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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2004
COMMISSION FILE NUMBER 0-13150
CONCURRENT COMPUTER CORPORATION
(Exact name of registrant as specified in our charter)
DELAWARE 04-2735766
(State of Incorporation) (I.R.S. Employer Identification Number)
4375 RIVER GREEN PARKWAY, SUITE 100, DULUTH, GEORGIA, 30096 (678) 258-4000
(Address and telephone number of principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock (par value $0.01 per share)
Preferred Stock Purchase Rights
Indicate by check mark whether Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by a check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
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As of August 23, 2004, there were 62,882,654 shares of Common Stock
outstanding. The aggregate market value of shares of such Common Stock (based
upon the last sale price of $1.81 per share as reported for August 23, 2004 on
the Nasdaq National Market) held by non-affiliates was approximately
$113,000,000.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Proxy Statement to be used in
connection with Registrant's 2004 Annual Meeting of Stockholders scheduled to be
held on October 20, 2004 are incorporated by reference in Part III hereof.
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PART I
Certain statements made or incorporated by reference in this Annual Report
on Form 10-K may constitute "forward-looking statements" within the meaning of
the federal securities laws. All forward-looking statements are subject to
certain risks and uncertainties that could cause actual events to differ
materially from those projected. The risks and uncertainties which could affect
our financial condition or results are discussed below under the heading "Risk
Factors". Our forward-looking statements are based on current expectations and
speak only as of the date of such statements.
ITEM 1. BUSINESS
OVERVIEW
We are a leading provider of computer and software systems for both the
video-on-demand, or VOD, market through our VOD division (formerly the Xstreme
division) and high-performance computing applications through our Integrated
Solutions Division, or ISD, (formerly the Real-Time division). Our VOD division
provides VOD systems consisting of hardware and software as well as integration
services, primarily to residential cable companies that have upgraded their
networks to support interactive, digital services. Our Integrated Solutions
Division provides high-performance, real-time computer systems to commercial and
government customers for use in applications such as simulation and data
acquisition.
Our VOD systems enable broadband telecommunication providers, mainly cable
television systems, that have two-way capability to stream video content to
their digital subscribers with digital set-top boxes or personal computers.
Once enabled, the subscribers can view and control the video stream at any time
with familiar VCR-like functionality such as fast-forward, rewind, and pause.
We have been selected to supply our VOD systems to 87 cable markets. We
provided the VOD systems for the first successful commercial deployment of VOD
in 1999 and for some of the largest system-wide commercial deployments to date.
The largest cable companies in the U.S. have begun deploying VOD services to
their residential markets.
Our high-performance computing systems and software are specially designed
to acquire, process, store, analyze and display large amounts of rapidly
changing information in real time - that is, with microsecond response as
changes occur. We have over 38 years of experience in high-performance
computing systems, including specific expertise in operating systems, computer
hardware, application software, productivity tools, and networking. Our systems
and software support applications in the information technology, simulation and
training, data acquisition, and industrial process control markets.
We were incorporated in Delaware in 1981 under the name Massachusetts
Computer Company.
We make our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports available, free of
charge, on our web site located at www.ccur.com. Since prior to November 15,
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2002, we have made these reports available as soon as reasonably practicable
after filing with the SEC. We have adopted a code of ethics that is applicable
to all employees as well as a code of ethics applicable to our principal
executive, financial, and accounting officers. Both of these ethics policies
are posted on our web site located at www.ccur.com. Copies will be furnished
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upon written request to the Company at the following address: Attn: Secretary,
4375 River Green Parkway, Suite 100, Duluth, Georgia 30096. If we amend or
change either code of ethics or grant a waiver under either code, we will
disclose these events through our website.
Financial information about our industry segments is included in Note 13 to
the consolidated financial statements included herein.
THE VOD MARKET
Technological developments have laid the groundwork for digitally
upgraded, two-way capable networks that enable cable companies to deliver VOD
services to their digitally enabled subscribers. These new systems include
forward and reverse path bandwidth capability and digital equipment throughout
the cable network. These digitally upgraded systems are capable of carrying a
larger quantity of signals at a faster rate. As of May 2004,
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according to the National Cable Television Association, there were 108,410,160
households with televisions in the United States, approximately 102,900,000 of
these homes have access to cable, of these homes, 73,782,880 were basic cable
subscribers, while 22,900,000 of the basic were digital subscribers. Further,
many major movie studios, major television networks, premium channel providers,
and other program and content creators are converting their most popular titles
into a digital format making content available for VOD services.
We believe these and other advancements have opened the door for our VOD
systems to serve the home video entertainment market. Our VOD systems offer the
following improvements over traditional home video services:
- Home video rentals. VOD eliminates travel to obtain and return
rentals and eliminates late charges.
- Pay-per-view. VOD enables a subscriber to view content at any time
with interactive capabilities such as play, rewind, fast-forward and
pause and is not limited by the availability of analog channel
frequencies for delivering content.
- Free on-Demand. Some of our customers are providing free on-demand
content to their subscribers. There are two main purposes for this
initiative. First, free on-demand is an effective tool for creating
awareness and educating the subscriber of the capabilities of
on-demand television. Secondly, free on-demand is a service that
cannot be duplicated by satellite broadcasters, yet has consumer
appeal and, therefore, reduces subscriber churn.
- Digital Video Recorder. A digital video recorder (DVR) is an
additional set-top device or an enhanced set-top device that enables a
user to record programming on a hard disk drive for playback after the
"live" program began with VCR-like functionality on the saved content.
VOD does not require subscribers to pre-plan recording, purchase or
rent an expensive DVR device, install and maintain the device, update
the device and learn how to operate the device. Further, since VOD is
network based, cable companies can incrementally add storage more
economically and efficiently, whereas storage on a DVR device is
typically not as easy to increase.
- Advertising. VOD has enabled interactive long-format advertising and
has the potential to enable cable companies to target advertising and
offer further enhanced interactive advertising experience.
We believe that VOD is a key strategic competitive initiative for cable
companies because it provides them with an opportunity to differentiate their
service offerings from digital broadcast satellite providers, which are
technically unable to duplicate the full functionality of VOD. Further, we
believe VOD will provide cable and other telecommunication companies access to
new revenue generating opportunities, increase subscriber satisfaction and
reduce subscriber churn.
We believe that VOD also will be a strategic differentiator for telephone
companies as they seek to expand services beyond the delivery of voice.
Recently, cable companies have begun offering voice services and, thus,
competing for telephone company customers. In response, we expect that the
telephone companies will begin to expand into television and will deploy VOD for
the same reasons that cable companies have.
THE HIGH-PERFORMANCE COMPUTING MARKETS
Our Integrated Solutions Division focuses on high-performance systems that
offer unique solutions for a wide-range of applications that require
state-of-the-art time-critical software and hardware technology. The solutions
we provide typically offer high-performance computation and high data
throughput, with predictable and repeatable responses to time-critical events.
Our computer systems and software are currently used in host, client server, and
embedded and distributed computing solutions. End uses of our products include
the following:
- Simulation and Training. Applications that utilize our core computing
systems include both man-in-the-loop (M-I-T-L) simulation and training
and hardware-in-the-loop (H-I-T-L) simulation. Examples of M-I-T-L
applications are personnel training simulators for commercial and
military aviation, vehicle operation, mission planning and rehearsal.
H-I-T-L solutions are constructed to create accurate simulations to
verify hardware designs for applications such as engineering design
for power plants, avionics and automotive subsystems.
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- Data Acquisition. Applications that run on our systems include
environmental analysis and display, engine testing, range and
telemetry systems, shock and vibration testing, weather satellite data
acquisition and forecasting, intelligence data acquisition and
analyses, and command and control.
- Industrial Process Control. Applications such as plant monitoring and
control systems that ensure safety and reliable operation in
industrial environments. Examples are gas and oil pipeline
supervision, power plant control systems, and manufacturing
monitoring.
- Information Technology. Data processing applications that require high
reliability and time-critical response to user action with minimal
interrupt latency such as applications used for stock and bond trading
and other financial transaction systems.
- Other Markets. Concurrent has recently expanded its focus to include
other markets that require time-critical solutions such as medical
imaging, air traffic control and telecommunications test systems.
BUSINESS STRATEGY
VIDEO-ON-DEMAND DIVISION
Our VOD strategy is comprised of the following primary initiatives:
- Maintain Existing and Establish New Relationships with Top North
American Cable and Telecommunication Companies. We have been selected
to supply VOD systems for 87 markets. Our primary North American
customers include, in alphabetical order, Blue Ridge Communications,
Bright House Networks, Charter Communications, Inc., Cogeco, Inc.,
Comcast Corporation, Cox Communications, Inc., Knology, Inc., Mediacom
Communications Corporation, Time Warner, Inc., and Videotron Ltee. We
intend to focus on continuing to serve these customers and add to our
customer base by providing the product innovations and customer
support that we believe the cable and other telecommunication
companies need to succeed. Additionally, we are focusing our sales
team on new opportunities in new markets within our existing customer
base as well as other domestic network providers.
- Develop Partnerships Enabling Incremental Revenue Opportunities for
Cable Companies. With the evolution of the television viewing
experience, we believe there will be opportunities for our customers
to generate incremental revenues with other product offerings
complementary to VOD services. To that end, we have an active partner
program to develop relationships with other industry suppliers.
Examples include, in alphabetical order, Cisco Systems, Inc., Digeo,
Inc., Gemstar-TV Guide International, Inc., Gotuit Media Corporation,
Liberate, Microsoft Corporation, NDS Group plc, N2 Broadband, Inc.,
Panasonic Consumer Electronics Company, TVGateway, LLC, and others.
Additionally, we support and partner with providers of network
equipment such as Scientific-Atlanta, Inc., Motorola, Inc., Alcatel,
Ciena Corporation, Harmonic, Inc., BigBand Networks, Inc., and others.
We have also invested in and formed a strategic partnership with
Everstream Holdings, Inc., a company specializing in incremental
software applications for the collection of information from VOD
systems that may be utilized for targeted advertising.
- Focus on International Cable and Telecommunications Markets. The
rollout of residential VOD service internationally over both cable
television systems and DSL-based networks is progressing. We have been
selected for four (Cable and Multimedia Communications Ltd., EM Media
Corporation, Jupiter Communications Inc., and Korea Digital Media
Center) commercial trials in Asia and have seen an increase in quoting
activity over the past 12 months. We believe that over the next 12-18
months, there is potential for additional international VOD
deployments. Additionally, we have executed an agreement with Alcatel
establishing Concurrent as Alcatel's preferred VOD solution on the
Alcatel platform for resale throughout the world. Integration of
Concurrent's VOD products with the Alcatel platform has progressed
well, and we anticipate deployments in the next 12-18 months. We will
continue to pursue relationships with international cable companies
and other telecommunication companies in order to take advantage of
opportunities as they arise.
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- Maintain a Technological Leadership Position in VOD Server Systems. We
have developed our VOD technology through internal research and
development, acquisitions, and relationships with third-party
technology providers. We intend to continue to focus on the
development of future VOD technologies in order to remain a technology
leader by improving streaming, storage and content ingest flexibility,
asset management, encryption techniques, network based digital video
recorder applications, software clients, advertising applications,
time shifted programming, business management software, and
functionality such as compatibility with high definition television.
INTEGRATED SOLUTIONS DIVISION
As the high-performance, real-time, computing market shifted to open
systems, we introduced new products to meet these open system requirements while
maintaining support for our proprietary systems. Our strategy strikes a balance
between offering upgrades for our Unix system offerings and investing in our
open-source RedHawk(TM) Linux(R) operating system and our iHawk(TM) Intel
integrated computer system solutions.
RedHawk(TM) Linux(R) is a real-time operating system that incorporates a
number of enhancements to Linux that make it a powerful real-time,
multi-processing operating system for time-critical applications. RedHawk also
maintains third-party software compatibility with Red Hat(TM) Linux, allowing us
to take advantage of the full range of third-party software applications that
run on Red Hat.
The iHawk family is a line of Intel-Xeon and AMD Opteron based servers
available in single, dual, quad-, and 8-way processor models. iHawks are
available in a wide-range of configurations that include our popular Real-Time
Clock and Interrupt module as well as the optional NightStar(R) tool suite. We
expect that the on-going introduction of a wide-range of Intel and AMD servers
running RedHawk Linux will allow us to compete for a broader range of business
opportunities.
CONCURRENT FEDERAL SYSTEMS
Concurrent Federal Systems, Inc., a wholly owned subsidiary of Concurrent
Computer Corporation, was established in October 2002 to help us respond to the
growing needs of the federal government. In order to gain greater efficiencies,
we have decided to consolidate this business into our Integrated Solutions
Division.
PRODUCTS AND SERVICES
Our products fall into two principal groups, VOD systems sold by our VOD
division and high performance computers sold by our Integrated Solutions
Division. In addition, both divisions provide technical support to our
customers. The percentage of total revenue contributed by our VOD division's
products, our ISD products and service offerings are discussed in Management's
Discussion and Analysis of Financial Condition and Results of Operation in this
Annual Report on Form 10-K.
VIDEO-ON-DEMAND DIVISION PRODUCTS
For the majority of our deployments, our VOD system may be located at the
cable operator's headend or hub in a distributed or centralized architecture
with our thin client software, or an alternative client application, residing on
the subscriber's set-top-box. When a subscriber selects a certain piece of
video content from an on-screen menu, a dedicated video session is established
between our video server and the digital set-top box in the subscriber's home
via the resource manager over the cable system's hybrid-fiber-coaxial (HFC)
network. The selected video content is accessed from the video server where it
is stored at either a headend or a hub. The purchase is typically captured by
our back-office software, creating a billing and royalty record for the cable
company's billing system.
Our VOD systems integrate video streaming technology, content management,
back-office software and readily available commercial hardware platforms to
provide interactive, VOD capabilities. Our VOD systems include the following:
- MediaHawk(R) 4G On-Demand Platform. In June 2003, we began shipping
our fourth generation of servers, the MediaHawk 4G On-Demand Platform.
This platform is based on our extensive software running on commercial
off-the-shelf hardware sourced from leading OEM suppliers. It consists
of the MediaHawk 4000 Video Server, the Media Store 1000 storage
system and the Media Matrix switching fabric. We
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believe that using proven off-the-shelf hardware provides a highly
reliable platform with what we believe to be a superior cost basis. We
believe that we are the only major VOD vendor to separate streaming,
storage, and content capture to maximize flexibility and scalability.
We believe our three dimensional, modular approach provides our
customers with the ability to better manage their initial deployments,
add-on expansion, and proliferation of new services. The highly
scaleable MediaHawk 4G works with legacy MediaHawk family products,
enabling our customers to seamlessly grow their VOD streaming
capabilities. As of June 30, 2004, we had shipped a total of 1,820
MediaHawk servers totaling 548 thousand streams in deployments serving
16.6 million basic subscribers.
- Resource Manager. Our resource manager establishes the network
connection that allows video to be streamed to the home over the cable
operator's network as a dedicated session. The resource manager is
designed to route video streams in the most efficient manner available
at any given time.
- MediaHawk Business Management System. Our Business Management System
is an industry standard, relational database supporting subscriber and
provider data management. Our back-office applications include
customer access management, content distribution management, order
management, royalty management, billing interfaces and marketing
analysis.
- Real Time Media System. Our Real Time Media System enables our
customers to capture broadcast television programming at the time of
broadcast and simultaneously digitally encode, store and propagate the
captured programs for future viewing by subscribers.
- Web Reports(TM). Our Web Report software puts our customers directly
in touch with our Business Management System to obtain real-time VOD
subscriber information via the internet, at their convenience from
anywhere in the world. Operators can obtain customized reports on
their network and information on VOD orders/purchases, usage, and
content.
- Data Mart(TM). A companion product to Web Reports, this software
application provides a data warehousing capability that stores two or
more years of anticipated usage data.
- Client. Our client is a software module with very small memory and
processor requirements that resides on each digital set-top-box,
empowering the subscriber to browse and select on-demand content with
complete interactive control.
- System Management and Maintenance Software. Our system management and
maintenance software is designed to detect failed components, to
re-route video streams bypassing the failed component, and to notify
the cable company that maintenance is required.
- Integration Options. Our VOD systems are compatible with a wide range
of equipment and software employed by cable companies to deliver
digital television service, including digital set-top boxes from
Scientific-Atlanta, Motorola, Pioneer, Sony, Pace Micro, Samsung and
Matsushita and transport topologies such as Gigabit Ethernet, DVB-ASI,
ATM, and 64 and 256 QAM IF or RF. Further, since our VOD technology
allows us to perform functionality in the server rather than in the
digital set-top box, we can overcome the challenge of providing VOD
services through digital set-top boxes with limited processing
capability.
- Subscription VOD (SVOD) Technology. SVOD is a complementary service to
VOD that enables subscribers to view on-demand content from providers
such as HBO, Showtime or Starz without a transaction fee. SVOD is not
a service that can be economically offered by direct broadcast
satellite, and we believe it is providing cable companies with a
competitive advantage by building greater subscriber satisfaction and
retention.
- Fault Tolerant System Designs. Through the use of proven commercial
off-the-shelf hardware and industry standard storage area network
(SAN) methodology, our VOD systems are designed to be highly fault
resilient as not to impact the subscriber experience. Our design goals
are to provide seamless end-user viewing without any interruption.
- Intelligent Asset Management. Our VOD systems enable cable companies
to automate the movement of content from one storage location to
another based upon demand and other network requirements. This
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feature enables the most efficient streaming and storage of content.
We have applied for a patent to protect our developments in this area.
VIDEO-ON-DEMAND DIVISION SERVICES
Our integration and support offerings are an essential piece of
successfully deploying and maintaining VOD services. A VOD system has multiple
interface points with other network elements; e.g., transport equipment, set-top
boxes, conditional access, clients, navigators (electronic program guides),
billing systems, content receivers, other applications and back office systems.
Our system engineers are able to integrate these diverse elements, creating
seamless VOD services. The basic customer service plans and support options
offered to our VOD customers include 24x7 telephone support, software patches to
correct problems in existing software, 24-hour parts replacement, product
service training classes, limited on-site services and preventative maintenance
services. These services are typically provided at no additional charge during
the warranty period and are available for additional fees under maintenance
agreements after the warranty period. In addition to these basic service and
support options, we also offer, for additional fees, software upgrades and
onsite hardware maintenance services.
INTEGRATED SOLUTIONS DIVISION PRODUCTS
The principle products sold by our Integrated Solutions Division are:
- RedHawk(TM) Linux. RedHawk Linux is an industry-standard, real-time
version of the open source Linux operating system. RedHawk Linux,
which includes the popular Red Hat(R) Linux distribution, provides
high-speed transfer of data, guaranteed fast response to external
events and optimized interprocess communications.
- iHawk(TM). Our iHawk Intel-based or AMD Opteron based servers feature
the RedHawk Linux operating system and our Real-Time Clock & Interrupt
Module. iHawk systems are extensively deployed in simulation, data
acquisition and industrial process control applications, and satisfy
scientific and other complex computing requirements.
- ImaGen(TM). ImaGen is our imaging platform for simulation and modeling
applications that require enhanced realism and the ability to process
very large amounts of input data. Typical ImaGen imaging applications
include civil and military simulation, mission planning, homeland
security, scientific and medical visualization, architectural design,
energy exploration and entertainment.
- Power Hawk(R) 700 and 900. Power Hawk is our family of
highly-scalable, advanced VME systems capable of supporting data
acquisition, simulation and industrial process control applications in
environments ranging from entry-level to highly complex. The Power
Hawk line is designed around the Motorola PowerPC processor, and is
available in single, dual and quad central processing unit (CPU)
versions.
- PowerMAXION(R). The PowerMAXION is our mid-level system specifically
targeted to the real-time data acquisition market, such as radar and
weapons control in the military market. The PowerMAXION series is
designed around the PowerPC 604e processors from IBM and Motorola and
is available in one-to-eight CPUs.
- Model 3200-2000. The Model 3200-2000 is the most recent addition to
our Series 3200 family of high-performance proprietary platforms.
Model 3200-2000 provides an upgrade to processing power and system
throughput required by demanding real-time applications. Model
3200-2000 runs our proprietary operating system.
- PowerMAX Operating System. The PowerMAX Operating System is our
highly-deterministic UNIX-based operating system used on our Power
Hawk and PowerMAXION systems.
- NightStar(TM) Tools. The NightStar development tools help users debug
and analyze their application software running under both the PowerMAX
and RedHawk Linux operating systems.
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INTEGRATED SOLUTIONS DIVISION SERVICES
Customer Support. We offer worldwide hardware and software maintenance and
support services for our ISD products and for the products of other computer and
peripheral suppliers used in our systems. Services include on-site maintenance,
return-to-factory warranty, depot repair, and software support update service.
We provide these support services at no additional charge during the warranty
period. We have routinely offered and delivered long-term service and support
of our products for as long as 15 to 20 years under maintenance contracts for
additional fees. However, we anticipate this source of revenue to decline over
time due to legacy product obsolescence.
Custom Engineering and Integration Services. We provide custom engineering
and integration services in the design of special hardware and software to help
our customers with their specific applications. This may include custom
modifications to our products or integration of third-party interfaces or
devices into our systems. Many customers use these services to migrate existing
applications from earlier generations of our systems or our competitors' systems
to our state-of-the-art systems. These services also include classroom and
on-site training, system and site performance analysis, and multiple vendor
support planning.
SALES AND MARKETING
We sell our systems primarily in the U.S. through our direct field sales
and support offices, as well as through value added resellers and systems
integrators. As of June 30, 2004, on a consolidated basis, we had 89 employees
in our sales and marketing force, which includes sales, sales support,
marketing, strategic communications, product management, program management, and
business development.
VIDEO-ON-DEMAND DIVISION
Our VOD sales strategy primarily focuses on maintaining and expanding
existing relationships and developing new relationships, with domestic cable
companies and international cable and DSL telecommunication providers. Our
domestic sales force has significant experience as either prior employees of, or
vendors to, the largest domestic cable companies. Outside the North American
cable market, we have a direct sales team that is augmented by value added
resellers and systems integrators. As of June 30, 2004, we employed 44 people
worldwide as part of our VOD sales and marketing team.
INTEGRATED SOLUTIONS DIVISION
We sell our high-performance computing systems in key markets worldwide
through direct field sales and support offices, as well as through value added
resellers and systems integrators. We have direct sales facilities in France,
England, Germany, Australia, Hong Kong and Japan. As of June 30, 2004, we
employed 45 people worldwide as part of our ISD sales and marketing team.
CUSTOMERS
Both of our divisions derive revenue from a limited number of customers.
As a result, the loss of, or reduced demand for products or related services
from any of our major customers could adversely affect our business, financial
condition and results of operations. Our products are typically manufactured
and shipped in the same quarter the purchase order is received. Accordingly, we
do not believe backlog is a meaningful indicator of future level of sales. Our
backlog for ISD and VOD systems at June 30, 2004 and 2003 totaled $2.6 million
and $2.0 million, respectively. In addition, we had deferred revenue of $14.8
million and $7.6 million at June 30, 2004 and 2003, respectively, which resulted
from prepaid maintenance services and shipments of systems where the revenue had
not yet been recognized.
We have purchase agreements with many customers, but none of these
agreements require fixed minimum purchases of our products except for our
agreement with Lockheed-Martin and Time Warner for calendar 2004. As a result,
sales to specific customers tend to, and are expected to continue to, vary from
year-to-year, depending on such customers' budgets for capital expenditures and
new product introductions.
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VIDEO-ON-DEMAND DIVISION
A significant portion of our VOD revenue has come from, and is expected to
continue to come from, sales to the large cable companies. Customers accounting
for more than 10% of total revenue consisted of Comcast (32%) and Cox (10%) for
the fiscal year ended June 30, 2004; Time Warner (16%) and Comcast (10%) for the
year ended June 30, 2003; and Time Warner (31%) and Cox Communications (13%) for
the fiscal year ended June 30, 2002. No other VOD division customer accounted
for more than 10% of total revenue during the last three fiscal years.
INTEGRATED SOLUTIONS DIVISION
Lockheed-Martin accounted for 13%, 16%, and 12% of total revenues in the
fiscal years ended June 30, 2004, 2003, and 2002, respectively. No other ISD
customer accounted for more than 10% of total revenue during the last three
fiscal years.
We derive a significant portion of our revenues from the supply of
integrated computer systems to U.S. government prime contractors and agencies of
the U.S. government. The supplied systems include configurations from the
iHawk, PowerMAXION, Power Hawk, and 3200-2000 product lines, with certain
systems incorporating custom enhancements requested by the customer. We sell
these integrated computer systems to prime contractors, including Boeing,
Lockheed-Martin, and Raytheon. We also supply spare parts, upgrades, and
engineering consulting services and both hardware and software maintenance. For
the fiscal year ended June 30, 2004 and 2003, we recorded $14.2 million and
$18.2 million in revenues to U.S. government prime contractors and agencies of
the U.S. government, representing 18% and 24% of total sales for the period,
respectively. Government business is subject to many risks, such as delays in
funding, reduction or modification of contracts or subcontracts, failure to
exercise options, changes in government policies and the imposition of budgetary
constraints. A loss of government contract revenues could have a material
adverse effect on our business, results of operations and financial condition.
NEW PRODUCT DEVELOPMENT
We are committed to the development of new technology and rapid innovation
in the evolving markets in which we compete. Research and development costs are
expensed when incurred and aggregated $20.0 million, $18.8 million, and $15.3
million in fiscal years 2004, 2003, and 2002, respectively.
VIDEO-ON-DEMAND DIVISION
Our research and development strategies with respect to our VOD solutions
are focused on the following:
- Content Management. As VOD matures as an industry, we anticipate that
demand for stored content will increase from a few hundred hours to
many thousands of hours. We continue to enhance our systems to
intelligently and automatically manage the distribution and lifecycle
of stored content, thus, increasing the efficiency of our customers'
networks.
- Network Digital Video Recorder Technology. This technology allows the
subscriber to pause and rewind time-shifted programming, effectively
providing "TV on-demand." We believe this is superior to existing DVR
devices because cable subscribers will not be required to purchase or
maintain an extra device since all the required equipment will reside
on the cable company's network. We have released our real time media
product line that captures, encodes, and stores broadcast programs for
future viewing. Additionally, we have released our MediaHawk 4G
On-Demand Platform that enables cable companies to grow streaming,
storage, and content capture independently so they can more easily
provide "TV on-demand".
- Interactive and Targeted Advertising. Interactive long format
advertising has already been deployed by Cox Communications in their
systems. Targeted advertising technology provided by partners such as
Everstream will allow our VOD system to insert different television
commercials into the video streams for different consumers. This
technology will allow the advertiser to closely "target" product
advertisements to consumers most likely to buy, rather than
broadcasting the same advertisements to everyone.
- Targeted Barker. This in-band software application enables the
operator to use more video to sell content through the menu and
enhance on-demand navigation with more graphically rich backgrounds
that intermix full motion video with menu backgrounds. This technology
provides the subscriber with the ability to
8
'window-shop' their on demand content without excessive investment in
additional time or bandwidth by the operators.
- High Definition VOD. We have added full end-to-end support for
high-definition content to our system this year. Such content requires
substantially greater streaming and storage capacity, which in turn,
will require more VOD products. For example, high-definition content
typically requires streaming capacity of 19 megabits/second while
standard content streams at 3.75 megabits/second. Thus,
high-definition content consumes approximately five times the storage
and approximately five times the streaming capacity.
- Resource Management. We have developed an advanced distributed
resource management system that will allow on-demand systems to grow
into the "everything on demand" environment that we believe the cable
industry is now envisioning.
INTEGRATED SOLUTIONS DIVISION
Our product development strategies will focus on higher-performance and
cost-effective scalable products that will provide the latest technology with a
wider range of solutions for our customers. New product development will be
focused on the following:
- iHawk. We continue to plan to offer systems based Intel 32-bit
processor technology and will expand our offering with new AMD Opteron
64-bit processor technology in addition to systems based on
higher-performance 32-bit processors from Intel(R). These systems
should be available in single, dual, quad and 8-way processor
configurations.
- RedHawk Linux. We plan to continue to enhance our RedHawk Linux
real-time operating system to provide increased determinism for
time-critical applications.
- RT-LAB RLX Simulation. We have entered into an engineering alliance
with Opal-RT whereby Opal-RT has made their automotive data
acquisition testing product available on our RedHawk Linux based
systems. The Concurrent product is called RT-LAB RLX and will allow
engineers to use mathematical block diagrams for design, simulation,
control and related functions. RT-LAB RLX offers a scalable,
high-performance, environment for the most demanding of hard-real-time
simulations such as for internal combustion engines, hydraulic
systems, car dynamics and flexible multi-body mechanical systems, as
well as electrical and power electronic systems.
- Image Generation. ImaGen is our imaging platform for simulation and
modeling applications that require enhanced realism and the ability to
process very large amounts of input data. We are developing this
PC-based product based on visual software from Multigen-Paradigm Inc.
These image generation systems will directly address the requirements
of the simulation and training and other markets. Typically we have
provided only the "host computer" component of training systems. This
new product will allow us to compete for the visual subsystems.
- Laboratory Workbench(TM). Laboratory Workbench (LWB) is a
high-performance graphical user interface data acquisition software
package for iHawk multiprocessing systems. LWB's easy-to-use,
point-and-click interface allows users to acquire, process, display
and record analog data without the need for programming. A set of
symbolic icons and graphic displays represent data acquisition
devices, file operations, signal processing tasks and display options.
COMPETITION
Both our VOD and Integrated Solutions Divisions operate in
highly-competitive environments, driven by rapid technological innovation. Both
divisions compete based upon features, reliability, scalability, service, and
price. Due in part to the range of performance and applications capabilities of
our products, we compete in various markets against a number of companies.
The major competitors of the VOD division currently include the following:
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- SeaChange International, Inc. and nCUBE Corporation. Additionally,
there are a number of other entities in the market, including Kasenna,
Inc., Mid-Stream Technologies, Inc., Broadbus Technologies, Inc., N2
Broadband, Inc., Myrio, Arroyo, Akimbo, Bitband, Video Propulsion,
Orca, Minerva, Silicon Graphics, Inc and others. We believe that we
and SeaChange International Inc. are the leaders in the North American
cable VOD market based on the number of subscribers in the markets
served.
Our Integrated Solutions Division competes with a number of companies. Our
major competitors can be categorized as follows:
- major computer companies that participate in the high-performance
computing business by layering specialized hardware and software on
top of, or as an extension of, their general purpose product
platforms, including Sun Microsystems, Hewlett Packard Corporation and
IBM Corporation.
- other computer companies that provide solutions for applications that
address specific performance characteristics, such as fault tolerance
or high-performance graphics, including Silicon Graphics, Inc. and
Hewlett Packard Corporation.
- single board computer companies that provide board-level processors
that are typically integrated into a customer's computer system,
including Force Computers, Inc., Motorola, Inc., and Mercury, Inc.
- companies providing competitive offerings on the Linux platform
including RedHat, Inc., MontaVista Software, Inc., FSMLabs, Inc.,
SuSE, Inc. and TimeSys Corporation.
- companies involved in data acquisition including dSpace and ADI
Corporation.
Additional competitors with significant market presence and financial
resources, including computer hardware and software companies, content providers
and television equipment manufacturers, including digital set-top-box
manufacturers, may enter our markets, thereby further intensifying competition.
Our future competitors also may include one or more of the parties with whom we
currently have a strategic relationship. Although we have proprietary rights
with respect to much of the technology incorporated in our VOD and ISD systems,
our strategic partners have not agreed to refrain from competing against us.
Increased competition could result in price reductions that would adversely
affect our business, financial condition and results of operations. Many of our
current and potential future competitors have longer operating histories,
significantly greater financial, technical, marketing and other resources than
us, and greater brand name recognition. In addition, many of our competitors
have well-established relationships with our current and potential customers and
have extensive knowledge of our markets.
INTELLECTUAL PROPERTY
We rely on a combination of contracts and copyright, trademark, patent and
trade secret laws to establish and protect our proprietary rights in our
technology. We distribute our products under software license agreements which
grant customers perpetual licenses to our products and which contain various
provisions protecting our ownership and confidentiality of the licensed
technology. The source code of our products is protected as a trade secret and
as an unpublished copyright work. In addition, in limited instances, we license
our products under licenses that give licensees limited access to the source
code of certain of our products, particularly in connection with our strategic
alliances.
Despite the precautions we have taken, there can be no assurance that our
products or technology will not be copied or otherwise obtained and used without
authorization. In addition, effective copyright and trade secret protection may
be unavailable or limited in certain foreign countries. We believe that, due to
the rapid pace of innovation within our industry, factors such as the
technological and creative skills of our personnel are more important to
establishing and maintaining a technology leadership position within the
industry than are the various legal protections for our technology.
We do not own any material issued patents. However, we have eight patent
applications pending in the United States and four pending abroad and have
obtained patent licenses to the portfolios owned by Everstream Holdings, Inc. (4
patents and 6 patent applications) and previously owned by Thirdspace Living
Limited, now owned by Alcatel (13 patents, 29 patent applications, and all
additions, divisionals, continuations, continuations-in-
10
part, extensions, reissues, and foreign counterparts thereof). The patents so
licensed cover multiple interactive television, targeted advertising, and VOD
technologies.
We have entered into licensing agreements with several third-party software
developers and suppliers. Generally, such agreements grant us non-exclusive,
worldwide licenses with respect to certain software provided as part of
computers and systems we market and terminate on varying dates.
SUPPLIERS
We sometimes purchase product components from a single supplier in order to
obtain the required technology and the most favorable price and delivery terms.
These components include, for example, processors, power supplies, integrated
circuits and storage devices. We purchase product components from the following
single suppliers: APW Electronic Solutions, Dell Corporation, DME Corporation,
Kardios Systems Corporation, Macrolink, Inc., Metal Form, Inc., Qlogic
Corporation, Synergy Microsystems, Inc., Sanmina-SCI Corporation, Seagate
Technology, Inc., Tyco Electronics Corporation, VMIC Corporation and Xyratex
Technology Limited. In most cases, comparable products are available from other
sources, but would require significant reengineering to conform to our system
specifications.
SEASONALITY
We have experienced variations in the revenue, expenses and operating
results from quarter to quarter in our VOD and ISD businesses, and it is
possible that these variations will continue. We believe that fluctuations in
the number of orders for our VOD systems being placed from quarter to quarter
are principally attributable to the buying patterns and budgeting cycles of
cable companies. We believe that orders for ISD products are dictated by buying
cycles of the government and large government contractors. In addition, in both
divisions, orders are often not finalized until the end of a quarter. We do
not believe seasonality is a significant factor at this time.
GOVERNMENTAL REGULATION
We are subject to various international, U.S. federal, state and local laws
affecting our business. Any finding that we have been or are in noncompliance
with such laws could result in, among other things, governmental penalties.
Further, changes in existing laws or new laws may adversely affect our business.
The television industry is subject to extensive regulation in the United
States and other countries. Our VOD business is dependent upon the continued
growth of the digital television industry in the United States and
internationally. Cable companies are subject to extensive government regulation
by the Federal Communications Commission and other federal and state regulatory
agencies. These regulations could have the effect of limiting capital
expenditures by cable companies and thus could have a material adverse effect on
our business, financial condition and results of operations. The enactment by
federal, state or international governments of new laws or regulations could
adversely affect our cable operator customers, and thereby materially adversely
affect our business, financial condition and results of operations.
ENVIRONMENTAL MATTERS
We purchase, use, and arrange for certified disposal of chemicals used in
the manufacturing process at our Pompano Beach facility. As a result, we are
subject to federal and state environmental protection and community
right-to-know laws. Violations of such laws, in certain circumstances, can
result in the imposition of substantial remediation costs and penalties. We
believe we are in compliance with all material environmental laws and
regulations.
EMPLOYEES
As of June 30, 2004, we had 425 employees worldwide. Of these employees,
357 were located in the United States and 68 were located internationally. We
had 169 employees in our VOD division, 169 employees in our Integrated Solutions
Division, and 87 employees as shared services between the two divisions. The
shared
11
employees include administrative, marketing and communications, and
manufacturing personnel. Our employees are not unionized.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
A summary of net sales (consolidated net sales reflects sales to
unaffiliated customers) attributable to our foreign and domestic operations for
the fiscal years ended June 30, 2004, 2003, and 2002 is presented in Note 17 to
the consolidated financial statements included herein. Financial information
about our foreign operations is included in Note 17 to the consolidated
financial statements included herein.
RISK FACTORS
The following are some of the risk factors we face.
You should carefully consider each of the following risk factors and all of
the other information in this Annual Report on Form 10-K. These risks are not
the only ones we face. Our business operations could also be impaired by
additional risks and uncertainties that, at present, are not known to us, or
that, at present, are considered immaterial.
If any of the following risks and uncertainties develops into actual
events, our business, financial condition and results of operations could be
materially and adversely affected. If that happens, the trading prices of our
common stock and other securities we may issue in the future could decline
significantly.
The risk factors below contain forward-looking statements regarding
Concurrent. Actual results could differ materially from those set forth in the
forward-looking statements. See "Cautionary Statements Regarding
Forward-Looking Statements" on page 39.
RISKS RELATED TO OUR BUSINESS
A SIGNIFICANT PORTION OF OUR VOD REVENUE IS DERIVED FROM, AND IS EXPECTED TO
CONTINUE TO DERIVE FROM, SALES TO THE LARGE, NORTH AMERICAN CABLE COMPANIES. IF
WE ARE UNSUCCESSFUL IN MAINTAINING AND EXPANDING RELATIONSHIPS WITH THESE
CUSTOMERS OR LOSE ANY OF THESE CUSTOMERS, OUR BUSINESS WILL BE ADVERSELY
AFFECTED.
For the fiscal year ended June 30, 2004, Comcast and Cox accounted for
approximately 32% and 10%, respectively, of our revenues. If we are
unsuccessful in maintaining and expanding key relationships with these and other
existing customers, our VOD business will be adversely affected. Further, if we
are unsuccessful in establishing relationships with other cable companies or
experience problems in any of our VOD system commercial launches, our ability to
attract new cable companies and sell additional products to existing customers
will be materially adversely affected.
Due to our limited customer base and the relative size of each customer
compared to Concurrent, our customers may make unreasonable and extensive
demands upon our business. Such demands may include service obligations and
product obligations and our failure to adequately perform such could result in
liquidated damages. The payment of any liquidated damages or failure to meet
our customers' expectations could substantially harm our future business
prospects.
Except for our agreement with Time Warner for calendar year 2004, we do not
have written agreements that require customers to purchase fixed minimum
quantities of our VOD products. Our sales to specific customers tend to, and
are expected to continue to, vary from year-to-year, depending on such
customers' budgets for capital expenditures and new product introductions.
A SIGNIFICANT PORTION OF OUR ISD REVENUE HAS BEEN, AND IS EXPECTED TO CONTINUE
TO BE, CONCENTRATED IN A SMALL NUMBER OF CUSTOMERS. IF WE LOSE ONE OR MORE
SIGNIFICANT ISD CUSTOMERS, OUR BUSINESS WOULD BE ADVERSELY AFFECTED.
We currently derive, and expect to continue to derive, a significant
portion of our ISD revenue from a limited number of customers. As a result, the
loss of, or reduced demand for products or related services from one or more of
our major customers could adversely affect our business, financial condition and
results of operations.
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In the fiscal year ended June 30, 2004, we recorded $10.3 million in sales
to Lockheed-Martin. This amount accounted for approximately 13% of our revenue
during fiscal year 2004.
Except for our agreement with Lockheed-Martin, we do not have written
agreements that require customers to purchase fixed minimum quantities of our
ISD products. Our sales to specific customers tend to, and are expected to
continue to, vary from year-to-year, depending on such customers' budgets for
capital expenditures and new product introductions.
A LOSS OF OUR GOVERNMENT CONTRACTS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS.
We also derive a significant portion of our ISD's revenues from the supply
of systems under government contracts. For the fiscal year ended June 30, 2004,
we recorded $14.2 million in sales to U.S. government prime contractors and
agencies of the U.S. government. This amount represents approximately 18% of
our total sales in the period. Government business is subject to many risks,
such as delays in funding, reduction or modification of contracts or
subcontracts, changes in governmental policies and the imposition of budgetary
constraints. A loss of government contract revenues could have a material
adverse effect on our business, results of operations and financial condition.
WE INCURRED NET LOSSES IN THE PAST AND MAY INCUR FURTHER LOSSES IN THE FUTURE.
We incurred net losses of $5.7 and $24.6 million in fiscal years ended June
30, 2004 and 2003, respectively. Our net loss for the fiscal year ended June
2004 included a gain of $3.1 million from the partial recovery of a previously
recognized loss in a minority investment. Our net loss for the fiscal year
ended June 30, 2003 included a charge of $13.0 million from the write-down of
our investment in Thirdspace and a restructuring charge of $1.6 million. As of
June 30, 2004, we had an accumulated deficit of approximately $128.7 million.
We may incur additional net losses in the future.
SYSTEM ERRORS, FAILURES, OR INTERRUPTIONS COULD CAUSE DELAYS IN SHIPMENTS,
REQUIRE DESIGN MODIFICATIONS OR FIELD REPLACEMENT WHICH MAY HAVE A NEGATIVE
IMPACT ON OUR BUSINESS AND DAMAGE OUR REPUTATION AND CUSTOMER RELATIONSHIPS.
System errors or failures may adversely affect our business, financial
condition and results of operations. Despite our testing and testing by current
and potential customers, all errors or failures may not be found in our products
or, if discovered, successfully corrected in a timely manner. These errors or
failures could cause delays in product introductions and shipments or require
design modifications that could adversely affect our competitive position.
Further, some errors may not be detected until the systems are deployed. In
such a case, we may have to undertake substantial field replacement programs to
correct the problem. Our reputation may also suffer if our customers view our
products as unreliable, whether based on actual or perceived errors or failures
in our products.
Further, a defect, error or performance problem with our VOD systems could
cause our customers' VOD offerings to fail for a period of time or be degraded.
Any such failure would cause customer service and public relations problems for
our customers. As a result, any failure of our customers' systems caused by our
technology could result in delayed or lost revenue due to adverse customer
reaction, negative publicity regarding us and our products and services and
claims for substantial damages against us, regardless of our responsibility for
such failure. Any claim could be expensive and require us to spend a
significant amount of resources.
THE VOD MARKET MAY NOT GAIN BROAD MARKET ACCEPTANCE; OUR CUSTOMERS MAY NOT
CONTINUE TO PURCHASE OUR VOD SYSTEMS; AND OUR CABLE COMPANY CUSTOMERS MAY ENTER
INTO ARRANGEMENTS WITH OUR COMPETITORS ANY OF WHICH COULD MATERIALLY AND
ADVERSELY AFFECT OUR BUSINESS.
We are focusing much of our VOD sales efforts on North American cable
companies that have upgraded some or all of their cable systems to support
digital, two-way service. Therefore, in order for our VOD business to succeed,
cable companies, particularly the largest North American cable companies, must
successfully market VOD to their cable television subscribers. None of our
cable company customers are contractually obligated to introduce, market or
promote VOD, nor are any of our customers bound to achieve any specific product
introduction schedule. Accordingly, even if a cable company initiates a
customer trial using our system, it is under no obligation to launch a
full-scale commercial introduction using our technology. Further, we do not
have exclusive arrangements with our customers. Therefore, our customers may
enter into arrangements with one or more of our current or future competitors.
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The growth and future success of our VOD business depends largely upon our
ability to penetrate new markets and sell our systems to digitally-upgraded
domestic and international cable companies, international digital subscriber
line operators, educational institutions and others. If these potential
customers determine that VOD is not viable as a business proposition or if they
decide to delay their purchase decisions, as a result of capital expenditure
restraints or otherwise, or to purchase systems from our competitors, our
business, financial condition and results of operations will be significantly
adversely affected.
IT IS DIFFICULT TO EVALUATE OUR BUSINESS AND PROSPECTS BECAUSE OF DECLINES IN
OUR ISD BUSINESS AND THE DEVELOPING NATURE OF THE VOD MARKET. OUR NET SALES OF
ISD SYSTEMS AND SERVICES HAVE DECREASED SIGNIFICANTLY OVER THE PAST EIGHT YEARS.
Prior to the fiscal year ended June 30, 1997, we focused solely on
providing real-time computer systems and related services. Over the last eight
full fiscal years, we have experienced a decline in ISD systems and service net
sales from $108.4 million for the fiscal year ended June 30, 1997 to $33.1
million for the fiscal year ended June 30, 2004. Revenues for VOD systems
increased from $1.2 million for the fiscal year ended June 30, 1999 to $46.1
million for the fiscal year ended June 30, 2004.
Over the past decade, the high performance computer industry has seen a
significant shift in demand from high-priced, proprietary real-time systems to
lower-priced, open server systems. High-performance processing in the past
required a large, expensive computer with significant proprietary and customized
software. Today, these requirements are often met by much smaller and less
expensive computers with off-the-shelf computer hardware and software. This
shift in demand has resulted in the significant decreases in our revenues from
ISD products and services over the last several years.
This decline in our ISD revenue together with the developing nature of the
VOD market make it difficult to evaluate our current business and prospects or
to accurately predict our future revenue or results of operations. We will
encounter risks and difficulties in our VOD business frequently encountered by
companies in developing markets. We may not successfully address any of these
risks. If we do not successfully address these risks, our business, financial
condition and results of operations would be adversely affected.
THE VOD OPPORTUNITIES BEYOND THE NORTH AMERICAN CABLE MARKET, SUCH AS VOD OVER
DSL, STREAMING VIDEO OVER INTERNET PROTOCOL AND INTERNATIONAL CABLE AND DSL/IP
MARKETS MAY NOT DEVELOP OR MAY NOT BE SUBSTANTIAL TO CONCURRENT.
In recent years there have been several false starts both in North American
and International markets in the deployment of video over DSL and IP streaming.
If there is limited adoption of VOD, further deployment delays or we do not
execute to enable our participation in these new markets, we may not be able to
broaden our customer base and expand revenues. We have little commercial
experience in these markets and cannot assure that we can be successful. Our
failure to do so could materially adversely affect our business, operating
results and financial condition.
AS VOD TECHNOLOGY HAS STABILIZED, THE VOD VENDOR SELECTION PROCESS HAS BEEN
PUSHED OUT, IN SOME CASES, TO THE REGIONAL AND LOCAL MANAGEMENT LEVELS.
The sales process for selling our VOD platform has transitioned from a
centralized VOD vendor selection process to a more distributed vendor selection
process. Our sales resources are limited, and as the selection process is
pushed out to regional and local management teams, it is very difficult for our
sales organization to establish and maintain productive relationships across all
of these levels. Our inability to nurture productive relationships at all
levels within our customers' organizations could significantly hinder our
ability to effectively market and sell our products.
WE MAY EXPERIENCE COMPETITIVE PRICING PRESSURE FOR OUR PRODUCTS AND SERVICES,
WHICH MAY IMPAIR OUR REVENUE GROWTH AND OUR ABILITY TO ACHIEVE PROFITABILITY.
We may experience decreasing prices for our products and services due to
competition, the purchasing leverage of our customers and other factors. If we
are required to decrease prices, our results of operations will be adversely
affected. We may reduce prices in the future to respond to competition and to
generate increased sales volume.
14
OUR OPERATING RESULTS MAY CONTINUE TO BE VOLATILE AND DIFFICULT TO PREDICT, AND
IN SOME FUTURE QUARTERS, OUR OPERATING RESULTS MAY FALL BELOW OUR EXPECTATIONS
AND THE EXPECTATIONS OF SECURITIES ANALYSTS AND INVESTORS, WHICH COULD RESULT IN
MATERIAL DECLINES OF OUR STOCK PRICE.
Our quarterly operating results may vary depending on a number of factors,
including:
- delay in customer orders based on, among other reasons, capital
expenditure restraints or the availability of content for VOD and
pending completion of negotiations for content between the cable
companies and content providers, particularly major movie studios and
providers of subscription based content such as HBO, Showtime, and
Starz-Encore;
- the timing, pricing and number of sales of our products;
- actions taken by our competitors, including new product introductions
and enhancements and price reduction;
- our ability to control costs;
- deferrals of customer orders in anticipation of product enhancements
or new products;
- delays in testing and introductions of new products;
- failure to effectively service the installed base;
- decisions by our customers to move to a competitor's platform at an
already deployed site;
- contractual obligations that could require the payment of liquidated
damages, heighten maintenance requirements and otherwise impact
revenue recognition;
- delays or cancellations of customer orders;
- various inventory risks due to changes in market conditions; and
- our inability to forecast customer spending.
TRENDS IN OUR VOD AND ISD BUSINESS MAY CAUSE OUR QUARTERLY OPERATING RESULTS TO
FLUCTUATE; THEREFORE, PERIOD-TO-PERIOD COMPARISONS OF OUR OPERATING RESULTS MAY
NOT NECESSARILY BE MEANINGFUL.
We have experienced significant variations in the revenue, expenses and
operating results from quarter to quarter in our VOD and ISD businesses, and it
is possible that these variations will continue. We believe that fluctuations
in the number of orders for our products being placed from quarter to quarter
are principally attributable to the buying patterns and budgeting cycles of our
customers. In addition, orders are often not finalized until the end of a
quarter. As a result, our results of operations have in the past and will
possibly continue to fluctuate in accordance with this purchasing activity.
Therefore, period-to-period comparisons of our operating results may not
necessarily be meaningful. In addition, because these factors are difficult for
us to forecast, our business, financial condition and results of operations for
one quarter or a series of quarters may be adversely affected and below the
expectations of securities analysts and investors, which could result in
material declines of our stock price.
THE VOD AND ISD MARKETS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE, AND WE MAY
BE UNABLE TO COMPETE SUCCESSFULLY AGAINST OUR CURRENT AND FUTURE COMPETITORS,
WHICH WOULD ADVERSELY AFFECT OUR BUSINESS.
The market for VOD systems is still maturing. Although there have been
many commercial deployments of VOD systems, ultimate market share has yet to be
determined and there are numerous new entries into the market. We believe that
the long-term primary factors influencing competition in the VOD market include
the flexibility of the VOD system, product quality and reliability and
established relationships with providers of interactive television services,
including cable companies. The traditional market for our ISD products,
although mature, is ever changing. As the demand shifts, we may be unable to
adequately respond to customer demands or technology changes. There may be new
entrants into the ISD market with better, more appropriate products. A list of
the competitors faced by both of our divisions and a categorization of our
competitors is included under the Competition heading in the Business section in
this Annual Report on Form 10-K.
IF WE DO NOT MANAGE OUR ANTICIPATED GROWTH, WE MAY NOT BE ABLE TO OPERATE OUR
BUSINESS EFFECTIVELY. OUR FAILURE TO MANAGE GROWTH COULD DISRUPT OUR OPERATIONS
AND ADVERSELY AFFECT OUR BUSINESS.
We anticipate growth in both of our operations. Our anticipated growth
could place a strain on our management systems and other resources or we may
hire faster than the anticipated growth, causing us to undergo a reduction in
force. Our ability to successfully implement our business plan in a rapidly
evolving market will require an effective planning and management process. We
cannot assure you that we will be able to successfully manage our anticipated
expansion. If we fail to manage our anticipated growth, our operations may be
disrupted and our business may be adversely affected. We must continue to
improve and effectively utilize our existing operational,
15
management, marketing and financial systems and successfully recruit, hire,
train and manage personnel, which we may be unable to do. Further, we must
maintain close coordination among our technical, finance, marketing, sales and
production staffs.
OUR FUTURE SUCCESS IS DEPENDENT ON OUR DEVELOPMENT AND MARKETING OF ADDITIONAL
PRODUCTS THAT ACHIEVE MARKET ACCEPTANCE AND ENHANCE OUR CURRENT PRODUCTS. IF WE
FAIL TO DEVELOP AND MARKET NEW PRODUCTS AND PRODUCT ENHANCEMENTS IN A TIMELY
MANNER, OUR BUSINESS COULD BE ADVERSELY AFFECTED.
Our inability to develop, on a timely basis, new products or enhancements
to existing products, or the failure of such new products or enhancements to
achieve market acceptance could have a material adverse effect on our business,
financial condition and results of operations. Although delivery of VOD over
digital subscriber lines currently is not widely practical in the United States,
we will look for opportunities in (1) the North American market as digital
subscriber line technology continues to advance (2) the international market
where digital subscriber line technology is further advanced. There can be no
assurance that we will be successful in pursuing any North American or
International digital subscriber line opportunities.
WE RELY ON A COMBINATION OF CONTRACTS AND COPYRIGHT, TRADEMARK, PATENT AND TRADE
SECRET LAWS TO ESTABLISH AND PROTECT OUR PROPRIETARY RIGHTS IN OUR TECHNOLOGY.
WE DO NOT OWN ANY SIGNIFICANT PATENTS DIRECTLY. IF WE ARE UNABLE TO PROTECT
OUR INTELLECTUAL PROPERTY RIGHTS, OUR COMPETITIVE POSITION COULD BE HARMED OR WE
COULD BE REQUIRED TO INCUR EXPENSES TO ENFORCE OUR RIGHTS. OUR BUSINESS ALSO
COULD BE ADVERSELY AFFECTED IF WE ARE FOUND TO INFRINGE ON THE INTELLECTUAL
PROPERTY RIGHTS OF OTHERS.
We typically enter into confidentiality or license agreements with our
employees, consultants, customers and vendors, in an effort to control access to
and distribution of our proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use our
proprietary technology without authorization. The steps we take may not prevent
misappropriation of our intellectual property, and the agreements we enter into
may not be enforceable. In addition, effective copyright and trade secret
protection may be unavailable or limited in some foreign countries. Other
companies, such as Acacia Technologies Group, Personalized Media Communication
L.L.C., the SCO Group, and our competitors, may currently own or obtain patents
or other proprietary rights that might prevent, limit or interfere with our
ability to make, use or sell our products. As a result, we may be found to
infringe on the intellectual property rights of others. In the event of a
successful claim of infringement against us and our failure or inability to
license the infringed technology, our business and operating results could be
adversely affected.
Any litigation or claims, whether or not valid, could result in substantial
costs and diversion of our resources. Intellectual property litigation or
claims could force us to do one or more of the following:
- cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;
- obtain a license from the holder of the infringed intellectual
property right, which license may not be available on reasonable
terms, if at all; and
- redesign products or services that incorporate the disputed
technology.
If we are forced to take any of the foregoing actions, we could face
substantial costs and our business could be seriously harmed. Although we carry
general liability insurance, our insurance may not cover potential claims of
this type or be adequate to indemnify us for all liability that may be imposed.
We may initiate claims or litigation against third parties in the future
for infringement of our proprietary rights or to determine the scope and
validity of our proprietary rights or the proprietary rights of competitors.
These claims could result in costly litigation and the diversion of our
technical and management personnel. As a result, our operating results could
suffer and our financial condition could be harmed.
IN SOME CASES, WE RELY ON A LIMITED NUMBER OF SUPPLIERS, WHICH ENTAILS SEVERAL
RISKS, INCLUDING THE POSSIBILITY OF DEFECTIVE PARTS, A SHORTAGE OF COMPONENTS,
AN INCREASE IN COMPONENT COSTS, AND REDUCED CONTROL OVER DELIVERY SCHEDULES.
We sometimes purchase product components from a single supplier in order to
obtain the required technology and the most favorable price and delivery terms.
These components include, for example, processors, power supplies, integrated
circuits and storage devices. We purchase product components from the following
single suppliers: APW Electronic Solutions, Dell Corporation, DME Corporation,
Kardios Systems Corporation,
16
Macrolink, Inc., Metal Form, Inc., Qlogic Corporation, Synergy Microsystems,
Inc., Sanmina-SCI Corporation, Seagate Technology, Inc., Tyco Electronics
Corporation, VMIC Corporation and Xyratex Technology Limited. In most cases,
comparable products are available from other sources, but would require
significant reengineering to conform to our system specifications. Our reliance
on single suppliers entails a number of risks, including the possibility of
defective parts, a shortage of components, increase in components costs, and
reduced control over delivery schedules. Any of these events could adversely
affect our business, results of operations and financial condition. We estimate
that a lead-time of 16-24 weeks may be necessary to switch to an alternative
supplier of certain custom application specific integrated circuit and printed
circuit assemblies. A change in the supplier of these components without the
appropriate lead-time could result in a material delay in shipments by us of
certain products. Where alternative sources are available, qualification of the
alternative suppliers and establishment of reliable supplies of components from
such sources may also result in delays. Shipping delays may also result in a
delay in revenue recognition, possibly outside the fiscal year period originally
planned, and, as a result, may adversely affect our financial results for that
particular period.
AS OUR PRODUCTS AGE, WE MAY NOT BE ABLE TO PURCHASE NECESSARY PARTS TO SUPPORT
LEGACY SYSTEMS DEPLOYED OR TO BE DEPLOYED.
Our products are beginning to age, especially our ISD products. With the
passage of time, suppliers of essential parts may stop producing these parts.
In such cases, we may be required to make "last-time" buys and subsequently
redesign our products to accommodate the obsolescence. If that occurs, we will
have to spend considerable effort in the redesign and, in some cases, may be
forced to have the redesigned products requalified. Requalification may take
several months, thereby delaying expected revenue.
OUR BUSINESS MAY BE ADVERSELY AFFECTED IF WE FAIL TO RETAIN OUR CURRENT KEY
PERSONNEL, MANY OF WHOM WOULD BE DIFFICULT TO REPLACE, OR FAIL TO ATTRACT
ADDITIONAL QUALIFIED PERSONNEL.
Our future performance depends on the continued service of our senior
management and our engineering, sales and marketing and manufacturing personnel.
Competition for qualified personnel is intense, and we may fail to retain our
key employees or to attract or retain other highly qualified personnel. In the
last twelve months we have lost key individuals in sales, product management,
and system engineering. We do not carry key person life insurance on any of our
employees. The loss of the services of one or more of our key personnel could
seriously impact our business. Our future success also depends on our
continuing ability to attract, hire, train and retain highly skilled managerial,
technical, sales, marketing and customer support personnel. In addition, new
employees frequently require extensive training before they achieve desired
levels of productivity.
WE CURRENTLY HAVE STRATEGIC RELATIONSHIPS WITH ALCATEL, SCIENTIFIC-ATLANTA,
MOTOROLA, TV GUIDE, AND PIONEER, AMONG OTHERS. WE MAY BE UNSUCCESSFUL IN
MAINTAINING THESE STRATEGIC RELATIONSHIPS, OR ESTABLISHING NEW STRATEGIC
RELATIONSHIPS THAT WILL BE AN IMPORTANT PART OF OUR FUTURE SUCCESS. IN EITHER
EVENT, OUR BUSINESS COULD BE ADVERSELY AFFECTED.
The success of our business is and will continue to be dependent in part on
our ability to maintain existing and enter into new strategic relationships.
There can be no assurance that:
- such existing or contemplated relationships will be commercially
successful;
- we will be able to find additional strategic partners; or
- we will be able to negotiate acceptable terms with potential strategic
partners.
We cannot provide assurance that existing or future strategic partners will
not pursue alternative technologies or develop alternative products in addition
to or in lieu of our technology, either on their own or in collaboration with
others, including our competitors. These alternative technologies or products
may be in direct competition with our technologies or products and may
significantly erode the benefit of our strategic relationships and adversely
affect our business, financial condition and results of operations.
INTERNATIONAL SALES ACCOUNTED FOR APPROXIMATELY 18%, 14%, AND 15% OF OUR REVENUE
IN FISCAL YEARS 2004, 2003, AND 2002, RESPECTIVELY AND IS EXPECTED TO INCREASE.
ACCORDINGLY, OUR BUSINESS IS SUSCEPTIBLE TO NUMEROUS RISKS ASSOCIATED WITH
INTERNATIONAL OPERATIONS.
Although our anticipated revenue growth in the near term is expected to
occur primarily in North America, we expect that long-term growth will require
expansion of our international operations as DSL and digital cable technology is
more widely deployed in Europe and Asia. As a result, we are subject to a
number of risks associated
17
with international business activities that could increase our costs, lengthen
our sales cycle and require significant management attention. These risks
include:
- compliance with, and unexpected changes in, regulatory requirements
resulting in unanticipated costs and delays;
- lack of availability of trained personnel in international locations;
- tariffs, export controls and other trade barriers;
- longer accounts receivable payment cycles than in the United States;
- potential difficulty of enforcing agreements and collecting
receivables in some foreign legal systems;
- potential difficulty in enforcing intellectual property rights in
certain foreign countries;
- potentially adverse tax consequences, including restrictions on the
repatriation of earnings;
- the burdens of complying with a wide variety of foreign laws;
- general economic conditions in international markets; and
- currency exchange rate fluctuations.
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DILUTE THE OWNERSHIP INTEREST OF OUR
STOCKHOLDERS, CAUSE US TO INCUR DEBT OR ASSUME CONTINGENT LIABILITIES OR PRESENT
OTHER CHALLENGES, SUCH AS INTEGRATION ISSUES, FOR OUR BUSINESS, WHICH IF NOT
SUCCESSFULLY RESOLVED WOULD ADVERSELY AFFECT OUR BUSINESS.
As part of our business strategy, we review acquisition prospects that
would compliment our current product offerings, enhance our technical
capabilities or otherwise offer growth opportunities. While we currently have
no agreements with respect to any acquisition, we periodically review
investments in new businesses, and we may acquire businesses, products or
technologies in the future. In the event of any future acquisitions, we could
issue equity securities that would dilute current stockholders' percentage
ownership, incur substantial debt, or assume contingent liabilities. These
actions could materially adversely affect our operating results. Acquisitions
also entail numerous risks, including:
- difficulties in the assimilation of acquired operations, technologies
or services;
- unanticipated costs associated with the acquisition;
- diversion of management's attention from other business concerns;
- adverse effects on existing business relationships;
- risks associated with entering markets in which we have no or limited
prior experience; and
- potential loss of key employees of acquired companies.
We cannot assure that we will be able to successfully integrate any
business, products, technologies or personnel that we might acquire in the
future. Our failure to do so could materially adversely affect our business,
operating results and financial condition.
IMPLEMENTATION OF OUR PRODUCTS IS COMPLEX, TIME CONSUMING AND EXPENSIVE, AND WE
FREQUENTLY EXPERIENCE LONG SALES AND IMPLEMENTATION CYCLES. CONSEQUENTLY, OUR
QUARTERLY REVENUES, EXPENSES AND OPERATING RESULTS MAY VARY SIGNIFICANTLY IN THE
FUTURE. PERIOD-TO-PERIOD COMPARISONS OF OUR RESULTS OF OPERATIONS MAY NOT
NECESSARILY BE MEANINGFUL, AND THESE COMPARISONS SHOULD NOT BE RELIED UPON AS
INDICATIONS OF FUTURE PERFORMANCE.
ISD and VOD products are relatively complex, their purchase generally
involves a significant commitment of capital, and there are frequent delays
associated with large capital expenditures and implementation procedures within
an organization. Moreover, the purchase of such products typically requires
coordination and agreement among a potential customer's corporate headquarters
and its regional and local operations. As a result, the sales cycles associated
with the purchase of many of our products are typically lengthy and subject to a
number of significant risks, including customers' budgetary constraints and
internal acceptance reviews, over which we have little or no control.
RISKS RELATED TO OUR INDUSTRIES
THE CURRENT UNCERTAINTY AND FINANCIAL INSTABILITY OF CERTAIN COMPANIES IN THE
CABLE INDUSTRY MAY ADVERSELY IMPACT THE SUCCESS OF OUR VOD BUSINESS.
We sell our VOD products to cable companies that have upgraded their
networks to support interactive, digital services. However, the cable industry
has received negative publicity regarding cable companies' lack of
18
sufficient free cash flow to fund capital expenditures and debt service
requirements after years of significant capital spending to upgrade their cable
plants to digital, two-way interactive capability. As a result, certain cable
companies have communicated their intent to reduce capital spending to
accelerate the point at which they will generate free cash flow and improve
their financial stability. This may adversely impact the speed at which these
cable companies deploy VOD in their cable markets. Other factors contributing to
the uncertainty in the cable industry is the bankruptcy filing of Adelphia
Communications Corporation and subsequent hiring by them of two investment banks
to evaluate strategic alternatives and Cox Communications' bid to go private.
THE SUCCESS OF OUR VOD BUSINESS IS DEPENDENT UPON THE GROWTH OF THE DIGITAL
VIDEO MARKET, WHICH MAY NOT GROW AS WE EXPECT. ANY FAILURE BY THE MARKET TO
ACCEPT DIGITAL VIDEO TECHNOLOGY WILL HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS.
VOD is an emerging technology, and we cannot assure you that it will
attract widespread demand or market acceptance. Further, the potential size of
the VOD market and the timing of our development are uncertain. Our success in
the VOD market will depend upon the commercialization and broad acceptance of
VOD by residential cable subscribers and other industry participants, including
cable companies, content providers, set-top box manufacturers, and educational
institutions. The future growth of our VOD business will depend on the pace of
the installation of interactive digital cable and digital set-top-boxes, the
rate at which cable companies deploy digital infrastructure, the rate at which
digital video technology expands to additional market segments, and the rate
that the technology is adopted by consumers.
THE SUCCESS OF OUR VOD BUSINESS IS DEPENDENT ON THE AVAILABILITY OF, AND THE
DISTRIBUTION WINDOWS FOR, MOVIES, PROGRAMS AND OTHER CONTENT. IF SUFFICIENT VOD
CONTENT IS NOT AVAILABLE ON A TIMELY BASIS, OUR VOD BUSINESS WILL BE ADVERSELY
AFFECTED.
The success of VOD will largely be dependent on the availability of a wide
variety and substantial number of movies, subscription based content from
providers such as Home Box Office, Inc., Showtime Networks, Inc., and Starz
Encore Group, LLC, specialty programs and other material, which we refer to as
content, in digital format. We do not provide digital VOD content. Therefore,
the future success of our VOD business is dependent in part on content
providers, such as traditional media and entertainment companies, providing
significant content for VOD. Further, we are dependent in part on other third
parties to convert existing analog content into digital content so that it may
be delivered via VOD.
In addition, we believe that the ultimate success of VOD will depend in
part on the timing of the VOD distribution window. The distribution window is
the time period during which different mediums, such as home movie rental
businesses, receive and have exclusive rights to motion picture releases.
Currently, video rental businesses have an advantage of receiving motion picture
releases on an exclusive basis before most other forms of non-theatrical movie
distribution, such as pay-per-view, premium television, VOD, basic cable and
network syndicated television. The length of the exclusive distribution window
for movie rental businesses varies, typically ranging from 30 to 90 days for
domestic video stores. Thereafter, movies are made sequentially available to
various television distribution channels. We believe the success of VOD will
depend in part on movies being available for VOD distribution either
simultaneously with, or shortly after, they are available for video rental
distribution. The order, length and exclusivity of each window for each
distribution channel is determined solely by the studio releasing the movie.
Given the size of the home video rental industry, the studios have a significant
interest in maintaining that market. We cannot assure you that favorable
changes, if any, will be made relating to the length and exclusivity of the
video rental and television distribution windows.
We believe all of the major studios have entered into agreements with
certain cable companies and content aggregators to provide digital movies for
distribution through VOD. However, these agreements are subject to change. If
studios fail to reach agreements regarding content or cancel existing
agreements, our customers could delay or cancel VOD system orders, which would
adversely affect our VOD business.
WE CANNOT ASSURE YOU THAT OUR PRODUCTS AND SERVICES WILL KEEP PACE WITH
TECHNOLOGICAL DEVELOPMENTS AND EMERGING INDUSTRY STANDARDS, ADDRESS THE CHANGING
NEEDS OF OUR CUSTOMERS OR ACHIEVE MARKET ACCEPTANCE, ANY OF WHICH COULD
MATERIALLY ADVERSELY AFFECT OUR BUSINESS.
The markets for our products are characterized by rapidly changing
technology, evolving industry standards and new product introductions and
enhancements. There can be no assurance that we will be successful in enhancing
our VOD & ISD products or developing, manufacturing and marketing new products
that satisfy customer needs or achieve market acceptance. In addition,
services, products or technologies developed by others
19
may render one or more of our products or technologies uncompetitive,
unmarketable or obsolete. Future technological advances in the real-time,
television and video industries may result in the availability of new products
and services that could compete with our solutions or reduce the cost of
existing products or services. Our future success will depend on our ability to
continue to enhance our existing products, including development of new
applications for our technology, and to develop and introduce new products to
meet and adapt to changing customer requirements and emerging technologies.
Further, announcements of currently planned or other new product offerings by
our competitors may cause customers to defer purchase decisions or to fail to
purchase our existing solutions. Our failure to respond to rapidly changing
technologies could adversely affect our business, financial condition and
results of operations.
BOTH OF OUR DIVISIONS ARE SUBJECT TO GOVERNMENTAL REGULATION. ANY FINDING THAT
WE HAVE BEEN OR ARE IN NONCOMPLIANCE WITH SUCH LAWS COULD RESULT IN, AMONG OTHER
THINGS, GOVERNMENTAL PENALTIES. FURTHER, CHANGES IN EXISTING LAWS OR NEW LAWS
MAY ADVERSELY AFFECT OUR BUSINESS.
We are subject to various international, U.S. federal, state and local laws
affecting our VOD and Integrated Solutions Divisions. The television industry
is subject to extensive regulation in the United States and other countries.
Our VOD business is dependent upon the continued growth of the digital
television industry in the United States and internationally. Cable companies
are subject to extensive government regulation by the Federal Communications
Commission and other federal and state regulatory agencies. These regulations
could have the effect of limiting capital expenditures by cable companies and
thus could have a material adverse effect on our business, financial condition
and results of operations. The enactment by federal, state or international
governments of new laws or regulations could adversely affect our cable operator
customers, and thereby materially adversely affect our business, financial
condition and results of operations. Our Integrated Solutions Division is also
subject to strict government regulation as the result of the government work we
do. The regulations deal with security clearances, employment practices,
pricing, purchasing, intellectual property and integrity. If we were ever found
in violation or if out of tolerance, our production and resultant revenues could
be halted or significantly delayed.
WE MAY BE SUBJECT TO LIABILITY IF PRIVATE INFORMATION SUPPLIED TO OUR CUSTOMERS,
INCLUDING CABLE COMPANIES, IS MISUSED.
Our VOD systems allow cable companies to collect and store video
preferences and other data that many viewers may consider confidential.
Unauthorized access or use of this information could result in liability to our
customers, and potentially us, and might deter potential VOD viewers. We have
no control over the policy of our customers with respect to the access to this
data and the release of this data to third parties.
THE DEPLOYMENT OF VOD BY CABLE COMPANIES MAY BE DELAYED DUE TO LIMITED BANDWIDTH
OR OTHER TECHNOLOGY INITIATIVES THAT COULD REQUIRE CABLE COMPANIES TO FURTHER
UPGRADE THEIR NETWORKS.
Bandwidth is a limited resource to cable companies. VOD deployments may be
delayed as operators focus on new initiatives that require incremental bandwidth
such as high definition television, increased high-speed data speed, voice over
internet protocol, interactive television, gaming and other evolving
applications. These initiatives compete for the cable companies' network
bandwidth and may require the cable companies to increase their bandwidth
capabilities by further upgrading their networks and therefore delaying VOD
deployments.
OTHER RISKS
WE HAVE IMPLEMENTED CERTAIN ANTI-TAKEOVER PROVISIONS THAT COULD MAKE IT MORE
DIFFICULT FOR A THIRD PARTY TO ACQUIRE US.
Provisions of Delaware law and our restated certificate of incorporation,
amended and restated bylaws, and rights plan could make it more difficult for a
third party to acquire us, even if doing so would be beneficial to our
stockholders.
We are subject to certain Delaware anti-takeover laws regulating corporate
takeovers. These anti-takeover laws prevent a Delaware corporation from
engaging in a business combination involving a merger or sale of more than 10%
of our assets with any stockholder, including affiliates and associates of the
stockholder, who owns 15% or more of the outstanding voting stock, for three
years following the date that the stockholder acquired 15% or more of the
corporation's stock except under limited circumstances.
20
There are provisions in our restated certificate of incorporation and our
amended and restated bylaws that also may delay, deter or impede hostile
takeovers or changes of control.
In addition, we have a rights plan, also known as a poison pill. The
rights plan has the potential effect of significantly diluting the ownership
interest in us of any person that acquires beneficial ownership of 15% or more
of our common stock or commences a tender offer that would result in a person or
group owning 15% or more of our common stock.
IN THE FUTURE, WE MAY NEED TO RAISE ADDITIONAL CAPITAL. THIS CAPITAL MAY NOT BE
AVAILABLE ON ACCEPTABLE TERMS, IF AT ALL. IF WE CANNOT RAISE FUNDS ON
ACCEPTABLE TERMS, IF AND WHEN NEEDED, WE MAY NOT BE ABLE TO DEVELOP OR ENHANCE
OUR PRODUCTS AND SERVICES, TAKE ADVANTAGE OF FUTURE OPPORTUNITIES, GROW OUR
BUSINESS OR RESPOND TO COMPETITIVE PRESSURES OR UNANTICIPATED REQUIREMENTS.
We believe that our existing cash balances and funds generated by
operations will be sufficient to meet our anticipated working capital and
capital expenditure requirements for the next twelve months. However, our
working capital declined from $43.5 million at June 30, 2002 to $26.4 million on
June 30, 2004. We expect that our working capital will continue to decrease
during fiscal year 2005. If our VOD revenue does not increase and stabilize in
future periods, we will continue to use substantial cash from operating
activities, which will cause working capital to further decline. If this
situation continues, we may need to raise additional funds. We cannot be
certain that we will be able to obtain additional financing on favorable terms,
if at all.
ANY WEAKNESSES IDENTIFIED IN OUR INTERNAL CONTROLS AS PART OF THE EVALUATION
BEING UNDERTAKEN BY US AND OUR INDEPENDENT PUBLIC ACCOUNTANTS PURSUANT TO
SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002 COULD HAVE AN ADVERSE EFFECT ON
OUR BUSINESS.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that companies
evaluate and report on their systems of internal control over financial
reporting. In addition, the independent accountants must report on management's
evaluation. We are in the process of documenting and testing our system of
internal control over financial reporting to provide the basis for our report.
Upon the completion of our review, it is possible that certain deficiencies
could be discovered that will require remediation. Due to the ongoing evaluation
and testing of our internal controls, there can be no assurance that there may
not be significant deficiencies or material weaknesses that would be required to
be reported. In addition, we expect the evaluation process and any required
remediation, if applicable, to increase our accounting, legal and other costs
and divert management resources from core business operations.
THE RECENT CONFLICT IN IRAQ AND ANY FUTURE ARMED CONFLICT OR TERRORIST
ACTIVITIES MAY CAUSE THE ECONOMIC CONDITIONS IN THE U.S. OR ABROAD TO
DETERIORATE, WHICH COULD HARM OUR BUSINESS.
The U.S. and other countries recently engaged in a war in Iraq and military
personnel are still engaged in that country. Continued occupation of Iraq,
future terrorist attacks against U.S. targets, rumor or threats of war,
additional conflicts involving the U.S. or its allies or trade disruptions may
impact our operations or cause general economic conditions in the U.S. and
abroad to deteriorate. A prolonged economic slowdown or recession in the U.S.
or in other areas of the world could reduce the demand for our products and,
therefore, negatively affect our future sales and profits. Any of these events
could have a significant impact on our business, financial condition or results
of operations and may result in the volatility of the market price for our
common stock and other securities.
OUR STOCK PRICE HAS BEEN VOLATILE IN THE PAST AND MAY BE VOLATILE IN THE FUTURE.
Our common stock is traded on the Nasdaq National Market. For the fiscal
year ended June 30, 2004, the high and low prices reported on the Nasdaq
National Market were $6.00 and $1.60, respectively. Further, as of August 23,
2004, the price as reported on the Nasdaq National Market was $1.81. The market
price of our common stock may fluctuate significantly in the future in response
to various factors, some of which are beyond our control, including, among
others:
- variations in our quarterly operating results;
- changes in securities analysts' estimates of our financial
performance;
- the development of the VOD market in general;
- changes in market valuations of similar companies;
21
- announcement by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
- loss of a major customer or failure to complete significant
transactions; and
- additions or departures of key personnel.
In addition, in recent years the stock market in general, and the Nasdaq
National Market and the market for technology companies in particular, have
experienced extreme price and volume fluctuations. In some cases, these
fluctuations have been unrelated or disproportionate to the operating
performance of these companies. These market and industry factors may
materially and adversely affect our stock price, regardless of our operating
performance.
In the past, class action litigation often has been brought against
companies following periods of volatility in the market price of those
companies' common stock. We may become involved in this type of litigation in
the future. Litigation is often expensive and diverts management's attention
and resources, which could materially and adversely affect our business,
financial condition and results of operations.
ITEM 2. PROPERTIES
Our principal facilities as of June 30, 2004, are listed below. All of the
principal facilities are leased. Management considers all facilities listed
below to be suitable for the purpose(s) for which they are used, including
manufacturing, research and development, sales, marketing, service, and
administration.
EXPIRATION DATE APPROX.
LOCATION PRINCIPAL USE OF LEASE FLOOR AREA
- ------------------------ -------------------------------- --------------- -----------
(SQ. FEET)
4375 River Green Parkway Corporate Headquarters, August 2006 33,000
Suite 100 Administration, Research &
Duluth, Georgia Development, Sales and Marketing
2800 Gateway Drive Manufacturing and Service December 2007 40,000
Pompano Beach, Florida
2881 Gateway Drive Administrative and Sales and December 2007 30,000
Pompano Beach, Florida Marketing
3535 Route 66 Repair and Service Depot May 2009 17,000
Bldg. 3
Neptune, New Jersey
3rd Floor, Voyager Place Sales, Service and Research & January 2008 10,000
Shoppenhangers Road Development
Maidenhead, Berkshire UK
100 Highpoint Drive Research & Development December 2006 16,500
Chalfont, Pennsylvania
Except for the Chalfont, Pennsylvania facility, which is used exclusively
for the VOD division, and the Administrative and Sales and Marketing offices at
2881 Gateway Drive, Pompano Beach, FL and Repair and Service Depot at Neptune,
NJ, which are used exclusively for the Integrated Solutions Division, our
facilities are used for both divisions. In addition to the facilities listed
above, we also lease space in various domestic and international industrial
centers for use as sales and service offices and warehousing.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our ordinary course of business. We are not presently involved
in any material litigation. However, we are involved in various legal
proceedings. We believe that any liability which may arise as a result of these
proceedings will not have a material adverse effect on our financial condition.
22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM X. OFFICERS OF THE REGISTRANT
Our officers are elected by the Board of Directors to hold office until
their successors have been chosen and qualified or until earlier resignation or
removal. Set forth below are the names, positions, and ages of executive
officers as of August 23, 2004:
NAME POSITION AGE
- -------------------- -------------------------------------------------- ---
T. Gary Trimm President and Chief Executive Officer 56
Stephen K. Necessary President, Video-on-Demand Division 48
Warren Neuburger President, Integrated Solutions Division 50
Steven R. Norton Executive Vice President & Chief Financial Officer 43
Kirk L. Somers General Counsel & Secretary 39
T. Gary Trimm, President, Chief Executive Officer, and Director. Mr. Trimm
has served as President and Chief Executive Officer of Concurrent since July
2004. He became a director on August 10, 2004. From 2003 to July 2004, Mr. Trimm
was President and Chief Executive Officer of OpVista, Inc., a manufacturer of
scalable transport solutions. From 1997 to 2003, Mr. Trimm served as President
and Chief Executive Officer of Strategic Management, LLC, a consulting firm.
From 1995 to 1997, Mr. Trimm served as President and Chief Executive Officer of
Compression Labs, a developer and marketer of CDV-based video-conferencing
systems, and then from 1988 to 1995, Mr. Trimm served at Scientific-Atlanta,
Inc., where his final position was President of their Subscriber Division. Mr.
Trimm also spent several years at American Technical Services and served in the
United States Navy within the US Navy Submarine Service. Mr. Trimm currently
serves on the board of directors of OpVista and EG Technologies, Inc.
Stephen K. Necessary, President, VOD Division. Mr. Necessary has served as
President of the VOD division since June 2002. From January 2000 to June 2002,
Mr. Necessary was President, CEO, and a Director of PowerTV, Inc, a software
subsidiary of Scientific-Atlanta. From April 1998 to January 2000, Mr.
Necessary served as Corporate Vice President and Vice President of Marketing at
Scientific-Atlanta. From June 1982 to February 1991 and then from October 1995
to April 1998, he also held a number of other positions with Scientific-Atlanta,
including Vice President and General Manager of analog video systems. Mr.
Necessary also spent several years at ARRIS Group, Inc. (f.k.a. Antec
Corporation), a communications technology company that specializes in
hybrid-fiber-coaxial-based networks, where his final position was President of
the products group. Earlier in his career, he was a team manager for Procter &
Gamble.
Warren Neuburger, President, Integrated Solutions Division. Mr. Neuburger
has served as President of the Integrated Solutions Division since June 2004.
From 2001 to 2003, Mr. Neuburger served as CEO, President , Chief Operations
Officer and Director at Optio Software Inc., a provider of output management
solutions. From 1998 to 2001, Mr. Neuburger held a number of positions at
Glenayre Electronics, including Executive Vice President, Products and President
of the ING Division. Mr. Neuburger also held a number of positions during his
tenures at Voicecom Systems, Inc., Digital Equipment Corporation, and Corning
Glass Works.
Steven R. Norton, Executive Vice President and Chief Financial Officer.
Mr. Norton has served as the Executive Vice President and Chief Financial
Officer since October 1999. From March 1996 to April 1999, Mr. Norton was Vice
President of Finance and Administration for LHS Group, Inc., a formerly publicly
held provider of services to communications services providers and Chief
Financial Officer for one of its subsidiaries, LHS Communications Systems, Inc.
Prior to his employment with LHS, he was an Audit Senior Manager for Ernst
&Young and KPMG LLP.
Kirk L. Somers, General Counsel and Secretary. Mr. Somers has served as
General Counsel since November 2001 and was appointed Secretary in August 2004.
Immediately prior to joining Concurrent, from December 1998 to November 2001,
Mr. Somers was the Assistant General Counsel for a company within divine, inc.
(f.k.a. eshare communication, Inc.), a developer and marketer of enterprise
interactive management solutions, where he was responsible for corporate-wide
development and enforcement of the company's intellectual property portfolio as
well as commercial contracts and other corporate matters. From December 1995 to
December 1998, Mr. Somers was a partner in the law firm of Marshall & Melhorn in
Toledo, Ohio practicing in the area of litigation. Prior to that, he was a JAG
in the USAF.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUE PURCHASES OF EQUITY SECURITIES
Our Common Stock is currently traded under the symbol "CCUR" on The NASDAQ
National Market. The following table sets forth the high and low sale for our
Common Stock for the periods indicated, as reported by the NASDAQ National
Market.
FISCAL YEAR 2004
QUARTER ENDED: HIGH LOW
----- -----
September 30, 2003 $4.75 $2.35
December 31, 2003 $5.47 $3.49
March 31, 2004 $6.00 $3.00
June 30, 2004 $3.71 $1.60
FISCAL YEAR 2003
QUARTER ENDED: HIGH LOW
----- -----
September 30, 2002 $4.78 $2.10
December 31, 2002 $3.44 $1.25
March 31, 2003 $3.87 $1.90
June 30, 2003 $3.66 $1.94
As of August 23, 2004, there were 62,882,654 shares of Common Stock
outstanding, held of record by approximately 19,860 stockholders with a closing
price on the Nasdaq National Market of $1.81.
We have never declared or paid any cash dividends on our capital stock.
Our present policy is to retain all available funds and any future earnings to
finance the operation and expansion of our business, and no change in the policy
is currently anticipated.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data that has been derived from our audited consolidated financial statements.
The information set forth below is not necessarily indicative of the results of
future operations and should be read in conjunction with, and is qualified by
reference to, our financial statements and related notes thereto included
elsewhere herein and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED JUNE 30,
-----------------------------------------------------------
INCOME STATEMENT DATA 2004 2003 2002 2001 2000
- ---------------------------- -------- --------- ------- -------- ---------
Net sales $79,235 $ 75,453 $89,369 $72,821 $ 68,090
Gross margin 38,722 36,423 44,566 33,020 31,743
Operating income (loss) (8,540) (11,429) (2) 3,679 (5,591) (23,987) (4)
Net income (loss) (5,725) (1) (24,552) (3) 4,383 (6,189) (23,715) (4)
Net income (loss) per share
Basic $ (0.09) (1) $ (0.40) (3) $ 0.07 $ (0.11) $ (0.46) (4)
Diluted $ (0.09) (1) $ (0.40) (3) $ 0.07 $ (0.11) $ (0.46) (4)
AT JUNE 30,
-----------------------------------------------------------
BALANCE SHEET DATA 2004 2003 2002 2001 2000
- ---------------------------- -------- --------- ------- -------- ---------
Cash, cash equivalents and
short-term investments $27,928 $ 30,697 $30,519 $ 9,460 $ 10,082
Working capital 26,378 30,180 43,545 14,824 15,383
Total assets 74,542 77,839 98,688 57,052 57,078
Stockholders' equity 45,726 43,458 69,224 33,283 38,271
Book value per share $ 0.73 $ 0.70 $ 1.12 $ 0.60 $ 0.71
(1) Net loss for the year ended June 30, 2004 includes $3.1 million from
the recovery of a previously recognized impairment charge related to
our investment in Thirdspace.
(2) Operating loss for the year ended June 30, 2003 includes a
restructuring charge of $1.6 million.
(3) Net loss for the year ended June 30, 2003 includes a $13.0 million
impairment charge related to our investment in Thirdspace and a
restructuring charge of $1.6 million.
(4) In October 1999, Concurrent acquired Vivid Technology. In connection
with the acquisition, management placed a value of $14.0 million on
in-process research and development based on valuation methods it
deemed appropriate. This entire amount was written off as required by
APB No. 16, "Business Combinations", which has since been superceded
by SFAS No. 141, "Business Combinations".
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIO