================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2003
COMMISSION FILE NUMBER 0-13150
CONCURRENT COMPUTER CORPORATION
(Exact name of registrant as specified in our charter)
DELAWARE 04-2735766
(State of Incorporation) (I.R.S. Employer Identification Number)
4375 RIVER GREEN PARKWAY, DULUTH, GEORGIA, 30096 (678) 258-4000
(Address and telephone number of principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock (par value $0.01 per share)
Preferred Stock Purchase Rights
Indicate by check mark whether Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by a check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
----- -----
As of September 8, 2003, there were 62,367,686 shares of Common Stock
outstanding. The aggregate market value of shares of such Common Stock (based
upon the last sale price of $4.24 per share as reported for September 8, 2003 on
the Nasdaq National Market) held by non-affiliates was approximately
$261,633,000.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Registrant's Proxy Statement to be used in connection
with Registrant's 2003 Annual Meeting of Stockholders scheduled to be held on
October 21, 2003 are incorporated by reference in Part III hereof.
================================================================================
PART I
ITEM 1. BUSINESS
OVERVIEW
We are a leading provider of computer systems for both the video-on-demand,
or VOD, market through our Xstreme division and high-performance computing
applications through our Integrated Solutions division (formerly the Real-Time
division). Our Xstreme division provides VOD systems consisting of hardware and
software as well as integration services, primarily to residential cable
companies that have upgraded their networks to support interactive, digital
services. Our Integrated Solutions division provides high-performance,
real-time computer systems to commercial and government customers for use in
applications such as simulation and data acquisition. Although almost all of
our revenues prior to fiscal 2000 were derived from our Integrated Solutions
division, we expect in the near term that a majority of our future revenue
growth will come from our Xstreme division, which began commercial sales in
1999.
Our VOD systems enable cable systems that have two-way capability to
deliver movies and a large variety of other content to subscribers with digital
set-top boxes. The subscribers can then view the content at any time with
familiar VCR-like functionality such as fast-forward, rewind, and pause. We
have been selected to supply our VOD system to 62 markets. We provided VOD for
the first successful commercial deployment of VOD in 1999 and some of the
largest system-wide commercial deployments to date. The largest cable companies
in the U.S. have begun deploying VOD services in one or more residential
markets.
Our high-performance computing systems and software are specially designed
to acquire, process, store, analyze and display large amounts of rapidly
changing information in real time - that is, with microsecond response as
changes occur. We have over 37 years of experience in high-performance
computing systems, including specific expertise in operating systems, computer
hardware, application software, productivity tools, and networking. Our systems
and software support applications in the simulation and training, data
acquisition, and industrial process control systems markets.
We recently created a new subsidiary, Concurrent Federal Systems, Inc., to
focus on opportunities within the federal government, leveraging Concurrent's
status under The North American Industry Classification System as a small
business that can offer end-to-end computing solutions.
We were incorporated in Delaware in 1981 under the name Massachusetts
Computer Company.
We make our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports available, free of
charge, on our web site located at www.ccur.com. Since at least as early as
------------
November 15, 2002, we have made these reports available as soon as reasonably
practicable after filing with the SEC. Additionally, we have adopted a code of
ethics that is applicable to our principal executive, financial, and accounting
officers. This ethics policy is also posted on our web site. If we amend or
change our code of ethics or grant a waiver to it, we will disclose these events
through our website.
Financial information about our industry segments is included in Note 14 to
the consolidated financial statements included herein.
THE VOD MARKET
Technological developments have laid the groundwork for digitally upgraded,
two-way capable networks that enable cable companies to deliver VOD services to
their digitally enabled subscribers. These new systems include additional
bandwidth capability and digital equipment throughout the network. These
digitally upgraded systems are capable of carrying a larger quantity of signals
at a faster rate. As of December 2002, according to the National Cable
Television Association, digital upgraded cable service is available to
approximately 82% of the homes passed by basic cable service in the United
States. Further, many major movie studios, major television
1
networks, premium channel providers, and other program and content creators are
converting their most popular titles into a digital format, thus, making content
available for VOD services.
We believe these advancements have opened the door for our VOD systems to
serve the home video entertainment market. Our VOD systems offer the following
improvements over traditional home video services:
- Home video rentals. VOD eliminates travel to pick-up or return rentals
and late charges.
- Pay-per-view. VOD enables a subscriber to view content at any time
with interactive capabilities such as play, rewind, fast-forward and
pause and is not limited by the availability of channel frequencies
for delivering content.
- Digital Video Recorder. A digital video recorder (DVR) is an
additional set-top device or an enhanced set-top device that enables a
user to record programming for playback after the "live" program began
with VCR-like functionality on the saved content. VOD does not require
subscribers to purchase an expensive DVR device, install and maintain
the device, update the device and learn how to operate the device.
Further, since VOD is network based, cable companies can incrementally
add storage (thus, a greater selection) whereas storage on a DVR
device is not so easily increased.
- Advertising. VOD has the potential to enable cable companies to target
advertising and offer an interactive advertising experience.
We believe that VOD is a key strategic competitive initiative for cable
companies because it provides them with an opportunity to differentiate their
service offerings, in that digital broadcast satellite providers are technically
unable to duplicate the full functionality of cable delivered VOD. Further, we
believe VOD will provide the cable companies access to new revenue generating
opportunities from subscribers, advertisers and electronic commerce initiatives.
THE HIGH-PERFORMANCE COMPUTING MARKETS
Our Integrated Solutions division focuses on high-performance systems that
offer unique solutions for a wide-range of applications that require
state-of-the-art technology. The solutions we provide typically offer
high-performance computation, high data throughput, and predictable and
repeatable responses to critical events. Our computer systems and software are
currently used in host, client server, and distributed computing solutions,
including fault tolerance applications. End uses of our products include the
following:
- Simulation and Training. Applications that utilize our systems include
training simulators for commercial and military aviation, vehicle
operation and power plants, mission planning and rehearsal, and
engineering design for avionics and automotive labs subsystems. Our
high-performance computer systems also run hardware-in-the-loop type
applications in which accurate simulations are constructed to verify
hardware designs.
- Data Acquisition. Applications that run on our systems include
environmental analysis and display, engine testing, range and
telemetry systems, weather satellite data acquisitions and
forecasting, intelligence data acquisition and analyses, and command
and control.
2
BUSINESS STRATEGY
XSTREME DIVISION
Our VOD strategy is comprised of the following primary initiatives:
- Maintain Existing and Establish New Relationships with Top Domestic Cable
Companies. We have been selected to supply VOD systems for 62 markets. Our
customers include, in alphabetical order, Adelphia Communications
Corporation, AOL Time Warner, Inc., Blue Ridge Communications, Bright House
Networks, Cablevision Systems Corporation, Charter Communications, Inc.,
Cogeco, Inc., Comcast Corporation, Cox Communications, Inc., Knology, Inc.,
Mediacom Communications Corporation, and Vid otron Lt e. We will focus on
continuing to serve these customers and adding to the customer base by
providing the product innovations and customer support the cable companies
need to succeed. Additionally, we are focusing our sales team on new
opportunities in new markets within our base as well as other domestic
network providers.
- Develop Partnerships Enabling Incremental Revenue Opportunities for Cable
Companies. With the evolution of the television viewing experience, we
believe there will be opportunities for our customers to generate
incremental revenues with other product offerings complementary to VOD
services. To that end, we have an active partner program to develop
relationships with other industry suppliers. Examples include, in
alphabetical order, Cisco Systems, Inc., Digeo, Inc., Gemstar-TV Guide
International, Inc., Gotuit Media Corporation, Microsoft Corporation,
TVGateway, LLC, Wink Communications, Inc., and others. Additionally, we
support and partner with major providers of network equipment such as
Scientific-Atlanta, Inc., Motorola, Inc., Harmonic, Inc., BigBand Networks,
Inc., Internet Photonics, Inc. and others. We have also invested in and
formed a strategic partnership with Everstream Holdings, Inc., a company
specializing in incremental software applications for the collection of
information from our VOD systems. Further, Everstream has developed an
application for the delivery of targeted advertising via our VOD systems.
- Focus on International Operations. The rollout of residential VOD service
internationally over both cable television systems and DSL-based telephone
networks is progressing more slowly than we originally expected. As a
result, we have reduced our presence in certain markets so we can focus on
more promising opportunities. We will continue to nurture relationships
with international cable companies and telephone companies in order to take
advantage of opportunities as they arise.
- Maintain a Technological Leadership Position in VOD Server Systems. We have
developed our VOD technology through internal research and development,
acquisitions, and relationships with third-party technology providers. We
intend to continue to focus on the development of future VOD technologies
in order to remain a technology leader by improving streaming flexibility,
asset management, encryption techniques, network based digital video
recorder applications, software clients, time shifted programming, and
functionality such as compatibility with high definition television.
INTEGRATED SOLUTIONS DIVISION
As the high-performance, real-time, computing market shifted to open
systems, we introduced new products to meet these open system requirements while
maintaining support for our proprietary systems. Our strategy strikes a balance
between offering upgrades for our proprietary system offerings and investing in
our open-source RedHawk(TM) Linux(R) operating system and our iHawk integrated
computer system solutions.
RedHawk(TM) Linux(R) is a real-time operating system that incorporates a
number of changes to Linux that make it a powerful real-time, multi-processing
operating system for time-critical applications. RedHawk includes the popular
Red Hat(TM) Linux distribution. RedHawk also maintains third-party software
compatibility with Red Hat Linux, allowing us to take advantage of the full
range of third-party software applications that run on Red Hat.
The iHawk family is a line of Intel-based servers available in single,
dual, quad, and 8-way processor models. iHawks are available in a wide-range of
configurations that include our proprietary real-time clock and
3
interrupt module as well as the optional NightStar tool suite. We expect that
the introduction of a wide-range of Intel-based servers running RedHawk Linux
will allow us to compete for a broader range of business opportunities.
Concurrent Federal Systems, Inc., a wholly owned subsidiary of Concurrent
Computer Corporation, was established in October 2002 to help us respond to the
growing needs of the federal government. The subsidiary operates as a prime
contractor or subcontractor or as part of a team to develop new and innovative
ways to address the difficult problems encountered in the information technology
arena for border and transportation security, emergency response, homeland
security, infrastructure protection and military action.
PRODUCTS AND SERVICES
Our products fall into two principal groups, VOD systems sold by our
Xstreme division and high-performance systems sold by our Integrated Solutions
division. In addition, both divisions provide technical support to our
customers. The percentage of total revenue contributed by our Xstreme division's
products, our Integrated Solutions division's products and our service offering
is discussed in Management's Discussion and Analysis of Financial Condition and
Results of Operation in this Annual Report on Form 10-K.
XSTREME DIVISION PRODUCTS
Our VOD system may be located at the headend or hub in a distributed or
centralized architecture with our thin client software, or an alternative client
application, residing on the subscriber's set-top-box. When a subscriber selects
a movie, a video session is established between our video server and the digital
set-top box in the subscriber's home via the resource manager over the cable
system's network. The selected movie is accessed from the video server where it
is stored at either a headend or a hub. The purchase is captured by our
back-office software, creating a billing and royalty record for the cable
company's billing system.
Our VOD systems integrate video streaming technology, content management,
and back-office software and readily available commercial hardware platforms to
provide interactive, VOD capabilities. Our VOD systems include the following:
- MediaHawk(R) Family of Video Servers. Our MediaHawk video servers are
high-performance computer systems designed for the demanding requirements
of interactive VOD applications. The MediaHawk video server includes
multiple content storage devices, stream processors and input/output
interfaces. In June 2003, we began shipping our fourth generation of
servers, the MediaHawk 4G On-Demand Platform, which separates streaming,
storage, and content capture to maximize flexibility and scalability. The
MediaHawk 4G will work with legacy MediaHawk family products, enabling our
customers to seamlessly grow their VOD streaming capabilities.
- Resource Manager. Our resource manager establishes the network connection
that allows the video to be streamed to the home over the cable operator's
network as a dedicated session. The resource manager is designed to route
video streams in the most efficient manner available at any given time.
- MediaHawk Business Management System. Our business management system is an
industry standard, relational database supporting subscriber and provider
data management. Our back-office applications include customer access
management, content distribution management, order management, royalty
management, billing interfaces and marketing analysis.
- Real Time Media. Our Real Time Media System enables our customers to
capture satellite or broadcast television programming at the time of
broadcast and simultaneously digitally encode and store the captured
programs for future viewing by the subscriber.
- Client. Our client is a small software module that resides on each
set-top-box, empowering the subscriber to select on-demand content and
maintain complete interactive control.
- System Management and Maintenance Software. Our system management and
maintenance software is designed to detect failed components, to re-route
video streams bypassing the failed component, and to notify the cable
company that maintenance is required.
4
- Integration Options. Our VOD systems are compatible with a wide range of
equipment and software employed by cable companies to deliver digital
television service, including digital set-top boxes from
Scientific-Atlanta, Motorola, Pioneer, Sony and Pace Micro and transport
topologies such as Gigabit Ethernet, DVB-ASI, ATM, and 64 and 256 QAM IF or
RF. Further, since our VOD technology allows us to perform functionality in
the server rather than in the digital set-top box, we can overcome the
challenge of providing VOD services through digital set-top boxes with
limited processing capability.
- Subscription VOD (SVOD) Technology. SVOD is a complementary service to VOD,
enabling impulse viewing of premium network programming such as HBO,
Showtime or Starz at flat monthly fees with VCR-like functionality. SVOD is
not a service that can be offered by direct broadcast satellite and we
believe it will provide cable companies with a competitive advantage and
build greater subscriber satisfaction and retention.
- Fault Tolerant System Designs. Our VOD systems are designed with multiple
layers of redundancy, including fully redundant storage, power and cooling
systems to provide seamless end-user viewing. Thus, in most cases, system
repairs can be made during delivery without any interruption to the
end-user.
- Intelligent Digital Asset Management. Our VOD systems enable cable
companies to automate the movement of content from one storage location to
another based upon demand and other network requirements. This feature
enables the most efficient streaming and storage of content. We have
applied for a patent to protect our developments in this area.
- Multiple Operating Systems. We offer solutions utilizing both proprietary,
purpose-specific operating systems, as well as open, commercially available
operating systems. Our general expectations are an orderly migration to
open systems, thus reinforcing our stance of embracing open standards where
feasible.
XSTREME DIVISION SERVICES
Our support offerings are an essential piece of successfully deploying VOD
services. A VOD system has multiple interface points with other network
elements; e.g., transport equipment, set-top boxes, conditional access,
navigators (electronic program guides), billing systems, content receivers,
other applications and back office systems. Our system engineers are able to
integrate these diverse elements, creating seamless VOD services. The basic
customer service plans and support options offered to our VOD customers include
24x7 telephone support, software patches to correct problems in existing
software, 24-hour parts replacement, product service training classes, limited
on-site services and preventative maintenance services. These services are
typically provided at no additional charge during the warranty period and are
available for additional fees under maintenance agreements after the warranty
period. In addition to these basic service and support options, we also offer,
for additional fees, software upgrades and onsite hardware maintenance services.
INTEGRATED SOLUTIONS DIVISION PRODUCTS
The principle products sold by our Integrated Solutions division are:
- Power Hawk(R) 700 and 900. Power Hawk is our family of highly-scalable,
advanced systems capable of supporting data acquisition, simulation and
industrial process control applications in environments ranging from entry
level to highly complex. The Power Hawk line is designed around the
Motorola PowerPC processor, and is available in single, dual and quad
central processing unit (CPU) versions.
- PowerMAXION(R). The PowerMAXION is our mid-level system specifically
targeted to the real-time data acquisition market, such as radar and
weapons control in the military market. The PowerMAXION series is designed
around the PowerPC 604e processors from IBM and Motorola and is available
in one-to-eight CPUs.
- Model 3200-2000. The Model 3200-2000 is the most recent addition to our
Series 3200 family of high-performance proprietary platforms. Model
3200-2000 provides an upgrade to processing power and system
5
throughput required by demanding real-time applications. Model 3200-2000
runs our proprietary operating system.
- PowerMAX Operating System. The PowerMAX Operating System is our
highly-deterministic UNIX-based operating system used on our Power Hawk and
PowerMAXION systems.
- NightStar Tools. The NightStar development tools help users debug their
application software running under both the PowerMAX and RedHawk Linux
operating systems.
- RedHawk(TM) Linux. RedHawk Linux is an industry-standard, real-time version
of the open source Linux operating system. RedHawk Linux, which includes
the popular Red Hat(R) Linux distribution, provides high-speed transfer of
data, guaranteed fast response to external events and optimized
interprocess communications.
- iHawk(TM). Our iHawk Intel-based servers feature the RedHawk Linux
operating system and our real-time clock and interrupt module. Although
this product is still new to the marketplace, we anticipate that it will be
deployed in simulation, data acquisition and industrial process control
applications, and satisfy scientific and other complex computing
requirements.
INTEGRATED SOLUTIONS DIVISION SERVICES
Customer Support. We offer worldwide hardware and software maintenance and
support services for our Integrated Solutions division products and for the
products of other computer and peripheral suppliers. Services include on-site
maintenance, return-to-factory warranty, depot repair, and software support
update service. We provide these support services at no additional charge during
the warranty period. We have routinely offered and delivered long-term service
and support of our products for as long as 15 to 20 years under maintenance
contracts for additional fees. However, we anticipate this source of revenue to
decline over time due to legacy product obsolescence.
Custom Engineering and Integration Services. We provide custom engineering
and integration services in the design of special hardware and software to help
our customers with their specific applications. This may include custom
modifications to our products or integration of third-party interfaces or
devices into our systems. Many customers use these services to migrate existing
applications from earlier generations of our systems or our competitors' systems
to our state-of-the-art systems. These services also include classroom and
on-site training, system and site performance analysis, and multiple vendor
support planning.
SALES AND MARKETING
We sell our systems primarily in the U.S. through our direct field sales
and support offices, as well as through value added resellers and systems
integrators. As of June 30, 2003, on a consolidated basis, we had 91 employees
in our sales and marketing force, which includes sales support, corporate
communications, application engineering, field sales, and sales administration.
Of these employees, ten are shared by our divisions.
XSTREME DIVISION
Our VOD sales strategy primarily focuses on maintaining and expanding
existing relationships and developing new relationships, with domestic cable
companies and international cable and DSL providers. Our domestic sales force
has significant experience as either prior employees of, or vendors to, the
largest domestic cable companies. During the fiscal year we added employees to
our direct sales team to enable us to better respond to our customers' needs.
Outside the North American cable market, we have a small direct sales team
that is augmented by value added resellers and systems integrators.
As of June 30, 2003, we employed 41 people worldwide as part of our Xstreme
sales and marketing team.
6
INTEGRATED SOLUTIONS DIVISION
We sell our high-performance computing systems in key markets worldwide
through direct field sales and support offices, as well as through value added
resellers and systems integrators. As of June 30, 2003, we employed 40 people
worldwide as part of our sales and marketing team.
CUSTOMERS
Both of our divisions derive revenue from a limited number of customers. As
a result, the loss of, or reduced demand for products or related services from
any of our major customers could adversely affect our business, financial
condition and results of operations. Our products are typically manufactured and
shipped in the same quarter the purchase order is received. Accordingly, we do
not believe backlog is a meaningful indicator of future level of sales. Our
backlog for real-time and VOD systems at June 30, 2003 and 2002 totaled $2.0
million and $2.3 million respectively. In addition, we had deferred revenue of
$7.6 million and $5.7 million at June 30, 2003 and 2002, respectively, which
resulted from prepaid maintenance services and shipments of systems where the
revenue had not yet been recognized.
We have purchase agreements with many customers, but none of these
agreements require fixed minimum purchases of our products except for our
agreement with Lockheed-Martin. As a result, sales to specific customers tend
to, and are expected to continue to, vary from year-to-year, depending on such
customers' budgets for capital expenditures and new product introductions.
XSTREME DIVISION
A significant portion of our VOD revenue has come from, and is expected to
continue to come from, sales to the large cable companies. Customers accounting
for more than 10% of total revenue consisted of AOL Time Warner (16%) and
Comcast (10%) for the year ended June 30, 2003; AOL Time Warner (31%) and Cox
Communications (13%) for the fiscal year ended June 30, 2002; and Comcast (12%)
and AOL Time Warner (11%) for the fiscal year ended June 30, 2001. No other
Xstreme division customer accounted for more than 10% of total revenue during
the last three fiscal years.
INTEGRATED SOLUTIONS DIVISION
Lockheed-Martin accounted for 16% and 12% of total revenues in the fiscal
years ended June 30, 2003 and 2002, respectively. No other Integrated Solutions
division customer accounted for more than 10% of total revenue during the last
three fiscal years.
We derive a significant portion of our revenues from the supply of
integrated computer systems to U.S. Government prime contractors and agencies of
the U.S. Government. The supplied systems include configurations from the
PowerMAXION, Power Hawk, and 3200-2000 product lines, with certain systems
incorporating custom enhancements requested by the customer. We sell these
integrated computer systems to prime contractors, including Boeing,
Lockheed-Martin, and Raytheon. We also supply spare parts, upgrades, and
engineering consulting services and both hardware and software maintenance. For
the fiscal year ended June 30, 2003, we recorded $18.2 million in revenues to
U.S. Government prime contractors and agencies of the U.S. Government,
representing 24% of total sales for the period. Government business is subject
to many risks, such as delays in funding, reduction or modification of contracts
or subcontracts, failure to exercise options, changes in government policies and
the imposition of budgetary constraints. A loss of government contract revenues
could have a material adverse effect on our business, results of operations and
financial condition.
NEW PRODUCT DEVELOPMENT
We are committed to the development of new technology and rapid innovation
in the evolving markets in which we compete. Research and development costs are
expensed when incurred and aggregated $18,775,000, $15,291,000, and $11,579,000
in fiscal years 2003, 2002, and 2001, respectively.
7
XSTREME DIVISION
Our research and development strategies with respect to our VOD solutions
are focused on the following:
- Network Digital Video Recorder Technology. This technology will allow the
subscriber to pause and rewind time-shifted programming, effectively
providing "TV on-demand." We believe this is superior to existing DVR
devices because cable subscribers will not be required to purchase or
maintain an extra device since all the required equipment will reside on
the cable company's network. We have released the first generation of our
real time media product line that captures, encodes, and stores broadcast
programs for future viewing. Additionally, we have released our MediaHawk
4G On-Demand Platform that will enable cable companies to grow streaming,
storage, and content capture independently so they can more easily provide
"TV on-demand".
- Interactive and Targeted Advertising. Interactive long format advertising
is already being deployed by Cox Communications in their systems. Targeted
advertising technology provided by partners such as Everstream will allow
our VOD system to insert different television commercials into the video
streams for different consumers. This technology will allow the advertiser
to closely "target" product advertisements to consumers most likely to buy,
rather than broadcasting the same advertisements to everyone.
- High Definition VOD. We are adding full end-to-end support for
high-definition content to our system this year. Such content requires
substantially greater streaming and storage capacity which, in turn, will
require more VOD products. For example, high-definition content typically
requires streaming capacity of 19 megabits/second while standard content
streams at 3.75 megabits/second. Thus, high-definition content consumes
approximately five times the storage and approximately five times the
streaming capacity.
- Content Management. As VOD matures as an industry, we anticipate that
demand for stored content will increase from a few hundred hours to many
thousands of hours. We continue to enhance our systems to intelligently and
automatically manage the distribution and lifecycle of stored content,
thus, increasing the efficiency of our customers' networks.
- Resource Management. We have developed an advanced distributed resource
management system that will allow on-demand systems to grow into the
"everything on demand" environment that we believe the cable industry is
now envisioning.
- Platform Consolidation. As our VOD systems have become more widely
deployed, we have been developing a single platform to focus future
development and ease support requirements.
INTEGRATED SOLUTIONS DIVISION
Our product development strategies will focus on higher-performance and
cost-effective scalable products that will provide the latest technology with a
wider range of solutions for our customers. New product development will be
focused on the following:
- iHawk. We plan to offer systems based on new 64-bit processor technology in
addition to systems based on higher-performance 32-bit processors from
Intel(R). These systems should be available in single, dual, quad and 8-way
processor configurations.
- RedHawk Linux. We are further developing our RedHawk Linux real-time
operating system to provide increased determinism for time-critical
applications.
- Opal-RT RT-LAB Simulation. We have entered into an engineering alliance
with Opal-RT whereby Opal-RT will make their automotive data acquisition
testing product available on our RedHawk Linux based systems. RT-LAB is a
widely-used real-time application that allows engineers to use mathematical
block diagrams for design, simulation, control and related functions.
RT-LAB offers a scalable, high-performance, environment for the most
demanding of hard-real-time simulations such as for internal
8
combustion engines, hydraulic systems, car dynamics and flexible multi-body
mechanical systems, as well as electrical and power electronic systems.
- Data Acquisition Products. We are developing data acquisition products
compatible with graphics-based software applications for acquiring,
storing, analyzing, filtering and displaying of multiple data streams. We
believe these developments will allow us to compete for general
high-performance data acquisition market applications.
- Image Generation. We are developing PC-based products based on visual
software from Multigen-Paradigm Inc. These image generation systems will
directly address the requirements of the simulation and training markets.
Typically we have provided only the "host computer" component of training
systems. The new products will allow us to compete for the visual
subsystems.
- Multi-Level Security Systems. We are developing multi-level security
features for our real-time products that will ensure that no user, either
authorized or unauthorized, can launch any process that circumvents the
security mechanisms.
COMPETITION
Both our Xstreme and Integrated Solutions divisions operate in
highly-competitive environments, driven by rapid technological innovation. Both
divisions compete based upon features, reliability, service, and price. Due in
part to the range of performance and applications capabilities of our products,
we compete in various markets against a number of companies.
The major competitors of the Xstreme Division currently include the
following:
- SeaChange International, Inc. and nCUBE Corporation. Additionally, there
are a number of other entities in the market, including Kasenna, Inc.,
Mid-Stream Technologies, Inc., Broadbus Technologies, Inc., N2 Broadband,
Inc., and Silicon Graphics, Inc. We believe SeaChange International Inc.
and ourselves are the leaders in the VOD market based on subscribers in the
markets served.
Our Integrated Solutions Division competes with a number of companies. Our
major competitors can be categorized as follows:
- major computer companies that participate in the high-performance computing
business by layering specialized hardware and software on top of, or as an
extension of, their general purpose product platforms, including Sun
Microsystems, Hewlett Packard Corporation and IBM Corporation.
- other computer companies that provide solutions for applications that
address specific performance characteristics, such as fault tolerance or
high-performance graphics, including Silicon Graphics, Inc. and Hewlett
Packard Corporation.
- single board computer companies that provide board-level processors that
are typically integrated into a customer's computer system, including Force
Computers, Inc., Motorola, Inc., Multicomputers, Inc., and Mercury, Inc.
- companies providing competitive offering on the Linux platform including
RedHat, Inc., MontaVista Software, Inc., FSMLabs, Inc., SuSE, Inc. and
TimeSys Corporation.
Additional competitors with significant market presence and financial
resources, including computer hardware and software companies, content providers
and television equipment manufacturers, including digital set-top-box
manufacturers, may enter our markets, thereby further intensifying competition.
Our future competitors also may include one or more of the parties with whom we
currently have a strategic relationship. Although we have proprietary rights
with respect to much of the technology incorporated in our VOD and real-time
systems, our strategic partners have not agreed to refrain from competing
against us. Increased competition could result in price reductions that would
adversely affect our business, financial condition and results of operations.
Many of our
9
current and potential future competitors have longer operating histories,
significantly greater financial, technical, marketing and other resources than
us, and greater brand name recognition. In addition, many of our competitors
have well-established relationships with our current and potential customers and
have extensive knowledge of our markets.
INTELLECTUAL PROPERTY
We rely on a combination of contracts and copyright, trademark, patents and
trade secret laws to establish and protect our proprietary rights in our
technology. We distribute our products under software license agreements which
grant customers perpetual licenses to our products and which contain various
provisions protecting our ownership and confidentiality of the licensed
technology. The source code of our products is protected as a trade secret and
as an unpublished copyright work. In addition, in limited instances, we license
our products under licenses that give licensees limited access to the source
code of certain of our products, particularly in connection with our strategic
alliances.
Despite the precautions we have taken, there can be no assurance that our
products or technology will not be copied or otherwise obtained and used without
authorization. In addition, effective copyright and trade secret protection may
be unavailable or limited in certain foreign countries. We believe that, due to
the rapid pace of innovation within our industry, factors such as the
technological and creative skills of our personnel are more important to
establishing and maintaining a technology leadership position within the
industry than are the various legal protections for our technology.
We do not own any material issued patents. However, we have four patent
applications pending in the United States and one pending abroad and have
obtained patent licenses to the portfolios owned by Everstream Holdings, Inc. (4
patents and 6 patent applications) and previously owned by Thirdspace Living
Limited (13 patents, 29 patent applications, and all additions, divisionals,
continuations, continuations-in-part, extensions, reissues, and foreign
counterparts thereof). The patents so licensed cover multiple interactive
television, targeted advertising, and VOD technologies.
We have entered into licensing agreements with several third-party software
developers and suppliers. Generally, such agreements grant us non-exclusive,
worldwide licenses with respect to certain software provided as part of
computers and systems we market and terminate on varying dates.
SUPPLIERS
We sometimes purchase product components from a single supplier in order to
obtain the required technology and the most favorable price and delivery terms.
These components include, for example, processors, power supplies, integrated
circuit and storage devices. We purchase product components from the following
single suppliers: Seagate Technology, Inc., Intel Corporation, Qlogic
Corporation, VME Micro System Corporation, Precision Analog Systems, Macrolink,
Inc., LSI Logic Corporation, National Instruments, Dell Computer Corporation,
Xyratex Storage Systems, Synergy Micro Systems, Peritek Corporation, Unipower
Corporation, Vicor Corporation, Wall Industries, Inc., and Vitesse Semiconductor
Corporation. In most cases, comparable products are available from other
sources, but would require significant reengineering to conform to our system
specifications.
SEASONALITY
We have experienced variations in the revenue, expenses and operating
results from quarter to quarter in our VOD business, and it is possible that
these variations will continue. We believe that fluctuations in the number of
orders for our VOD systems being placed from quarter to quarter are principally
attributable to the buying patterns and budgeting cycles of cable companies. In
addition, orders are often not finalized until the end of a quarter. We do not
believe seasonality is a relevant factor at this time.
10
GOVERNMENTAL REGULATION
We are subject to various international, U.S. federal, state and local laws
affecting our business. Any finding that we have been or are in noncompliance
with such laws could result in, among other things, governmental penalties.
Further, changes in existing laws or new laws may adversely affect our business.
The television industry is subject to extensive regulation in the United
States and other countries. Our VOD business is dependent upon the continued
growth of the digital television industry in the United States and
internationally. Cable companies are subject to extensive government regulation
by the Federal Communications Commission and other federal and state regulatory
agencies. These regulations could have the effect of limiting capital
expenditures by cable companies and thus could have a material adverse effect on
our business, financial condition and results of operations. The enactment by
federal, state or international governments of new laws or regulations could
adversely affect our cable operator customers, and thereby materially adversely
affect our business, financial condition and results of operations.
ENVIRONMENTAL MATTERS
We purchase, use, and arrange for certified disposal of chemicals used in
the manufacturing process at our Pompano Beach facility. As a result, we are
subject to federal and state environmental protection and community
right-to-know laws. Violations of such laws, in certain circumstances, can
result in the imposition of substantial remediation costs and penalties. We
believe we are in compliance with all material environmental laws and
regulations.
EMPLOYEES
As of June 30, 2003, we had 418 employees worldwide. Of these employees,
339 were in the United States and 79 were international. We had 148 employees
in our Xstreme division, 181 employees in our Integrated Solutions division,
and 89 employees shared between the two divisions. The shared employees include
administrative, marketing and communications, and manufacturing personnel. Our
employees are not unionized.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
A summary of net sales (consolidated net sales reflects sales to
unaffiliated customers) attributable to our foreign and domestic operations for
the fiscal years ended June 30, 2003, 2002, and 2001 is presented in Note 18 to
the consolidated financial statements included herein. Financial information
about our foreign operations is included in Note 18 to the consolidated
financial statements included herein.
11
RISK FACTORS
The following are risk factors we face.
RISKS RELATED TO OUR BUSINESS
IT IS DIFFICULT TO EVALUATE OUR BUSINESS AND PROSPECTS BECAUSE OF DECLINES IN
OUR INTEGRATED SOLUTIONS DIVISION BUSINESS AND THE EMERGING NATURE OF THE VOD
MARKET. OUR NET SALES OF REAL-TIME SYSTEMS AND SERVICES HAVE DECREASED
SIGNIFICANTLY OVER THE PAST SIX YEARS.
Prior to the fiscal year ended June 30, 1997, we focused solely on
providing real-time computer systems and related services. Over the last five
full fiscal years, we have experienced a decline in real-time net sales from
$68.8 million for the fiscal year ended June 30, 1999 to $36.9 million for the
fiscal year ended June 30, 2003. Although almost all of our revenues prior to
fiscal 2000 were derived from our Integrated Solutions division, we expect in
the near term that a majority of our future revenue growth will come from our
Xstreme division, which began commercial sales in 1999. Revenues for VOD systems
increased from $1.2 million for the fiscal year ended June 30, 1999 to $48.0
million for the fiscal year ended June 30, 2002 and decreased to $38.6 million
for the fiscal year ended June 30, 2003.
Over the past several years, the real-time computer industry has seen a
significant shift in demand from high-priced, proprietary real-time systems to
lower-priced, open server systems. High-performance processing in the past
required a large, expensive computer with significant proprietary and customized
software. Today, these requirements are often met by much smaller and less
expensive computers with off-the-shelf computer hardware and software. This
shift in demand has resulted in the significant decreases in our revenues from
real-time products and services over the last several years.
This decline in our real-time revenue together with the emerging nature of
the VOD market make it difficult to evaluate our current business and prospects
or to accurately predict our future revenue or results of operations. We will
encounter risks and difficulties in our VOD business frequently encountered by
companies in emerging markets. We may not successfully address any of these
risks. If we do not successfully address these risks, our business, financial
condition and results of operations would be adversely affected.
THE VOD MARKET MAY NOT GAIN BROAD MARKET ACCEPTANCE; OUR CUSTOMERS MAY NOT
CONTINUE TO PURCHASE OUR VOD SYSTEMS; AND OUR CABLE COMPANY CUSTOMERS MAY ENTER
INTO ARRANGEMENTS WITH OUR COMPETITORS ANY OF WHICH COULD MATERIALLY AND
ADVERSELY AFFECT OUR BUSINESS.
We are focusing much of our VOD sales efforts on North American cable
companies that have upgraded some or all of their cable systems to support
digital, two-way service. Therefore, in order for our VOD business to succeed,
cable companies, particularly the largest North American cable companies, must
successfully market VOD to their cable television subscribers. To date, we have
been publicly selected by (in alphabetical order) Adelphia, AOL Time Warner,
Blue Ridge Communications, Bright House Networks, Cablevision, Charter
Communications, Cogeco Cable, Comcast, Cox Communications, Knology, Mediacom,
and Videotron for commercial VOD deployments. However, none of our cable
company customers are contractually obligated to introduce, market or promote
VOD, nor are any of our customers bound to achieve any specific product
introduction schedule. Accordingly, even if a cable company initiates a
customer trial using our system, it is under no obligation to launch a
full-scale commercial introduction using our technology. Further, we do not
have exclusive arrangements with our customers. Therefore, our customers may
enter into arrangements with one or more of our current or future competitors.
The growth and future success of our VOD business depends largely upon our
ability to penetrate new markets and sell our systems to digitally-upgraded
domestic and international cable companies, international digital subscriber
line operators, educational institutions and others. If these potential
customers determine that VOD is not viable as a business proposition or if they
decide to delay their purchase decisions, as a result of capital expenditure
restraints or otherwise, or to purchase systems from our competitors, our
business, financial condition and results of operations will be significantly
adversely affected.
12
A SIGNIFICANT PORTION OF OUR VOD REVENUE HAS COME FROM, AND IS EXPECTED TO
CONTINUE TO COME FROM, SALES TO THE LARGE, NORTH AMERICAN CABLE COMPANIES. IF
WE ARE UNSUCCESSFUL IN MAINTAINING AND EXPANDING RELATIONSHIPS WITH THESE
CUSTOMERS OR LOSE ANY OF THESE CUSTOMERS, OUR BUSINESS WILL BE ADVERSELY
AFFECTED.
For the fiscal year ended June 30, 2003, Time Warner, Comcast, Charter and
Cogeco accounted for approximately 32%, 20%, 14% and 14% of our VOD revenues,
respectively. Many cable companies are currently evaluating the extent and pace
of their VOD deployment plans. If we are unsuccessful in maintaining and
expanding these key relationships with cable companies, our VOD business will be
adversely affected. Further, if we are unsuccessful in establishing
relationships with other cable companies or experience problems in any of our
VOD system commercial launches, our ability to attract new cable companies and
sell additional products to existing customers will be materially adversely
affected.
WE INCURRED NET LOSSES IN THE PAST AND MAY INCUR FURTHER LOSSES IN THE FUTURE.
We incurred a net loss of $24.6 million in the fiscal year ended June 30,
2003, net income of $4.4 million in the fiscal year ended June 30, 2002, and a
net loss of $6.2 million in the fiscal year ended June 30, 2001. Our net loss
for the fiscal year ended June 30, 2003 includes a charge of $13.0 million from
the write-down of our investment in Thirdspace and a restructuring charge of
$1.6 million. As of June 30, 2003, we had an accumulated deficit of
approximately $122.9 million. We may incur additional net losses in the future.
SYSTEM ERRORS, FAILURES, OR INTERRUPTIONS COULD CAUSE DELAYS IN SHIPMENTS,
REQUIRE DESIGN MODIFICATIONS OR FIELD REPLACEMENT WHICH MAY HAVE A NEGATIVE
IMPACT ON OUR BUSINESS AND DAMAGE OUR REPUTATION AND CUSTOMER RELATIONSHIPS.
System errors or failures may adversely affect our business, financial
condition and results of operations. Despite our testing and testing by current
and potential customers, all errors or failures may not be found in our products
or, if discovered, successfully corrected in a timely manner. These errors or
failures could cause delays in product introductions and shipments or require
design modifications that could adversely affect our competitive position.
Further, some errors may not be detected until the systems are deployed. In
such a case, we may have to undertake substantial field replacement programs to
correct the problem. Our reputation may also suffer if our customers view our
products as unreliable, whether based on actual or perceived errors or failures
in our products.
Further, a defect, error or performance problem with our VOD systems could
cause our customers' cable television systems to fail for a period of time. Any
such failure would cause customer service and public relations problems for our
customers. As a result, any failure of our customers' systems caused by our
technology could result in delayed or lost revenue due to adverse customer
reaction, negative publicity regarding us and our products and services and
claims for substantial damages against us, regardless of our responsibility for
such failure. Any claim could be expensive and require us to spend a
significant amount of resources.
OUR OPERATING RESULTS MAY CONTINUE TO BE VOLATILE AND DIFFICULT TO PREDICT, AND
IN SOME FUTURE QUARTERS, OUR OPERATING RESULTS MAY FALL BELOW OUR EXPECTATIONS
AND THE EXPECTATIONS OF SECURITIES ANALYSTS AND INVESTORS, WHICH COULD RESULT IN
MATERIAL DECLINES OF OUR STOCK PRICE.
Our quarterly operating results may vary depending on a number of factors,
including:
- demand for our VOD and real-time systems and services;
- delay in customer orders based on, among other reasons, capital
expenditure restraints or the availability of content for VOD and
pending completion of negotiations for content between the cable
companies and content providers, particularly major movie studios and
providers of subscription based content such as HBO, Showtime, and
Starz-Encore;
- the timing, pricing and number of sales of our products;
- actions taken by our competitors, including new product introductions
and enhancements;
- changes in our prices or the prices of our competitors;
- our ability to develop and introduce new products and to deliver new
services and enhancements that meet customer requirements in a timely
manner;
- the length of the sales cycle for our products;
- our ability to control costs;
13
- technological changes in our markets;
- deferrals of customer orders in anticipation of product enhancements
or new products;
- customer budget cycles and changes in these budget cycles;
- our ability to service our existing customer base;
- interoperatability of our products and new versions thereof; and
- general political and economic conditions in the United States and
abroad, including, but not limited to, terrorist activity and
potential and actual armed conflict.
TRENDS IN OUR VOD BUSINESS MAY CAUSE OUR QUARTERLY OPERATING RESULTS TO
FLUCTUATE; THEREFORE, PERIOD-TO-PERIOD COMPARISONS OF OUR OPERATING RESULTS MAY
NOT NECESSARILY BE MEANINGFUL.
We have experienced significant variations in the revenue, expenses and
operating results from quarter to quarter in our VOD business, and it is
possible that these variations will continue. We believe that fluctuations in
the number of orders for our VOD systems being placed from quarter to quarter
are principally attributable to the buying patterns and budgeting cycles of
cable companies. In addition, orders are often not finalized until the end of a
quarter. As a result, our results of operations have in the past and will
possibly continue, at least in the near future, to fluctuate in accordance with
this purchasing activity. Therefore, period-to-period comparisons of our
operating results may not necessarily be meaningful. In addition, because these
factors are difficult for us to forecast, our business, financial condition and
results of operations for one quarter or a series of quarters may be adversely
affected and below the expectations of securities analysts and investors, which
could result in material declines of our stock price.
THE VOD AND REAL-TIME MARKETS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE AND WE
MAY BE UNABLE TO COMPETE SUCCESSFULLY AGAINST OUR CURRENT AND FUTURE COMPETITORS
WHICH WOULD ADVERSELY AFFECT OUR BUSINESS.
The market for VOD systems is still young. Although there have been many
commercial deployments of VOD systems, ultimate market share has yet to be
determined and there are numerous new entries into the market. We believe that
the long-term primary factors influencing competition in the VOD market include
the flexibility of the VOD system, product quality and reliability and
established relationships with providers of interactive television services,
including cable companies. A list of the competitors faced by both of our
divisions and a categorization of our competitors is included under the
Competition heading in the Business section in this Annual Report on Form 10-K.
IF WE DO NOT MANAGE OUR ANTICIPATED GROWTH IN OUR VOD OPERATIONS, WE MAY NOT BE
ABLE TO OPERATE OUR BUSINESS EFFECTIVELY. OUR FAILURE TO MANAGE GROWTH COULD
DISRUPT OUR OPERATIONS AND ADVERSELY AFFECT OUR BUSINESS.
We anticipate growth in our VOD operations and that a majority of our
future revenue growth will come from our VOD operations. Our anticipated growth
could place a strain on our management systems and other resources. Our ability
to successfully implement our business plan in a rapidly evolving market will
require an effective planning and management process. We cannot assure you that
we will be able to successfully manage our anticipated expansion. If we fail to
manage our anticipated growth, our operations may be disrupted and our business
may be adversely affected. We must continue to improve and effectively utilize
our existing operational, management, marketing and financial systems and
successfully recruit, hire, train and manage personnel, which we may be unable
to do. Further, we must maintain close coordination among our technical,
finance, marketing, sales and production staffs.
OUR FUTURE SUCCESS WILL REQUIRE THAT WE DEVELOP AND MARKET ADDITIONAL PRODUCTS
THAT ACHIEVE MARKET ACCEPTANCE AND ENHANCE OUR CURRENT PRODUCTS. IF WE FAIL TO
DEVELOP AND MARKET NEW PRODUCTS AND PRODUCT ENHANCEMENTS IN A TIMELY MANNER, OUR
BUSINESS COULD BE ADVERSELY AFFECTED.
Our inability to develop, on a timely basis, new products or enhancements
to existing products, or the failure of such new products or enhancements to
achieve market acceptance could have a material adverse effect on our business,
financial condition and results of operations. We recently completed the
development of our MediaHawk 4G On-Demand Platform. Although we have shipped
and installed the new system to a limited number of cable companies, we may
experience unexpected problems. Although delivery of VOD over digital
subscriber lines currently is not practical in the United States, we will look
for opportunities in the domestic market as digital
14
subscriber line technology continues to advance. There can be no assurance that
we will be successful in pursuing any domestic digital subscriber line
opportunities.
A SIGNIFICANT PORTION OF OUR INTEGRATED SOLUTIONS DIVISION REVENUE HAS BEEN, AND
IS EXPECTED TO CONTINUE TO BE, CONCENTRATED IN A SMALL NUMBER OF CUSTOMERS. IF
WE LOSE ONE OR MORE SIGNIFICANT INTEGRATED SOLUTIONS DIVISION CUSTOMERS, OUR
BUSINESS WOULD BE ADVERSELY AFFECTED.
We currently derive, and expect to continue to derive, a significant
portion of our real-time revenue from a limited number of customers. As a
result, the loss of, or reduced demand for products or related services from one
or more of our major customers could adversely affect our business, financial
condition and results of operations.
In the fiscal year ended June 30, 2003, we recorded $12.4 million in sales
to Lockheed-Martin. This amount accounted for approximately 34% of our total
Integrated Solutions division revenue during fiscal 2003.
We also derive a significant portion of our Integrated Solutions division's
revenues from the supply of systems under government contracts. For the fiscal
year ended June 30, 2003, we recorded $18.2 million in sales to U.S. government
prime contractors and agencies of the U.S. Government. This amount represents
approximately 24% of our total Integrated Solutions division sales in the
period. Government business is subject to many risks, such as delays in
funding, reduction or modification of contracts or subcontracts, changes in
governmental policies and the imposition of budgetary constraints. A loss of
government contract revenues could have a material adverse effect on our
business, results of operations and financial condition.
Except for our agreement with Lockheed-Martin, we do not have written
agreements that require customers to purchase fixed minimum quantities of our
products. Our sales to specific customers tend to, and are expected to continue
to, vary from year-to-year, depending on such customers' budgets for capital
expenditures and new product introductions.
WE RELY ON A COMBINATION OF CONTRACTS AND COPYRIGHT, TRADEMARK, AND TRADE SECRET
LAWS TO ESTABLISH AND PROTECT OUR PROPRIETARY RIGHTS IN OUR TECHNOLOGY. WE DO
NOT OWN ANY SIGNIFICANT PATENTS DIRECTLY. IF WE ARE UNABLE TO PROTECT OUR
INTELLECTUAL PROPERTY RIGHTS, OUR COMPETITIVE POSITION COULD BE HARMED OR WE
COULD BE REQUIRED TO INCUR EXPENSES TO ENFORCE OUR RIGHTS. OUR BUSINESS ALSO
COULD BE ADVERSELY AFFECTED IF WE ARE FOUND TO INFRINGE ON THE INTELLECTUAL
PROPERTY RIGHTS OF OTHERS.
We typically enter into confidentiality or license agreements with our
employees, consultants, customers and vendors, in an effort to control access to
and distribution of our proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use our
proprietary technology without authorization. The steps we take may not prevent
misappropriation of our intellectual property, and the agreements we enter into
may not be enforceable. In addition, effective copyright and trade secret
protection may be unavailable or limited in some foreign countries. Other
companies, including our competitors, may currently own or obtain patents or
other proprietary rights that might prevent, limit or interfere with our ability
to make, use or sell our products. As a result, we may be found to infringe on
the intellectual property rights of others. In the event of a successful claim
of infringement against us and our failure or inability to license the infringed
technology, our business and operating results could be adversely affected.
Any litigation or claims, whether or not valid, could result in substantial
costs and diversion of our resources. Intellectual property litigation or
claims could force us to do one or more of the following:
- cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;
- obtain a license from the holder of the infringed intellectual
property right, which license may not be available on reasonable
terms, if at all; and
- redesign products or services that incorporate the disputed
technology.
If we are forced to take any of the foregoing actions, we could face
substantial costs and our business could be seriously harmed. Although we carry
general liability insurance, our insurance may not cover potential claims of
this type or be adequate to indemnify us for all liability that may be imposed.
15
We may initiate claims or litigation against third parties in the future
for infringement of our proprietary rights or to determine the scope and
validity of our proprietary rights or the proprietary rights of competitors.
These claims could result in costly litigation and the diversion of our
technical and management personnel. As a result, our operating results could
suffer and our financial condition could be harmed.
IN SOME CASES, WE RELY ON A LIMITED NUMBER OF SUPPLIERS, WHICH ENTAILS SEVERAL
RISKS, INCLUDING THE POSSIBILITY OF DEFECTIVE PARTS, A SHORTAGE OF COMPONENTS,
AN INCREASE IN COMPONENT COSTS, AND REDUCED CONTROL OVER DELIVERY SCHEDULES.
We sometimes purchase product components from a single supplier in order to
obtain the required technology and the most favorable price and delivery terms.
These components include, for example, processors, power supplies, integrated
circuits and storage devices. We purchase product components from the following
single suppliers: Seagate Technology, Inc., Intel Corporation, Qlogic
Corporation, VME Micro System Corporation, Precision Analog Systems, Macrolink,
Inc., LSI Logic Corporation, National Instruments, Dell Computer Corporation,
Xyratex Storage Systems, Synergy, Peritek Corporation, Unipower Corporation,
Vicor Corporation, Wall Industries, Inc., and Vitesse Semiconductor Corporation.
In most cases, comparable products are available from other sources, but would
require significant reengineering to conform to our system specifications.
Historically, we have not experienced any major disruption in manufacturing our
products due to problems with, or defective products from, a single supplier,
but our reliance on single suppliers entails a number of risks, including the
possibility of defective parts, a shortage of components, increase in components
costs, and reduced control over delivery schedules. Any of these events could
adversely affect our business, results of operations and financial condition.
We estimate that a lead-time of 16-24 weeks may be necessary to switch to an
alternative supplier of certain custom application specific integrated circuit
and printed circuit assemblies. A change in the supplier of these components
without the appropriate lead-time could result in a material delay in shipments
by us of certain products. Where alternative sources are available,
qualification of the alternative suppliers and establishment of reliable
supplies of components from such sources may also result in delays. Shipping
delays may also result in a delay in revenue recognition, possibly outside the
fiscal period originally planned, and, as a result, may adversely affect our
financial results for that particular period.
OUR BUSINESS MAY BE ADVERSELY AFFECTED IF WE FAIL TO RETAIN OUR CURRENT KEY
PERSONNEL, MANY OF WHOM WOULD BE DIFFICULT TO REPLACE, OR FAIL TO ATTRACT
ADDITIONAL QUALIFIED PERSONNEL.
Our future performance depends on the continued service of our senior
management and our engineering, sales and marketing and manufacturing personnel.
Competition for qualified personnel is intense, and we may fail to retain our
key employees or to attract or retain other highly qualified personnel. We do
not carry key person life insurance on any of our employees. The loss of the
services of one or more of our key personnel could seriously impact our
business. Our future success also depends on our continuing ability to attract,
hire, train and retain highly skilled managerial, technical, sales, marketing
and customer support personnel. In addition, new employees frequently require
extensive training before they achieve desired levels of productivity.
WE CURRENTLY HAVE STRATEGIC RELATIONSHIPS WITH SCIENTIFIC-ATLANTA, MOTOROLA,
MICROSOFT CORPORATION, TV GUIDE, AND PIONEER, AMONG OTHERS. WE MAY BE
UNSUCCESSFUL IN MAINTAINING THESE STRATEGIC RELATIONSHIPS, OR ESTABLISHING NEW
STRATEGIC RELATIONSHIPS, THAT WILL BE AN IMPORTANT PART OF OUR FUTURE SUCCESS.
IN EITHER EVENT, OUR BUSINESS COULD BE ADVERSELY AFFECTED.
The success of our business is and will continue to be dependent in part on
our ability to maintain existing and enter into new strategic relationships.
There can be no assurance that:
- such existing or contemplated relationships will be commercially
successful;
- we will be able to find additional strategic partners; or
- we will be able to negotiate acceptable terms with potential strategic
partners.
We cannot provide assurance that existing or future strategic partners will
not pursue alternative technologies or develop alternative products in addition
to or in lieu of our technology, either on their own or in collaboration with
others, including our competitors. These alternative technologies or products
may be in direct competition with our technologies or products and may
significantly erode the benefit of our strategic relationships and adversely
affect our business, financial condition and results of operations.
16
INTERNATIONAL SALES ACCOUNTED FOR APPROXIMATELY 14% AND 15% OF OUR REVENUE IN
FISCAL YEARS 2003 AND 2002, RESPECTIVELY. ACCORDINGLY, OUR BUSINESS IS
SUSCEPTIBLE TO NUMEROUS RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.
Although our anticipated revenue growth in the near term is expected to
occur primarily in North America, we expect that long-term growth will require
expansion of our international operations as DSL and digital cable technology is
more widely deployed in Europe and Asia. As a result, we are subject to a
number of risks associated with international business activities that could
increase our costs, lengthen our sales cycle and require significant management
attention. These risks include:
- compliance with, and unexpected changes in, regulatory requirements
resulting in unanticipated costs and delays;
- lack of availability of trained personnel in international locations;
- tariffs, export controls and other trade barriers;
- longer accounts receivable payment cycles than in the United States;
- potential difficulty of enforcing agreements and collecting
receivables in some foreign legal systems;
- potential difficulty in enforcing intellectual property rights in
certain foreign countries;
- potentially adverse tax consequences, including restrictions on the
repatriation of earnings;
- the burdens of complying with a wide variety of foreign laws;
- general economic conditions in international markets; and
- currency exchange rate fluctuations.
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DILUTE THE OWNERSHIP INTEREST OF OUR
STOCKHOLDERS, CAUSE US TO INCUR DEBT OR ASSUME CONTINGENT LIABILITIES OR PRESENT
OTHER CHALLENGES, SUCH AS INTEGRATION ISSUES, FOR OUR BUSINESS, WHICH IF NOT
SUCCESSFULLY RESOLVED WOULD ADVERSELY AFFECT OUR BUSINESS.
As part of our business strategy, we review acquisition prospects that
would compliment our current product offerings, enhance our technical
capabilities or otherwise offer growth opportunities. While we currently have
no agreements with respect to any acquisition, we periodically review
investments in new businesses, and we may acquire businesses, products or
technologies in the future. In the event of any future acquisitions, we could
issue equity securities that would dilute current stockholders' percentage
ownership, incur substantial debt, or assume contingent liabilities. These
actions could materially adversely affect our operating results. Acquisitions
also entail numerous risks, including:
- difficulties in the assimilation of acquired operations, technologies
or services;
- unanticipated costs associated with the acquisition;
- diversion of management's attention from other business concerns;
- adverse effects on existing business relationships;
- risks associated with entering markets in which we have no or limited
prior experience; and
- potential loss of key employees of acquired companies.
We cannot assure that we will be able to successfully integrate any
business, products, technologies or personnel that we might acquire in the
future. Our failure to do so could materially adversely affect our business,
operating results and financial condition.
WE MAY EXPERIENCE COMPETITIVE PRICING PRESSURE FOR OUR PRODUCTS AND SERVICES,
WHICH MAY IMPAIR OUR REVENUE GROWTH AND OUR ABILITY TO ACHIEVE PROFITABILITY.
We may experience decreasing prices for our products and services due to
competition, the purchasing leverage of our customers and other factors. If we
are required to decrease prices, our results of operations will be adversely
affected. We may reduce prices in the future to respond to competition and to
generate increased sales volume.
IMPLEMENTATION OF OUR PRODUCTS IS COMPLEX, TIME CONSUMING AND EXPENSIVE, AND WE
FREQUENTLY EXPERIENCE LONG SALES AND IMPLEMENTATION CYCLES. CONSEQUENTLY, OUR
QUARTERLY REVENUES, EXPENSES AND OPERATING RESULTS MAY VARY SIGNIFICANTLY IN THE
FUTURE, PERIOD-TO-PERIOD COMPARISONS OF OUR RESULTS OF OPERATIONS MAY NOT
17
NECESSARILY BE MEANINGFUL, AND THESE COMPARISONS SHOULD NOT BE RELIED UPON AS
INDICATIONS OF FUTURE PERFORMANCE.
Real-time and VOD products are relatively complex, their purchase generally
involves a significant commitment of capital, and there are frequent delays
associated with large capital expenditures and implementation procedures within
an organization. Moreover, the purchase of such products typically requires
coordination and agreement among a potential customer's corporate headquarters
and its regional and local operations. As a result, the sales cycles associated
with the purchase of many of our products are typically lengthy and subject to a
number of significant risks, including customers' budgetary constraints and
internal acceptance reviews, over which we have little or no control.
RISKS RELATED TO OUR INDUSTRIES
THE CURRENT UNCERTAINTY AND FINANCIAL INSTABILITY OF THE CABLE INDUSTRY MAY
ADVERSELY IMPACT THE SUCCESS OF OUR VOD BUSINESS.
We sell our VOD products to cable companies that have upgraded their
networks to support interactive, digital services. However, the cable industry
has received negative publicity regarding cable companies' lack of sufficient
free cash flow to fund capital expenditures and debt service requirements after
years of significant capital spending to upgrade their cable plants to digital,
two-way interactive capability. As a result, certain cable companies have
communicated their intent to reduce capital spending to accelerate the point at
which they will generate free cash flow and improve their financial stability.
This may adversely impact the speed at which these cable companies deploy VOD in
their cable markets. Another factor contributing to the uncertainty in the cable
industry was the bankruptcy filing by Adelphia Communications Corporation.
THE SUCCESS OF OUR VOD BUSINESS IS DEPENDENT UPON THE EMERGING DIGITAL VIDEO
MARKET, WHICH MAY NOT GAIN BROAD MARKET ACCEPTANCE. ANY FAILURE BY THE MARKET
TO ACCEPT DIGITAL VIDEO TECHNOLOGY WILL HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS.
VOD is an emerging technology, and we cannot assure you that it will
attract widespread demand or market acceptance. Further, the potential size of
the VOD market and the timing of our development are uncertain. Our success in
the VOD market will depend upon the commercialization and broad acceptance of
VOD by residential cable subscribers and other industry participants, including
cable companies, content providers, set-top box manufacturers, and educational
institutions.
Cable companies historically have relied on traditional analog technology
for video delivery and distribution. Interactive technology installation, which
is necessary to provide VOD, requires a significant initial investment of
capital. The future growth of our VOD business will depend on the pace of the
installation of interactive digital cable and digital set-top-boxes, the rate at
which cable companies deploy digital infrastructure, the rate at which digital
video technology expands to additional market segments, and the rate that the
technology is adopted by consumers.
THE SUCCESS OF OUR VOD BUSINESS IS DEPENDENT ON THE AVAILABILITY OF, AND THE
DISTRIBUTION WINDOWS FOR, MOVIES, PROGRAMS AND OTHER CONTENT. IF SUFFICIENT VOD
CONTENT IS NOT AVAILABLE ON A TIMELY BASIS, OUR VOD BUSINESS WILL BE ADVERSELY
AFFECTED.
The success of VOD will largely be dependent on the availability of a wide
variety and substantial number of movies, subscription based content from
providers such as Home Box Office, Inc., Showtime Networks, Inc., and Starz
Encore Group, LLC, specialty programs and other material, which we refer to as
content, in digital format. We do not provide digital VOD content. Therefore,
the future success of our VOD business is dependent in part on content
providers, such as traditional media and entertainment companies, providing
significant content for VOD. Further, we are dependent in part on other third
parties to convert existing analog content into digital content so that it may
be delivered via VOD.
In addition, we believe that the ultimate success of VOD will depend in
part on the timing of the VOD distribution window. The distribution window is
the time period during which different mediums, such as home movie rental
businesses, receive and have exclusive rights to motion picture releases.
Currently, video rental businesses have an advantage of receiving motion picture
releases on an exclusive basis before most other forms of
18
non-theatrical movie distribution, such as pay-per-view, premium television,
VOD, basic cable and network syndicated television. The length of the exclusive
distribution window for movie rental businesses varies, typically ranging from
30 to 90 days for domestic video stores. Thereafter, movies are made
sequentially available to various television distribution channels. We believe
the success of VOD will depend in part on movies being available for VOD
distribution either simultaneously with, or shortly after, they are available
for video rental distribution. The order, length and exclusivity of each window
for each distribution channel is determined solely by the studio releasing the
movie. Given the size of the home video rental industry, the studios have a
significant interest in maintaining that market. We cannot assure you that
favorable changes, if any, will be made relating to the length and exclusivity
of the video rental and television distribution windows.
A number of the major studios have entered into agreements with certain
cable companies and content aggregators to provide digital movies for
distribution through VOD. However, not all of the major studios have reached
agreements regarding the content for VOD. If studios fail to reach agreements
regarding content or cancel existing agreements, our customers could delay or
cancel VOD system orders, which would adversely affect our VOD business.
WE CANNOT ASSURE YOU THAT OUR PRODUCTS AND SERVICES WILL KEEP PACE WITH
TECHNOLOGICAL DEVELOPMENTS AND EMERGING INDUSTRY STANDARDS, ADDRESS THE CHANGING
NEEDS OF OUR CUSTOMERS OR ACHIEVE MARKET ACCEPTANCE, ANY OF WHICH COULD
MATERIALLY ADVERSELY AFFECT OUR BUSINESS.
The markets for our products are characterized by rapidly changing
technology, evolving industry standards and new product introductions and
enhancements. There can be no assurance that we will be successful in enhancing
the products of our Xstreme and Integrated Solutions divisions or developing,
manufacturing and marketing new products that satisfy customer needs or achieve
market acceptance. In addition, services, products or technologies developed by
others may render one or more of our products or technologies uncompetitive,
unmarketable or obsolete. Future technological advances in the real-time,
television and video industries may result in the availability of new products
and services that could compete with our solutions or reduce the cost of
existing products or services. Our future success will depend on our ability to
continue to enhance our existing products, including development of new
applications for our technology, and to develop and introduce new products to
meet and adapt to changing customer requirements and emerging technologies.
Further, announcements of currently planned or other new product offerings by
our competitors may cause customers to defer purchase decisions or to fail to
purchase our existing solutions. Our failure to respond to rapidly changing
technologies could adversely affect our business, financial condition and
results of operations.
WE ARE SUBJECT TO GOVERNMENTAL REGULATION, AS IS THE TELEVISION INDUSTRY. ANY
FINDING THAT WE HAVE BEEN OR ARE IN NONCOMPLIANCE WITH SUCH LAWS COULD RESULT
IN, AMONG OTHER THINGS, GOVERNMENTAL PENALTIES. FURTHER, CHANGES IN EXISTING
LAWS OR NEW LAWS MAY ADVERSELY AFFECT OUR BUSINESS.
We are subject to various international, U.S. federal, state and local laws
affecting our Xstreme and Integrated Solutions divisions. The television
industry is subject to extensive regulation in the United States and other
countries. Our VOD business is dependent upon the continued growth of the
digital television industry in the United States and internationally. Cable
companies are subject to extensive government regulation by the Federal
Communications Commission and other federal and state regulatory agencies.
These regulations could have the effect of limiting capital expenditures by
cable companies and thus could have a material adverse effect on our business,
financial condition and results of operations. The enactment by federal, state
or international governments of new laws or regulations could adversely affect
our cable operator customers, and thereby materially adversely affect our
business, financial condition and results of operations.
WE MAY BE SUBJECT TO LIABILITY IF PRIVATE INFORMATION SUPPLIED TO OUR CUSTOMERS,
INCLUDING CABLE COMPANIES, IS MISUSED.
Our VOD systems allow cable companies to collect and store video
preferences and other data that many viewers may consider confidential.
Unauthorized access or use of this information could result in liability to our
customers, and potentially us, and might deter potential VOD viewers. We have
no control over the policy of our customers with respect to the access to this
data and the release of this data to third parties.
19
OTHER RISKS
WE HAVE IMPLEMENTED CERTAIN ANTI-TAKEOVER PROVISIONS THAT COULD MAKE IT MORE
DIFFICULT FOR A THIRD PARTY TO ACQUIRE US.
Provisions of Delaware law and our restated certificate of incorporation,
amended and restated bylaws, and rights plan could make it more difficult for a
third party to acquire us, even if doing so would be beneficial to our
stockholders.
We are subject to certain Delaware anti-takeover laws regulating corporate
takeovers. These anti-takeover laws prevent a Delaware corporation from
engaging in a business combination involving a merger or sale of more than 10%
of our assets with any stockholder, including affiliates and associates of the
stockholder, who owns 15% or more of the outstanding voting stock, for three
years following the date that the stockholder acquired 15% or more of the
corporation's stock except under limited circumstances.
There are provisions in our restated certificate of incorporation and our
amended and restated bylaws that also may delay, deter or impede hostile
takeovers or changes of control.
In addition, we have a rights plan, also known as a poison pill. The
rights plan has the potential effect of significantly diluting the ownership
interest in us of any person that acquires beneficial ownership of 15% or more
of our common stock or commences a tender offer that would result in a person or
group owning 15% or more of our common stock.
IN THE FUTURE, WE MAY NEED TO RAISE ADDITIONAL CAPITAL. THIS CAPITAL MAY NOT BE
AVAILABLE ON ACCEPTABLE TERMS, IF AT ALL. IF WE CANNOT RAISE FUNDS ON
ACCEPTABLE TERMS, IF AND WHEN NEEDED, WE MAY NOT BE ABLE TO DEVELOP OR ENHANCE
OUR PRODUCTS AND SERVICES, TAKE ADVANTAGE OF FUTURE OPPORTUNITIES, GROW OUR
BUSINESS OR RESPOND TO COMPETITIVE PRESSURES OR UNANTICIPATED REQUIREMENTS.
We believe that our existing cash balances and funds generated by
operations will be sufficient to meet our anticipated working capital and
capital expenditure requirements for the next twelve months. After that, we may
need to raise additional funds. We cannot be certain that we will be able to
obtain additional financing on favorable terms, if at all.
TERRORIST ATTACKS AND THE POSSIBILITY OF WIDER ARMED CONFLICT MAY HAVE AN
ADVERSE EFFECT ON OUR BUSINESS AND OPERATING RESULTS.
Terrorist attacks and other acts of violence or war, such as those that
took place on September 11, 2001 and in Iraq, could have a material adverse
affect on our business and operating results. There can be no assurance that
there will not be further terrorist attacks against the United States or our
interests. Future terrorist attacks or wars could result in political and
social turmoil that could put further pressure on economic conditions in the
United States and worldwide. These political, social and economic conditions
could make it difficult for us, our vendors and our customers to accurately
forecast and plan future business activities and could have a material adverse
effect on our business and results of operations. Finally, further terrorist
acts could cause the United States to enter into a wider armed conflict which
could further impact our business and results of operations.
OUR STOCK PRICE HAS BEEN VOLATILE IN THE PAST AND MAY BE VOLATILE IN THE FUTURE.
Our common stock is traded on the Nasdaq National Market. For the fiscal
year ended June 30, 2003, the high and low prices reported on the Nasdaq
National Market were $4.78 and $1.25, respectively. Further, as of September 8,
2003, the price as reported on the Nasdaq National Market was $4.24. The market
price of our common stock may fluctuate significantly in the future in response
to various factors, some of which are beyond our control, including the
following and the other risks discussed under the heading "Risk Factors:"
- variations in our quarterly operating results;
- changes in securities analysts' estimates of our financial
performance;
- the development of the VOD market in general;
- changes in market valuations of similar companies;
20
- announcement by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
- loss of a major customer or failure to complete significant
transactions; and
- additions or departures of key personnel.
In addition, in recent years the stock market in general, and the Nasdaq
National Market and the market for technology companies in particular, have
experienced extreme price and volume fluctuations. In some cases, these
fluctuations have been unrelated or disproportionate to the operating
performance of these companies. These market and industry factors may
materially and adversely affect our stock price, regardless of our operating
performance.
In the past, class action litigation often has been brought against
companies following periods of volatility in the market price of those
companies' common stock. We may become involved in this type of litigation in
the future. Litigation is often expensive and diverts management's attention
and resources, which could materially and adversely affect our business,
financial condition and results of operations.
21
ITEM 2. PROPERTIES
Our principal facilities as of June 30, 2003, are listed below. All of the
principal facilities are leased. Management considers all facilities listed
below to be suitable for the purpose(s) for which they are used, including
manufacturing, research and development, sales, marketing, service, and
administration.
EXPIRATION APPROX.
LOCATION PRINCIPAL USE DATE OF LEASE FLOOR AREA(SQ. FEET)
- ------------------------ -------------------------------- ------------- --------------------
4375 River Green Parkway Corporate Headquarters, August 2006 33,000
Suite 100 Administration, Research &
Duluth, Georgia Development, Sales and Marketing
2800 Gateway Drive Manufacturing and Service December 2004 40,000
Pompano Beach, Florida
2881 Gateway Drive Administrative and Sales and December 2004 30,000
Pompano Beach, Florida Marketing
3535 Route 66 Repair and Service Depot May 2009 17,000
Bldg. 3
Neptune, New Jersey
3rd Floor, Voyager Place Sales, Service and Research & January 2008 10,000
Shoppenhangers Road Development
Maidenhead, Berkshire UK
100 Highpoint Drive Research & Development December 2006 16,500
Chalfont, Pennsylvania
Except for the Chalfont, Pennsylvania facility, which is used exclusively
for the Xstreme division, and the Administrative and Sales and Marketing offices
at 2881 Gateway Drive and Repair and Service Depot at Neptune, NJ, which are
used exclusively for the Integrated Solutions division, our facilities are used
for both divisions. In addition to the facilities listed above, we also lease
space in various domestic and international industrial centers for use as sales
and service offices and warehousing.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our ordinary course of business. We are not presently involved
in any material litigation, but have the following matters pending:
- SeaChange International, Inc. v. Putterman, et al, Pulaski County
------------------------------------------------------
Circuit Court, Arkansas, Case No. 99-5384. The suit was filed on June
14, 1999 alleging that we defamed SeaChange International, Inc.
("SeaChange"). On June 14, 2000, we counterclaimed against SeaChange
alleging that SeaChange defamed us. On January 4, 2001, the court
granted our motion to dismiss all claims against us. SeaChange
subsequently successfully appealed and the matter is now set for trial
in January 2004.
- Eason v. Concurrent Computer Corp, et al., Superior Court of New
---------------------------------------------
Jersey, Appellate Division, Docket No. A-003181-02T2. This suit arose
out of personal injury claim filed in 1994 wherein plaintiff alleged
that he was injured when a lamp post in our parking lot fell. The case
against us was dismissed in 1995, but in 2000 the plaintiff amended
the cause of action and refiled against us alleging spoliation of
evidence. The plaintiff obtained a default judgment for $119,800 in
December 2001 that was vacated in August 2002. Plaintiff subsequently
refiled and in February 2003 the court granted our motion to dismiss
all claims. Plaintiff has appealed, but no date for arguments has been
set.
22
We are involved in various other legal proceedings. We believe that any
liability which may arise as a result of these proceedings, including the
proceedings specifically discussed above, will not have a material adverse
effect on our financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM X. OFFICERS OF THE REGISTRANT
Our officers are elected by the Board of Directors to hold office until
their successors have been chosen and qualified or until earlier resignation or
removal. Set forth below are the names, positions, and ages of executive
officers as of September 8, 2003:
NAME POSITION AGE
- ---- -------- ---
Jack A. Bryant, III President, Chief Executive Officer, and Director 45
Stephen K. Necessary President, Xstreme Division 47
Paul C. Meyer President, Integrated Solutions Division 56
Steven R. Norton Executive Vice President, Chief Financial Officer and Secretary 42
Robert E. Chism Vice President, Development and Chief Technical Officer, Xstreme 50
Division
Robert T. Menzel Vice President, Sales & Marketing, Integrated Solutions Division 50
David Nicholas Vice President, North American Cable Sales, Xstreme Division 49
Kirk L. Somers General Counsel 38
Jack A. Bryant, III, President, Chief Executive Officer, and Director. Mr.
Bryant has served as President and Chief Executive Officer since October 2000.
Mr. Bryant served as President of the Xstreme division from July 2000 to October
2000. Mr. Bryant was named a Director in January 2001. Since May 2002, Mr.
Bryant has also served as Director for Thirdspace Living Ltd. Prior to joining
Concurrent, he held a number of positions at Arris Corporation (f.k.a. Antec
Corporation), a communications technology company that specializes in
hybrid-fiber-coax-based networks, from 1991 to June 2000. The positions
included, from March 1998 to June 2000, President of the Network Technologies
Group, from January 1996 to March 1998, President of the Digital Systems
Division, and from January 1995 to January 1996, Vice President of Marketing.
Before joining Arris, Mr. Bryant held various product marketing and sales
positions at General Instrument and Scientific-Atlanta.
Stephen K. Necessary, President, Xstreme Division. Mr. Necessary has
served as President of the Xstreme division since June 2002. From January 2000
to June 2002, Mr. Necessary was President, CEO, and a Director of PowerTV, Inc,
a software subsidiary of Scientific-Atlanta. From April 1998 to January 2000,
Mr. Necessary served as Corporate Vice President and Vice President of
Marketing at Scientific-Atlanta. From June 1982 to February 1991 and then from
October 1995 to April 1998, he also held a number of other positions with
Scientific-Atlanta, including Vice President and General Manager of analog video
systems. Mr. Necessary also spent several years at Arris Corporation (f.k.a.
Antec Corporation), where his final position was President of the products
group. Earlier in his career, he was a team manager for Procter & Gamble.
Paul C. Meyer, President, Integrated Solutions Division. Mr. Meyer has
served as President of the Integrated Solutions division since December 2000.
Immediately prior to joining Concurrent, he was the President of ASM Associates,
Inc. from 1996 to 2000, a consulting firm that provides interim senior
management services. From 1994 to 1996, he served as the Executive Vice
President and General Manager of Viacom New Media. From 1988 to 1994, he served
as President of his own consulting firm, Paul C. Meyer & Associates, Ltd.,
leading a small team of professionals in consulting assignments involving
turnaround, restructuring, and crisis management. Before forming his own firm,
he served in various positions with Coleco Industries, Inc.
Steven R. Norton, Executive Vice President, Chief Financial Officer and
Secretary. Mr. Norton has served as the Executive Vice President and Chief
Financial Officer since October 1999. From March 1996 to April 1999,
23
Mr. Norton was Vice President of Finance and Administration for LHS Group, Inc.,
a formerly publicly held provider of services to communications services
providers and Chief Financial Officer for one of its subsidiaries, LHS
Communications Systems, Inc. Prior to his employment with LHS, he was an Audit
Senior Manager for Ernst & Young and KPMG LLP.
Robert E. Chism, Vice President, Development and Chief Technology Officer,
Xstreme Division. Mr. Chism has served as Vice President, Development of the
Xstreme division since April 1999 and was named Chief Technology Officer in
February 2002. From June 1996 to April 1999, he served as the Vice President,
Development. From October 1994 through June 1996, he served as Vice President,
Technical and Production Operations of Harris Computer Systems Corporation. In
June 1993, he joined the Harris Computer Systems Division of Harris Corporation
as Director, Simulation Business Area. Before joining the Harris Computer
Systems Division, he held diverse engineering, program management and marketing
assignments in computer and related industries with General Electric Company, a
diversified industrial corporation, and from May 1978 to June 1993 he was
Subsection Manager of Satellite Command and Data Handling.
Robert T. Menzel, Vice President, Sales & Marketing, Integrated Solutions
Division. Mr. Menzel has served as Vice President, Sales & Marketing of the
Integrated Solutions division since April 1999. He served as the Vice
President, real-time systems from June 1997 to March 1999, and the Vice
President, North American Sales, from June 1996 to February 1997. From June
1996 to June 1997, he was the Vice President, Interactive Video-on-Demand. Mr.
Menzel was Vice President, General Manager of the Trusted Systems Division of
Harris Computer Systems Corporation from April 1995 to June 1996, and he served
as Vice President, National Sales of Harris Computer Systems Corporation from
October 1994 to April 1995.
David M. Nicholas, Vice President, North American Cable Sales, Xstreme
Division. Mr. Nicholas has served as Vice President, North American Cable
Sales, of the Xstreme division since March 1999. From September 1995 to
February 1999 he served as Executive Vice President of Pioneer New Media
Technologies, Inc., a provider of audio video products. From August 1993 to
August 1995, he served as Vice President and General Manager of Texscan Network
Systems, a privately held provider of advertising insertion solutions. Prior to
that time, he served in various positions at Pioneer Communications of America,
Panasonic Industrial, and Magnavox.
Kirk L. Somers, General Counsel. Mr. Somers has served as General Counsel
since November 2001. Immediately prior to joining Concurrent, from December
1998 to November 2001, Mr. Somers was the Assistant General Counsel for a
company within divine, inc. (f.k.a. eshare communication, Inc.) where he was
responsible for corporate-wide development and enforcement of the company's
intellectual property portfolio as well as commercial contracts and other
corporate matters. From December 1995 to December 1998, Mr. Somers was a
partner in the law firm of Marshall & Melhorn in Toledo, Ohio practicing in the
area of litigation. Prior to that, he was a JAG in the USAF.
24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is currently traded under the symbol "CCUR" on The Nasdaq
National Market. The following table sets forth the high and low sale
information for our Common Stock for the periods indicated, as reported by The
Nasdaq National Market.
FISCAL YEAR 2003
QUARTER ENDED: HIGH LOW
------ -----
September 30, 2002 $ 4.78 $2.10
December 31, 2002 $ 3.44 $1.25
March 31, 2003 $ 3.87 $1.90
June 30, 2003 $ 3.66 $1.94
FISCAL YEAR 2002
QUARTER ENDED: HIGH LOW
------ -----
September 30, 2001 $12.70 $5.76
December 31, 2001 $16.99 $7.25
March 31, 2002 $17.68 $7.11
June 30, 2002 $ 9.23 $4.25
As of September 8, 2002, there were 62,367,686 shares of Common Stock
outstanding, held of record by approximately 1,379 stockholders with a closing
price on the Nasdaq National Market of $4.24.
We have never declared or paid any cash dividends on our capital stock.
Our present policy is to retain all available funds and any future earnings to
finance the operation and expansion of our business, and no change in the policy
is currently anticipated.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data which has been derived from our audited consolidated financial statements.
The information set forth below is not necessarily indicative of the results of
future operations and should be read in conjunction with, and is qualified by
reference to, our financial statements and related notes thereto included
elsewhere herein and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
25
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED JUNE 30,
---------------------------------------------------------
INCOME STATEMENT DATA 2003 2002 2001 2000 1999
- ---------------------------- ------------- ------- -------- ------------- --------
Net sales $ 75,453 $89,369 $72,821 $ 68,090 $69,963
Gross margin 36,423 44,566 33,020 31,743 35,337
Operating income (loss) (11,429) (1) 3,679 (5,591) (23,987) (3) (1,289)
Net income (loss) (24,552) (2) 4,383 (6,189) (23,715) (3) (1,665)
Net income (loss) per share
Basic $ (0.40) (2) $ 0.07 $ (0.11) $ (0.46) (3) $ (0.03)
Diluted $ (0.40) (2) $ 0.07 $ (0.11) $ (0.46) (3) $ (0.03)
AT JUNE 30,
---------------------------------------------------------
BALANCE SHEET DATA 2003 2002 2001 2000 1999
- ---------------------------- ------------- ------- -------- ------------- --------
Cash, cash equivalents and
short-term investments $ 30,697 $30,519 $ 9,460 $ 10,082 $ 6,872
Working capital 30,042 43,545 14,824 15,383 14,694
Total assets 77,839 98,688 57,052 57,078 40,569
Stockholders' equity 43,458 69,224 33,283 38,271 26,011
Book value per share $ 0.70 $ 1.12 $ 0.60 $ 0.71 $ 0.54
(1) Operating loss for the year ended June 30, 2003, includes a
restructuring charge of $1.6 million.
(2) Net loss for the year ended June 30, 2003 includes a $13.0 million
impairment charge related to our investment in Thirdspace and a
restructuring charge of $1.6 million.
(3) In October 1999, Concurrent acquired Vivid Technology. In connection
with the acquisition, management placed a value of $14.0 million on
in-process research and development based on valuation methods it
deemed appropriate. This entire amount was written off as required by
the APB No. 16, "Business Combinations", which has since been
superceded by SFAS No. 141, "Business Combinations".
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and the notes thereto which appear elsewhere herein. The following
discussion contains forward-looking statements that reflect our plans, estimates
and beliefs. Actual results could differ materially from those discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below, elsewhere
herein and in other filings made with the Securities and Exchange Commission.
OVERVIEW
We operate our business as two distinct divisions, the Xstreme division and
the Integrated Solutions divisions. In 1998, we created the Xstreme division to
capitalize on the increasing opportunities in the emerging digital television
services market and focus on the development and sale of digital VOD systems to
cable providers that are upgrading their networks to support digital services.
Although almost all of our revenues prior to fiscal 2000 were derived from the
Integrated Solutions division, we expect in the near term that a majority of our
growth will come from our Xstreme division. VOD revenues result from the sale
of VOD systems and related services primarily to cable television providers in
North America, and to a lesser extent, to DSL service providers and cable
service providers, internationally.
Over the past several years, the real-time computer processing industry has
seen a significant shift in demand from high-priced, proprietary real-time
systems to lower-priced, open server systems. High performance processing in
the past required a large, expensive computer system with significant
proprietary and customized
26
software. Today, these requirements are often met by much smaller and less
expensive computers with off-the-shelf computer hardware and software. As a
result, revenues from both real-time products and services have been declining.
We are currently working to stabilize the revenue and possibly reverse this
trend by dedicating more resources and technology to the data acquisition market
and also by creating a unit, Concurrent Federal Systems, Inc., dedicated to
pursuing opportunities with the U.S. Government in various areas, including
homeland security. Integrated Solutions revenues consist of real-time computer
system sales to prime contractors, domestic and foreign government agencies and
commercial corporations, and fees for maintenance and other services provided to
our real-time customers.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Revenue Recognition
VOD and real-time system revenues are recognized based on the guidance in
American Institute of Certified Public Accountants Statement of Position, or
SOP, 97-2, "Software Revenue Recognition", and related amendments, SOP 98-4,
"Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue
Recognition" and SOP 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions." We recognize revenue from
the sale of these products when: (1) persuasive evidence of an arrangement
exists; (2) the system has been shipped; (3) the fee is fixed or determinable;
and (4) collectibility of the fee is probable. Under multiple element
arrangements, we allocate revenue to the various elements based on
vendor-specific objective evidence ("VSOE") of fair value. VSOE of fair value
is determined based on the price charged when the same element is sold
separately. If evidence of fair value does not exist for all elements in a
multiple element arrangement, we recognize revenue using the residual method.
Under the residual method, the fair value of the undelivered elements is
deferred and the remaining portion of the arrangement is recognized as revenue.
Determination of criteria (3) and (4) are based on our judgments regarding the
fixed nature of the fee charged for products and services delivered and the
collectibility of those fees. Should changes in conditions cause us to
determine these criteria are not met for certain future transactions, revenue
recognized for any reporting period could be adversely affected.
In certain instances, our customers require significant customization of
both software and hardware products and, therefore, revenues are recognized as
long term contracts using the percentage-of-completion method, which relies on
estimates of total expected contract revenue and costs. We follow this method
since reasonably dependable estimates of the revenue and costs applicable to
various stages of a contract can be made. Recognized revenues and profit are
subject to revisions as the contract progresses to completion. Revisions in
profit estimates are charged to income in the period in which the facts that
give rise to the revision become known.
Valuation and Accrual of Non-Cash Warrants
Comcast Cable Communications, Inc. Warrants
In March 2001, we entered into a three-year definitive purchase agreement
with Comcast Cable, to provide for the sale of VOD equipment. As part of that
agreement, we agreed to issue three types of warrants (See Note 16 to the
consolidated financial statements).
We recognized the value of the Initial Warrant as a reduction of revenue in
the quarter ended March 31, 2001. We recognize the value of Performance Warrants
and Cliff Warrants as an adjustment to revenue over the term of the agreement as
Comcast purchases additional VOD servers from us and makes the service available
to its customers.
The value of the warrants is determined using the Black-Scholes valuation
model. The weighted assumptions used for the year ended June 30, 2003 were:
expected dividend yield - 0.0%; risk free interest rate - 2.1%; expected life
- - 4 years; and expected volatility - 113.3%. We adjust the value of the earned
but unissued warrants on a quarterly basis using the valuation option-pricing
model until the warrants are actually issued. The value of the new warrants
earned and any adjustments in value for warrants previously earned is determined
using the Black-Scholes valuation model and recognized as part of revenue on a
quarterly basis. To the extent the above assumptions change on a periodic
basis, or the number of subscribers capable of receiving VOD increases or
decreases, revenue and gross margins may be positively or negatively impacted.
27
Scientific Atlanta, Inc. Warrants
In accordance with a five-year definitive agreement with Scientific
Atlanta, Inc., or SAI, executed in August 1998, we agreed to issue warrants to
SAI upon achievement of pre-determined revenue targets. (See Note 16 to the
consolidated financial statements.) The value of these warrants could not exceed
5% of applicable revenue and the number of shares related to the warrant were
determined using the Black-Scholes valuation model and could not exceed 888,888
shares for every $30 million of revenue from the sale of VOD servers using the
SAI platform. We accrued this cost as a part of cost of sales at the time of
recognition of applicable revenue in anticipation of reaching the next $30
million threshold. As a result of not reaching the next $30 million threshold by
the August 17, 2003 deadline, it is likely we will recognize a reduction of
approximately $1.3 million to cost of sales in the first quarter of fiscal
2004.
Warranty Accrual/Maintenance Revenue Deferral
In accordance with the requirements under SOP 97-2, we either accrue the
estimated costs to be incurred in performing warranty services at the time of
revenue recognition and shipment of the servers, or defer revenue associated
with the maintenance services to be provided during the warranty period based
upon the value for which we would sell such services separately, depending upon
the specific terms of the customer agreement. Our estimate of costs to service
warranty obligations is based on historical experience and expectation of future
conditions. To the extent we experience increased warranty claim activity or
increased costs associated with servicing those claims, our warranty accrual
will increase resulting in decreased gross margin.
Allowance for Doubtful Accounts