, 2001, and 2000. Options issued
under the Stock Option Plans generally vest over four years and are exercisable
for ten years from the grant date. The Company's 1991 Restated Stock Option Plan
was terminated on October 31, 2001 and was replaced with the 2001 Stock Option
Plan that became effective November 1, 2001. As of November 1, 2001 there were
no options for shares of Common Stock available for future grant under the 1991
Restated Stock Option Plan. The 2001 Stock Option Plan terminates on October 31,
2011. Stockholders have authorized the issuance of up to 15,825,000 shares under
these plans.
73
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Changes in options outstanding under the plan during the years ended June
30, 2002, 2001, and 2000 are as follows:
2002 2001 2000
------------------------ ----------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------ ---------- ------------ --------- ----------- ---------
Outstanding at beginning of year 5,388,161 $ 6.00 5,681,521 $ 4.28 7,190,969 $ 2.56
Granted 1,750,000 $ 8.23 1,049,600 $ 12.03 1,763,419 $ 7.60
Exercised (1,105,089) $ 3.21 (1,140,333) $ 3.17 (3,127,306) $ 2.23
Forfeited (229,928) $ 8.35 (202,627) $ 4.96 (145,561) $ 3.91
------------ ------------ -----------
Outstanding at year end 5,803,144 $ 7.11 5,388,161 $ 6.00 5,681,521 $ 4.28
============ ============ ===========
Options exercisable at year end 3,149,444 2,638,708 2,600,401
============ ============ ===========
Weighted average fair value of
options granted during the year $ 8.05 $ 11.91 $ 5.62
============ ============ ===========
The weighted-average assumptions used for the years ended June 30, 2002,
2001 and 2000 were: expected dividend yield of 0% for all periods; risk-free
interest rate of 4.3%, 5% and 5%; expected life of 6 years, 6 years and 4 years;
and an expected volatility of 184%, 206%, and 106%.
74
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The following table summarizes information about stock options outstanding
and exercisable at June 30, 2002:
OUTSTANDING OPTIONS OPTIONS EXERCISABLE
---------------------------------------- ---------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES LIFE AT JUNE 30, 2002 PRICE AT JUNE 30, 2002 PRICE
--------------------------------------------------------- ---------------------------
$ 0.37 - $ 0.99 5.17 232,166 $ 0.37 232,166 $ 0.37
$ 1.00 - $ 1.99 4.26 114,738 1.54 114,738 1.54
$ 2.00 - $ 2.99 4.98 1,315,567 2.47 1,315,567 2.47
$ 3.00 - $ 3.99 5.82 1,000 3.44 1,000 3.44
$ 4.00 - $ 4.99 6.66 298,000 4.41 298,000 4.41
$ 5.00 - $ 5.99 8.64 685,249 5.04 267,124 5.04
$ 6.00 - $ 6.99 9.68 672,334 6.83 31,252 6.55
$ 7.00 - $ 7.99 8.63 167,934 7.11 50,734 7.03
$ 8.00 - $ 8.99 7.15 170,489 8.00 94,414 8.00
$ 9.00 - $ 9.99 9.07 2,000 9.26 - -
$10.00 - $10.99 7.37 508,500 10.13 319,007 10.12
$11.00 - $11.99 9.10 567,000 11.06 27,000 11.06
$12.00 - $12.99 8.28 838,667 12.38 260,934 12.37
$13.00 - $13.99 7.65 20,000 13.75 13,334 13.75
$14.00 - $14.99 9.41 32,000 14.10 - -
$15.00 - $15.99 9.45 10,000 15.92 - -
$17.00 - $17.99 8.19 25,000 17.83 8,334 17.83
$18.00 - $18.99 7.91 127,500 18.53 107,506 18.53
$19.00 - $19.99 7.88 15,000 19.48 8,334 19.54
---------------- ----------------
7.42 5,803,144 $ 7.11 3,149,444 $ 5.31
================ ================
Concurrent applies APB Opinion 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had Concurrent determined compensation cost based on
the fair value at the grant date for its stock options under SFAS 123,
Concurrent's net income (loss) and net income (loss) per share would have been
increased to the pro forma amounts indicated below:
75
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
YEAR ENDED JUNE 30,
------------------------------
2002 2001 2000
-------- --------- ---------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Net income (loss)
As reported $ 4,383 $ (6,189) $(23,715)
Pro forma $(6,214) $(14,546) $(28,431)
Net income (loss) per share - basic
As reported $ 0.07 $ (0.11) $ (0.46)
Pro forma $ (0.10) $ (0.27) $ (0.55)
Net income (loss) per share - diluted
As reported $ 0.07 $ (0.11) $ (0.46)
Pro forma $ (0.10) $ (0.27) $ (0.55)
18. ISSUANCE AND ACCRUAL OF NON-CASH WARRANTS
On March 29, 2001, Concurrent entered into a definitive purchase agreement
with Comcast Cable, providing for the purchase of VOD equipment. As part of that
agreement Concurrent agreed to issue three different types of warrants.
Concurrent issued warrants to purchase 50,000 shares of its Common Stock on
March 29, 2001, exercisable at $5.196 per share over a four year term. These
warrants are referred to as the "Initial Warrants". Concurrent has recognized
$224,000 in the consolidated statements of operations for the year ended June
30, 2001 as a reduction to revenue for the value of these warrants.
Concurrent is also generally obligated to issue new warrants to purchase
shares of its Common Stock to Comcast at the end of each quarter through March
31, 2004, based upon specified performance goals which are measured by the
number of Comcast basic cable subscribers that have the ability to utilize the
VOD service. The incremental number of subscribers that have access to VOD at
each quarter end as compared to the prior quarter end multiplied by a specified
percentage is the number of additional warrants that were earned during the
quarter. These warrants are referred to as the "Performance Warrants".
Concurrent issued to Comcast a performance warrant for 4,431 shares on October
9, 2001, exercisable at $6.251 per share over a four-year term and a performance
warrant for 52,511 shares on January 15, 2002, exercisable at $15.019 per share
over a four-year term. Concurrent will also issue to Comcast a performance
warrant for 1,502 shares during the first quarter of fiscal 2003 for warrants
that were earned during the quarter ended June 30, 2002.
The resale of the shares issuable upon exercise of the warrants to purchase
50,000 shares and 4,431 shares were registered under a registration statement
filed with the Securities and Exchange Commission and declared effective on
November 20, 2001.
Concurrent will also issue additional warrants to purchase shares of its
Common Stock, if at the end of any quarter the then total number of Comcast
basic cable subscribers with the ability to utilize the VOD system exceeds
specified threshold levels. These warrants are referred to as the "Cliff
Warrants".
Concurrent is recognizing the value of the Performance Warrants and the
Cliff Warrants over the term of the agreement as Comcast purchases additional
VOD servers from Concurrent and makes the service available to its customers.
Concurrent has recognized $398,000 and $433,000 in the consolidated statements
76
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
of operations for the years ended June 30, 2002 and 2001, respectively, as a
reduction to revenue for the value of the Performance Warrants and Cliff
Warrants that have been earned.
The value of the warrants is determined using the Black-Scholes valuation
model. The weighted-average assumptions used for the years ended June 30, 2002
and 2001were: expected dividend yield of 0% for both periods; risk-free interest
rate of 3.7% and 5.0%, respectively; expected life of 4 years in both periods;
and an expected volatility of 117% and 138%, respectively. Concurrent will
adjust the value of the earned but unissued warrants on a quarterly basis using
the Black-Scholes valuation model until the warrants are actually issued. The
value of the new warrants earned and any adjustments in value for warrants
previously earned will be determined using the Black-Scholes valuation model and
recognized as part of revenue on a quarterly basis.
The exercise price of the warrants is subject to adjustment for stock
splits, combinations, stock dividends, mergers, and other similar
recapitalization events. The exercise price is also subject to adjustment for
issuance of additional equity securities at a purchase price less than the then
current fair market value of Concurrent's Common Stock. Based on the
information that is currently available, Concurrent does not expect the warrants
to be issued to Comcast to exceed 1% of its outstanding shares of Common Stock
over the term of the agreement. The exercise price of the warrants to be issued
to Comcast will equal the average closing price of Concurrent's Common Stock for
the 30 trading days prior to the applicable warrant issuance date and will be
exercisable over a four-year term.
On May 20, 1998, Concurrent entered into a Letter of Intent ("LOI") with
Scientific-Atlanta, Inc. ("SAI") providing for the joint development and
marketing of a video-on-demand system to cable network operators. A five-year
definitive agreement was signed on August 17, 1998. In exchange for SAI's
technical and marketing contributions, Concurrent issued warrants for 2 million
shares of its Common Stock, exercisable at $5 per share for four years from the
date of issuance at which time the warrants expire, if not already exercised.
The LOI between Concurrent and SAI is broken into three phases:
Phase I Technical/Commercial Evaluation and Definitive Agreement
Phase II Initial Development and Video-on-Demand Field Demonstration
System
Phase III Commercial Deployment
During Phase I, either party could terminate the negotiations at any time.
In June 1998, the parties moved to Phase II and pursuant to the provisions of
SFAS 123, Concurrent recorded a charge of $1.6 million representing the fair
value of the underlying stock using the Black-Scholes valuation model for the
warrants to purchase 2 million shares of Concurrent's stock. The weighted
assumptions used were: expected dividend yield 0%, risk-free interest rate of
5.0%, expected life of 4.01years and an expected volatility of 35%.
The LOI further stipulates that Concurrent is required to issue additional
warrants to SAI upon achievement of pre-determined revenue targets. These
warrants are to be issued with a strike price of a 15% discount to the then
current market price. The maximum number of additional warrants that could be
issued under this agreement is 8 million upon achieving the revenue targets.
Concurrent issued warrants to purchase 261,164 shares of its Common Stock on
April 1, 2002, exercisable at $7.106 per share over a four-year term. Concurrent
has recognized charges of $1,825,000, $398,000 and $322,000 in the consolidated
statements of operations for the years ended June 30, 2002, 2001 and 2000,
respectively, representing the fair market value of the warrants earned during
each year.
19. 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
77
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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.
20. CONCENTRATION OF RISK
A summary of Concurrent's financial data by geographic area follows:
YEAR ENDED JUNE 30,
2002 2001 2000
-------- -------- ---------
(DOLLARS IN THOUSANDS)
Net sales:
United States $76,352 $55,400 $ 44,049
Intercompany 3,528 3,310 4,828
-------- -------- ---------
79,880 58,710 48,877
-------- -------- ---------
Europe 6,650 7,572 12,545
Intercompany - - 34
-------- -------- ---------
6,650 7,572 12,579
-------- -------- ---------
Asia/Pacific 5,899 9,128 10,399
Intercompany - - 21
-------- -------- ---------
5,899 9,128 10,420
-------- -------- ---------
Other 468 721 1,097
-------- -------- ---------
92,897 76,131 72,973
Eliminations (3,528) (3,310) (4,883)
-------- -------- ---------
Total $89,369 $72,821 $ 68,090
======== ======== =========
Operating income (loss):
United States $ 5,734 $(5,608) $(23,278)
Europe (1,711) (448) (1,084)
Asia/Pacific (453) 155 47
Other 59 174 308
Eliminations 50 136 20
-------- -------- ---------
Total $ 3,679 $(5,591) $(23,987)
======== ======== =========
78
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
JUNE 30,
------------------------
2002 2001
----------- -----------
(DOLLARS IN THOUSANDS)
Identifiable assets:
United States $ 124,849 $ 82,702
Europe 11,571 10,138
Asia/Pacific 11,263 12,919
Other 774 474
Eliminations (49,769) (49,181)
Total $ 98,688 $ 57,052
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
$13,433,000, $18,354,000 and $24,585,000 for the years ended June 30, 2002, 2001
and 2000, respectively, which amounts represented 15%, 25% and 36% of total
sales for the respective fiscal years.
Sales to the U.S. Government and its agencies amounted to approximately
$19,723,000, $16,063,000 and $18,455,000 for the years ended June 30, 2002, 2001
and 2000, respectively, which amounts represented 22%, 22% and 27% of total
sales for the respective fiscal years. Sales to three commercial customers
amounted to $27,364,000 or 31% of total sales, $11,507,000 or 13% of total
sales, and $10,524,000 or 12% of total sales, respectively, for the year ended
June 30, 2002. Sales to two commercial customers amounted to approximately
$8,962,000 or 12% of total sales and $8,072,000 or 11% of total sales,
respectively, for the year ended June 30, 2001. Sales to one commercial customer
amounted to $7,934,000 or 12% of total sales for the year ended June 30, 2000.
There were no other customers during fiscal years 2002, 2001 or 2000
representing more than 10% of total revenues.
Concentration of credit risk with respect to trade receivables is limited
due to the large number of customers comprising Concurrent's customer base.
Ongoing credit evaluations of customers' financial condition are performed and
collateral is generally not required. There were two customers that accounted
for $12,654,000 or 51% of total trade receivables and $3,468,000 or 14% of total
trade receivables at June 30, 2002. There were two customers that accounted for
$3,754,000 or 25% of total trade receivables and $1,586,000 or 10% of total
trade receivables at June 30, 2001.
79
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
21. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of quarterly financial results for the years
ended June 30, 2002 and 2001:
THREE MONTHS ENDED
-------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
2001 2001 2002 2002
--------------- -------------- ---------- ----------
2002 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales $ 14,102 $ 22,481 $ 25,028 $ 27,758
Gross margin $ 6,460 $ 10,080 $ 12,761 $ 15,265
Operating income (loss) $ (3,064) $ 62 $ 2,361 $ 4,320
Net income (loss) $ (3,010) $ 56 $ 2,304 $ 5,033
Net income (loss) per share - basic $ (0.05) $ 0.00 $ 0.04 $ 0.08
Net income (loss) per share - diluted $ (0.05) $ 0.00 $ 0.04 $ 0.08
THREE MONTHS ENDED
-------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
2000 2000 2001 2001
--------------- -------------- ---------- ----------
2001 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales $ 16,312 $ 14,533 $ 22,081 $ 19,895
Gross margin $ 7,591 $ 6,662 $ 10,210 $ 8,557
Operating income (loss) $ (1,580) $ (3,997) $ 675 $ (689)
Net income (loss) $ (1,794) $ (4,158) $ 571 $ (808)
Net income (loss) per share - basic $ (0.03) $ ( 0.08) $ 0.01 $ (0.01)
Net income (loss) per share - diluted $ (0.03) $ ( 0.08) $ 0.01 $ (0.01)
22. COMMITMENTS AND CONTINGENCIES
Concurrent leases certain sales and service offices, warehousing, and
equipment under various operating leases. The leases expire at various dates
through 2007 and generally provide for the payment of taxes, insurance and
maintenance costs. Additionally, certain leases contain escalation clauses
which provide for increased rents resulting from the pass through of increases
in operating costs, property taxes and consumer price indexes.
80
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
At June 30, 2002, future minimum lease payments for the years ending June
30 are as follows:
CAPITAL LEASES OPERATING LEASES TOTAL
---------------- ----------------- ---------------
(DOLLARS IN THOUSANDS)
2003 $ 101 $ 2,742 $ 2,843
2004 101 2,198 2,299
2005 51 1,835 1,886
2006 - 1,267 1,267
2007 - 1,119 1,119
Thereafter - 287 287
---------------- ----------------- ---------------
253 $ 9,448 $ 9,701
================= ===============
Amount representing interest (26)
----------------
Present value of minimum
capital lease payments $ 227
================
Rent expense under all operating leases amounted to $3,612,000, $3,406,000
and $3,906,000 for the years ended June 30, 2002, 2001 and 2000, respectively.
Concurrent, from time to time, is involved in litigation incidental to the
conduct of its business. Concurrent believes that such pending litigation will
not have a material adverse effect on Concurrent's results of operations or
financial condition.
Pursuant to the terms of the employment agreements with the executive
officers of Concurrent, employment may be terminated by either Concurrent or the
respective executive officer at any time. In the event the executive officer
voluntarily resigns (except as described below) or is terminated for cause,
compensation under the employment agreement will end. In the event an agreement
is terminated directly by Concurrent without cause or in certain circumstances
constructively by Concurrent, the terminated employee will receive severance
compensation for a one-year period, in an annualized amount equal to the
respective employee's base salary then in effect. At June 30, 2002, the maximum
contingent liability under these agreements is approximately $2.0 million.
Concurrent's employment agreements with certain of its officers contain certain
offset provisions, as defined in their respective agreements.
23. NEW ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 establishes financial accounting
and reporting obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS 143 requires that the
fair value of a liability for an asset retirement obligation be recognized in
the period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. The liability is accreted to its
present value each period while the cost is depreciated over its useful life.
Concurrent will adopt SFAS 143 for our fiscal year beginning July 1, 2002.
Management believes the adoption of the provisions of this statement will not
have a material impact on Concurrent's consolidated financial statements.
In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" ("SFAS 144"), which superseded the accounting
81
CONCURRENT COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
and reporting provisions of SFAS 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 will
adopt SFAS 144 for our fiscal year beginning July 1, 2002. Management believes
the adoption of the provisions of this statement will not have a material impact
on Concurrent's consolidated financial statements. Through the end of fiscal
2002, Concurrent evaluated long-lived assets for impairment in accordance with
SFAS 121.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Costs covered by the standard include lease termination costs and certain
employee severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. This statement is
to be applied prospectively to exit or disposal activities initiated after
December 31, 2002. Management believes the adoption of the provisions of this
statement will not have a material effect on Concurrent's consolidated financial
statements.
82
SCHEDULE II
CONCURRENT COMPUTER CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(DOLLARS IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND DEDUCTIONS AT END
DESCRIPTION OF YEAR EXPENSES (a) OTHER OF YEAR
---------------------------------- ----------- ----------- ------------ ------ --------
Reserves and allowances deducted
from asset accounts:
2002
----
Reserve for inventory obsolescence
and shrinkage $ 3,481 $ 343 $ (548) $ - $ 3,276
Allowance for doubtful accounts 860 484 (379) - 965
Warranty accrual 977 1,918 (623) - 2,272
2001
----
Reserve for inventory obsolescence
and shrinkage $ 4,034 $ 1,712 $ (2,265) $ - $ 3,481
Allowance for doubtful accounts 484 590 (214) - 860
Warranty accrual 668 780 (471) - 977
2000
----
Reserve for inventory obsolescence
and shrinkage $ 4,568 $ 550 $ (1,084) $ - $ 4,034
Allowance for doubtful accounts 418 289 (223) - 484
Warranty accrual - 668 - - 668
(a) Charges and adjustments to the reserve accounts for write-offs and credits
issued during the year.
83
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
CONCURRENT COMPUTER CORPORATION
By: /s/ Jack A. Bryant
----------------------------------
Jack A. Bryant
President and Chief Executive Officer
Date: September 25, 2002
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 17, 2002.
NAME TITLE
---- -----
/s/ Steve G. Nussrallah Chairman of the Board and Director
--------------------------
Steve G. Nussrallah
/s/ Jack A. Bryant President, Chief Executive Officer and Director
-------------------------- (Principal Executive Officer)
Jack A. Bryant
/s/ Steven R. Norton Executive Vice President, Chief Financial Officer
-------------------------- and Secretary
Steven R. Norton (Principal Financial and Accounting Officer)
/s/ Alex B. Best Director
--------------------------
Alex B. Best
/s/ Michael A. Brunner Director
--------------------------
Michael A. Brunner
/s/ Morton Handel Director
--------------------------
Morton Handel
/s/ Bruce N. Hawthorne Director
--------------------------
Bruce N. Hawthorne
/s/ C. Shelton James Director
--------------------------
C. Shelton James
84
CERTIFICATIONS
I, Jack A. Bryant, certify that:
1. I have reviewed this annual report on Form 10-K of Concurrent Computer
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
Date: September 18, 2002
-----------------------------
/s/ Jack A. Bryant
----------------------------------------
Jack A. Bryant
President and Chief Executive Officer
I, Steven R. Norton, certify that:
1. I have reviewed this annual report on Form 10-K of Concurrent Computer
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
Date: September 18, 2002
-----------------------------
/s/ Steven R. Norton
----------------------------------------
Steven R. Norton
Executive Vice President, Chief Financial Officer and Secretary
85