10-K 1 form10-k.txt CONCURRENT COMPUTER CORP 10-K 6-30-2006 -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------------------------------------------------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2006 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------------------------------------------------------------------------- COMMISSION FILE NUMBER: 0-13150 CONCURRENT COMPUTER CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE (STATE OF INCORPORATION) 04-2735766 (I.R.S. EMPLOYER IDENTIFICATION NO.) 4375 RIVER GREEN PARKWAY, SUITE 100, DULUTH, GEORGIA 30096 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE) (678) 258-4000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) -------------------------------------------------------------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: COMMON STOCK, $0.01 PAR VALUE (TITLE OF CLASS) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] The aggregate market value of the common equity held by non-affiliates of the registrant as of December 31, 2005 was approximately $133 million based on the closing price of $1.89 of our common stock as reported by the NASDAQ National Market on December 31, 2005. There were 72,255,000 shares of common stock outstanding as of August 31, 2006. Certain portions of the Registrant's Proxy Statement to be used in connection with Registrant's 2006 Annual Meeting of Stockholders scheduled to be held on October 26, 2006 are incorporated by reference in Part III hereof. --------------------------------------------------------------------------------
CONCURRENT COMPUTER CORPORATION 2006 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I PAGE ------ ---- ITEM 1. BUSINESS 1 ITEM 1A RISK FACTORS 14 ITEM 1B UNRESOLVED STAFF COMMENTS 23 ITEM 2. PROPERTIES 24 ITEM 3. LEGAL PROCEEDINGS 24 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 24 ITEM X. OFFICERS OF THE REGISTRANT 24 PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUE PURCHASES OF EQUITY SECURITIES 26 ITEM 6. SELECTED FINANCIAL DATA 27 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 28 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 43 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 43 Report of Independent Registered Public Accounting Firm 51 Management Report on Internal Control Over Financial Reporting 52 Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting 53 Consolidated Balance Sheets 54 Consolidated Statements of Operations 55 Consolidated Statements of Stockholders' Equity and Comprehensive Income (loss) 56 Consolidated Statements of Cash Flows 57 Notes to Consolidated Financial Statements 58 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 43 ITEM 9A. CONTROLS AND PROCEDURES 44 ITEM 9B. OTHER INFORMATION 44 PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 45 ITEM 11. EXECUTIVE COMPENSATION 45 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 45 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 45 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 45 PART IV ------- ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 46
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 provider of computer and software systems for the video-on-demand, or VOD, market and the real-time operating systems/productivity tools market. We approach the two markets as one company with two product lines, on-demand and real-time. Our on-demand products consist of hardware and software as well as integration services, sold primarily to broadband companies that have upgraded their networks to support interactive, digital services. These on-demand systems enable broadband telecommunication providers, mainly cable television systems, to stream video content to their digital subscribers with digital set-top boxes or personal computers and then measure the use and success of the streamed content. 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. The largest broadband companies in the U.S. and abroad have begun deploying on-demand services to their residential markets. Currently, 159 markets worldwide, with approximately 25,100,000 basic subscribers, utilize our systems to deliver video streams. Our data analysis software, sold through our on-demand subsidiary, Everstream, quantifies subscriber VOD usage and other important system parameters for over 16,200,000 digital subscribers in 152 markets worldwide. Our real-time products consist of real-time operating systems and diagnostic software tools combined, in most cases, with off-the-shelf hardware and services sold to a wide variety of companies seeking high-performance, real-time computer systems for use in a multitude of applications requiring low-latency response such as simulation, image generation and data acquisition. These real-time products are specially designed for use with applications that acquire, process, store, analyze and display large amounts of rapidly changing information in real time - that is, with microsecond response times as changes occur. We have over 40 years of experience in high-performance computing systems, including specific expertise in operating systems, computer hardware, application software, productivity tools, and networking. Our systems and software support applications in the information technology, simulation and training, financial, data acquisition, and industrial process control markets. We were incorporated in Delaware in 1981 under the name Massachusetts Computer Company. We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports available, free of charge, on our website located at www.ccur.com, as soon as reasonably ------------ practicable after filing with the SEC. We have adopted a code of ethics that is applicable to all employees as well as a code of ethics applicable to our principal executive, financial, and accounting officers. Both of these ethics policies are posted on our website located at www.ccur.com. Copies will be ------------ furnished upon written request to the Company at the following address: Attn: Secretary, 4375 River Green Parkway, Suite 100, Duluth, Georgia 30096. If we amend or change either code of ethics or grant a waiver under either code, we will disclose these events through our website. THE VOD MARKET Technological developments have laid the groundwork for digitally upgraded, two-way capable networks that enable broadband companies to deliver on-demand services to their digitally enabled subscribers. As of May 2006, according to Kagan Research, LLC, there were 123,818,000 North American households passed by cable and of these homes, approximately 65,534,000 were basic cable subscribers, with approximately 29,575,000 of these 1 basic subscribers also being digital subscribers. Of those digital subscribers, 25,206,000 had access to VOD, up from 20,329,000 in 2005. Our on-demand systems offer the following improvements over traditional home video services: - Convenience Without Late Fees. On-demand products eliminate travel to obtain and return rentals and eliminate late charges. - Interactivity. On-demand products enable a subscriber to view content at any time with interactive capabilities such as play, rewind, fast-forward and pause. - Greater Content. On-demand products enable our customers to make large amounts of content available to their subscribers. Our customers utilize both free on-demand and subscription on-demand services. These offerings help create awareness and understanding of on-demand television. Further, they are compelling services that cannot be duplicated by satellite broadcasters, and thus, reduce subscriber churn. - No Special Recorder Box Necessary. A digital video recorder (DVR) is an additional set-top device or an enhanced set-top device that enables a user to record programming on a hard disk drive for playback after the "live" program began with VCR-like functionality on the saved content. Our on-demand products have the capability to provide all the benefits of a DVR box from within the network (network DVR or nDVR), thus eliminating the need for such a set-top device. A partial implementation of such services has been initiated with our on-demand products by Time Warner Cable in their Columbia, S.C. market and is called "Start Over." nDVR services further do not require subscribers to pre-plan recording, purchase or rent a DVR device, install and maintain the device, update the device and learn how to operate the device. Additionally, since on-demand is network based, cable companies can incrementally add storage more economically and efficiently, whereas storage on a DVR device is typically not as easy to increase. Finally, and perhaps most importantly, DVRs are expensive devices that are inconsistent, we believe, with the broadband companies' long-range plans for the availability of on-demand services. - Advertising. On-demand products have enabled interactive long-format advertising and have the potential to enable broadband companies to target advertising and offer a further enhanced interactive advertising experience. Through our Everstream subsidiary, we provide software to broadband companies that enable them to measure the use and effectiveness of a variety of services, including VOD. Our products capture this information and enable its display in a wide-array of reports. This software is also utilized by satellite broadcasters to measure transactions with subscribers. We believe that on-demand is a key strategic competitive initiative for broadband companies because it provides them with an opportunity to differentiate their service offerings from digital broadcast satellite providers, which are technically unable to duplicate the full functionality of VOD. Further, we believe on-demand will provide cable and other telecommunication companies' access to new revenue generating opportunities, increase subscriber satisfaction and reduce subscriber churn. We believe that on-demand also will be a strategic differentiator for telephone companies as they seek to expand services beyond the delivery of voice. Cable companies are offering voice services and, thus, competing for telephone company customers. In response, we expect that the telephone companies will begin to expand into television and will deploy on-demand products for the same reasons that cable companies have. THE REAL-TIME COMPUTING MARKETS Our real-time products offer unique solutions for a wide-range of applications that require state-of-the-art, time-critical software and hardware technology. The operating systems we provide typically offer high-performance computation and high data throughput, with predictable and repeatable responses to time-critical events. Our real- 2 time products are currently used in host, client-server, and embedded and distributed computing solutions. Applications that utilize our operating system and development tools include the following: - Simulation and Training. Man-in-the-loop (M-I-T-L) simulation and training and hardware-in-the-loop (H-I-T-L) simulation. Examples of M-I-T-L applications are 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. - Data Acquisition. Applications that perform environmental analysis and display, engine testing, range and telemetry systems, shock and vibration testing, weather satellite data acquisition and forecasting, intelligence data acquisition and analyses, and command and control. - Image Generation. Image generation applications requiring scalable, commercial-off-the-shelf graphics technology for the highest levels of computer-generated image quality and fidelity, compatibility with the latest industry-standard components from leading graphics suppliers and improved customer value versus proprietary solutions. - Industrial Process Control. Applications such as plant monitoring and control systems that ensure safety and reliable operation in industrial environments. Examples are gas and oil pipeline supervision, power plant control systems and manufacturing monitoring. - Information Technology. Data processing applications that require high reliability and time-critical response to user action with minimal interrupt latency such as applications used for stock and bond trading, financial analysis and other financial transaction systems. - Other Markets. We have expanded our focus to include other markets that require a low-latency, time-critical backbone such as medical imaging, air traffic control, financial trading and telecommunications test systems. BUSINESS STRATEGY ON-DEMAND PRODUCT LINE Our on-demand strategy is comprised of the following primary initiatives: - North American Cable. We have been selected to supply on-demand systems for 105 North American cable markets. Our primary customers include, in alphabetical order, Blue Ridge Communications, Bright House Networks, Charter Communications, Inc., Cogeco, Inc., Comcast Corporation, Cox Communications, Inc., Knology, Inc., Mediacom Communications Corporation, Time Warner, Inc., and Vid otron Lt e. We intend to focus on continuing to serve these customers and add to our customer base by providing the product innovations and customer support that we believe the cable companies need to succeed. It is our goal to provide the highest quality products and support so that we enable our customers to succeed with their customers. - Data Analytics. With the continuing success of VOD, in October 2005 we closed the acquisition of Everstream, a company providing data measurement and reporting software to broadband companies. We plan to continue to develop this software to expand its capabilities for our broadband customers so they can better understand how video content is utilized by consumers. We expect product developments will be aimed at audience measurement and ad insertion. - International Cable. The rollout of residential on-demand service internationally over cable television systems is progressing well. We have been deployed in 16 international cable markets in Japan, Korea, China and Spain. We have been commercially deployed in Spain by Telefonica, in Korea by Broadband Solutions, Inc., Cable and Multimedia Communications Ltd. and Korea Digital Cable Media Center Co., 3 Ltd., and in China by Shekou CATV and in Japan by Jupiter Telecommunications, Inc. We will continue to pursue relationships with international cable companies. - Telecommunications Markets. We believe the international rollout of residential VOD services over DSL-based networks is progressing well. We have been deployed in 38 international telco markets by several international telcos, including Telecom Italia, Austria Telecom, Cyta Telecom (in Cypress) Chungwa Telecom in Taiwan, Sistema in Russia and the Galaxy Group in Hong Kong. These opportunities have been obtained through a reseller agreement with Alcatel pursuant to which we are Alcatel's preferred on-demand solution on their platform for resale throughout the world. Although we have been integrated with the Alcatel platform since January 2005, in mid-2005, Alcatel announced an agreement with Microsoft Corp. that we believe may affect our long term relationship with Alcatel. However, we intend to pursue relationships with other integrators and international telecommunication companies in order to take advantage of opportunities as they arise. Additionally, we are currently pursuing North American DSL opportunities. - Innovate to Improve the On-Demand Viewing Experience. We intend to continue to focus on the development of future on-demand technologies to remain a technology leader by improving streaming, storage and content ingest flexibility, asset management, the subscriber's navigation experience, encryption techniques, network based digital video recorder applications, business analytics, advertising applications, and functionality. REAL-TIME PRODUCT LINE Our real-time strategy is comprised of the following primary initiatives: - Establish Our Real-Time Linux Operating Systems as the DeFacto Standard for Real-Time Computing. As the high-performance, real-time, computing market shifted to open systems, we introduced new products to meet these open system requirements while maintaining support for our proprietary systems. The market for open software has grown dramatically and we believe we can position our products (RedHawk and SUSE Linux Enterprise-Real Time) as the standard open software real-time operating system. We are seeking to accomplish this by partnering with established industry providers of both software and hardware to resell our products as a software-only product. - Real-Time Operating System Sales on Commercial-Off-The-Shelf (COTS) Hardware Platforms. Our strategy strikes a balance between offering upgrades for our Unix system offerings and investing in our open-source Linux(R) operating systems and our integrated hardware solutions (called iHawk(TM)) that include our real time operating systems. Our iHawk family is a line of COTS-based Intel(R) Xeon(TM) and AMD Opteron(TM) servers available in single, dual, quad, and 8-way processor models including new dual-core models. iHawks are available in a wide-range of configurations and include our Real-Time Clock and Interrupt Module. We expect that the on-going introduction of a wide-range of Intel and AMD servers running our Linux operating systems will allow us to compete for a broader range of business opportunities. - NightStar(R) Tool Suite. Our NightStar Tool Suite is a collection of software debugging and analysis products that enable our customers to perform diagnostic tests on the applications they have developed and system tuning for use on our Linux(R) open source and proprietary real-time operating systems. In the last year, we ported these tools to the standard Red Hat Linux distribution and we intend to continue to license the NightStar Tool Suite to our typical customers and port the suite so it may be used for system tuning on other platforms. PRODUCTS AND SERVICES Our products fall into two principal groups, on-demand systems and real-time systems. In addition, we provide technical support to all of our customers. The percentage of total revenue contributed by our on-demand and our real-time products and service offerings are discussed in Management's Discussion and Analysis of Financial Condition and Results of Operation in this Annual Report on Form 10-K. 4 ON-DEMAND PRODUCTS Our on-demand systems are typically located at the network operator's headend or hub in a distributed or centralized architecture with a small software module residing on the subscriber's set-top-box. When a subscriber selects a certain piece of video content from an on-screen menu, a dedicated video session is established between our video server and the digital set-top-box in the subscriber's home via the resource manager over the broadband network. The selected video content is accessed from the video server where it is stored at either a headend or a hub. The purchase is typically captured by our back-office software, creating a billing and royalty record for the broadband company's billing system. Our Everstream products integrate with VOD systems provided by us or our competitors and capture information from the VOD systems and organize and report that information to the broadband provider. MediaHawk(R) 4G On-Demand Platform. Our MediaHawk 4G On-Demand Platform is based on our extensive software running on commercial-off-the-shelf hardware sourced from leading Original Equipment Manufacturers (OEMs) suppliers. It consists of the MediaHawk Video Server, the Media Store 1000 storage system and the Media Matrix switching fabric. We believe we are the only major VOD vendor to separate streaming, storage, and content capture to maximize flexibility and scalability. We believe our modular approach provides our customers with the ability to better manage their initial deployments, expand those deployments, and add new services. Our recently announced MediaHawk 4500, introducing RAM/disk hybrid storage architecture, extends our modular approach and provides excellent stream density with superior resiliency. As of June 30, 2006, we had shipped a total of 3,377 MediaHawk servers with a total capacity of 954,741 streams in 159 deployments serving approximately 25.1 million basic subscribers. Our design goals are to provide seamless end-user viewing without any interruption. Our on-demand systems enable broadband companies to automate the movement of content from one storage location to another based upon demand and other network requirements. This feature enables the most efficient streaming and storage of content. We have applied for a patent to protect our developments in this area. Our 4G On-Demand Platform includes the following software components: - Resource Manager. Our resource manager is a software component that establishes the network connection that allows video to be streamed to the home over the cable operator's network as a dedicated session. The resource manager is designed to route video streams in the most efficient manner available at any given time. - Business Management System. Our Business Management System is a relational database supporting subscriber and provider data management. Our back-office applications include customer access management, content distribution management, order management, royalty management, billing interfaces and marketing analysis. - Real Time Media System. Our Real Time Media System is software that enables our customers to capture broadcast television programming at the time of broadcast and simultaneously digitally encode, store and propagate the captured programs for future viewing by subscribers. The TimeWarner Cable Start Over initiative is enabled by this module. - Client. Our client is a software module with very small memory and processor requirements that resides on each digital set-top-box, empowering the subscriber to browse and select on-demand content with complete interactive control. - System Management and Maintenance Software. Our system management and maintenance software is designed to detect failed components, to re-route video streams to bypass the failed component, and to notify the cable company that maintenance is required. - Integration Options. Our on-demand systems are compatible with a wide range of equipment and software employed by broadband companies to deliver digital television service, including digital set-top boxes from Cisco Systems Inc. (f.k.a. Scientific-Atlanta), Motorola, Pioneer, Sony, Pace Micro, Samsung, Humax, and Matsushita and transport topologies such as IP, DSL, Gigabit Ethernet, DVB-ASI, ATM, and 64 and 256 5 QAM IF or RF. Further, since our on-demand technology allows us to perform functionality in the server rather than in the digital set-top box, we can overcome the challenge of providing on-demand services through digital set-top boxes with limited processing capability. Everstream(R) Data Suite. Our Everstream Data Suite is the foundation to our comprehensive data collection, reporting, analytics, and ad insertion platforms; enabling universal data collection from multiple vendor systems. Everstream's Data Suite is a comprehensive solution for collecting data from disparate interactive TV (iTV) systems and platforms, scrubbing and transforming that data into standardized information, and storing that data within a standard data warehouse model. This enables our customers, broadband companies deploying iTV services, to use Everstream applications or third party solutions to leverage data from all of their systems. Data Suite is built upon open relational database standards using proven Oracle technology and is integrated with the leading technologies that power iTV and on-demand services including Microsoft TV, Cisco ACNS, Real Networks, Windows Media, SeaChange, Concurrent, C-COR, Broadbus, and TANDBERG, as well as all major billing systems including Convergys, DST/Innovis, and CSG. Once our Everstream Data Suite product has captured operational information from our customers' diverse iTV services, that information can be leveraged, correlated, and interpreted empowering marketing, programming, advertising, and operations teams to seamlessly analyze usage, revenue, and quality of services. This intelligence provides new ways to compete by quickly identifying opportunities for revenue growth, operational efficiencies, and reduction of subscriber defection. This information can be utilized by the following Everstream modules: - Oi(TM) for VOD. Everstream's Oi provides operations and engineering teams with crucial insight into service performance and subscriber experience for digital services such as video on demand. Oi enables clear and concise roll-up of metrics and trends, with the ability to apply and track organization-wide targets. - Xi(TM) for VOD. Everstream's Xi provides market-to-market comparison, trending, and correlation analysis on the key performance metrics of interactive services. Xi provides the industry's most comprehensive insight into the impact of iTV offerings across multiple locations, platforms, and services. - Cd or Campaign Director. Campaign Director is a centralized, enterprise application server and data warehouse system for managing advertising campaigns across single or multiple system networks. Campaign Director represents Everstream's fourth generation of distributed ad campaign management technology for iTV and broadband platforms including video on demand. Campaign Director is comprised of two applications: the Campaign Director and the Campaign Decision Engine. Campaign Directors are normally licensed to cable and broadband operators, while Campaign Decision engines are licensed to iTV and broadband partners for inclusion as part of their product strategy. A third level system is available for content providers working with licensed MSOs. The Campaign Director was created using Java J2EE Enterprise Java Bean technology, giving it enterprise scalability, reliability and portability to different hardware and operating system platforms. - ReportOneTM Template Sets. Everstream provides a series of template sets to meet the standard demands of the broadband industry. These templates work within common reporting and business intelligence tools such as Cognos ReportNet. These templates may be used "out-of-the-box" or modified by our customers or ourselves to meet specific business requirements. The following report templates are available as part of the Everstream ReportOne template offerings: - ReportOne for VOD. Everstream's ReportOne for VOD provides universal ----------------- reporting templates for popular off-the-shelf reporting tools and platforms. Universal reporting templates provide flexible query, filter, sort, grouping, and output of event, content, and subscriber level data from your interactive systems, supporting all major on-demand vendors and platforms. By employing industry standard tools, marketing, programming, and operations groups have the ability to use our reporting templates as is, or quickly adapt standard reports to meet evolving business requirements. - ReportOne for Long Form Advertising. Everstream's ReportOne Long Form ----------------------------------- Advertising (LFA) provides immediate visibility for campaigns across all on-demand platforms and channels. 6 Whether over cable VOD or IP-Based Streaming, LFA reports enable valuable insight into privacy protected subscriber viewing statistics and audience share metrics. Everstream's LFA templates provide key performance metrics such as views by households, views by demographic, views by Postal / ZIP code, share of active audience, share of total audience, viewing time per household, and time of day viewing analysis. Everstream's LFA reports can be configured to periodically send saved reports via email to users and clients, or allow them to securely log in to see the progress of their campaigns. Because each template can be extended easily with off-the-shelf reporting tools, users can collaborate with advertisers to provide exactly the reports needed. - ReportOne for Audience Measurement. ReportOne for Audience ---------------------------------- Measurement provides a series of analytical report and dashboard templates for measuring iTV service consumption across channels and interactive applications while adhering to and protecting privacy. Our reporting templates are designed for off-the-shelf use or easy customization supporting common interactive events such as: channel surfing, channel stays, channel viewing correlation, and application usage. REAL-TIME PRODUCTS Our principle real-time products are: - SUSE Linux Enterprise-Real Time. SUSE Linux Enterprise-Real Time, provided in partnership by Concurrent and Novell is an industry standard, real-time version of the Novell open source Linux operating system for Intel/AMD-based multiprocessors. SUSE Linux Enterprise-Real Time provides the performance needed in time-critical and hard real-time environments. We believe SUSE Linux Enterprise-Real Time is the needed Linux solution for a broad range of deterministic applications such as financial trading, telecommunications, modeling, simulation, data acquisition, industrial control and medical imaging systems. Properly configured, SUSE Linux Enterprise-Real Time guarantees that a user-level application can respond to an external event in less than 30 microseconds. SUSE Linux Enterprise-Real Time achieves its superior real-time performance through key kernel enhancements we developed. SUSE Linux Enterprise-Real Time includes all the standard features of SUSE Linux including its user-level commands, utilities and system administration. SUSE Linux Enterprise-Real Time user libraries provide access to its value-add features that are not part of other Linux offerings. SUSE Linux Enterprise-Real Time is fully compatible with standard Linux user-level APIs, thus Linux applications written for other Linux distributions will run without modification. - RedHawk(TM) Linux. RedHawk Linux is an industry-standard, POSIX-compliant, real-time version of the open source Linux operating system. RedHawk Linux, compatible with the popular Red Hat(R) Linux distribution, provides high I/O throughput, guaranteed fast response to external events, and optimized interprocess communication. RedHawk is the ideal Linux environment for the complex real-time applications found in simulation, data acquisition, and industrial systems control. RedHawk also maintains third-party software compatibility with Red Hat Linux, allowing us to take advantage of the full range of third-party software applications that run on Red Hat. RedHawk achieves real-time performance by replacing the Red Hat kernel with a multithreaded, fully-preemptable kernel with low-latency enhancements. RedHawk's true symmetric multiprocessing support includes load-balancing and CPU shielding to maximize determinism and real-time performance in mission-critical solutions. - iHawk(TM). Our iHawk servers, based on Intel Xeon or AMD Opteron technologies, feature our real-time Linux operating systems and our Real-Time Clock & Interrupt Module. iHawk systems are extensively deployed in simulation, data acquisition and industrial process control applications, and satisfy scientific and other complex computing requirements. - ImaGen(TM). ImaGen is our imaging platform for simulation and modeling applications that require enhanced realism and the ability to process very large amounts of input data. Typical ImaGen imaging applications include civil and military simulation, mission planning, homeland security, scientific and medical visualization, architectural design, energy exploration and entertainment. - Power Hawk(R) 700 and 900. Power Hawk is our family of highly-scalable, advanced VersModular Eurocard (VME) systems capable of supporting data acquisition, simulation and industrial process control 7 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. - 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 systems. - NightStar(TM) Tools. The NightStar development tools help users debug and analyze their application software running under the PowerMAX, RedHawk Linux, SUSE Linux Enterprise-Real Time, Red Hat and SLES 10 operating systems. SERVICES Customer Support. We offer worldwide hardware and software maintenance and support services for our products. Services include installation, integration, training, on-site maintenance, 24x7 telephone support, return-to-factory warranty, depot repair, and software support update service. Our integration and support offerings are an essential piece of successfully deploying and maintaining our products. An on-demand system has multiple interface points with other network elements, e.g., transport equipment, set-top boxes, conditional access, clients, navigators (electronic program guides), billing systems, content receivers, other applications and back office systems. Our system engineers are able to integrate these diverse elements, creating seamless on-demand services. Typically we provide support services at no additional charge during the warranty period and charge for the services under maintenance agreements after the warranty period. In addition to these basic service and support options, we also offer, for additional fees, software upgrades and additional onsite services. Over the past 20 to 25 years, we have routinely offered and delivered long-term service and support of our products, under maintenance contracts, for additional fees. Custom Engineering and Integration Services. We provide custom engineering and integration services in the design of special hardware and software to help our customers with their specific applications. This may include custom modifications to our products or integration of third-party interfaces or devices into our systems. Many customers use these services to migrate existing applications from earlier generations of our systems or our competitors' systems to our state-of-the-art systems. These services also include classroom and on-site training, system and site performance analysis, and multiple vendor support planning. SALES AND MARKETING We sell our systems primarily in the U.S. through our direct field sales and support offices, as well as through channel partners (resellers, value added resellers, systems integrators, etc.). As of June 30, 2006, we had 87 employees in our sales and marketing force, which includes sales, sales support, marketing, strategic communications, product management, program management, and business development. Our sales force has significant experience in on-demand and real-time operating systems. Outside North America, we utilize a direct sales force out of our facilities in France, Germany, Australia, Hong Kong and Japan. Further, our direct sales forces are augmented by our channel partners that are able to introduce our products to new markets. 8 CUSTOMERS We derive revenue from a limited number of customers. As a result, the loss of, or reduced demand for products or related services from any of our major customers could adversely affect our business, financial condition and results of operations. Our products are typically manufactured and shipped in the same quarter the purchase order is received. Accordingly, we do not believe backlog is a meaningful indicator of future level of sales. Our backlog for real-time and on-demand systems at June 30, 2006 and 2005 totaled $4.1 million and $3.2 million, respectively. In addition, we had deferred revenue of $8.9 million and $9.0 million at June 30, 2006 and 2005, respectively, which resulted primarily from prepaid maintenance services and shipments of systems where the revenue had not yet been recognized. We have purchase agreements with many customers, but none of these agreements currently require minimum purchases of our products. As a result, sales to specific customers tend to, and are expected to continue to, vary from year-to-year, depending on such customers' budgets for capital expenditures and new product introductions. A significant portion of our on-demand revenue has come from, and is expected to continue to come from, sales to the large broadband companies. The customers accounting for more than 10% of total revenue consisted of Cox (16%) and Comcast (13%) for the fiscal year ended June 30, 2006; Comcast (14%) for the fiscal year ended June 30, 2005; and Comcast (32%) and Cox (10%) for the fiscal year ended June 30, 2004. No other customer of our on-demand products accounted for more than 10% of total revenue during the last three fiscal years. Although we sell our real-time products to large customers, the customer base is more diversified than our on-demand business. Thus, only one customer, Lockheed-Martin, accounted for more than 10% of total revenues for the last three years. Specifically, Lockheed-Martin accounted for 13%, 18%, and 13% of total revenues in the fiscal years ended June 30, 2006, 2005, and 2004, respectively. We derive a significant portion of our revenues from the supply of products to U.S. government prime contractors and agencies of the U.S. government. The supplied systems include configurations from the RedHawk Linux, iHawk, PowerMAXION, Power Hawk, and 3200-2000 product lines, with certain systems incorporating custom enhancements requested by the customer. We sell these integrated computer systems to prime contractors, including Boeing, Lockheed-Martin and Raytheon. We also supply spare parts, upgrades, and engineering consulting services and both hardware and software maintenance. For the fiscal years ended June 30, 2006 and 2005, we recorded $15.1 million and $19.9 million in revenues to U.S. government prime contractors and agencies of the U.S. government, representing 21% and 25% of total sales for the period, respectively. Government business is subject to many risks, such as delays in funding, reduction or modification of contracts or subcontracts, failure to exercise options, changes in government policies and the imposition of budgetary constraints. A loss of government contract revenues could have a material adverse effect on our business, financial condition and results of operations. NEW PRODUCT DEVELOPMENT We are committed to the development of new technology and rapid innovation in the evolving markets in which we compete. Research and development costs are expensed when incurred and aggregated $18.8 million, $18.7 million, and $20.0 million in fiscal years 2006, 2005, and 2004, respectively. Our Everstream products measure and report on the quality of VOD services. Since they integrate with VOD systems provided to all major providers, they are utilized across numerous VOD deployments. We expect to continue to expand the capabilities of these products. Our research and development strategies with respect to our on-demand solutions are focused on the following: - Solid State Storage. In order to improve performance and storage reliability, we are developing the MH 4500 that integrates RAM storage with traditional disk storage. This hybrid approach enables us to provide a cost effective solution that will easily evolve as technology improves. We will continue to develop this product to meet our customer demands. 9 - 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". - Audience Management. Understanding what consumers watch, when they watch and how they watch television is essential to the broadband providers, content owners, advertisers, and ad agencies. We expect to develop our Everstream products so they can provide this information, thereby, replacing services that currently project or estimate consumer activity with small samplings. - Interactive and Targeted Advertising. Interactive long format advertising has already been deployed by Cox Communications in their systems. Targeted advertising technology provided by Everstream will allow our on-demand system to insert different television commercials into the video streams for different consumers. This technology will allow the advertiser to closely "target" product advertisements to consumers most likely to buy, rather than broadcasting the same advertisements to everyone. - Interactive Menus. We have developed an interactive menu environment for on-demand service that we call the Interactive Media Solution. This in-band software application enables the operator to use more video to sell content through the menu and enhance on-demand navigation with more graphically rich backgrounds that intermix full motion video with menu backgrounds. This technology provides the subscriber with the ability to "window-shop" their on demand content without excessive investment in additional time or bandwidth by the operators. Our research and development strategies with respect to our real-time products are focused on the following: - RedHawk Linux. We plan to continue to enhance our RedHawk Linux real-time operating system to provide increased determinism for time-critical applications. We are also investigating opportunities to sell this operating system as a software only, independent product through partners. - SUSE Linux Enterprise-Real Time. We recently released SUSE Linux Enterprise-Real Time which is our real-time Linux operating system on Novell's SLES 10 release. This pure software product, sold by both Concurrent and Novell, will continue to be expanded and improved to meet customer demands and is licensed under a one-year subscription. - iHawk. We continue to plan to offer systems based on Intel Xeon 32-bit and 64-bit processor technology and AMD Opteron 64-bit processor technology in addition to systems based on new Intel and AMD dual-core processors. These systems are available in single, dual, quad and 8-way processor configurations and include support for the new dual-core technology. - RT-LAB RLX Simulation. Our agreement with Opal-RT has made their MATLAB/Simulink(TM) based simulation, rapid prototyping and hardware-in-the-loop product available on our RedHawk Linux based systems. Our product is called RT-LAB RLX and allows engineers to use mathematical block diagrams for design, simulation, control and related functions. RT-LAB RLX offers a scalable, high-performance, environment for the most demanding hardware-in-the-loop 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. 10 - Image Generation. ImaGen is our imaging platform for simulation and modeling applications that require enhanced realism and the ability to process very large amounts of input data. We developed this PC-based product based on visual software from Multigen-Paradigm Inc. These image generation systems directly address the requirements of the simulation and training and other markets. This new product allows us to compete for the visual subsystems within training systems. - 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. - NightStar Tools. Nightstar Tools is a powerful, integrated set of graphics- based tools for developing time-critical applications. NightStar tools run on real-time multiprocessing systems with minimum intrusion, thus preserving the behavior and determinism of the application being analyzed. Users can debug, monitor, schedule and analyze their applications locally or remotely from a PC or laptop. We expect to continue to expand the operating systems on which this product operates and improve the user interface. COMPETITION Both our on-demand and real-time products are sold into highly-competitive environments, driven by rapid technological innovation. Both product groups compete based upon features, reliability, scalability, service, and price. Due in part to the range of performance and applications capabilities of our products, we compete in various markets against a number of companies. The major competitors of the on-demand product line currently include the following: SeaChange International, Inc., Microsoft Corp., Broadbus Technologies, Inc., Arroyo and C-COR Inc. (f.k.a. nCUBE Corp.). Additionally, there are a number of other entities in the market, including Kasenna, Inc., Tandberg Television (f.k.a. N2 Broadband, Inc.), Myrio, 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 and international VOD markets based on the number of subscribers in the markets served. Typically, in Everstream opportunities, we compete against in-house development or customer offerings from consulting entities such as Accenture. Our real-time product line competes with a number of companies. Our major competitors can be categorized as follows: - major computer companies that participate in the high-performance computing business by layering specialized hardware and software on top of, or as an extension of, their general purpose product platforms, including Sun Microsystems, Hewlett Packard Company 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 Company; - single board computer companies that provide board-level processors that are typically integrated into a customer's computer system, including Motorola, Inc., and Mercury, Inc.; - companies providing competitive offerings on the specialized Linux platform, including MontaVista Software, Inc., LynuxWorks, Inc., FSMLabs, Inc. and TimeSys Corporation; - companies providing a Linux platform with which our products are compatible, such as RedHat, Inc.; and - companies involved in data acquisition including dSpace and ADI Corporation. 11 Additional competitors with significant market presence and financial resources, including computer hardware and software companies, content providers and television equipment manufacturers, including digital set-top-box manufacturers, may enter our markets, thereby further intensifying competition. Our future competitors also may include one or more of the parties with whom we currently have a strategic relationship. Although we have proprietary rights with respect to much of the technology incorporated in our on-demand and real-time systems, our strategic partners have not agreed to refrain from competing against us. Increased competition could result in price reductions that would adversely affect our business, financial condition and results of operations. Many of our current and potential future competitors have longer operating histories, significantly greater financial, technical, marketing and other resources than us, and greater brand name recognition. In addition, many of our competitors have well-established relationships with our current and potential customers and have extensive knowledge of our markets. INTELLECTUAL PROPERTY We rely on a combination of contracts and copyright, trademark, patent and trade secret laws to establish and protect our proprietary rights in our technology. We distribute our products under software license agreements that typically grant customers perpetual licenses to our products and which contain various provisions protecting our ownership and confidentiality of the licensed technology. The source code of our products is protected as a trade secret and as an unpublished copyright work. However, some of our products utilize open source that provides little copyright protection. In addition, in limited instances, we license our products under licenses that give licensees limited access to the source code of certain of our products, particularly in connection with our strategic alliances. Despite the precautions we have taken, there can be no assurance that our products or technology will not be copied or otherwise obtained and used without authorization. In addition, effective copyright and trade secret protection may be unavailable or limited in certain foreign countries or with respect to open source code utilized in our products. We believe that, due to the rapid pace of innovation within our industry, factors such as the technological and creative skills of our personnel are more important to establishing and maintaining a technology leadership position within the industry than are the various legal protections for our technology. We own three U.S. patents and multiple foreign patents focused on ad insertion. Additionally, we have patent applications pending in the United States and abroad and have obtained a patent license to the portfolio previously owned by Thirdspace Living Limited, now owned by Alcatel (13 patents, 29 patent applications, and all additions, divisionals, continuations, continuations-in-part, extensions, reissues, and foreign counterparts thereof). These patents cover multiple interactive television, targeted advertising, and on-demand technologies. We have entered into licensing agreements with several third-party software developers and suppliers. Generally, such agreements grant us non-exclusive, worldwide licenses with respect to certain software provided as part of computers and systems we market and terminate on varying dates. SUPPLIERS We sometimes purchase product components from a single supplier in order to obtain the required technology and the most favorable price and delivery terms. These components include, for example, processors, power supplies, integrated circuits and storage devices. We purchase product components from the following single suppliers: APW Electronic Solutions, Dell Inc., DME Corporation, Kardios Systems Corporation, Macrolink, Inc., Metal Form, Inc., Qlogic Corporation, Curtiss-Wright Controls, Inc., Sanmina-SCI Corporation, Seagate Technology, Inc., Tyco Electronics Corporation, GE Fanuc and Xyratex Technology Limited. In most cases, comparable products are available from other sources, but would require significant reengineering to conform to our system specifications. SEASONALITY We have experienced variations in revenue, expenses and operating results from quarter to quarter in our on-demand and real-time businesses, and it is probable that these variations will continue. We believe that 12 fluctuations in the number of orders for our on-demand systems being placed from quarter to quarter are principally attributable to the buying patterns and budgeting cycles of cable companies. We believe that orders for real-time products are dictated by buying cycles of the government and large government contractors. In addition, for both product lines, orders are often not finalized until the end of a quarter. We do not believe seasonality is a significant factor at this time. GOVERNMENTAL REGULATION We are subject to various international, U.S. federal, state and local laws affecting our business. Any finding that we have been or are in noncompliance with such laws could result in, among other things, governmental penalties. Further, changes in existing laws or new laws may adversely affect our business. In connection with orders from the U.S. federal government and government contractors, we are in some circumstances subject to the U.S. federal government procurement regulations that may provide the buyer with the right to audit and review our performance, as well as our compliance with applicable laws and regulations. In addition, our business is subject to government regulation based on the products we sell that may be subject to government requirements such as obtaining an export license in certain circumstances or an end-use certificate from the buyer. In the United States, these requirements include, among others, the U.S. Export Administration Regulations, International Traffic in Arms Regulations and the economic sanctions and embargo laws enforced by the Office of Foreign Assets Control Regulations. If a government audit uncovers improper or illegal activities, or if we are alleged to have violated any laws or regulations governing the products we sell under our government contracts, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines, and suspension or debarment from doing business with U.S. federal government agencies. The television industry is subject to extensive regulation in the United States and other countries. Our on-demand business is dependent upon the continued growth of the digital television industry in the United States and internationally. Broadband companies are subject to extensive government regulation by the Federal Communications Commission and other federal and state regulatory agencies. These regulations could have the effect of limiting capital expenditures by broadband companies and thus could have a material adverse effect on our business, financial condition and results of operations. The enactment by federal, state or international governments of new laws or regulations could adversely affect our broadband customers, and thereby materially adversely affect our business, financial condition and results of operations. ENVIRONMENTAL MATTERS We purchase, use, and arrange for certified disposal of chemicals used in the manufacturing process at our Pompano Beach, Florida, facility. As a result, we are subject to federal and state environmental protection and community right-to-know laws. Additionally, we export our products around the world where there are additional environmental regulations. These laws could have the effect of limiting our capital expenditures and thus could have a material adverse effect on our business, financial condition and results of operations. Violations of such laws can result in the imposition of substantial remediation costs and penalties. We believe we are in compliance with all material environmental laws and regulations. EMPLOYEES As of June 30, 2006, we had 399 employees worldwide. Of these employees, 347 were located in the United States and 52 were located internationally. Our employees are not unionized. 13 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, 2006, 2005, and 2004 is presented in Note 13 to the consolidated financial statements included herein. ITEM 1A. 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 42. RISKS RELATED TO OUR BUSINESS WE INCURRED NET LOSSES IN THE PAST AND MAY INCUR FURTHER LOSSES IN THE FUTURE. We incurred net losses of $9.3, $7.7, $5.7 and $24.6 million in fiscal years ended June 30 2006, 2005, 2004 and 2003, respectively. Our net loss for the fiscal year ended June 2004 included a gain of $3.1 million from the partial recovery of a previously recognized loss in a minority investment. Our net loss for the fiscal year ended June 30, 2003 included a charge of $13.0 million from the write-down of our investment in Thirdspace and a restructuring charge of $1.6 million. As of June 30, 2006, we had an accumulated deficit of approximately $146 million. We may incur additional net losses in the future. If these losses continue, we may be forced to take extreme measures to continue the business, such as further employee reductions, re-capitalization or reorganization transactions at undesirable prices, incurring significant debt at above market rates, or seeking bankruptcy protection. A SIGNIFICANT PORTION OF OUR REVENUE HAS BEEN, AND IS EXPECTED TO CONTINUE TO BE, CONCENTRATED IN A SMALL NUMBER OF CUSTOMERS. IF WE ARE UNSUCCESSFUL IN MAINTAINING AND EXPANDING RELATIONSHIPS WITH THESE CUSTOMERS OR LOSE ANY OF THESE CUSTOMERS, OUR BUSINESS WILL BE ADVERSELY AFFECTED. For the fiscal year ended June 30, 2006, Cox, Comcast and Lockheed Martin accounted for approximately 16%, 13% and 13%, respectively, of our revenues. If we are unsuccessful in maintaining and expanding key relationships with these and other existing customers, our business will be materially adversely affected. Further, if we are unsuccessful in establishing relationships with other large companies or experience problems in any of our systems, our ability to attract new customers and sell additional products to existing customers will be materially adversely affected. Our VOD customers typically swap sites or purchase sites from competitors such as the purchase and swap of sites from Adelphia between Time Warner Cable and Comcast. If we already have products deployed at a swapped site, the new owner may replace our products or discontinue maintenance with respect to such site. Alternatively, forecasted revenues could be negatively impacted because the new owner of the site may not need to purchase products from us due to their existing agreement with us. Due to our limited customer base and the relative size of each customer compared to Concurrent, our customers may make unreasonable and extensive demands upon our business. Such demands may include contractual service and product obligations on unfavorable terms. In addition, our failure to adequately perform 14 under these contracts could result in liquidated damages. The payment of any liquidated damages or failure to meet our customers' expectations could substantially harm our future business prospects. We do not have written agreements that require customers to purchase fixed minimum quantities of our products. Our sales to specific customers tend to, and are expected to continue to, vary from year-to-year, depending on such customers' budgets for capital expenditures and new product introductions. WE UTILIZE OPEN SOURCE SOFTWARE WHICH COULD ENABLE OUR CUSTOMERS OR COMPETITORS TO GAIN ACCESS TO OUR SOURCE CODE AND DISTRIBUTE IT WITHOUT PAYING ANY LICENSE FEE TO CONCURRENT. Key components of both our real-time and on-demand products utilize open source software on Linux platforms. Some open source software, especially that provided under the GNU Public License, is provided pursuant to licenses that limit the restrictions that may be placed on the distribution and copying of the provided code. Thus, it is possible that customers or competitors could copy our software and freely distribute it. This could substantially impact our business and the ability to protect future business. OUR FACILITIES, ESPECIALLY OUR POMPANO BEACH, FLORIDA FACILITIES, COULD BE SUBJECT TO SEVERE WEATHER THAT COULD SHUT DOWN THOSE FACILITIES AND HALT PRODUCTION. All of our facilities are, from time to time, subject to severe weather that could result in a temporary shut-down of the impacted facility. However, our Pompano Beach, Florida facilities are located in south Florida where there have been a number of hurricanes in recent years. A hurricane could shut-down both Pompano Beach facilities for extended periods thereby making it impossible for us to manufacture and ship products since all of our products are shipped out of those facilities. Further, an extended shut-down could slow the release of software products for our real-time business since almost all the developers for those products are located at those facilities. THE VOD MARKET MAY NOT GAIN BROAD MARKET ACCEPTANCE AND OUR CUSTOMERS MAY NOT CONTINUE TO PURCHASE OUR ON-DEMAND SYSTEMS. In order for our on-demand business to succeed, broadband companies, particularly the largest North American broadband companies, must successfully market VOD to their television subscribers. None of our customers are contractually obligated to introduce, market or promote VOD, nor are any of our customers bound to achieve any specific product introduction schedule. Accordingly, even if a broadband company launches services using our system, it is under no obligation to expand to a full-scale commercial deployment using our technology. Further, we do not have exclusive arrangements with our customers. Therefore, our customers may enter into arrangements with one or more of our competitors. The growth and future success of our on-demand business depends largely upon our ability to penetrate markets and sell our systems to digitally-upgraded domestic and international broadband companies. If these potential customers determine that VOD is not viable as a business proposition or if they decide to delay their purchase decisions, as a result of capital expenditure restraints or otherwise, our business, financial condition and results of operations will be significantly adversely affected. THE MARKETS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE, AND WE MAY BE UNABLE TO COMPETE SUCCESSFULLY AGAINST OUR CURRENT AND FUTURE COMPETITORS, WHICH WOULD ADVERSELY AFFECT OUR BUSINESS. The markets for on-demand and real-time products are extremely competitive. Our primary on-demand competitor, SeaChange International, is well funded and has been very successful in the VOD market. Additionally, some smaller competitors are private and have been funded by some of our broadband customers. This intense competition has negatively impacted our VOD revenues and may severely impact our success and ability to expand our on-demand deployments. The market for our real-time products is ever changing. Although we currently enjoy a leadership position, a number of well-funded competitors such as IBM, or Red Hat could seek to displace us. As the demand shifts, we may be unable to adequately respond to customer demands or technology changes. There may be new entrants into the real-time market with better, more appropriate products. A list of the competitors faced by both of our markets and a categorization of our competitors is included under the Competition heading in the Business section in this Annual Report on Form 10-K. 15 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 on-demand systems could cause our customers' VOD offerings to fail for a period of time or be degraded. Any such failure would cause customer service and public relations problems for our customers. As a result, any failure of our customers' systems caused by our technology could result in delayed or lost revenue due to adverse customer reaction, negative publicity regarding us and our products and services and claims for substantial damages against us, regardless of our responsibility for such failure. Any claim could be expensive and require us to spend a significant amount of resources. THE VOD OPPORTUNITIES BEYOND THE NORTH AMERICAN CABLE MARKET, SUCH AS VOD OVER DSL, STREAMING VIDEO OVER INTERNET PROTOCOL AND INTERNATIONAL CABLE AND DSL/IP MARKETS MAY NOT DEVELOP OR MAY NOT BE SUBSTANTIAL TO CONCURRENT. In recent years there have been several false starts both in North American and International markets in the deployment of video over DSL and IP streaming. If there is limited adoption of VOD, further deployment delays or if we fail to participate in these new markets, we may not be able to broaden our customer base and expand revenues. We have little commercial experience in these markets and cannot assure that we can be successful. Our failure to do so could materially adversely affect our business, financial condition and results of operations. THE INTRODUCTION OF BROADBAND INTERNET VOD SERVICES FOR TELEVISIONS MAY GAIN TRACTION, THUS REPLACING CURRENT VOD SERVICES AND HAVING A NEGATIVE IMPACT ON CONCURRENT'S ON-DEMAND BUSINESS. A number of well-funded companies such as Google, Yahoo, and Apple have been discussing broadband Internet VOD services for home television viewing. If these products are developed they may be more cost effective than our VOD solutions, thus, forcing our customers to discontinue purchases of our on-demand products. WE HAVE A SIGNIFICANT BASE OF DEPLOYED PRODUCTS THAT OUR CUSTOMERS, OVER TIME, MAY DECIDE TO SWAP FOR NEWER PRODUCTS FROM OTHER COMPANIES WITH IMPROVED FUNCTIONALITY. Although the VOD market is young in the view of most subscribers, a significant number of our on-demand products have been deployed for several years and may be facing obsolescence. When our customers evaluate replacing those older products, they may choose to try a different vendor. If that were to occur, we would lose future revenue opportunities from expansion as well as maintenance. WE MAY EXPERIENCE COMPETITIVE PRICING PRESSURE FOR OUR PRODUCTS AND SERVICES, WHICH MAY IMPAIR OUR REVENUE GROWTH AND OUR ABILITY TO ACHIEVE PROFITABILITY. We may experience decreasing prices for our products and services due to competition, the purchasing leverage of our customers and other factors. If we are required to decrease prices, our results of operations will be adversely affected. We may reduce prices in the future to respond to competition and to generate increased sales volume. A LOSS OF OUR GOVERNMENT CONTRACTS AND/OR ORDERS WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS. We also derive a significant portion of our real-time revenues from the supply of systems under government contracts and/or orders. For the fiscal year ended June 30, 2006, we recorded $15.1 million in sales to U.S. government prime contractors and agencies of the U.S. government, down $4.9 million, or 24%, from the year 16 ended June 30, 2005. These sales represent approximately 21% 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 would have a material adverse effect on our business, results of operations and financial condition. WE CURRENTLY HAVE STRATEGIC RELATIONSHIPS WITH NOVELL, ORACLE, ALCATEL, CISCO SYSTEMS INC. (F.K.A. SCIENTIFIC-ATLANTA) AND MOTOROLA, AMONG OTHERS. WE MAY BE UNSUCCESSFUL IN MAINTAINING THESE STRATEGIC RELATIONSHIPS, OR ESTABLISHING NEW STRATEGIC RELATIONSHIPS THAT WILL BE AN IMPORTANT PART OF OUR FUTURE SUCCESS. IN EITHER EVENT, OUR BUSINESS COULD BE ADVERSELY AFFECTED. The success of our business is and will continue to be dependent in part on our ability to maintain existing and enter into new strategic relationships. There can be no assurance that: - such existing or contemplated relationships will be commercially successful; - we will be able to find additional strategic partners; or - we will be able to negotiate acceptable terms with potential strategic partners. We cannot provide assurance that existing or future strategic partners will not pursue alternative technologies or develop alternative products in addition to or in lieu of our technology, either on their own or in collaboration with others, including our competitors. For example, in 2005 Alcatel announced an agreement with Microsoft Corp. that we believe may jeopardize our long term relationship with Alcatel and in July 2006, Motorola announced intentions to purchase Broadbus Technologies, one of our VOD 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. TRENDS IN OUR BUSINESS MAY CAUSE OUR QUARTERLY OPERATING RESULTS TO FLUCTUATE; THEREFORE, PERIOD-TO-PERIOD COMPARISONS OF OUR OPERATING RESULTS MAY NOT NECESSARILY BE MEANINGFUL. We have experienced significant variations in the revenue, expenses and operating results from quarter to quarter in our business, and it is possible that these variations will continue. We believe that fluctuations in the 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. IF WE FAIL TO DEVELOP AND MARKET NEW PRODUCTS AND PRODUCT ENHANCEMENTS IN A TIMELY MANNER, OUR BUSINESS COULD BE ADVERSELY AFFECTED. Our future success is dependent on our development and marketing of additional products that achieve market acceptance and enhance our current products. Our inability to develop, on a timely basis, new products or enhancements to existing products, or the failure of such new products or enhancements to achieve market acceptance could have a material adverse effect on our business, financial condition and results of operations. There can be no assurance that we will be successful in pursuing any new products or enhancements to existing products. WE RELY ON A COMBINATION OF CONTRACTS AND COPYRIGHT, TRADEMARK, PATENT AND TRADE SECRET LAWS TO ESTABLISH AND PROTECT OUR PROPRIETARY RIGHTS IN OUR TECHNOLOGY. 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. 17 We typically enter into confidentiality or license agreements with our employees, consultants, customers and vendors, in an effort to control access to and distribution of our proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our proprietary technology without authorization. The steps we take may not prevent misappropriation of our intellectual property, and the agreements we enter into may not be enforceable. In addition, effective copyright and trade secret protection may be unavailable or limited in some foreign countries. Other companies, such as Acacia Technologies Group, Personalized Media Communication L.L.C., the SCO Group, and our competitors, may currently own or obtain patents or other proprietary rights that might prevent, limit or interfere with our ability to make, use or sell our products. Further, we have indemnification obligations with numerous customers that could require us to become involved in IP litigation. As a result, we may be found to infringe on the intellectual property rights of others. In the event of a successful claim of infringement against us and our failure or inability to license the infringed technology, our business and operating results could be adversely affected. Any litigation or claims, whether or not valid, could result in substantial costs and diversion of our resources. Intellectual property litigation or claims could force us to do one or more of the following: - cease selling, incorporating or using products or services that incorporate the challenged intellectual property; - obtain a license from the holder of the infringed intellectual property right, which license may not be available on reasonable terms, if at all; and - redesign products or services that incorporate the disputed technology. 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 Inc., DME Corporation, Kardios Systems Corporation, Macrolink, Inc., Metal Form, Inc., Qlogic Corporation, Curtiss-Wright Controls, Inc., Sanmina-SCI Corporation, Seagate Technology, Inc., Tyco Electronics Corporation, GE Fanuc and Xyratex Technology Limited. In most cases, comparable products are available from other sources, but would require significant reengineering to conform to our system specifications. Our reliance on single suppliers entails a number of risks, including the possibility of defective parts, a shortage of components, increase in components costs, and reduced control over delivery schedules. Any of these events could adversely affect our business, results of operations and financial condition. We estimate that a lead-time of 16-24 weeks may be necessary to switch to an alternative supplier of certain custom application specific integrated circuit and printed circuit assemblies. A change in the supplier of these components without the appropriate lead-time could result in a material delay in shipments by us of certain products. Where alternative sources are available, qualification of the alternative suppliers and establishment of reliable supplies of components from such sources may also result in delays. Shipping delays may also result in a delay in revenue recognition, possibly outside the fiscal year period originally planned, and, as a result, may adversely affect our financial results for that particular period. 18 AS OUR PRODUCTS AGE, WE MAY NOT BE ABLE TO PURCHASE NECESSARY PARTS TO SUPPORT LEGACY SYSTEMS DEPLOYED OR TO BE DEPLOYED. With the passage of time, suppliers of essential parts may stop producing these parts. In such cases, we may be required to make "last-time" buys and subsequently redesign our products to accommodate the obsolescence. If that occurs, we will have to spend considerable effort in the redesign and, in some cases, may be forced to have the redesigned products requalified. Requalification may take several months, thereby delaying expected revenue. OUR BUSINESS MAY BE ADVERSELY AFFECTED IF WE FAIL TO RETAIN OUR CURRENT KEY PERSONNEL, MANY OF WHOM WOULD BE DIFFICULT TO REPLACE, OR FAIL TO ATTRACT ADDITIONAL QUALIFIED PERSONNEL. Our future performance depends on the continued service of our senior management and our engineering, sales and marketing and manufacturing personnel. Competition for qualified personnel is intense, and we may fail to retain our new key employees or to attract or retain other highly qualified personnel. In the last six months we have experienced abnormally high turnover. 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 do not carry key person life insurance on any of our employees. INTERNATIONAL SALES ACCOUNTED FOR APPROXIMATELY 32%, 33%, 18%, AND 14% OF OUR REVENUE IN FISCAL YEARS 2006, 2005, 2004, AND 2003. ACCORDINGLY, OUR BUSINESS IS SUSCEPTIBLE TO NUMEROUS RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. We are subject to a number of risks associated with international business activities that could increase our costs, lengthen our sales cycle and require significant management attention. These risks include: - compliance with, and unexpected changes in, regulatory requirements resulting in unanticipated costs and delays; - difficulties in compliance with export and re-export regulations governing U.S. goods and goods from our international subsidiaries; - lack of availability of trained personnel in international locations; - tariffs, export controls and other trade barriers; - longer accounts receivable payment cycles than in the United States; - potential difficulty of enforcing agreements and collecting receivables in some foreign legal systems; - potential difficulty in enforcing intellectual property rights in certain foreign countries; - potentially adverse tax consequences, including restrictions on the repatriation of earnings; - the burdens of complying with a wide variety of foreign laws; - general economic conditions in international markets; and - currency exchange rate fluctuations. WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DILUTE THE OWNERSHIP INTEREST OF OUR STOCKHOLDERS, CAUSE US TO INCUR DEBT OR ASSUME CONTINGENT LIABILITIES OR PRESENT OTHER CHALLENGES, SUCH AS INTEGRATION ISSUES, FOR OUR BUSINESS, WHICH IF NOT SUCCESSFULLY RESOLVED WOULD ADVERSELY AFFECT OUR BUSINESS. As part of our business strategy, we review acquisition prospects that would compliment our current product offerings, enhance our technical capabilities or otherwise offer growth opportunities. We periodically review investments in new businesses, and we may acquire businesses, products or technologies in the future. In the event of any future acquisitions, we could issue equity securities that would dilute current stockholders' percentage ownership, incur substantial debt, or assume contingent liabilities. These actions could materially adversely affect our operating results. Acquisitions also entail numerous risks, including: - difficulties in the assimilation of acquired operations, technologies or services; - unanticipated costs associated with the acquisition; - diversion of management's attention from other business concerns; 19 - 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. Real-time and on-demand products are relatively complex, their purchase generally involves a significant commitment of capital, and there are frequent delays associated with large capital expenditures and implementation procedures within an organization. Moreover, the purchase of such products typically requires coordination and agreement among a potential customer's corporate headquarters and its regional and local operations. As a result, the sales cycles associated with the purchase of many of our products are typically lengthy and subject to a number of significant risks, including customers' budgetary constraints and internal acceptance reviews, over which we have little or no control. RISKS RELATED TO OUR INDUSTRIES THE SUCCESS OF OUR ON-DEMAND BUSINESS IS DEPENDENT UPON THE GROWTH OF THE DIGITAL VIDEO MARKET, WHICH MAY NOT GROW AS WE EXPECT. ANY FAILURE BY THE MARKET TO ACCEPT DIGITAL VIDEO TECHNOLOGY WILL HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS. VOD is still an emerging technology, and we cannot assure you that it will attract widespread demand or market acceptance. Further, the potential size of the VOD market and the timing of our development are uncertain. Our success in the VOD market will depend upon the commercialization and broad acceptance of VOD by residential subscribers and other industry participants, including broadband companies, content providers, set-top box manufacturers, and educational institutions. The future growth of our on-demand business will depend on the pace of the installation of interactive digital cable and digital set-top-boxes, the rate at which cable companies deploy digital infrastructure, the rate at which digital video technology expands to additional market segments, and the rate that the technology is adopted by consumers. THE SUCCESS OF OUR ON-DEMAND BUSINESS IS DEPENDENT ON THE AVAILABILITY OF, AND THE DISTRIBUTION WINDOWS FOR, MOVIES, PROGRAMS AND OTHER CONTENT. IF SUFFICIENT VOD CONTENT IS NOT AVAILABLE ON A TIMELY BASIS, OUR ON-DEMAND BUSINESS WILL BE ADVERSELY AFFECTED. The success of VOD will largely be dependent on the availability of a wide variety and substantial number of movies, subscription based content from providers such as HBO, Showtime, and Starz Encore, specialty programs and other material, which we refer to as content, in digital format. We do not provide digital VOD content. Therefore, the future success of our on-demand business is dependent in part on content providers, such as traditional media and entertainment companies, providing significant content for VOD. Further, we are dependent in part on other third parties to convert existing analog content into digital content so that it may be delivered via VOD. In addition, we believe that the ultimate success of VOD will depend in part on the timing of the VOD distribution window. The distribution window is the time period during which different mediums, such as home movie rental businesses, receive and have exclusive rights to motion picture releases. Currently, video rental businesses have an advantage of receiving motion picture releases on an exclusive basis before most other forms of non-theatrical movie distribution, such as pay-per-view, premium television, VOD, basic cable and network syndicated television. The length of the exclusive distribution window for movie rental businesses varies, typically ranging from 30 to 90 days for domestic video stores. Thereafter, movies are made sequentially available to various 20 television distribution channels. We believe the success of VOD will depend in part on movies being available for VOD distribution either simultaneously with, or shortly after, they are available for video rental distribution. The order, length and exclusivity of each window for each distribution channel are determined solely by the studio releasing the movie. Given the size of the home video rental industry, the studios have a significant interest in maintaining that market. We cannot assure you that favorable changes, if any, will be made relating to the length and exclusivity of the video rental and television distribution windows. We believe all of the major studios have entered into agreements with certain cable companies and content aggregators to provide digital movies for distribution through VOD. However, these agreements are subject to change. If studios fail to reach agreements regarding content or cancel existing agreements, our customers could delay or cancel on-demand system orders, which would adversely affect our on-demand business. WE CANNOT ASSURE YOU THAT OUR PRODUCTS AND SERVICES WILL KEEP PACE WITH TECHNOLOGICAL DEVELOPMENTS AND EMERGING INDUSTRY STANDARDS, ADDRESS THE CHANGING NEEDS OF OUR CUSTOMERS OR ACHIEVE MARKET ACCEPTANCE, ANY OF WHICH COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS. The markets for our products are characterized by rapidly changing technology, evolving industry standards and new product introductions and enhancements. There can be no assurance that we will be successful in enhancing our on-demand and real-time products or developing, manufacturing and marketing new products that satisfy customer needs or achieve market acceptance. In addition, services, products or technologies developed by others may render one or more of our products or technologies uncompetitive, unmarketable or obsolete. Future technological advances in the real-time, television and video industries may result in the availability of new products and services that could compete with our solutions or reduce the cost of existing products or services. Our future success will depend on our ability to continue to enhance our existing products, including development of new applications for our technology, and to develop and introduce new products to meet and adapt to changing customer requirements and emerging technologies. Further, announcements of currently planned or other new product offerings by our competitors may cause customers to defer purchase decisions or to fail to purchase our existing solutions. Our failure to respond to rapidly changing technologies could adversely affect our business, financial condition and results of operations. BOTH OF OUR PRODUCT LINES ARE SUBJECT TO GOVERNMENTAL REGULATION. ANY FINDING THAT WE HAVE BEEN OR ARE IN NONCOMPLIANCE WITH SUCH LAWS COULD RESULT IN, AMONG OTHER THINGS, GOVERNMENTAL PENALTIES OR CLASS ACTION LAWSUITS. FURTHER, CHANGES IN EXISTING LAWS OR NEW LAWS MAY ADVERSELY AFFECT OUR BUSINESS. We are subject to various international, U.S. federal, state and local laws affecting our on-demand and real-time product lines. The television industry is subject to extensive regulation in the United States and other countries. Our on-demand business is dependent upon the continued growth of the digital television industry in the United States and internationally. Broadband companies are subject to extensive government regulation by the Federal Communications Commission and other federal and state regulatory agencies, including privacy regulations. If we were found to be, or believed to be non-compliant with privacy laws, we could face substantial exposure to government fines or privacy litigation. This risk is especially important for our Everstream products since these products, current and future, monitor set-top-box functions that could be impacted by privacy law protections. Additionally, regulations could have the effect of limiting capital expenditures by broadband companies and thus could have a material adverse effect on our business, financial condition and results of operations. The enactment by federal, state or international governments of new laws or regulations could adversely affect our broadband customers, and thereby materially adversely affect our business, financial condition and results of operations. Our real-time business is also subject to strict government regulation as the result of the government work we do. The regulations deal with security clearances, privacy, employment practices, pricing, purchasing, intellectual property and integrity. If we were ever found in violation or if out of tolerance, our production and resultant revenues could be halted or significantly delayed. WE MAY BE SUBJECT TO LIABILITY IF PRIVATE INFORMATION SUPPLIED TO OUR CUSTOMERS, INCLUDING BROADBAND COMPANIES, IS MISUSED. Our on-demand systems allow broadband companies to collect and store video preferences and other data that many viewers may consider confidential. Unauthorized access or use of this information could result in liability 21 to our customers, and potentially us, and might deter potential on-demand viewers. We have no control over the policy of our customers with respect to the access to this data and the release of this data to third parties. THE DEPLOYMENT OF ON-DEMAND BY BROADBAND COMPANIES MAY BE DELAYED DUE TO LIMITED BANDWIDTH OR OTHER TECHNOLOGY INITIATIVES THAT COULD REQUIRE BROADBAND COMPANIES TO FURTHER UPGRADE THEIR NETWORKS. Bandwidth is a limited resource. On-demand deployments may be delayed as operators focus on new initiatives that require incremental bandwidth such as high definition television, increased high-speed data speed, voice over internet protocol, interactive television, gaming and other evolving applications. These initiatives compete for the broadband companies' network bandwidth and may require the cable companies to increase their bandwidth capabilities by further upgrading their networks and therefore delaying on-demand deployments. OTHER RISKS IN THE FUTURE, WE MAY NEED TO RAISE ADDITIONAL CAPITAL. THIS CAPITAL MAY NOT BE AVAILABLE ON ACCEPTABLE TERMS, IF AT ALL. IF WE CANNOT RAISE FUNDS ON ACCEPTABLE TERMS, IF AND WHEN NEEDED, WE MAY NOT BE ABLE TO DEVELOP OR ENHANCE OUR PRODUCTS AND SERVICES, TAKE ADVANTAGE OF FUTURE OPPORTUNITIES, GROW OUR BUSINESS OR RESPOND TO COMPETITIVE PRESSURES OR UNANTICIPATED REQUIREMENTS. We believe that our existing cash balances and funds generated by operations will be sufficient to meet our anticipated working capital and capital expenditure requirements for the next twelve months. However, our working capital declined from $43.5 million on June 30, 2002 to $17.4 million on June 30, 2006. We expect that our working capital may continue to decrease during fiscal year 2007. If our revenue does not increase and stabilize in future periods, we will continue to use substantial cash from operating activities, which will cause working capital to further decline. If these losses continue, we may be forced to take extreme measures to continue the business, such as employee reductions, re-capitalization or reorganization transactions at undesirable prices, incurring significant debt at above market rates, or seeking bankruptcy protection. WE HAVE IMPLEMENTED CERTAIN ANTI-TAKEOVER PROVISIONS THAT COULD MAKE IT MORE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US. Provisions of Delaware law and our restated certificate of incorporation, amended and restated bylaws, and rights plan could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. We are subject to certain Delaware anti-takeover laws regulating corporate takeovers. These anti-takeover laws prevent a Delaware corporation from engaging in a business combination involving a merger or sale of more than 10% of our assets with any stockholder, including affiliates and associates of the stockholder, who owns 15% or more of the outstanding voting stock, for three years following the date that the stockholder acquired 15% or more of the corporation's stock except under limited circumstances. There are provisions in our restated certificate of incorporation and our amended and restated bylaws that also may delay, deter or impede hostile takeovers or changes of control. In addition, we have a rights plan, also known as a poison pill. The rights plan has the potential effect of significantly diluting the ownership interest in us of any person that acquires beneficial ownership of 15% or more of our common stock or commences a tender offer that would result in a person or group owning 15% or more of our common stock. THE ONGOING CONFLICTS IN THE MIDDLE EAST 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. U.S. military personnel are still engaged in the continued occupation of Iraq. In addition, armed conflict between Israel and Hezbollah in Lebanon has created instability as the future of conflict in the Middle East. The conflicts in the Middle East, 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 22 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, 2006, the high and low prices reported on the NASDAQ National Market were $3.40 and $1.45, respectively. Further, as of August 31, 2006, the price as reported on the NASDAQ National Market was $1.54. The market price of our common stock may fluctuate significantly in the future in response to various factors, some of which are beyond our control, including, among others: - variations in our quarterly operating results; - changes in securities analysts' estimates of our financial performance; - the development of the on-demand market in general; - changes in market valuations of similar companies; - announcement by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; - loss of a major customer or failure to complete significant transactions; and - additions or departures of key personnel. In addition, in recent years the stock market in general, and the NASDAQ National Market and the market for technology companies in particular, have experienced extreme price and volume fluctuations. In some cases, 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 1B. UNRESOLVED STAFF COMMENTS None. 23 ITEM 2. PROPERTIES Our principal facilities as of June 30, 2006, 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) 6001 Cochran Road, Suite 300 Everstream Sales, Research & December 2007 10,000 Solon, OH 44139 Development, and Support 4375 River Green Parkway Corporate Headquarters, November 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 Administration, Research & December 2007 30,000 Pompano Beach, Florida Development, Sales and Marketing 3535 Route 66 Repair and Service Depot May 2009 17,000 Bldg. 3 Neptune, New Jersey 3rd Floor, Voyager Place Administration and Research & January 2008 10,000 Shoppenhangers Road Development Maidenhead, Berkshire UK 100 Highpoint Drive Research & Development December 2006 16,500 Chalfont, Pennsylvania
In addition to the facilities listed above, we also lease space in various domestic and international industrial centers for use as sales and service offices and warehousing. ITEM 3. LEGAL PROCEEDINGS From time to time, we may be involved in litigation relating to claims arising out of our ordinary course of business. We are not presently involved in any material litigation, but have the following matters pending: - Vicor, Inc. v. Concurrent Computer Corporation, Essex Superior Court, ---------------------------------------------- Massachusetts, Civil Action No. C5-1437A. This suit was filed August 18, 2005 requesting declaratory relief regarding a contractual dispute between the parties. On March 8, 2006, after briefing and arguments, the case was dismissed for resolution by arbitration. Vicor has appealed the matter and filed a motion to stay the arbitration that is proceeding in Florida. 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 31, 2006: 24
NAME POSITION AGE ---- -------- --- T. Gary Trimm President and Chief Executive Officer 58 Warren Neuburger Chief Operating Officer 52 Gregory S. Wilson Chief Financial Officer 41 Kirk L. Somers Vice President Investor Relations and General Counsel & Secretary 41
T. Gary Trimm, President, Chief Executive Officer, and Director. Mr. Trimm has served as President and Chief Executive Officer of Concurrent since July 2004. He became a director on August 10, 2004. From 2003 to July 2004, Mr. Trimm was President and Chief Executive Officer of OpVista, Inc., a manufacturer of scalable transport solutions. From 1997 to 2003, Mr. Trimm served as President and Chief Executive Officer of Strategic Management, LLC, a consulting firm. From 1995 to 1997, Mr. Trimm served as President and Chief Executive Officer of Compression Labs, a developer and marketer of CDV-based video-conferencing systems, and from 1988 to 1995, Mr. Trimm served at Scientific-Atlanta, Inc., where his final position was President of their Subscriber Division. Mr. Trimm also spent several years at American Technical Services and served in the United States Navy within the US Navy Submarine Service. Mr. Trimm serves on the board of directors of ATX Inc. in Canada. Warren Neuburger, Chief Operating Officer. Mr. Neuburger joined Concurrent in June 2004 as President of the Integrated Solutions Division. In January 2005, as part of the integration of the VOD and Integrated Solutions divisions, he became Chief Operating Officer. From 2001 to 2003, Mr. Neuburger served as CEO, President, Chief Operations Officer and Director at Optio Software Inc., a provider of output management solutions. From 1998 to 2001, Mr. Neuburger held a number of positions at Glenayre Electronics, including Executive Vice President, Products and President of the ING Division. Mr. Neuburger also held a number of positions during his tenures at Voicecom Systems, Inc., Digital Equipment Corporation, and Corning Glass Works. Gregory S. Wilson, Chief Financial Officer. Mr. Wilson joined Concurrent in February 2000 as Corporate Controller. In January 2005, he was promoted to Chief Financial Officer. Prior to joining Concurrent, from 1998 to 2000, Mr. Wilson served as the Manager of Financial Planning and Analysis at LHS Group Inc., a publicly traded global provider of operating support system software and services to the communications industry. From 1997 to 1998, Mr. Wilson served as a consultant for BAAN Corporate Office Solutions. From 1994 to 1997, Mr. Wilson served as Director of Planning and Analysis for a division of Turner Broadcasting. From 1990 to 1994, he worked for Oppenheimer Capital where his financial responsibilities included internal financial reporting, quarterly and annual filings with the SEC, and financial planning and analysis. Mr. Wilson began his career with Ernst and Young of Atlanta in 1987. Kirk L. Somers, Vice President, Investor Relations, General Counsel and Secretary. Mr. Somers has served as General Counsel since November 2001 and was appointed Secretary in August 2004. He was made a vice president and placed in charge of Investor Relations in January 2005. Immediately prior to joining Concurrent, from December 1998 to November 2001, Mr. Somers was the Assistant General Counsel for a company within divine, inc. (f.k.a. eshare communication, Inc.), a developer and marketer of enterprise interactive management solutions, where he was responsible for corporate-wide development and enforcement of the company's intellectual property portfolio as well as commercial contracts and other corporate matters. From December 1995 to December 1998, Mr. Somers was a partner in the law firm of Marshall & Melhorn in Toledo, Ohio practicing in the area of litigation. Prior to that, he was a JAG in the USAF. 25 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 2006 QUARTER ENDED: HIGH LOW ----- ----- September 30, 2005 $2.39 $1.63 December 31, 2005 $2.13 $1.45 March 31, 2006 $3.23 $1.82 June 30, 2006 $3.40 $2.35 FISCAL YEAR 2005 QUARTER ENDED: HIGH LOW ----- ----- September 30, 2004 $2.00 $1.35 December 31, 2004 $2.95 $1.40 March 31, 2005 $2.94 $1.69 June 30, 2005 $2.31 $1.48
As of August 31, 2006, there were 72,255,000 shares of Common Stock outstanding, held by approximately 14,100 stockholders with a closing price on the NASDAQ National Market of $1.54. 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. 26 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected historical consolidated financial data that has been derived from our audited consolidated financial statements. The information set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with, and is qualified by reference to, our financial statements and related notes thereto included elsewhere herein and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
SELECTED CONSOLIDATED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED JUNE 30, -------------------------------------------------------------------- INCOME STATEMENT DATA 2006 2005 2004 2003 2002 --------------------- -------- -------- -------- --------- ------- Net sales $71,612 $78,685 $79,235 $ 75,453 $89,369 Gross margin 35,369 38,776 38,722 36,423 44,566 Operating income (loss) (9,580) (7,457) (8,540) (11,429) (4) 3,679 Income (loss) before cumulative effect of accounting change (9,022) (7,729) (5,725) (24,552) 4,383 Cumulative effect of accounting change (net of income tax) (323) (1) - - - - Net income (loss) (9,345) (1) (7,729) (2) (5,725) (3) (24,552) (5) 4,383 Net income (loss) per share Basic $ (0.14) (1) $ (0.12) (2) $ (0.09) (3) $ (0.40) (5) $ 0.07 Diluted $ (0.14) (1) $ (0.12) (2) $ (0.09) (3) $ (0.40) (5) $ 0.07 AT JUNE 30, -------------------------------------------------------------------- BALANCE SHEET DATA 2006 2005 2004 2003 2002 ------------------ -------- -------- -------- --------- ------- Cash, cash equivalents and short-term investments $14,423 $19,880 $27,928 $ 30,697 $30,519 Working capital 17,384 22,911 26,378 30,180 43,545 Total assets 68,758 63,977 74,542 77,839 98,688 Stockholders' equity 43,774 38,353 45,726 43,458 69,224 (1) In March 2005, the FASB issued Financial Interpretation No. 47 ("FIN 47"), "Accounting for Asset Retirement Obligations - an interpretation of FASB Statement No. 143." FIN 47 requires the recognition of a liability for the fair value of a legally-required conditional asset retirement obligation when incurred, if the liability's fair value can be reasonably estimated. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. We are required to record an asset and a corresponding liability for the present value of the estimated asset retirement obligation associated with the leasehold improvements at some of our international locations. The asset is depreciated over the life of the corresponding lease while the liability accretes to the amount of the estimated retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. We adopted FIN 47 on June 30, 2006 with a $323,000 cumulative effect of accounting change (net of tax) recorded in Concurrent's results of operations. This charge is a combination of depreciation and accretion expense. (2) Net loss for the year ended June 30, 2005 includes $0.4 million impairment charge related to our investment in Everstream, net of a $0.1 million recovery of a previously recognized impairment charge related to our investment in Thirdspace. (3) Net loss for the year ended June 30, 2004 includes $3.1 million from the partial recovery of the previously recognized impairment charge related to our investment in Thirdspace discussed in Note (5) below. (4) Operating loss for the year ended June 30, 2003 includes a restructuring charge of $1.6 million. (5) 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.
27 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and the related Notes thereto which appear elsewhere herein. Except for the historical financial information, many of the matters discussed in this Item 7 may be considered "forward-looking" statements that reflect our plans, estimates and beliefs. Actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below, elsewhere herein and in other filings made with the Securities and Exchange Commission. OVERVIEW During the twelve months ended June 30, 2006, we used $4.0 million in cash and cash equivalents from operations, and ended the year with $14.4 million in cash and cash equivalents. During the year ended June 30, 2005, we used $8.5 million in cash and cash equivalents from operations, and ended the year with $19.9 million in cash and cash equivalents. The decrease in cash usage from operations during the twelve months ended June 30, 2006 compared to the twelve months ended June 30, 2005 is due to changes in working capital, primarily timing of receivable collections. See further discussions in the "Liquidity and Capital Resources" section of this document. Our cash balance benefited from the addition of $1.2 million from the acquisition of Everstream during the twelve months ended June 30, 2006. We believe that existing cash balances will be sufficient to meet our anticipated working capital and capital expenditure requirements for the next twelve months. Over the next 6-9 months we plan to reduce our operating expenses and our costs of goods and services in certain areas while at the same time investing resources in other key strategic areas. We began this plan by terminating approximately 7% of our employees in July, 2006. We will continue to review and realign our cost structure as needed. However, unless and until our revenue increases and stabilizes, it is likely we will continue to use cash from operating activities. See further discussions in the "Liquidity and Capital Resources" section of this document. If we continue to use cash from operating activities, we may be forced to take extreme measures to continue the business, such as further employee reductions, re-capitalization or reorganization transactions at undesirable prices, incurring significant debt at above market rates, or seeking bankruptcy protection. We expect that we will report a net loss for fiscal 2007 and will continue to use cash from operating activities. Some recent trends in the VOD market have been a shift in on-demand revenue from large, new North American on-demand deployments to a mix of new international deployments; expansions of streams, ingest, and storage at previously deployed systems; and smaller, new North American on-demand deployments. We have also seen pricing pressure due to the entrance of small competitors, a number of which have announced that they are being acquired by substantially larger companies. We also believe that since the VOD market has a limited number of customers, a large number of well-financed competitors, and requires significant research and development expenditures, it may be difficult to make a profit in this market until market forces such as the availability of telco VOD or consumer adoption drive significantly greater demand. Another recent trend in the real-time market is the reallocation of government spending away from some of our traditional real-time projects to other initiatives. This redeployment of resources has resulted in a number of opportunities being delayed and, in some cases, terminated. In each of the past two fiscal years, we have recorded costs associated with Sarbanes-Oxley Section 404 compliance. During fiscal year 2006 and 2005, we spent approximately $0.6 million and $0.9 million related to outside services for Sarbanes-Oxley compliance, respectively, and invested significant personnel hours. APPLICATION OF CRITICAL ACCOUNTING POLICIES The SEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. The following is not intended to be a comprehensive list of all of our accounting policies. Our significant accounting policies are more fully described in Note 2 to the Consolidated Financial Statements. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States of America, with no need for management's judgment in their application. There are also areas in which management's judgment in selecting an available alternative would not produce a materially different result. We have identified the following as accounting policies critical to us: 28 Revenue Recognition We recognize revenue when (1) persuasive evidence of an arrangement exists, (2) the system has been shipped, (3) the fee is fixed or determinable and (4) collectibility of the fee is probable. Determination of criteria (3) and (4) are based on our judgments regarding the fixed nature of the fee charged for products and services delivered and the collectibility of those fees. Should changes in conditions cause us to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected. Software and Hardware Sales --------------------------- On-demand and real-time product revenues are recognized based on the guidance in American Institute of Certified Public Accountants Statement of Position ("SOP") 97-2, "Software Revenue Recognition" ("SOP 97-2") and related amendments, SOP 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue Recognition", and SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions". Our standard contractual arrangements with our customers generally include the delivery of a hardware and software system, certain professional services that typically involve installation and training, and ongoing software and hardware maintenance. The software component of the arrangement is considered to be essential to the functionality of the hardware. Therefore, in accordance with Emerging Issues Task Force No. 03-5, "Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software", the hardware and the hardware maintenance components are considered software related and the provisions of SOP 97-2 apply to all elements of the arrangement. Under multiple element arrangements, we allocate revenue to the various elements based on vendor-specific objective evidence ("VSOE") of fair value. Our VSOE of fair value is determined based on the price charged when the same element is sold separately. If VSOE of fair value does not exist for all elements in a multiple element arrangement, we recognize revenue using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement is recognized as revenue. Professional Services --------------------- Professional services revenue is primarily generated from integration of third party software interfaces, training, and hardware installation. These services are typically completed within 90 days from the receipt of the order. Under multiple element arrangements, we allocate revenue to the various elements based on VSOE of fair value. We determine VSOE of fair value for the services based on the standard rate per hour or fixed fee used when similar services are sold separately. Revenues from these services are recognized when the services are performed. In certain instances, our customers require significant customization of both the software and hardware products. In these situations, the services are considered essential to the functionality of the software and, therefore, the revenue from the arrangement, with the exception of maintenance, is recognized in conformity with Accounting Research Bulletin ("ARB") No. 45, "Long Term Construction Type Contracts" and SOP 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts." We record the value of the entire arrangement (excluding maintenance) as the project progresses based on actual costs incurred compared to the total costs expected to be incurred through completion. Revisions in profit estimates are charged to income in the period in which the facts that give rise to the revision become known. Hardware and Software Maintenance --------------------------------- We recognize revenue from maintenance services in accordance with SOP 97-2. Depending upon the specific terms of the customer agreement, we may include warranty as part of the purchase price. In accordance with SOP 97-2 and, depending upon the specific terms of the customer agreement, we either accrue the estimated costs to be incurred in performing maintenance services at the time of revenue recognition and shipment of product, or we defer revenue associated with the maintenance services to be provided during the warranty period based upon the value for which we have sold such services separately when they are renewed by existing customers. For those arrangements in which the warranty period is less than or equal to one year, we accrue the estimated costs to be incurred in providing services. In accordance with paragraph 59 of SOP 97-2, we have determined that the warranty fee is part of the initial license fee, the warranty period is for one year or less, the estimated cost of providing the services are immaterial, and upgrades and enhancements offered during maintenance arrangements historically have been and are expected to continue to be minimal and infrequent. Actual costs are then charged against the warranty 29 accrual as they are incurred. For those arrangements in which the warranty period is greater than one year, we defer revenue based upon the value for which we have sold such services separately. This revenue is then recognized on a straight line basis over the warranty period. Warranty Accrual For certain customers we accrue the estimated costs to be incurred in performing warranty services at the time of revenue recognition and shipment of the servers. Our estimate of costs to service warranty obligations is based on historical experience and expectation of future conditions. To the extent we experience increased warranty claim activity or increased costs associated with servicing those claims, our warranty accrual will increase resulting in decreased gross margin. Allowance for Doubtful Accounts The allowance for doubtful accounts receivable is based on the aging of accounts receivable and our assessment of the collectibility of our receivables. If there is a deterioration of one of our major customer's credit worthiness or actual account defaults are higher than our historical trends, our reserve estimates could be adversely impacted. Inventory Valuation Reserves We provide for inventory obsolescence based upon assumptions about future demand, market conditions and anticipated timing of the release of next generation products. If actual market conditions or future demand are less favorable than those projected, or if next generation products are released earlier than anticipated, additional inventory write-downs may be required. We also review, on a quarterly basis, the value of inventory on hand for which a newer and more advanced technology or product is currently, or will soon be, available. When we believe that we will not be able to sell the products in inventory at or above cost, we record an obsolescence reserve to write them down to fair market value. Impairment of Goodwill and Trademark We review goodwill and trademark for impairment on an annual basis or on an interim basis whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Any such impairment loss would be measured as the difference between the carrying amount of the asset and its fair value based on the present value of estimated future cash flows. Significant judgment is required in the forecasting of future operating results, which are used in the preparation of projected cash flows. Due to uncertain market conditions and potential changes in our strategy and products, it is possible that forecasts used to support our goodwill and trademark may change in the future which could result in significant non-cash charges that would adversely affect our results of operations. At June 30, 2006, we had $15.6 million of goodwill and a $1.1 million Everstream trademark. In assessing whether or not goodwill and the trademark are impaired, we make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. On July 1, 2006 and 2005, our annual testing day, as required by Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets", we updated and reviewed the impairment analysis in conjunction with our revised expected future operating results. We have concluded that goodwill is realizable based on forecasted discounted cash flows and on our stock market valuation. Neither method indicated that our goodwill had been impaired and, as a result, we did not record an impairment loss related to goodwill during the twelve months ended June 30, 2006. We have concluded that the trademark is realizable based on forecasted future cash flows associated with the Everstream name. If the estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets. Subsequent impairment charges, if any, will be reflected in operating income in the Consolidated Statements of Operations. Valuation of Deferred Tax Assets In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent 30 upon the generation of future taxable income during the periods in which those temporary differences become deductible. At June 30, 2006 and June 30, 2005, substantially all of the deferred tax assets have been fully reserved due to the tax operating losses for the past several years and the inability to assess as more likely than not the likelihood of generating sufficient future taxable income to realize such benefits. Stock-Based Compensation We adopted Statement of Financial Accounting Standard ("SFAS") No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)") on July 1, 2005 which required that the cost resulting from all share-based payment transactions be recognized in the financial statements and required all entities to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees. The additional compensation expense resulting from the adoption of SFAS 123(R) was $278,000 for fiscal year 2006. Assumptions used to estimate compensation expense from issuance of share-based compensation are based, to some extent, on historical experience and expectation of future conditions. To the extent we issue additional share-based compensation, or assumptions regarding previously issued share-based compensation change, our future share-based compensation expense may be positively or negatively impacted. 31 SELECTED OPERATING DATA AS A PERCENTAGE OF NET SALES The following table sets forth our consolidated historical operating information, as a percentage of total revenues, for the periods indicated:
YEAR ENDED JUNE 30, ----------------------- 2006 2005 2004 ------- ------ ------ Revenue (% of total sales): Product 69.3% 72.5 % 71.9% Service 30.7 27.5 28.1 ------- ------ ------ Total revenue 100.0 100.0 100.0 Cost of sales (% of respective sales category): Product 50.4 47.4 49.3 Service 51.0 59.5 55.7 ------- ------ ------ Total cost of sales 50.6 50.7 51.1 Gross margin 49.4 49.3 48.9 Operating expenses: Sales and marketing 23.1 22.6 21.8 Research and development 26.3 23.8 25.2 General and administrative 13.4 12.4 12.7 Gain on liquidation of foreign subsidiary - - (0.1) ------- ------ ------ Total operating expenses 62.8 58.8 59.6 ------- ------ ------ Operating loss (13.4) (9.5) (10.8) Recovery (impairment) of minority investment - (0.4) 3.9 Interest income - net 0.3 0.3 0.4 Other income (expense), net 0.8 (0.6) (0.2) ------- ------ ------ Loss before income taxes and cumulative effect of accounting change (12.3) (10.2) (6.6) Provision (benefit) for income taxes (0.3) (0.4) 0.6 ------- ------ ------ Loss before cumulative effect of accounting change (12.6) (9.8) (7.2) Cumulative effect of accounting change (net of income taxes) (0.4) - - ------- ------ ------ Net loss (13.0)% (9.8)% (7.2)% ======= ====== ======
32 RESULTS OF OPERATIONS We recognize revenue for product sales in accordance with the appropriate accounting guidance as described in our critical accounting policies. We recognize revenue from customer service plans ratably over the term of each plan, which are typically between one and three years. Custom engineering and integration services are typically completed within 90 days from receipt of an order. Revenues from these services are recognized upon completion and delivery of the product to the customer. Cost of sales consists of the cost of the computer systems sold, including labor, material, overhead and third party product costs. Cost of sales also includes the salaries, benefits and other costs of the maintenance, service and help desk personnel associated with product installation and support activities. Sales and marketing expenses consist primarily of the salaries, benefits and travel expenses of employees responsible for acquiring new business and maintaining existing customer relationships, as well as marketing expenses related to trade publications, advertisements and trade shows. Research and development expenses are comprised of salaries, benefits, and travel expenses of employees involved in hardware and software product enhancement and development, cost of outside contractors engaged to perform software development services, and software certification costs. Development costs are expensed as incurred. General and administrative expenses consist primarily of salaries, benefits and travel expenses of management and administrative personnel, human resources, information systems, investor relations, accounting and fees for legal, accounting, and other professional services. 33 FISCAL YEAR 2006 IN COMPARISON TO FISCAL YEAR 2005 The following table sets forth summarized consolidated financial information for each of the two fiscal years ended June 30, 2006 and 2005 as well as comparative data showing increases and decreases between periods.
YEAR ENDED JUNE 30, --------------------- $ % (DOLLARS IN THOUSANDS) 2006 2005 CHANGE CHANGE ---------- ---------- ---------- --------- Product revenue $ 49,592 $ 57,070 $ (7,478) (13.1%) Service revenue 22,020 21,615 405 1.9% ---------- ---------- ---------- --------- Total revenue 71,612 78,685 (7,073) (9.0%) Product cost of sales 25,010 27,053 (2,043) (7.6%) Service cost of sales 11,233 12,856 (1,623) (12.6%) ---------- ---------- ---------- --------- Total cost of sales 36,243 39,909 (3,666) (9.2%) ---------- ---------- ---------- --------- Product gross margin 24,582 30,017 (5,435) (18.1%) Service gross margin 10,787 8,759 2,028 23.2% ---------- ---------- ---------- --------- Total gross margin 35,369 38,776 (3,407) (8.8%) Operating expenses: Sales and marketing 16,576 17,785 (1,209) (6.8%) Research and development 18,783 18,748 35 0.2% General and administrative 9,590 9,717 (127) (1.3%) Restructuring charge - (17) 17 NM (1) ---------- ---------- ---------- --------- Total operating expenses 44,949 46,233 (1,284) (2.8%) ---------- ---------- ---------- --------- Operating loss (9,580) (7,457) (2,123) 28.5% Impairment loss on minority investment - (313) 313 NM (1) Other income (expense) - net 749 (231) 980 NM (1) ---------- ---------- ---------- --------- Loss before provision for income taxes and cumulative effect of accounting change (8,831) (8,001) (830) 10.4% Provision (benefit) for income taxes 191 (272) 463 NM (1) ---------- ---------- ---------- --------- Loss before cumulative effect of accounting change (9,022) (7,729) (1,293) 16.7% Cumulative effect of accounting change (net of taxes) (323) - (323) NM (1) ---------- ---------- ---------- --------- Net loss $ (9,345) $ (7,729) $ (1,616) 20.9% ========== ========== ========== ========= (1) NM denotes percentage is not meaningful
Product Revenue. Total product sales for fiscal year 2006 were $49.6 million, a decrease of approximately $7.5 million, or 13.1% from $57.1 million in fiscal year 2005. The decrease in product sales resulted from the $5.1 million, or 16.2%, decrease in on-demand product sales to $25.9 for fiscal year 2006 from $31.0 million for fiscal year 2005. To a lesser extent the decrease in product sales also resulted from the $2.4 million, or 9.4% decrease in real-time product sales to $23.7 million for fiscal year 2006 from $26.1 million for fiscal year 2005. The decrease in on-demand product sales was primarily due to a $3.4 million decrease in international sales, particularly in Japan, during the twelve months ended June 30, 2006, as compared to the same period of the prior year. Although we were able to generate incremental revenue from the sale of Everstream on-demand reporting tools within our Japanese market during the twelve months ended June 30, 2006, this revenue did not match the revenue generated from prior year new system deployments within the Japanese market. The reduction in on-demand product revenue in Japan was partially offset by an increase in European on-demand product revenue through our relationship with Alcatel. However, we do not expect European revenues from our Alcatel relationship to continue at levels achieved during fiscal 2006 because Alcatel has entered into an agreement with Microsoft Corporation that is likely to jeopardize our long term relationship. The decrease in on-demand product sales was also due to a $1.7 million decrease in revenue 34 from our North American market in fiscal year 2006, as compared to fiscal year 2005, primarily due to competitive pricing pressures in the North American market during 2006. Fluctuation in on-demand revenue is often due to the fact that we have a small base of large customers making periodic large purchases that account for a significant percentage of revenue. The decrease in real-time product sales was primarily due to a $3.2 million decrease in North American sales during the twelve months ended June 30, 2006, as compared to the same period of the prior year. This decrease was primarily due to lower revenue for our traditional real-time products from our largest North American real-time customer. This decline has been partially offset by an increase in revenue from international and domestic demand for our Linux based real-time products. Service Revenue. Service revenue increased $0.4 million, or 1.9%, to $22.0 million for fiscal year 2006 from $21.6 million in fiscal year 2005. The increase in service revenue was attributable to a $2.6 million, or 29.1%, increase in service revenue associated with on-demand products, compared to fiscal year 2005. Service revenue associated with on-demand products increased primarily due to the addition of Everstream service revenue in the current period. Everstream service revenue was attributable to maintenance service on software products and integration and service performed after our acquisition of Everstream. Furthermore, the on-demand business continued to recognize maintenance and installation revenue on our expanding base of on-demand market deployments. As the warranty agreements that typically accompany the initial sale and installation of our on-demand systems expire, we anticipate selling new maintenance agreements to our customers. The increase in service revenue associated with on-demand product was partially offset by a $2.2 million, or 17.9%, decrease in service revenue associated with real-time product during fiscal year 2006, compared to the prior fiscal year. Service revenue associated with real-time products continued to decline primarily due to the expiration of maintenance contracts as legacy machines were removed from service and, to a lesser extent, from customers purchasing our new products that produce significantly less service revenue. We expect this trend of declining service for real-time products to continue into the foreseeable future. Product Gross Margin. Product gross margin was $24.6 million for fiscal year 2006, a decrease of $5.4 million, or 18.1%, from $30.0 million for fiscal year 2005. Product gross margin as a percentage of product sales decreased to 49.6% in fiscal year 2006 from 52.6% in fiscal year 2005. The decrease in product margins as a percentage of product sales is primarily due to a less favorable mix of real-time software and hardware products both domestically and internationally in fiscal year 2006. In addition, we incurred an additional $0.5 million of amortization expense during the twelve months ended June 30, 2006 related to acquired Everstream technology. Service Gross Margin. The gross margin on service sales increased $2.0 million, or 23.2%, to $10.8 million, or 49.0% of service revenue in fiscal 2006 from $8.8 million, or 40.5% of service revenue in fiscal year 2005. Increasing service margins are primarily due to service revenues generated by Everstream subsequent to the acquisition of Everstream. This new source of revenue provides higher service margins than we have traditionally experienced and we expect this revenue source to continue to have a favorable impact on service margins going forward, although we cannot be assured that they will continue at the same level achieved during the twelve months ended June 30, 2006. Service margins also increased during fiscal year 2006 compared to fiscal year 2005 due to cost savings generated by our cost reduction initiative during the prior fiscal year. Service cost of sales decreased $1.6 million due to fewer service personnel, net of Everstream additions, in fiscal year 2006. This net decrease in service personnel resulted in a $0.7 million reduction in salaries, wages and benefits. In addition to the decreasing personnel costs, we also incurred $0.6 million less in severance costs compared to the prior year and we incurred $0.4 million less in travel costs compared to the prior year. Severance expense recorded in the twelve months ended June 30, 2005 resulted from a reduction in service personnel as we scaled down the infrastructure necessary to fulfill declining real-time product related contractual obligations. The decline in contractual obligations results from the expiration of maintenance contracts as legacy machines are removed from service and replaced with machines that are less costly to maintain. Sales and Marketing. Sales and marketing expenses decreased $1.2 million, or 6.8%, to $16.6 million during fiscal year 2006 from $17.8 million in fiscal year 2005. This decrease is primarily due to a $1.2 million reduction in salaries, wages and benefits resulting from the cost savings initiative implemented during the twelve months ended June 30, 2005, and severance of $0.3 million recorded in the prior year. In addition, we reduced depreciation expense associated with demonstration equipment by $0.4 million during the twelve months ended June 35 30, 2006, as compared to the same period of the prior year, due to the fact that we have reduced spending on such equipment. Partially offsetting these decreases, commission expense increased $0.3 million during the twelve months ended June 30, 2006, as compared to the same period of the prior year, due to the structure of commission agreements in fiscal year 2006. Also during the twelve months ended June 30, 2006, we began including expenses from Everstream's sales force and amortization of Everstream's customer base, resulting in an additional $0.3 million of expense during the twelve months ended June 30, 2006. Research and Development. Research and development expenses remained relatively flat, increasing $0.1 million, or 0.2%, to $18.8 million during fiscal 2006 from $18.7 million in fiscal year 2005. During the twelve months ended June 30, 2006, we incurred $2.2 million less in development expenses for subcontractors and engineers because they were no longer necessary to meet software development requirements for customers' business management functionality, resource management and client system monitoring. In addition to the decreasing personnel costs, we also incurred $0.2 million less in severance costs as compared to the twelve months ended June 30, 2005. These decreasing costs from our traditional research and development group were partially offset by the inclusion of expenses of $2.5 million from Everstream's research and development group during the twelve months ended June 30, 2006. General and Administrative. General and administrative expenses remained relatively flat, decreasing $0.1 million, or 1.3%, to $9.6 million during fiscal year 2006 from $9.7 million in fiscal year 2005. During the twelve months ended June 30, 2006, share-based compensation expense resulting from adoption of SFAS 123(R) increased by $0.2 million and inclusion of Everstream's operations resulted in an additional $0.1 million in expenses during the twelve months ended June 30, 2006, as compared to the same period of the prior year. Offsetting these increasing costs, salaries wages and benefits decreased by $0.4 million during the twelve months ended June 30, 2006, primarily due to the cost savings initiative during the twelve months ended June 30, 2005. Recovery (Impairment Loss) of Minority Investment. During fiscal year 2005, we became aware of circumstances that, at the time, provided evidence of an "other than temporary" impairment of our investment in Everstream. Based upon an evaluation of the investment in Everstream during this period, we recorded an impairment charge of $0.4 million and reduced our "Investment in minority owned company" to $140,000. Partially offsetting this charge was the receipt, during fiscal year 2005, of $0.1 million in cash from the continued monetization of Thirdspace assets and settlement of its liabilities. Other income (expense). Other income (expense), net, increased $1.0 million to $0.7 million other income, net during fiscal year 2006 from ($0.2) million of expense, net in fiscal 2005. During the twelve months ended June 30, 2006, we received a $0.7 million refund from the Australian Tax Authority. This refund related to previous withholding tax payments, over many years, on intercompany charges with our Australian subsidiary. Expense associated with previous payments was originally recorded to "other income (expense)" within our Consolidated Statement of Operations; therefore, we recorded the refund to "other income (expense)" within our Consolidated Statement of Operations. The net expense amount in fiscal 2005 was primarily due to $0.2 million in realized currency translation losses on settlement of foreign transactions and $0.2 million on losses from the write-off of fixed assets that were no longer of use. Provision (Benefit) for Income Taxes. We recorded an income tax provision for our domestic and foreign subsidiaries of $191,000 during fiscal year 2006. Income tax expense during fiscal year 2006 was primarily attributable to state income taxes and income earned in foreign locations that cannot be offset by net operating loss carryforwards. We recorded an income tax benefit for our domestic and foreign subsidiaries of $(272,000) during fiscal year 2005. Of this amount, $(264,000) relates to income tax contingency reserves that we determined were no longer required and were reversed as an income tax benefit. The remainder of the benefit relates primarily to a tax benefit recognized by one of our international subsidiaries that utilized a net operating loss carryback in fiscal year 2005. Cumulative Effect of Accounting Change. The Financial Accounting Standards Board ("FASB") issued Financial Interpretation No. 47 ("FIN 47"), "Accounting for Asset Retirement Obligations - an interpretation of FASB Statement No. 143", which requires the recognition of a liability for the fair value of a legally-required conditional asset retirement obligation when incurred, if the liability's fair value can be reasonably estimated. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. We adopted FIN 47 on June 30, 2006, recording a $0.3 million cumulative effect of accounting change (net of tax) in our consolidated Statement of 36 Operations. This amount resulted from our obligation to restore certain of our leased facilities to their original condition, upon eventual non-renewal of the applicable lease agreements and represents accretion of interest for the asset retirement obligation and depreciation of the associated leasehold improvement. Net loss. The net loss for fiscal year 2006 was $9.3 million or $0.14 per basic and diluted share compared to net loss for fiscal year 2005 of $7.7 million or $0.12 per basic and diluted share. FISCAL YEAR 2005 IN COMPARISON TO FISCAL YEAR 2004 The following table sets forth summarized consolidated financial information for each of the two fiscal years ended June 30, 2005 and 2004 as well as comparative data showing increases and decreases between periods.
YEAR ENDED JUNE 30, ------------------- $ % (DOLLARS IN THOUSANDS) 2005 2004 CHANGE CHANGE ---------- ---------- ---------- --------- Product revenue $ 57,070 $ 56,947 $ 123 0.2% Service revenue 21,615 22,288 (673) (3.0%) ---------- ---------- ---------- --------- Total revenue 78,685 79,235 (550) (0.7%) Product cost of sales 27,053 28,091 (1,038) (3.7%) Service cost of sales 12,856 12,422 434 3.5% ---------- ---------- ---------- --------- Total cost of sales 39,909 40,513 (604) (1.5%) ---------- ---------- ---------- --------- Product gross margin 30,017 28,856 1,161 4.0% Service gross margin 8,759 9,866 (1,107) (11.2%) ---------- ---------- ---------- --------- Total gross margin 38,776 38,722 54 0.1% Operating expenses: Sales and marketing 17,785 17,302 483 2.8% Research and development 18,748 20,000 (1,252) (6.3%) General and administrative 9,717 10,071 (354) (3.5%) Restructuring charge (17) - (17) NM (1) Gain on liquidation of foreign subsidiary - (111) 111 NM (1) ---------- ---------- ---------- --------- Total operating expenses 46,233 47,262 (1,029) (2.2%) ---------- ---------- ---------- --------- Operating loss (7,457) (8,540) 1,083 (12.7%) Recovery (impairment) of minority investment (313) 3,103 (3,416) NM (1) Other income (expense) - net (231) 184 (415) NM (1) ---------- ---------- ---------- --------- Loss before provision for income taxes (8,001) (5,253) (2,748) 52.3% Provision for income taxes (272) 472 (744) NM (1) ---------- ---------- ---------- --------- Net loss $ (7,729) $ (5,725) $ (2,004) 35.0% ========== ========== ========== ========= (1) NM denotes percentage is not meaningful
37 Product Revenue. Total product sales for fiscal year 2005 were $57.1 million, an increase of approximately $0.2 million from $56.9 million in fiscal year 2004. The increase in product sales resulted from an $8.6 million, or 48.8%, increase in real-time product sales to $26.1 million during fiscal year 2005, from $17.6 million during fiscal year 2004. The increase in real-time product sales is due to an increase in product volume to both domestic and international customers. Domestic and international real-time product revenues increased $7.6 million and $1.0 million, respectively, from fiscal year 2004 to fiscal year 2005. Partially offsetting the increase in real-time products, on-demand product sales decreased approximately $8.4 million, or 21.5%, to $31.0 million during fiscal year 2005 from $39.4 million during fiscal year 2004. The decrease in on-demand product sales was due to fewer products sold in the North American market during 2005, as compared to the same period of the prior year. This reduction in domestic on-demand product revenue was partially offset by an increase in international sales volume during fiscal year 2005 that resulted in a $10.0 million increase in international on-demand product revenue, compared to fiscal year 2004. Fluctuation in on-demand product revenue is often due to the fact that we have a small base of large customers making periodic large purchases that account for a significant percentage of revenue. Service Revenue. Service revenue decreased $0.7 million, or 3.0%, to $21.6 million for fiscal year 2005 from $22.3 million in fiscal year 2004. Service revenue associated with on-demand products increased approximately $2.4 million, or 35.3%, to $9.1 million during fiscal year 2005 from $6.7 million in fiscal year 2004, as we continue to recognize maintenance, installation, and training revenue on our expanding base of on-demand market deployments. However, the increase in service revenue associated with on-demand product was more than offset by a $3.1 million, or 19.6%, decrease in service revenue associated with real-time product to $12.5 million during fiscal year 2005 from $15.6 million in the same period of the prior fiscal year. Real-time related service revenue continued to decline primarily due to the expiration of maintenance contracts as legacy machines were removed from service and, to a lesser extent, from customers purchasing our new products that produce significantly less service revenue. Product Gross Margin. Product gross margin was $30.0 million for fiscal year 2005, an increase of $1.2 million, or 4.0%, from $28.8 million for fiscal year 2004. Product gross margin as a percentage of product sales increased to 52.6% in fiscal year 2005 from 50.7% in fiscal year 2004, primarily because the gross margin on sales of real-time product increased to 60.6% in fiscal year 2005 from 58.9% in fiscal year 2004. The increase in real-time product gross margin is due to a favorable product mix, as compared to the same period of the prior fiscal year. On-demand product gross margin decreased to 45.8% from 47.0% of on-demand product revenue in fiscal 2004. On-demand product gross margin was higher in fiscal year 2004 primarily due to the 3.4% favorable impact on margins in that year resulting from a $1.3 million expense reversal for warrants previously accrued for Scientific Atlanta, Inc. Partially offsetting this, fiscal year 2005 margins were favorably impacted by $0.8 million lower provision for inventory reserves, as a significant portion of older generation on-demand inventory was reserved in the prior fiscal year. Service Gross Margin. The gross margin on service sales decreased $1.1 million, or 11.2%, to $8.8 million, or 40.5% of service revenue in fiscal 2005 from $9.9 million, or 44.3% of service revenue in fiscal year 2004. The decline in service margins is primarily due to severance expense incurred in fiscal year 2005. Severance expense of $0.6 million recorded to service cost of sales in fiscal year 2005 resulted from a reduction in domestic and international service personnel as we have scaled down our infrastructure necessary to fulfill declining real-time contractual service obligations. Additionally, the service margins were brought down by lower revenues from the expiration of maintenance contracts as legacy machines are removed from service and replaced with machines that are less expensive to maintain. We will continue to scale down the real-time service infrastructure in response to this trend of declining real-time contractual service obligations. Sales and Marketing. Sales and marketing expenses increased $0.5 million, or 2.8%, to $17.8 million during fiscal year 2005 from $17.3 million in fiscal year 2004, primarily due to an additional $0.7 million of commissions resulting from sales growth in Europe and Asia. In addition, we incurred $0.5 million of severance expense related to a reduction in force initiative during the current fiscal year. The increases in severance and international commission expense were partially offset by a $0.3 million decrease in salaries, wages and benefits and a $0.2 million decrease in sales facilities, trade show, and other marketing costs, all due to the reduction in force and 38 cost savings initiative in the current fiscal year. In addition, we reduced depreciation expense associated with demonstration equipment by $0.3 million from fiscal year 2004 to 2005 by exercising greater discipline over expenditures on such equipment. Research and Development. Research and development expenses decreased $1.3 million, or 6.3%, to $18.7 million during fiscal 2005 from $20.0 million in fiscal year 2004. During fiscal year 2005, we incurred $1.2 million less expense from development engineers and subcontractors that had previously been used to meet software development requirements. In addition to the decreasing personnel costs, we also incurred $0.4 million less in product certification costs during fiscal year 2005, compared to fiscal year 2004. These decreasing costs were partially offset by $0.2 million of additional severance expense associated with the reduction in development personnel after meeting development objectives. General and Administrative. General and administrative expenses decreased $0.4 million, or 3.5%, to $9.7 million during fiscal year 2005 from $10.1 million in fiscal year 2004. This decrease in general and administrative expense is primarily due to reduced fiscal year 2005 expenses and prior year non recurring expense activity. During fiscal year 2004, we incurred $0.6 million in non-recurring legal fees resulting primarily from the successful defense of a lawsuit brought by SeaChange International alleging defamation. In fiscal year 2004 we also incurred $0.6 million of severance resulting from the resignation of our former president and CEO. Partially offsetting these fiscal year 2004 costs, we reversed $0.6 million of bad debt reserve related to specific receivables that were ultimately collected. In addition to this fiscal year 2004, non-recurring activity, during fiscal year 2005 we incurred an additional $0.6 million in accounting services. These services related to the additional internal and external audit work required for compliance with the Sarbanes-Oxley Act of 2002. Partially offsetting the fiscal year 2005 increase in accounting fees, we reduced administrative staff resulting in a $0.3 million reduction in salaries wages and benefits, and reduced fees and expenses incurred by the Board of Directors by approximately $0.2 million, both as a result of the company-wide cost savings initiative during fiscal year 2005. Gain on Liquidation of Foreign Subsidiary. During the fourth quarter of fiscal year 2004, we reorganized and recapitalized our operating entities in the United Kingdom. These activities resulted in the curtailment and settlement of our UK defined benefit pension plan and a net gain of $111,000. Recovery (Impairment Loss) of Minority Investment. During fiscal year 2005, we became aware of circumstances that provide evidence of an "other than temporary" impairment of our investment in Everstream. Based upon an evaluation of the investment in Everstream during this period, we recorded an impairment charge of $413,000 and reduced our "Investment in minority owned company" to $140,000. During fiscal year 2004 we received $3.1 million in cash from continued monetization of the Thirdspace assets and settlement of its liabilities. An additional $100,000 recovery of Thirdspace assets was recognized in fiscal year 2005, partially offsetting the $413,000 Everstream impairment charge. Interest Expense. Interest expense increased $0.2 million to $0.2 million in fiscal year 2005 from fiscal year 2004 as we entered into a three year $3 million term loan during the second quarter of fiscal year 2005. As of June 30, 2005, we recorded approximately $0.2 million of interest expense associated with this loan. Other expense. Other expenses increased $0.4 million to $0.5 million in fiscal year 2005 from $0.1 million in fiscal 2004 primarily due to $0.2 million in realized currency translation losses on settlement of foreign transactions and $0.2 million on losses from the write-off of fixed assets that are no longer of use. Provision (Benefit) for Income Taxes. We recorded an income tax benefit for our domestic and foreign subsidiaries of $272,000 during fiscal year 2005. Of this amount, $264,000 relates to income tax contingency reserves that we determined were no longer required and were reversed as an income tax benefit. The remainder of the benefit relates primarily to a tax benefit recognized by one of our international subsidiaries that utilized a net operating loss carryback in fiscal year 2005. In fiscal year 2004, we recorded income tax expense for our domestic and foreign subsidiaries, which was related primarily to income earned in foreign locations, which cannot be offset by net operating loss carryforwards. Net loss. The net loss for fiscal year 2005 was $7.7 million or $0.12 per basic and diluted share compared to a net loss for fiscal year 2004 of $5.7 million or $.09 per basic and diluted share. 39 LIQUIDITY AND CAPITAL RESOURCES Our liquidity is dependent on many factors, including sales volume, operating profit and the efficiency of asset use and turnover. Our future liquidity will be affected by, among other things: - the rate of growth or decline, if any, of on-demand market expansions and the pace at which domestic and international cable companies and telephone companies implement on-demand technology; - the rate of growth, if any, of deployment of our real-time operating systems and tools; - the actual versus anticipated decline in revenue from maintenance and product sales of real-time proprietary systems; - ongoing cost control actions and expenses, including capital expenditures; - the margins on our product lines; - our ability to leverage the potential of Everstream; - our ability to raise additional capital, if necessary; - our ability to obtain additional bank financing, if necessary; - our ability to meet the covenants contained in our Credit Agreement; - timing of product shipments, which occur primarily during the last month of the quarter; - the percentage of sales derived from outside the United States where there are generally longer accounts receivable collection cycles; and - the number of countries in which we operate, which may require maintenance of minimum cash levels in each country and, in certain cases, may restrict the repatriation of cash, such as cash held on deposit to secure office leases. Uses and Sources of Cash We used $4.0 million, $8.5 million and $2.4 million of cash from operating activities during fiscal years 2006, 2005, and 2004, respectively. The use of cash from operations during each fiscal year was primarily due to operating losses. The decrease in cash usage from operations during the twelve months ended June 30, 2006 compared to the twelve months ended June 30, 2005 is due to changes in working capital, primarily the timing of receivable collections. We invested $1.9 million in property, plant and equipment during fiscal year 2006 compared to $2.0 million during fiscal year 2005 and $4.9 million in fiscal year 2004. Capital additions during each of these periods related primarily to product development and testing equipment. We expect a similar mix and cost of capital during the upcoming year, as we continue to focus on further development of our technology. Also, we received $1.2 million of cash during the twelve months ended June 30, 2006 from the operations of Everstream which we acquired on October 11, 2005. During the quarter ended December 31, 2004, we executed a Loan and Credit Agreement with Silicon Valley Bank. The Credit Agreement provides for a two year $10 million revolving credit line and a three year $3.0 million term loan. As of June 30, 2006, we had no amounts drawn under the Revolver and had drawn down the entire $3.0 million term loan, of which $1.4 million has been repaid. Interest on all outstanding amounts under the Revolver is payable monthly at the prime rate (8.25% at June 30, 2006) plus 0.5% per annum, and interest on all outstanding amounts under the Term Loan is payable monthly at a rate of 8.0% per annum. Based on the borrowing formula and our financial position as of June 30, 2006, $5.8 million would have been available to us under the Revolver. The Term Loan is repayable in 36 equal monthly principal and interest installments of $94,000 and any outstanding amounts under the Revolver would be due on December 23, 2006, unless the Revolver was terminated earlier in accordance with its terms. 40 In addition, the Credit Agreement contains certain financial covenants, including required minimum quick ratio and minimum tangible net worth, and customary restrictive covenants concerning our operations. As of June 30, 2006, we were not in compliance with these covenants, as our tangible net worth was less than the required amount specified within the Credit Agreement Covenants, however, Silicon Valley Bank agreed to forebear until September 15, 2006 its rights to call the term note as a result of the non-compliance. During the forbearance period, we worked with Silicon Valley Bank to restructure the covenants to better align with our business expectations. On August 31, 2006, prior to expiration of the forbearance, we entered into a Loan Modification Agreement that provided for the waiver of our event of default on June 30, 2006 and revised the financial covenants to better reflect our operations. We believe we will be in compliance with the revised covenants for at least the next twelve months subsequent to June 30, 2006. At June 30, 2006, we had working capital of $17.4 million and had no material commitments for capital expenditures compared to working capital of $22.9 million and $26.4 million at June 30, 2005 and 2004, respectively. We believe that existing cash balances will be sufficient to meet our anticipated working capital and capital expenditure requirements for the next twelve months. However, until our revenue increases and stabilizes, it is likely that we will continue to use cash from operating activities. As part of our cost reduction initiative implemented during the prior fiscal year, we reduced our breakeven point, but the acquisition of Everstream increased our quarterly operating expenses by approximately $1.0 million. If revenues do not reach these breakeven levels, we will continue to use cash. If this situation continues, we may be forced to take extreme measures to continue the business, such as employee reductions, re-capitalization or reorganization transactions at undesirable prices, incurring significant debt at above market rates, or seeking bankruptcy protection. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS The following table summarizes our significant contractual obligations and commitments:
PAYMENTS DUE BY FISCAL YEAR --------------------------------------------------------------- (DOLLARS IN THOUSANDS) CONTRACTUAL OBLIGATIONS TOTAL 2007 2008-2009 2010-2011 THEREAFTER --------------------------------------- --------------------------------------------------------------- Operating leases $ 5,367 $ 2,287 $ 1,886 $ 965 $ 229 Term Loan principal payments 1,583 1,034 549 - - Interest payments related to Term Loan 104 91 13 - - Pension plan 2,613 167 428 487 1,531 Non-binding purchase commitment (a) 148 148 - - - --------------------------------------------------------------- TOTAL $ 9,815 $ 3,727 $ 2,876 $ 1,452 $ 1,760 =============================================================== (a) This is a purchase commitment with a supplier for us to pay for nonrecurring customization costs.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In March 2005, the FASB issued Financial Interpretation ("FIN") No. 47 ("Accounting for Asset Retirement Obligation - an interpretation of FASB Statement No. 143" ("FIN 47"). FIN 47 requires the recognition of a liability for the fair value of a legally-required conditional asset retirement obligation when incurred, if the liability's fair value can be reasonably estimated. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. We are required to record an asset and a corresponding liability for the present value of the estimated asset retirement obligation associated with the fixed assets and leasehold improvements at some of its international offices. The asset is depreciated over the life of the corresponding lease while the liability accretes to the amount of the estimated retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. We adopted FIN 47 on June 30, 2006, recording a $323,000 cumulative effect of accounting change (net of tax) within the Statement of Operations and a $323,000 asset retirement obligation as a non-current liability within the consolidated Balance Sheet. This charge is a combination of depreciation and accretion expense. Had we applied this interpretation to all periods presented, we would have recorded an additional $20,000 to $25,000 of interest expense in fiscal years 2004, 2005 and 2006, and recorded the remaining approximately $256,000 of the cumulative effect of accounting change to the beginning balance retained earnings as of July 1, 2003. We expect to record an additional $25,000 to $30,000 of interest expense each year for the next five fiscal years due to adoption of FIN 47, and an additional $30,000, thereafter. 41 In March 2006, the FASB Emerging Issues Task Force issued Issue 06-3 ("EITF 06-3"),"How Sales Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement." A consensus was reached that a company should disclose its accounting policy (i.e., gross or net presentation) regarding presentation of taxes within the scope of EITF 06-3. If taxes are significant, a company should disclose the amount of such taxes for each period for which an income statement is presented. The guidance is effective for periods beginning after December 15, 2006. We present Company sales net of sales taxes and therefore do not expect any changes as a result of EITF 06-3. In July 2006, the FASB issued FIN No. 48, "Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109". FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, "Accounting for Income Taxes". FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The new FASB standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. Earlier application is permitted as long as the enterprise has not yet issued financial statements, including interim financial statements, in the period of adoption. The provisions of FIN 48 are to be applied to all tax positions upon initial adoption of this standard. Only tax positions that meet the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 48. We are currently evaluating the impact of this interpretation on its financial statements but do not believe that it will have a material impact to our financial position. We expect to adopt FIN 48 no later than its fiscal year beginning July 1, 2007. CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS Certain statements made or incorporated by reference in this release may constitute "forward-looking statements" within the meaning of the federal securities laws. When used or incorporated by reference in this release, the words "believes," "expects," "estimates," "anticipates," and similar expressions, are intended to identify forward-looking statements. Statements regarding future events and developments, our future performance, market share, and new market growth, as well as our expectations, beliefs, plans, estimates, or projections relating to the future, are forward-looking statements within the meaning of these laws. Examples of our forward-looking statements in this report include, but are not limited to, our pricing trends, our expected cash position, our expectations of market share and growth, the impact of interest rate changes and fluctuation in currency exchange rates, our sufficiency of cash, our recovery rights to litigation proceeds, the impact of litigation, our trend of declining real-time service revenue, and our international opportunities with Alcatel. All forward-looking statements are subject to certain risks and uncertainties that could cause actual events to differ materially from those projected. The risks and uncertainties which could affect our financial condition or results of operations include, without limitation: our ability to keep our customers satisfied; availability of video-on-demand content; delays or cancellations of customer orders; changes in product demand; economic conditions; various inventory risks due to changes in market conditions; uncertainties relating to the development and ownership of intellectual property; uncertainties relating to our ability and the ability of other companies to enforce their intellectual property rights; the pricing and availability of equipment, materials and inventories; the concentration of our customers; failure to effectively manage growth; delays in testing and introductions of new products; rapid technology changes; system errors or failures; reliance on a limited number of suppliers and failure of components provided by those suppliers; uncertainties associated with international business activities, including foreign regulations, trade controls, taxes, and currency fluctuations; the highly competitive environment in which we operate and predatory pricing pressures; failure to effectively service the installed base; the entry of new well-capitalized competitors into our markets; the success of new on-demand and real-time products; financing for working capital needs; the availability of Linux software in light of issues raised by SCO Group; the success of our relationship with Alcatel; capital spending patterns by a limited customer base; the integration of Everstream; and contractual obligations that could impact revenue recognition. Other important risk factors are discussed under the heading "Risk Factors". Our forward-looking statements are based on current expectations and speak only as of the date of such statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of future events, new information or otherwise. 42 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK We are exposed to market risk from changes in interest rates and foreign currency exchange rates. We are exposed to the impact of interest rate changes on our short-term cash investments and bank loans. Short-term cash investments are backed by U.S. government obligations, and other investments in respect of institutions with the highest credit ratings, all of which have maturities of three months or less. These short-term investments carry a degree of interest rate risk. Bank loans include a fixed rate Term Loan with a maturity of less than two years and a variable rate Revolver, which we have never borrowed against. We believe that the impact of a 10% increase or decrease in interest rates would not be material to our investment income and interest expense from bank loans. We conduct business in the United States and around the world. Our most significant foreign currency transaction exposure relates to the United Kingdom, those Western European countries that use the Euro as a common currency, Australia, and Japan. We do not hedge against fluctuations in exchange rates and believe that a hypothetical 10% upward or downward fluctuation in foreign currency exchange rates relative to the United States dollar would not have a material impact on future earnings, fair values, or cash flows. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements and supplementary data are included herein.
PAGE ---- Report of Independent Registered Public Accounting Firm 51 Management Report on Internal Control Over Financial Reporting 52 Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting 53 Consolidated Balance Sheets as of June 30, 2006 and 2005 54 Consolidated Statements of Operations for each of the three years in the period ended June 30, 2006 55 Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) for each of the three years in the period ended June 30, 2006 56 Consolidated Statements of Cash Flows for each of the three years in the period ended June 30, 2006 57 Notes to Consolidated Financial Statements 58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 43 ITEM 9A. CONTROLS AND PROCEDURES EVALUATION OF CONTROLS AND PROCEDURES As required by Securities and Exchange Commission rules, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. This evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer and principal financial officer. Based on this evaluation, these officers have concluded that the design and operation of our disclosure controls and procedures are effective. Our disclosure controls and procedures are designed to provide a reasonable level of assurance of reaching our desired disclosure control objectives and are effective in reaching that level of reasonable assurance. CHANGES IN INTERNAL CONTROL There were no significant changes to our internal control over financial reporting during the quarter ended June 30, 2006 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management's report on internal control over financial reporting and the attestation report of our independent registered public accountants are included in Part II, Item 8 "Financial Statements and Supplementary Data" of this report under the captions entitled "Management's Report on Internal Control Over Financial Reporting" and "Report of Independent Registered Public Accounting Firm" and are on pages 52 and 53, respectively, and incorporated herein by reference. ITEM 9B. OTHER INFORMATION None. 44 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding the Registrant's executive officers is located in Item X of this Form 10-K. The Registrant hereby incorporates by reference in this Form 10-K certain information contained under the caption "Election of Directors" in the Registrant's Proxy Statement to be used in connection with its Annual Meeting of Stockholders to be held on October 26, 2006 ("Registrant's 2006 Proxy Statement"). The Registrant hereby incorporates by reference in this Form 10-K certain information contained under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Registrant's 2006 Proxy Statement. The Registrant hereby incorporates by reference in this Form 10-K certain information contained under the caption "Election of Directors - Corporate Governance and Committees of the Board of Directors - Audit Committee" in the Registrant's 2006 Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The Registrant hereby incorporates by reference in this Form 10-K certain information contained under the caption "Executive Compensation" in the Registrant's 2006 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The Registrant hereby incorporates by reference in this Form 10-K certain information contained under the captions "Common Stock Ownership of Management and Certain Beneficial Owners" and "Equity Compensation Plan Information" in Registrant's 2006 Proxy Statement. The Registrant knows of no contractual arrangements, including any pledge by any person of securities of the Registrant, the operation of which may at a subsequent date result in a change in control of the Registrant. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The registrant hereby incorporates by reference in this Form 10-K certain information under the caption "Principal Accountant Fees and Services" in Registrant's 2006 Proxy Statement. 45 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) (1) Financial Statements Filed As Part Of This Report: Report of Independent Registered Public Accounting Firm Management Report on Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of June 30, 2006 and 2005 Consolidated Statements of Operations for each of the three years in the period ended June 30, 2006 Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) for each of the three years in the period ended June 30, 2006 Consolidated Statements of Cash Flows for each of the three years in the period ended June 30, 2006 Notes to Consolidated Financial Statements (2) Financial Statement Schedules Schedule II Valuation and Qualifying Accounts All other financial statements and schedules not listed have been omitted since the required information is included in the Consolidated Financial Statements or the Notes thereto, is not applicable, material or required. (3) Exhibits EXHIBIT DESCRIPTION OF DOCUMENT ------- ------------------------- 3.1 --Restated Certificate of Incorporation of the Registrant (incorporated by reference to the Registrant's Registration Statement on Form S-2 (No. 33-62440)). 3.2 --Amended and Restated Bylaws of the Registrant (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 2003). 3.3 --Certificate of Correction to Restated Certificate of Incorporation of the Registrant (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2002). 3.4 --Amended Certificate of Designations of Series A Participating Cumulative Preferred Stock (incorporated by reference to the Form 8-A/A, dated August 9, 2002). 3.5 --Amendment to Amended Certificate of Designations of Series A Participating Cumulative Preferred Stock (incorporated by reference to the Form 8-A/A, dated August 9, 2002). 4.1 --Form of Common Stock Certificate (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 2003). 4.2 --Form of Rights Certificate (incorporated by reference to the Registrant's Current Report on Form 8-K/A filed on August 12, 2002). 46 4.3 --Amended and Restated Rights Agreement dated as of August 7, 2002 between the Registrant and American Stock Transfer & Trust Company, as Rights Agent (incorporated by reference to the Registrant's Current Report on Form 8-K/A filed on August 12, 2002). 4.4 --Warrant to purchase 50,000 shares of common stock of the Registrant dated March 29, 2001 issued to Comcast Concurrent Holdings, Inc. (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2002). 4.5 --Warrant to purchase 4,431 shares of common stock of the Registrant dated October 9, 2001 issued to Comcast Concurrent Holdings, Inc. (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2002). 4.6 --Warrant to purchase 261,164 shares of common stock of the Registrant dated April 1, 2002 issued to Scientific-Atlanta, Inc. (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2002). 4.7 --Warrant to purchase 52,511 shares of common stock of the Registrant dated January 15, 2002 issued to Comcast Concurrent Holdings, Inc. (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2002). 4.8 --Warrant to purchase 1,502 shares of common stock of the Registrant dated August 10, 2002 issued to Comcast Concurrent Holdings, Inc. (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2002). 4.9 --Warrant to purchase 14,355 shares of common stock of the Registrant dated March 22, 2004 issued to Comcast Concurrent Holdings, Inc. (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2004). 4.10 --Warrant to purchase 5,261 shares of common stock of the Registrant dated March 22, 2004 issued to Comcast Concurrent Holdings, Inc. (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2004). 4.11 --Warrant to purchase 27,332 shares of common stock of the Registrant dated March 22, 2004 issued to Comcast Concurrent Holdings, Inc. (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2004). 4.12 --Warrant to purchase 6 shares of common stock of the Registrant dated March 22, 2004 issued to Comcast Concurrent Holdings, Inc. (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2004). 4.13 --Warrant to purchase 63,145 shares of common stock of the Registrant dated June 4, 2004 issued to Comcast Concurrent Holdings, Inc. (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2004). 4.14 --Warrant to purchase 50,000 shares of common stock of the Registrant dated June 4, 2004 issued to Comcast Concurrent Holdings, Inc. (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2004). 10.1 --Loan and Security Agreement (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed on February 4, 2005). 10.2 --Schedule of Officers who have entered into the Form Indemnification Agreement (incorporated by reference to the Registrant's Quarterly report on Form 10-Q for the quarter ended December 31, 2004). 10.3 --1991 Restated Stock Option Plan (as amended as of October 26, 2000) (incorporated by reference Exhibit A to the Registrant's Proxy Statement dated September 18, 2000). 47 10.4 --Richard Rifenburgh Non-Qualified Stock Option Plan and Agreement (incorporated by reference to the Registrant's Registration Statement on Form S-8 (No. 333-82686)). 10.5 --Concurrent Computer Corporation 2001 Stock Option Plan (incorporated by reference to Annex II to the Registrant's Proxy Statement dated September 19, 2001). 10.6 --Concurrent Computer Corporation Amended and Restated 2001 Stock Option Plan (incorporated by reference to the Registrant's Registration Statement on Form S-8 (No. 333-125974)). 10.7 --Form of Option agreement with transfer restrictions (incorporated by reference to the Registrant's Current Report on Form 8-K dated June 24, 2005). 10.8 --Form of Incentive Stock Option Agreement between the Registrant and its executive officers (incorporated by reference to the Registrant's Registration Statement on Form S-1 (No. 33-45871)). 10.9 --Form of Non-Qualified Stock Option Agreement between the Registrant and its executive officers (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1997). 10.10 --Summary of Performance Grants (incorporated by reference to the Registrant's Current Report on Form 8-K filed March 3, 2005). 10.11 --Amended and Restated Employment Agreement dated as of November 15, 1999 between the Registrant and Steve G. Nussrallah (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 1999). 10.12 --Employment Agreement dated as of February 1, 2005 between the Registrant and Greg Wilson (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed on February 4, 2005). 10.13 --Protective Agreement dated as of February 1, 2005 between the Registrant and Greg Wilson (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed on February 4, 2005). 10.14 --Employment Agreement dated as of November 26, 2001 between the Registrant and Kirk Somers (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2002). 10.15 --Employment Agreement dated as of June 24, 2004 between the Registrant and T. Gary Trimm (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2004). 10.16 --Employment Agreement dated as of June 24, 2004 between the Registrant and Warren Neuburger (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2004). 10.17 --Video-on-demand Purchase Agreement, dated March 29, 2001, by and between Concurrent Computer Corporation and Comcast Cable Communications of Pennsylvania, Inc. (portions of the exhibit have been omitted pursuant to a request for confidential treatment) (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2001). 10.18 --Entry into a Material Definitive Agreement between the Registrant and Stream Acquisitions, Inc. to acquire Everstream Holdings, Inc. (incorporated by reference to the Registrant's Current Report on Form 8-K filed on August 25, 2005). 10.19 --Amendment of Material Definitive Agreement between the Registrant and Stream Acquisitions, Inc. to acquire Everstream Holdings, Inc. (incorporated by reference to the Registrant's Current Report on Form 8-K filed on August 31, 2005). 48 10.20 --Amended and Restated Employment Agreement dated as of August 8, 2006 between the Registrant and T. Gary Trimm and adjustment to executive officers' salaries (incorporated by reference to the Registrant's Current Report on Form 8-K filed on August 10, 2006). 10.21 --Entry into a Material Definitive Agreement between the Registrant and Silicon Valley Bank in the form of a Forbearance to Loan and Security Agreement (incorporated by reference to the Registrant's Current Report on Form 8-K filed on August 14, 2006). 10.22 --Entry into a Material Definitive Agreement between the Registrant and Silicon Valley Bank in the form of a Waiver and Third Loan Modification Agreement (incorporated by reference to the Registrant's Current Report on Form 8-K filed on August 31, 2006). 14.1 --Code of Ethics for Senior Executives & Financial Officers (incorporated by reference to the Registrant's Proxy for the fiscal year ended June 30, 2003). 21.1* --List of Subsidiaries. 23.1* --Consent of Deloitte & Touche LLP. 31.1* --Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* --Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1* --Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2* --Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Included herewith. 49 CONCURRENT COMPUTER CORPORATION ANNUAL REPORT ON FORM 10-K ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA YEAR ENDED JUNE 30, 2006 50 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders of Concurrent Computer Corporation: We have audited the accompanying consolidated balance sheets of Concurrent Computer Corporation and subsidiaries (the "Company") as of June 30, 2006 and 2005, and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows for each of the three years in the period ended June 30, 2006. Our audits also included the consolidated financial statement schedule listed in the Index at Item 15(a)(2). These consolidated financial statements and the consolidated financial statement schedule are the responsibility of The Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the consolidated financial statement schedule based on our audits. We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Concurrent Computer Corporation and subsidiaries as of June 30, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2006, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of June 30, 2006 based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 1, 2006 expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. /s/ Deloitte & Touche LLP Atlanta, Georgia September 1, 2006 51 MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Pursuant to the rules and regulations of the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: - Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of Concurrent; - Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of Concurrent are being made only in accordance with authorizations of management and directors of Concurrent; and - Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Concurrent's assets that could have a material effect on the financial statements. Management has evaluated the effectiveness of its internal control over financial reporting as of June 30, 2006 based on the control criteria established in a report entitled Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such evaluation, we have concluded that Concurrent's internal control over financial reporting is effective as of June 30, 2006. Management excluded from its assessment the internal control over financial reporting at Everstream, which was acquired on October 11, 2005 and whose financial statements constitute 23% and 11% of net and total assets, respectively, 6% of revenues and 0% of net loss of the consolidated financial statement amounts as of and for the year ended June 30, 2006. The registered independent public accounting firm of Deloitte & Touche LLP, as auditors of Concurrent's consolidated financial statements, has issued an attestation report on management's assessment of Concurrent's internal control over financial reporting, which report is included herein. /s/ T. Gary Trimm /s/ Gregory S. Wilson ----------------- ----------------------- T. Gary Trimm Gregory S. Wilson President and Chief Executive Officer Chief Financial Officer 52 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Concurrent Computer Corporation: We have audited management's assessment, included in the accompanying Management Report on Internal Control Over Financial Reporting, that Concurrent Computer Corporation and subsidiaries (the "Company") maintained effective internal control over financial reporting as of June 30, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Management Report on Internal Control Over Financial Reporting, management excluded from their assessment the internal control over financial reporting at Everstream, which was acquired on October 11, 2005 and whose financial statements constitute 23 percent and 11 percent of net and total assets, respectively, 6 percent of revenues and 0 percent of net loss of the consolidated financial statement amounts as of and for the year ended June 30, 2006. Accordingly, our audit did not include the internal control over financial reporting at Everstream. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's Board of Directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of June 30, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2006, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and consolidated financial statement schedule as of and for the year ended June 30, 2006 of the Company and our report dated September 1, 2006 expressed an unqualified opinion on those consolidated financial statements and consolidated financial statement schedule. /s/ Deloitte & Touche LLP Atlanta, Georgia September 1, 2006 53
CONCURRENT COMPUTER CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) JUNE 30, ---------------------- 2006 2005 ---------- ---------- ASSETS Current assets: Cash and cash equivalents $ 14,423 $ 19,880 Accounts receivable, less allowance for doubtful accounts of $380 at June 30, 2006 and $200 at June 30, 2005 15,111 16,577 Inventories, net 6,164 5,071 Prepaid expenses and other current assets 1,578 1,084 ---------- ---------- Total current assets 37,276 42,612 Property, plant and equipment, net 6,015 8,319 Intangibles, net 8,787 823 Goodwill 15,560 10,744 Investment in minority owned company - 140 Other long-term assets, net 1,120 1,339 ---------- ---------- Total assets $ 68,758 $ 63,977 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 11,581 $ 12,055 Notes payable to bank, current portion 1,034 954 Deferred revenue 7,277 6,692 ---------- ---------- Total current liabilities 19,892 19,701 Long-term liabilities: Deferred revenue 1,602 2,349 Notes payable to bank, less current portion 549 1,583 Pension liability 2,290 1,705 Other 651 286 ---------- ---------- Total liabilities 24,984 25,624 Commitments and contingencies (Note 20) Stockholders' equity: Shares of series preferred stock, par value $.01; 25,000,000 authorized; none issued - - Shares of class A preferred stock, par value $100; 20,000 authorized; none issued - - Shares of Series A participating cumulative preferred stock, par value $0.01; 300,000 authorized; none issued - - Shares of common stock, par value $.01; 100,000,000 authorized; 71,530,763 and 63,642,646 issued and outstanding at June 30, 2006 and 2005, respectively 716 637 Capital in excess of par value 189,409 175,769 Accumulated deficit (145,800) (136,455) Treasury stock, at cost; 3,971 shares at June 30, 2006 (13) - Unearned compensation - (1,562) Accumulated other comprehensive loss (538) (36) ---------- ---------- Total stockholders' equity 43,774 38,353 ---------- ---------- Total liabilities and stockholders' equity $ 68,758 $ 63,977 ========== ========== The accompanying notes are an integral part of the consolidated financial statements.
54
CONCURRENT COMPUTER CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED JUNE 30, ---------------------------- 2006 2005 2004 -------- -------- -------- Revenues: Product $49,592 $57,070 $56,947 Service 22,020 21,615 22,288 -------- -------- -------- Total revenues 71,612 78,685 79,235 Cost of sales: Product 25,010 27,053 28,091 Service 11,233 12,856 12,422 -------- -------- -------- Total cost of sales 36,243 39,909 40,513 -------- -------- -------- Gross margin 35,369 38,776 38,722 Operating expenses: Sales and marketing 16,576 17,785 17,302 Research and development 18,783 18,748 20,000 General and administrative 9,590 9,717 10,071 Restructuring charge - (17) - Gain on liquidation of foreign subsidiary - - (111) -------- -------- -------- Total operating expenses 44,949 46,233 47,262 -------- -------- -------- Operating loss (9,580) (7,457) (8,540) Recovery (impairment loss) of minority investment - (313) 3,103 Interest income 467 403 335 Interest expense (235) (163) (11) Other income (expense), net 517 (471) (140) -------- -------- -------- Loss before income taxes and cumulative effect of accounting change (8,831) (8,001) (5,253) Provision (benefit) for income taxes 191 (272) 472 -------- -------- -------- Loss before cumulative effect of accounting change (9,022) (7,729) (5,725) Cumulative effect of accounting change (net of income taxes) (323) - - -------- -------- -------- Net loss $(9,345) $(7,729) $(5,725) ======== ======== ======== Net loss per share Basic $ (0.14) $ (0.12) $ (0.09) ======== ======== ======== Diluted $ (0.14) $ (0.12) $ (0.09) ======== ======== ======== The accompanying notes are an integral part of the consolidated financial statements.
55
CONCURRENT COMPUTER CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) (IN THOUSANDS, EXCEPT SHARE AMOUNTS) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 2006 ACCUMU CAPITAL LATED IN OTHER COMMON STOCK EXCESS COMPRE ---------------------- OF ACCUMU UNEARNED HENSIVE TREASURY STOCK PAR PAR LATED COMPEN INCOME -------------------- SHARES VALUE VALUE DEFICIT SATION (LOSS) SHARES COST TOTAL ----------- --------- --------- ---------- ---------- --------- -------- ---------- -------- Balance at June 30, 2003 62,367,449 $ 623 $174,396 $(122,929) $ (576) $ (7,998) (840) $ (58) $43,458 Sale of common stock under stock plans 505,581 5 1,179 1,184 Retirement of restricted stock (56,001) (118) 118 - Amortization of unearned compensation 107 107 Performance warrants (1,119) (1,119) Acquisition of treasury stock (19,323) (42) (42) Disposition of treasury stock (58) 840 58 - Other comprehensive income (loss): Net loss (5,725) (5,725) Foreign currency translation adjustment 487 487 Minimum pension liability adjustment 7,376 7,376 Total comprehensive -------- income 2,138 ----------- --------- --------- ---------- ---------- --------- -------- ---------- -------- Balance at June 30, 2004 62,817,029 628 174,338 (128,712) (351) (135) (19,323) (42) 45,726 Sale of common stock under stock plans 116,105 1 57 58 Issuance of restricted stock 1,040,632 10 1,936 (1,946) - Retirement of restricted stock (331,120) (2) (683) 685 - Revaluation of restricted stock 119 (119) - Amortization of unearned compensation 169 169 Acquisition of treasury stock (2,946) (5) (5) Disposition of treasury stock 2 (14) 22,269 47 35 Other comprehensive income (loss): Net loss (7,729) (7,729) Foreign currency translation adjustment 200 200 Minimum pension liability adjustment (101) (101) Total comprehensive -------- loss (7,630) ----------- --------- --------- ---------- ---------- --------- -------- ---------- -------- Balance at June 30, 2005 63,642,646 637 175,769 (136,455) (1,562) (36) - - 38,353 Sale of common stock under stock plans 165,827 2 345 347 Issuance of common stock 5,000 10 10 Issuance of restricted stock 132,999 1 1 Elimination of unearned Compensation (SFAS 123(R)) (872,486) (9) (1,553) 1,562 - Issuance of shares for acquisition 8,456,777 85 14,292 14,377 Share-based compensation expense 528 528 Acquisition of treasury stock (21,192) (34) (34) Disposition of treasury stock 18 17,221 21 39 Other comprehensive income (loss): Net loss (9,345) (9,345) Foreign currency translation adjustment (49) (49) Minimum pension liability adjustment (453) (453) Total comprehensive -------- loss (9,847) ----------- --------- --------- ---------- ---------- --------- -------- ---------- -------- Balance at June 30, 2006 71,530,763 $ 716 $189,409 $(145,800) $ 0 $ (538) (3,971) $ (13) $43,774 =========== ========= ========= ========== ========== ========= ======== ========== ======== The accompanying notes are an integral part of the consolidated financial statements.
56
CONCURRENT COMPUTER CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) YEAR ENDED JUNE 30, ---------------------------- 2006 2005 2004 -------- -------- -------- Cash flows provided by (used in) operating activities: Net loss $(9,345) $(7,729) $(5,725) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 5,163 5,259 5,404 Share-based compensation 528 169 107 Non-cash accretion expense 323 - - Provision for (reversal of) bad debts 184 - (601) Impairment loss on (recovery of) minority investment - 313 (3,103) Accrual (reversal) of non-cash warrants - - (1,119) Pension settlement and curtailment - - (1,482) Provision for (reversal of) inventory reserves (4) 11 924 Other non-cash expenses 170 376 502 Decrease (increase) in assets: Accounts receivable, net 2,081 (6,385) 780 Inventories, net (1,061) 4,535 (3,367) Prepaid expenses and other current assets, net (704) 73 18 Other long-term assets, net 262 341 (149) Increase (decrease) in liabilities: Accounts payable and accrued expenses, net (1,399) (14) (2,575) Short-term deferred revenue 406 (3,976) 5,373 Long-term liabilities, net (573) (1,513) 2,627 -------- -------- -------- Net cash used in operating activities (3,969) (8,540) (2,386) Cash flows provided by (used in) investing activities: Additions to property, plant and equipment (1,912) (2,031) (4,876) Cash received from acquisition of Everstream 1,159 - - Repayment of note receivable from minority owned company - - 3,103 -------- -------- -------- Net cash used in investing activities (753) (2,031) (1,773) Cash flows provided by (used in) financing activities: Proceeds from sale and issuance of common stock 357 58 1,184 Repayment of note payable to bank (954) (463) - Proceeds from note payable to bank, net of issuance expenses - 2,930 - Repayment of capital lease obligation - (49) (93) Sale (purchase) of treasury stock 5 30 (42) -------- -------- -------- Net cash provided by (used in) financing activities (592) 2,506 1,049 Effect of exchange rates on cash and cash equivalents (143) 17 341 -------- -------- -------- Decrease in cash and cash equivalents (5,457) (8,048) (2,769) Cash and cash equivalents - beginning of year 19,880 27,928 30,697 -------- -------- -------- Cash and cash equivalents - end of year $14,423 $19,880 $27,928 ======== ======== ======== Cash paid during the period for: Interest $ 206 $ 64 $ 14 ======== ======== ======== Income taxes (net of refunds) $ 64 $ 327 $ 527 ======== ======== ======== Non-cash investing/financing activities: Non-cash consideration for acquisition $14,375 $ - $ - ======== ======== ======== The accompanying notes are an integral part of the consolidated financial statements.
57 CONCURRENT COMPUTER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. OVERVIEW OF THE BUSINESS Concurrent Computer Corporation (Concurrent) is a supplier of high-performance computer systems, software, and services. The computer systems and software fall under two product lines: on-demand and real-time. Concurrent's on-demand product line provides on-demand systems consisting of hardware and software that provide monitoring and operations management for on-demand TV and integration services, primarily to residential cable companies that have upgraded their networks to support interactive, digital services. Concurrent's real-time product line provides high-performance, real-time operating systems and development tools to commercial and government customers for use with a wide range of applications that benefit from guaranteed, instantaneous response and repeatability. Concurrent provides sales and support from offices and subsidiaries throughout North America, Europe, Asia, and Australia. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of Concurrent and all wholly-owned domestic and foreign subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Foreign Currency The functional currency of all of Concurrent's foreign subsidiaries is the applicable local currency. The translation of the applicable foreign currencies into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using average rates of exchange prevailing during the fiscal year. Adjustments resulting from the translation of foreign currency financial statements are accumulated in a separate component of stockholders' equity. Gains or losses resulting from foreign currency transactions are included in the Consolidated Statements of Operations, except for those relating to intercompany transactions of a long-term investment nature which are accumulated in a separate component of stockholders' equity. Gains (losses) on foreign currency transactions of ($86,000), ($162,000) and $8,000 for the years ended June 30, 2006, 2005 and 2004, respectively, are included in "Other income (expense), net" in the Consolidated Statements of Operations. Cash Equivalents Short-term investments with maturities of ninety days or less at the date of purchase are considered cash equivalents. Cash equivalents are stated at cost plus accrued interest, which approximates market value, and represent cash invested in U.S. government securities, bank certificates of deposit, or commercial paper. Inventories Inventories are stated at the lower of cost or market, with cost determined on the first-in, first-out basis. Concurrent establishes excess and obsolete inventory reserves based upon historical and anticipated usage. Property, Plant, and Equipment Property, plant and equipment are stated at acquired cost less accumulated depreciation. Depreciation is provided on a straight-line basis over the estimated useful lives of assets ranging from one to ten years. Leasehold improvements are amortized over the shorter of the useful lives of the improvements or the terms of the related lease. Gains and losses resulting from the disposition of property, plant and equipment are included in operations. Expenditures for repairs and maintenance are charged to operations as incurred and expenditures for major renewals and betterments are capitalized. 58 CONCURRENT COMPUTER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- continued Goodwill and Trademark At July 1, 2006 and 2005, Concurrent's annual testing day, and in accordance with the requirements under Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), Concurrent updated and reviewed the impairment analysis in conjunction with revised expected future operating results and as a result, there was no impairment charge necessary in either period. Subsequent impairment charges, if any, will be reflected in operating income in the Consolidated Statements of Operations. Revenue Recognition Policy Concurrent recognizes revenue when persuasive evidence of an arrangement exists, the system has been shipped, the fee is fixed or determinable and collectibility of the fee is probable. Software and Hardware Sales --------------------------- On-demand and real-time product revenues are recognized based on the guidance in SOP 97-2 and related amendments, SOP 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue Recognition", and SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions". Concurrent's standard contractual arrangements with its customers generally include the delivery of a hardware and software system, certain professional services that typically involve installation and training, and ongoing software and hardware maintenance. The software component of the arrangement is considered to be essential to the functionality of the hardware. Therefore, in accordance with Emerging Issues Task Force No. 03-5, "Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software", the hardware and the hardware maintenance components are considered software related and the provisions of SOP 97-2 apply to all elements of the arrangement. Under multiple element arrangements, Concurrent allocates revenue to the various elements based on vendor-specific objective evidence ("VSOE") of fair value. Concurrent's VSOE of fair value is determined based on the price charged when the same element is sold separately. If VSOE of fair value does not exist for all elements in a multiple element arrangement, Concurrent recognizes revenue using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement is recognized as revenue. Professional Services --------------------- Professional services revenue is primarily generated from integration of third party software interfaces, training, and hardware installation. These services are typically completed within 90 days from the receipt of the order. Under multiple element arrangements, Concurrent allocates revenue to the various elements based on VSOE of fair value. Concurrent determines VSOE of fair value for the services based on the standard rate per hour or fixed fee used when similar services are sold separately. Revenues from these services are recognized when the services are performed. In certain instances, Concurrent's customers require significant customization of both the software and hardware products. In these situations, the services are considered essential to the functionality of the software and, therefore, the revenue from the arrangement, with the exception of maintenance, is recognized in conformity with Accounting Research Bulletin ("ARB") No. 45, "Long Term Construction Type Contracts" and SOP 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts." Concurrent records the value of the entire arrangement (excluding maintenance) as the project progresses based on actual costs incurred compared to the total costs expected to be incurred through completion. Hardware and Software Maintenance --------------------------------- Concurrent recognizes revenue from maintenance services in accordance with SOP 97-2. Depending upon the specific terms of the customer agreement, Concurrent may include warranty as part of the purchase price. In accordance with SOP 97-2 and, depending upon the specific terms of the customer agreement, Concurrent either 59 CONCURRENT COMPUTER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- continued accrues the estimated costs to be incurred in performing maintenance services at the time of revenue recognition and shipment of product, or Concurrent defers revenue associated with the maintenance services to be provided during the warranty period based upon the value for which Concurrent has sold such services separately when they are renewed by existing customers. For those arrangements in which the warranty period is less than or equal to one year, Concurrent accrues the estimated costs to be incurred in providing services. In accordance with paragraph 59 of SOP 97-2, Concurrent has determined that the warranty fee is part of the initial license fee, the warranty period is for one year or less, the estimated cost of providing the services are immaterial, and upgrades and enhancements offered during maintenance arrangements historically have been and are expected to continue to be minimal and infrequent. Actual costs are then charged against the warranty accrual as they are incurred. For those arrangements in which the warranty period is greater than one year, Concurrent defers revenue based upon the value for which Concurrent has sold such services separately. This revenue is then recognized on a straight line basis over the warranty period. Deferred Revenue Deferred revenue consists of billings for maintenance contracts and for products that are pending completion of the revenue recognition process. Maintenance revenue, whether bundled with the product or priced separately, is recognized ratably over the maintenance period. For contracts extending beyond one year, deferred revenue related to the contract period extending beyond twelve months is classified among long-term liabilities. Capitalized Software Concurrent accounts for software development costs in accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed" ("SFAS 86"). Under SFAS 86, the costs associated with software development are required to be capitalized after technological feasibility has been established. Concurrent ceases capitalization upon the achievement of customer availability. Costs incurred by Concurrent between technological feasibility and the point at which the products are ready for market are insignificant and as a result Concurrent had no internal software development costs capitalized at June 30, 2006 and 2005. Concurrent has not incurred costs related to the development of internal use software. Research and Development Research and development expenditures are expensed as incurred. Basic and Diluted Net Loss per Share Basic net loss per share is computed in accordance with SFAS No. 128, "Earnings Per Share," by dividing net loss by the weighted average number of common shares outstanding during each year. Diluted net loss per share is computed by dividing net loss by the weighted average number of shares including dilutive common share equivalents. Under the treasury stock method, incremental shares representing the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued are included in the computation. Common share equivalents of 7,848,000, 6,403,000 and 6,002,000 for the years ended June 30, 2006, 2005, and 2004, respectively, were excluded from the calculation as their effect was antidilutive. The following table presents a reconciliation of the numerators and denominators of basic and diluted loss per share for the periods indicated: 60
CONCURRENT COMPUTER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- continued YEAR ENDED JUNE 30, ---------------------------- (DOLLARS AND SHARE DATA IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2006 2005 2004 -------- -------- -------- Basic and diluted EPS calculation: Net loss $(9,345) $(7,729) $(5,725) ======== ======== ======== Basic weighted average number of shares outstanding 68,988 62,737 62,392 Effect of dilutive securities: Employee stock options - - - -------- -------- -------- Diluted weighted average number of shares outstanding 68,988 62,737 62,392 ======== ======== ======== Basic EPS $ (0.14) $ (0.12) $ (0.09) ======== ======== ======== Diluted EPS $ (0.14) $ (0.12) $ (0.09) ======== ======== ========
Valuation of Long-Lived Assets In accordance with SFAS No. 144 "Accounting for Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"), which addresses financial accounting and reporting for the impairment and disposition of long-lived assets, Concurrent evaluates the recoverability of long-lived assets, other than indefinite lived intangible assets, for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, Concurrent recognizes an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and fair value. Long-lived assets held for sale are reported at the lower of cost or fair value less costs to sell. As a result of these reviews, Concurrent has not recorded any impairment losses related to long-lived assets, for any of the years ending June 30, 2006, 2005 and 2004. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, accounts receivable, inventories, prepaid expenses, accounts payable and short term debt approximate fair value because of the short maturity of these instruments. The carrying amount of long-term debt also approximates fair value, as the interest rate on the term note approximates market and the remaining term of the note is less than two years. Fair value estimates are made at a specific point in time, based on the relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumption could significantly affect the estimates. Income Taxes Concurrent and its domestic subsidiaries file a consolidated federal income tax return. All foreign subsidiaries file individual tax returns pursuant to local tax laws. Concurrent follows the asset and liability method of accounting for income taxes. Under the asset and liability method, a deferred tax asset or liability is recognized for temporary differences between financial reporting and income tax bases of assets and liabilities, tax credit carryforwards and operating loss carryforwards. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that such deferred tax assets will not be realized. Utilization of net operating loss carryforwards and tax credits, which originated prior to Concurrent's quasi-reorganization in November of 1991, are recorded as adjustments to capital in excess of par value. 61 CONCURRENT COMPUTER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- continued Share-Based Compensation Option awards are granted with an exercise price equal to the market price of Concurrent's stock at the date of grant. Effective July 1, 2005, Concurrent adopted SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)"). SFAS 123(R) requires the recognition of the fair value of stock compensation in the Statement of Operations. Concurrent recognizes stock compensation expense over the requisite service period of the individual grantees, which generally equals the vesting period. All of Concurrent's stock compensation is accounted for as equity instruments. Prior to July 1, 2005, Concurrent accounted for these plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations. Refer to Note 14 for assumptions used in calculation of fair value. As of June 30, 2006, total compensation costs related to unvested options not yet recognized is approximately $590,000. Comprehensive Income (Loss) Concurrent reports comprehensive income (loss), in addition to net loss from operations, as required by SFAS No. 130, "Reporting Comprehensive Income." Comprehensive income (loss) is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income (loss). Comprehensive income (loss) is defined as a change in equity during the financial reporting period of a business enterprise resulting from non-owner sources. Accumulated other comprehensive income (loss) consists of the following components:
FOREIGN ACCUMULATED CURRENCY MINIMUM OTHER TRANSLATION PENSION COMPREHENSIVE ADJUSTMENTS LIABILITY INCOME (LOSS) ------------- ------------- ------------- (DOLLARS IN THOUSANDS) Balance at June 30, 2003 $ (571) $ (7,427) $ (7,998) Other comprehensive income 487 7,376 7,863 ------------- ------------- ------------- Balance at June 30, 2004 (84) (51) (135) Other comprehensive income (loss) 200 (101) 99 ------------- ------------- ------------- Balance at June 30, 2005 116 (152) (36) Other comprehensive income (loss) (49) (453) (502) ------------- ------------- ------------- Balance at June 30, 2006 $ 67 $ (605) $ (538) ============= ============= =============
Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Prior year's current deferred tax assets have been reclassified on the face of the Consolidated Balance Sheet as "Prepaid expenses and other current assets" to conform to the current year's presentation. 3. NEW ACCOUNTING PRONOUNCEMENTS In March 2005, the FASB issued Financial Interpretation ("FIN") No. 47, "Accounting for Asset 62 CONCURRENT COMPUTER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- continued Retirement Obligation - an interpretation of FASB Statement No. 143" ("FIN 47"). FIN 47 requires the recognition of a liability for the fair value of a legally-required conditional asset retirement obligation when incurred, if the liability's fair value can be reasonably estimated. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. Concurrent is required to record an asset and a corresponding liability for the present value of the estimated asset retirement obligation associated with the fixed assets and leasehold improvements at some of its international offices. The asset is depreciated over the life of the corresponding lease while the liability accretes to the amount of the estimated retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. Concurrent adopted FIN 47 on June 30, 2006, recording a $323,000 cumulative effect of accounting change (net of tax) within the Statement of Operations and a $323,000 asset retirement obligation as a non-current liability within the Consolidated Balance Sheet. This charge is a combination of depreciation and accretion expense. Had Concurrent applied this interpretation to all periods presented, Concurrent would have recorded an additional $20,000 to $25,000 of interest expense in fiscal years 2004, 2005 and 2006, and recorded the remaining approximately $256,000 of the cumulative effect of accounting change to the beginning balance retained earnings as of July 1, 2003. Concurrent expects to record an additional $25,000 to $30,000 of interest expense each year for the next five fiscal years due to adoption of FIN 47, and an additional $30,000, thereafter. In March 2006, the FASB Emerging Issues Task Force issued Issue 06-3 ("EITF 06-3"), "How Sales Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement." A consensus was reached that a company should disclose its accounting policy (i.e., gross or net presentation) regarding presentation of taxes within the scope of EITF 06-3. If taxes are significant, a company should disclose the amount of such taxes for each period for which an income statement is presented. The guidance is effective for periods beginning after December 15, 2006. Concurrent presents sales net of sales taxes and therefore does not expect any changes as a result of EITF 06-3. In July 2006, the FASB issued FIN No. 48, "Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109". FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, "Accounting for Income Taxes". FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The new FASB standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. Earlier application is permitted as long as the enterprise has not yet issued financial statements, including interim financial statements, in the period of adoption. The provisions of FIN 48 are to be applied to all tax positions upon initial adoption of this standard. Only tax positions that meet the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 48. Concurrent is currently evaluating the impact of this interpretation on its financial statements but does not believe that it will have a material impact to Concurrent's financial position. Concurrent expects to adopt FIN 48 no later than its fiscal year beginning July 1, 2007. 4. INVESTMENTS IN MINORITY OWNED COMPANIES In March 2002, Concurrent purchased a 14.4% equity ownership interest in Thirdspace Living Limited (Thirdspace). Concurrent invested $4.0 million in cash and the equivalent of $3.0 million in its common stock in exchange for 1,220,601 series C shares of Thirdspace. In addition to the equity investment, Concurrent also loaned Thirdspace $6.0 million in exchange for two $3.0 million long-term notes receivable. In fiscal year 2003, Concurrent recorded a $13.0 million net impairment charge due to an "other-than-temporary" decline in the market value of the investment in Thirdspace. In May 2003, Thirdspace sold the majority of its assets to Alcatel Telecom Ltd. As a result of the sale of these certain assets, Concurrent received proceeds in fiscal years 2005 and 2004 of $100,000 and $3.1 million, respectively, that were recorded as a recovery of previously impaired minority investment. Thirdspace's only significant remaining asset is a right to 40% of amounts recovered by nCube Corporation, now part of C-Cor, Incorporated (nCube), if any, from the lawsuit brought by nCube against 63 CONCURRENT COMPUTER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- continued SeaChange International, Inc., alleging patent infringement. On January 9, 2006, the U.S. Court of Appeals for the Federal Circuit affirmed the lower court's decision in favor of nCube. The likelihood of collecting this asset, and the amount and timing of such collection is uncertain and, as a result, Concurrent has not recorded the gain contingency. Pursuant to the sale of the assets of Thirdspace to Alcatel, Concurrent believes that it has the right to the first approximately $3.0 million of such recovery, if any. Beyond any such recovery, Concurrent does not anticipate further cash proceeds related to the liquidation of Thirdspace's remaining assets. In April 2002, Concurrent invested cash of $500,000 in Everstream Holdings, Inc. (Everstream and incurred $53,000 in acquisition costs in exchange for 480,770 shares of Series C Preferred stock, giving Concurrent a 4.9% ownership interest. Concurrent accounted for its investment in the Series C Preferred stock of Everstream using the cost method because Concurrent did not believe it exercised significant influence over Everstream. During fiscal year 2005, Concurrent became aware of circumstances that provided evidence of an "other than temporary" impairment of Concurrent's investment in Everstream, in accordance with EITF 03-01, "The Meaning of 'Other-Than-Temporary Impairment' and Its Application to Certain Investments." Based upon an evaluation of the investment in Everstream during this period, Concurrent recorded an impairment charge of $413,000 in the Statement of Operations, under the line item, "Impairment loss on minority investment", and reduced its "Investment in minority owned company" to $140,000. On August 19, 2005, Concurrent entered into an Agreement and Plan of Merger with Stream Acquisition, Inc., Everstream, and certain selling stockholders of Everstream, and entered into an amendment to such agreement on August 26, 2005 (the "Merger Agreement"). The acquisition of Everstream pursuant to the Merger Agreement was completed on October 11, 2005. At that time, Concurrent reduced the balance in its "Investment in minority owned company" to $0, as Concurrent acquired 100% of the voting equity interest of Everstream. Pursuant to the Merger Agreement, Concurrent issued 8,456,777 shares of Concurrent stock equal to approximately $14.375 million for the Everstream stock it did not already own (Concurrent's existing Everstream stock was valued in the transaction at approximately $0.5 million), determined by dividing $14.375 million by $1.70, the average trading price of Concurrent stock for the 30 calendar days ending on the third calendar day prior to closing. Refer to Note 8 for additional information on Concurrent's acquisition of Everstream. 5. DISSOLUTION OF SUBSIDIARIES In June, 2004, Concurrent began liquidation proceedings for its UK based subsidiary, Concurrent Realisations Limited (Realisations), formerly Concurrent Computer UK Limited, as Concurrent decided to discontinue the ongoing funding of this company. The employees were transferred to and certain assets of the business were sold to Concurrent UK Limited (Concurrent UK), formerly Concurrent Computer Holding Company Ltd., another UK subsidiary of Concurrent Computer Corporation, for fair market value, as determined by an independent appraisal firm. As a result, the remaining assets of Realisations are in the custody of a liquidator and are being used to settle its liabilities that primarily consist of a liability to the defined benefit pension plan of Realisations. Concurrent no longer has any control over the assets of Realisations nor can Concurrent exert influence or control over the liquidation process. Neither Concurrent, nor any of its subsidiaries, has any further legal obligation to fund Realisations or its defined benefit pension plan. Therefore, a curtailment and settlement of the pension plan occurred in 2004. All assets, liabilities, and additional minimum pension liabilities related to the pension plan were removed from the balance sheet in 2004, which resulted in a gain of $111,000, net of related legal and actuarial expenses, during the year ended June 30, 2004. This gain was recorded in the line item "Gain on liquidation of foreign subsidiary" in the Consolidated Statements of Operations, and the components of the gain were as follows (in thousands of dollars):
YEAR ENDED JUNE 30, 2004 ------------- Net gain on pension settlement and curtailment $ 1,482 Reorganization costs (1,371) ------------- Gain on liquidation of foreign subsidiary $ 111 =============
64 CONCURRENT COMPUTER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- continued The $1,482,000 gain on the settlement and curtailment relates to the write-off of the $9,846,000 pension liability, the $210,000 intangible pension asset, and the $8,154,000 additional minimum pension liability. Reorganization costs include the $918,000 purchase of certain assets of Realisations at fair market value and $453,000 of legal, actuarial and accounting costs required to liquidate Realisations. 6. INVENTORIES Inventories consist of the following:
JUNE 30, -------------------------- 2006 2005 ----------- ------------- (DOLLARS IN THOUSANDS) Raw materials, net $ 4,405 $ 3,599 Work-in-process 852 864 Finished goods 907 608 ----------- ------------- $ 6,164 $ 5,071 =========== =============
At June 30, 2006 and 2005, some portion of Concurrent's inventory was in excess of the current requirements based upon the planned level of sales for future years. Accordingly, Concurrent had inventory valuation allowances for raw materials of $1.6 million and $2.0 million to reduce the value of the inventory to its estimated net realizable value at both June 30, 2006 and 2005, respectively. 7. PROPERTY, PLANT AND EQUIPMENT Property, plant, and equipment consist of the following:
JUNE 30, --------------------------- 2006 2005 ------------ ------------- (DOLLARS IN THOUSANDS) Leasehold improvements $ 3,231 $ 3,216 Machinery, equipment and customer support spares 13,833 16,426 ------------ ------------- 17,064 19,642 Less: Accumulated depreciation (11,049) (11,323) ------------ ------------- $ 6,015 $ 8,319 ============ =============
For the years ended June 30, 2006, 2005 and 2004, depreciation expense for property, plant and equipment amounted to $4,327,000, $5,069,000 and $5,214,000, respectively. In March 2005, the FASB issued FIN 47. FIN 47 requires the recognition of a liability for the fair value of a legally-required conditional asset retirement obligation when incurred, if the liability's fair value can be reasonably estimated. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective as of the end of fiscal years ending after December 15, 2005. Concurrent adopted FIN 47 on June 30, 2006, recording a $323,000 cumulative effect of accounting change (net of tax) in Concurrent's Consolidated Statement of Operations for the fiscal year ended June 30, 2006. This charge is a combination of depreciation and accretion expense. Concurrent is also required to record an asset and a corresponding liability for the present value of the estimated asset retirement obligation associated with the leasehold improvements at some of our international locations. The asset is depreciated over the life of the corresponding lease while the liability accretes to the amount of the estimated retirement obligation. As part of the adoption of FIN 47, Concurrent recorded leasehold improvements of $95,000 and offsetting accumulated depreciation for the same amount, as the initial lease terms associated with these assets has passed. The present 65 CONCURRENT COMPUTER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- continued value of the asset retirement obligation recorded on the Consolidated Balance Sheet as of June 30, 2006 was $323,000. 8. ACQUISITION OF EVERSTREAM On August 19, 2005, Concurrent entered into the Merger Agreement with Stream Acquisition, Inc., Everstream, and certain selling stockholders of Everstream, and entered into an amendment to such agreement on August 26, 2005. The acquisition of 100% of the voting equity interest of Everstream pursuant to the Merger Agreement was completed on October 11, 2005. Everstream is an organization that provides comprehensive business analytics and advertising solutions for cable and satellite operators. Everstream develops solutions that enable its customers to evaluate and measure performance characteristics of transactional services such as video-on-demand. Everstream is also developing interactive and on-demand television applications to deliver impression based and one-to-one interactive advertising. Concurrent purchased Everstream to acquire its software and customer base and has included Everstream results in its interim financial results for the period from October 11, 2005 through June 30, 2006. Pursuant to the Merger Agreement, Concurrent issued 8,456,777 shares of Concurrent stock equal to approximately $14.375 million for the Everstream stock it did not already own (Concurrent's existing Everstream stock was valued in the transaction at approximately $0.5 million), determined by dividing $14.375 million by $1.70, the average trading price of Concurrent stock for the 30 calendar days ending on the third calendar day prior to closing. The purchase price has been allocated as follows (in thousands):
Fair value of Concurrent stock issued to Everstream $14,375 Direct costs of acquisition 680 -------- Purchase price 15,055 Historical book values of Everstream assets and liabilities (2,531) Additional fair value of intangible assets acquired (7,848) Carrying value of previous investment in Everstream 140 -------- Goodwill $ 4,816 ========
Concurrent allocated $8.8 million of the purchase price to the acquired intangible assets. The fair values reflected below were determined by a third party appraiser and are based on the expected future cash flows over the expected lives of the intangible assets. Concurrent expects to maintain usage of the Everstream trademark on existing products and introduce new products in the future that will also display the trademark. Consequently, the acquired Everstream trademark qualifies as an indefinite-lived asset in accordance with the criteria set forth in SFAS No. 142. Identifiable intangible assets with finite useful lives are amortized over their estimated useful lives under the purchase method of accounting. In accordance with SFAS No. 142, indefinite-lived intangible assets and goodwill are tested at least annually for impairment, or more frequently if circumstances warrant, based on the fair value of the reporting unit for goodwill and the direct fair value of indefinite-lived intangible assets. In accordance with SFAS No. 144, which addresses financial accounting and reporting for the impairment and disposition of long-lived assets, Concurrent evaluates the recoverability of long-lived assets, other than indefinite lived intangible assets, for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Concurrent recognizes an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and fair value. 66 CONCURRENT COMPUTER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- continued The following table reflects the fair values of the acquired intangible assets and related useful lives (dollar amounts in thousands):
ESTIMATED ESTIMATED FAIR VALUE USEFUL LIFE ----------- ----------- Identifiable intangible assets: Developed Technologies $ 5,800 8 years Customer Base 1,900 11 years Trademarks 1,100 Indefinite ----------- Total $ 8,800 ===========
The remaining excess purchase price of $4.8 million was determined to be goodwill and will be periodically reviewed for potential impairment in accordance with SFAS No. 142. See Note 9 for further discussion of goodwill and other intangibles. The following table reflects the unaudited pro forma combined results of Concurrent and Everstream for the years ended June 30, 2006 and 2005 as if the acquisition occurred on July 1, 2004 (in thousands, except per share data):
YEAR ENDED JUNE 30, ---------------------- 2006 2005 ---------- ---------- Pro forma revenue $ 72,664 $ 83,817 Pro forma net loss $ (9,926) $ (6,564) Pro forma loss per share: Basic $ (0.14) $ (0.09) Diluted $ (0.14) $ (0.09) Weighted average shares outstanding: Basic 71,351 71,194 Diluted 71,351 71,194
The pro forma information does not necessarily reflect the actual results that would have occurred, nor is it necessarily indicative of future results of the combined companies. 9. GOODWILL AND OTHER INTANGIBLES Goodwill was $15,560,000 and $10,744,000 as of June 30, 2006 and June 30, 2005, respectively. Concurrent does not measure assets on a segment basis, and therefore, does not allocate goodwill on a segment basis. During fiscal 2006, goodwill increased by $4,816,000 as a result of the Everstream acquisition on October 11, 2005 (See Note 8). In accordance with SFAS 142, Concurrent tests goodwill and trademark for impairment, at least annually. The impairment test has been performed for fiscal years 2006, 2005, and 2004, and there has not been any impairment charge as a result of these assessments. 67 CONCURRENT COMPUTER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- continued Other intangible assets as of June 30, 2006 and June 30, 2005 consisted of the following (in thousands):
JUNE 30, JUNE 30, 2006 2005 ---------- ---------- Cost of amortizable intangibles: Purchased technology $ 7,700 $ 1,900 Customer relationships 1,900 - ---------- ---------- Total cost of intangibles 9,600 1,900 Less accumulated amortization: Purchased technology (1,789) (1,077) Customer relationships (124) - ---------- ---------- Total accumulated amortization (1,913) (1,077) Trademark 1,100 - ---------- ---------- Total intangible assets, net $ 8,787 $ 823 ========== ==========
Amortization expense for the years ended June 30, 2006, 2005 and 2004 was $836,000, $190,000 and $190,000, respectively. The estimated amortization expense related to intangible assets for the next five fiscal years is (in thousands):
Fiscal year: 2007 $1,088 2008 1,088 2009 1,088 2010 961 2011 899 ------ $5,123 ======
10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following:
JUNE 30, -------------------------- 2006 2005 ----------- ------------- (DOLLARS IN THOUSANDS) Accounts payable, trade $ 5,400 $ 4,727 Accrued payroll, vacation and other employee expenses 4,015 4,143 Warranty accrual 376 702 Other accrued expenses 1,790 2,483 ----------- ------------- $ 11,581 $ 12,055 =========== =============
Our estimate of warranty obligations is based on historical experience and expectation of future conditions. The changes in the warranty accrual during fiscal year 2006 consist of the following (in thousands):
Balance at June 30, 2005 $ 702 Charged to costs and expenses 95 Deductions against accrual (421) ------ Balance at June 30, 2006 $ 376 ======
68 CONCURRENT COMPUTER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- continued 11. INCOME TAXES The domestic and foreign components of loss before provision for income taxes are as follows:
YEAR ENDED JUNE 30, ---------------------------------- 2006 2005 2004 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) United States $ (8,298) $ (5,598) $ (4,393) Foreign (533) (2,403) (860) ---------- ---------- ---------- $ (8,831) $ (8,001) $ (5,253) ========== ========== ==========
The components of the provision for income taxes are as follows:
YEAR ENDED JUNE 30, -------------------------------- 2006 2005 2004 ---------- --------- --------- (DOLLARS IN THOUSANDS) Current: Federal $ - $ (264) $ - State 12 34 310 Foreign 114 (22) 119 ---------- --------- --------- Total 126 (252) 429 ---------- --------- --------- Deferred: Federal - - - Foreign 65 (20) 43 ---------- --------- --------- Total 65 (20) 43 ---------- --------- --------- Total $ 191 $ (272) $ 472 ========== ========= =========
In May 2003, Concurrent reached a negotiated settlement with the Greek Tax Authority relating to a 1993 through 1995 audit of Concurrent's Greek subsidiary, which was sold in December of 1995. Concurrent made partial payments towards this settlement during fiscal year 2004 and made final payments towards this settlement in fiscal year 2005. During fiscal year 2005, Concurrent reversed $264,000 of income tax contingency reserves that Concurrent determined were no longer required and was reversed as an income tax benefit. 69 CONCURRENT COMPUTER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- continued A reconciliation of the income tax (benefit) expense computed using the federal statutory income tax rate to Concurrent's provision for income taxes is as follows:
YEAR ENDED JUNE 30, ----------------------------------- 2006 2005 2004 ---------- ----------- ---------- (DOLLARS IN THOUSANDS) Loss before provision for income taxes $ (8,831) $ (8,001) $ (5,253) ---------- ----------- ---------- Benefit at Federal statutory rate (3,003) (2,720) (1,786) Change in valuation allowance (10,403) (8,838) 2,396 Valuation allowance recorded on acquisition 704 - - Dividend from subsidiary - 1,201 - Permanent differences 191 291 (125) Net operating loss expiration 14,425 7,429 188 Change in state tax rates (1,462) 1,739 - Release of tax contingency reserves - (264) - Foreign, net (90) 775 176 Other (171) 115 (377) ---------- ----------- ---------- Provision for income taxes $ 191 $ (272) $ 472 ========== =========== ==========
As of June 30, 2006 and 2005, Concurrent's deferred tax assets and liabilities were comprised of the following:
JUNE 30, ---------------------- 2006 2005 ---------- ---------- (DOLLARS IN THOUSANDS) Gross deferred tax assets related to: U.S. and foreign net operating loss carryforwards $ 62,044 $ 71,122 Book and tax basis differences for property and equipment 843 - Bad debt, warranty and inventory reserves 1,159 1,549 Accrued compensation 1,215 - Impairment loss on minority investments 3,702 3,786 Deferred revenue 1,042 1,882 Stock warrants 685 700 Capital loss carryforward - 801 Research and development tax credit 254 - Other 353 - ---------- ---------- Total gross deferred tax assets 71,297 79,840 Valuation allowance (67,978) (78,381) ---------- ---------- Total deferred tax asset 3,319 1,459 Gross deferred tax liabilities related to: Acquired intangibles 3,127 - Property and equipment/other - 1,200 ---------- ---------- Total gross deferred tax liability 3,127 1,200 ---------- ---------- Deferred income taxes $ 192 $ 259 ========== ==========
As of June 30, 2006, Concurrent has U.S. Federal Tax net operating loss carryforwards of approximately $151 million for income tax purposes which expire at various dates through 2026. Any future benefits attributable 70 CONCURRENT COMPUTER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- continued to the U.S. Federal net operating loss carryforwards, which originated prior to Concurrent's quasi-reorganization in November, 1991 are accounted for through adjustments to the capital in excess of par value. Approximately $37 million of the net operating loss carryforwards originated prior to Concurrent's quasi-reorganization in 1991, of which all have expired as of June 30 2006. Under Section 382 of the Internal Revenue Code, future benefits attributable to the net operating loss carryforwards in the amount of approximately $5.0 million that originated subsequent to Concurrent's quasi-reorganization through the date of Concurrent's July, 1993 comprehensive refinancing (1993 Refinancing) are limited to approximately $1.9 million per year. To the extent that the unused tax net operating loss carryforwards can not be used in a given year, whether limited or not, the unused amount can be carried forward and used in future years until they expire. Concurrent also acquired tax benefits from the Everstream acquisition in the form of approximately $11.0 million of net operating loss carryforwards. The benefits associated with these losses are also limited under Section 382 of the Internal Revenue Code and fully offset these losses with a valuation allowance. The tax benefits associated with nonqualified stock options and disqualifying dispositions of incentive stock options increased the federal net operating loss carryforward by approximately $115,000 and $22,000 for the years ended June 30, 2006 and 2005, respectively. Such benefits will be recorded as an increase to additional paid-in capital when realized. Deferred income taxes have not been provided for undistributed earnings of foreign subsidiaries, which originated subsequent to Concurrent's quasi-reorganization, primarily due to Concurrent's required investment in certain subsidiaries. Additionally, deferred income taxes have not been provided on undistributed earnings of foreign subsidiaries, which originated prior to Concurrent's quasi-reorganization. The impact of both the subsequent repatriation of such earnings and the resulting offset, in full, from the utilization of net operating loss carryforwards will be accounted for through adjustments to capital in excess of par value. The valuation allowance for deferred tax assets as of June 30, 2006 and 2005 was approximately $68.0 million and $78.4 million, respectively. The net change in the total valuation allowance for the year ended June 30, 2006 was a decrease of approximately $10.4 million. The net decrease in the total valuation allowance for the year ended June 30, 2005 was approximately $8.8 million. In assessing the realizability of deferred tax assets, Concurrent considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. As such, the deferred tax assets have been reduced by the valuation allowance since Concurrent considers it more likely than not that a significant portion of these deferred tax assets will not be realized. In October 2004, the American Jobs Creation Act of 2004 (the "Act") was enacted. Among other provisions, the Act provides for a special one-time tax deduction of 85% of certain foreign earnings that are repatriated in either an enterprise's last tax year that began before the enactment date or the first tax year that begins during the one-year period beginning on the date of enactment. As a result of execution of the Act, the accounting treatment of such unremitted earnings that are expected to be repatriated must be considered in evaluating an entity's tax provision. Concurrent has not repatriated any funds under the American Jobs Creation Act and therefore there have been no tax consequences. 12. PENSIONS AND OTHER POSTRETIREMENT BENEFITS Concurrent maintains a retirement savings plan (the "Plan"), available to U.S. employees, that qualifies as a defined contribution plan under Section 401(k) of the Internal Revenue Code. For fiscal year 2006, the plan allowed a discretionary matching contribution up to 100% of the first 3% of all employees' contributions during the first six months of the fiscal year. For the last six months of fiscal 2006, the plan allowed a discretionary matching contribution up to 100% of the first 3% of employees' contributions by non-highly compensated employees only. For fiscal year 2005, the plan allowed for a discretionary matching contribution up to 100% of the first 4% of 71 CONCURRENT COMPUTER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- continued employees' contributions during the first six months of the year, and 3% of employees' contributions during the second six months. For fiscal year 2004, the plan allowed a discretionary matching contribution up to 100% of the first 4% of employees' contributions. For the years ended June 30, 2006, 2005 and 2004, Concurrent matched 100% of the allowable discretionary matching percentage of the employees' Plan contributions. Concurrent's matching contributions under the Plan were as follows:
2006 2005 2004 --------- --------- --------- (DOLLARS IN THOUSANDS) Matching contribution $ 498 $ 830 $ 990
Concurrent also maintains a defined contribution plan (the Stakeholder Plan) for its UK based employees. The stakeholder plan provides for discretionary matching contributions of between 4% and 7% of the employee's salary. Concurrent also has agreements with certain of its UK based employees to make supplementary contributions to the plan over the next three years, contingent upon their continued employment with Concurrent. For fiscal years 2006, 2005 and 2004, Concurrent made total contributions to the stakeholder plan of $429,000, $540,000 and $90,000, respectively. Certain foreign subsidiaries of Concurrent maintain pension plans for their employees that conform to the common practice in their respective countries. As of June 30, 2003, Concurrent maintained two defined benefit pension plans covering certain current and former employees in the UK and in Germany. The liquidation of the UK subsidiary in 2004 resulted in the settlement and curtailment gains included in the changes in benefit obligation and fair value of plan assets detailed below (see Note 5). As of June 30, 2006, 2005, and 2004, only the defined benefit pension plan in Germany remained, due to the effects of the liquidation of Concurrent's UK subsidiary. The measurement date used to determine fiscal 2006 benefit information for the plans was June 30, 2006. The related changes in benefit obligation and fair value of plan assets and the amounts recognized in the consolidated balance sheets are presented in the following tables: Reconciliation of Funded Status
JUNE 30, ---------------------- 2006 2005 ---------- ---------- (DOLLARS IN THOUSANDS) Change in benefit obligation: Benefit obligation at beginning of year $ 4,156 $ 3,715 Service cost 29 25 Interest cost 186 205 Actuarial loss (gain) 388 362 Foreign currency exchange rate change 238 (37) Benefits paid (131) (114) ---------- ---------- Benefit obligation at end of year $ 4,866 $ 4,156 ========== ========== Change in plan assets: Fair value of plan assets at beginning of year $ 2,395 $ 2,396 Actual return on plan assets 45 76 Employer contributions 62 28 Benefits paid (105) (88) Foreign currency exchange rate change 137 (17) ---------- ---------- Fair value of plan assets at end of year $ 2,534 $ 2,395 ========== ========== Funded status $ (2,332) $ (1,761) Unrecognized actuarial loss 648 208 Unrecognized net transition cost 102 127 ---------- ---------- Net amount recognized $ (1,582) $ (1,426) ========== ==========
72
CONCURRENT COMPUTER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- continued Amounts Recognized in the Consolidated Balance Sheet JUNE 30, ---------------------- 2006 2005 ---------- ---------- (DOLLARS IN THOUSANDS) Accrued pension cost, net $ (2,290) $ (1,705) Intangible asset 102 127 Accumulated other comprehensive loss 606 152 ---------- ---------- Net amount recognized $ (1,582) $ (1,426) ========== ==========
The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $4.9 million, $4.8 million and $2.5 million, respectively, as of June 30, 2006, and $4.2 million, $4.1 million and $2.4 million, respectively, as of June 30, 2005. The following tables provide the components of net periodic pension cost recognized in earnings and pension related components of other comprehensive income for the fiscal years ended June 30, 2006, 2005 and 2004: Components of Net Periodic Benefit Cost
YEAR ENDED JUNE 30, ---------------------------------- 2006 2005 2004 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Service cost $ 29 $ 25 $ 353 Interest cost 186 205 1,111 Expected return on plan assets (84) (88) (767) Amortization of unrecognized net transition obligation (asset) 25 32 (65) Amortization of unrecognized prior service cost - - 24 Settlement gain - - (387) Curtailment loss - - 177 Recognized actuarial loss - 3 375 ---------- ---------- ---------- Net periodic benefit cost $ 156 $ 177 $ 821 ========== ========== ==========
Additional Information
YEAR ENDED JUNE 30, --------------------------- 2006 2005 2004 -------- -------- ------- (DOLLARS IN THOUSANDS) Decrease (increase) in minimum liability included in other comprehensive income $ (453) $ (101) $ 7,376
Pension expense for fiscal years 2006, 2005 and 2004 related to the UK defined benefit pension plan was $0, $0, and $805,000. Concurrent does not anticipate any further contributions or any further pension expense related to this plan, subsequent to June 30, 2004. 73 CONCURRENT COMPUTER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- continued Assumptions The following table sets forth the assumptions used to determine benefit obligations:
JUNE 30, ------------ 2006 2005 ----- ----- Discount rate 4.70% 4.50% Expected return on plan assets 4.20% 3.50% Compensation increase rate 2.50% 2.50%
The following table sets forth the assumptions used to determine net periodic benefit cost:
YEAR ENDED JUNE 30, ---------------------------------------------- 2006 2005 2004 -------------- -------------- -------------- Discount rate 4.50% 5.35% 5.25% to 5.50% Expected return on plan assets 3.50% 3.50% 6.00% Compensation increase rate 2.50% 2.50% 1.00% to 4.25%
Plan Assets Concurrent's pension plan weighted-average asset allocations at June 30, 2006 and 2005, by asset category are as follows:
PLAN ASSETS AT JUNE 30, --------------------------- 2006 2005 ------------- ------------ ASSET CATEGORY $ % $ % -------------- ------ ----- ------ ---- Equity securities 2,534 100% 2,395 100% ------ ----- ------ ---- Total 2,534 100% 2,395 100% ====== ===== ====== ====
Plan assets as of June 30, 2006 and 2005 are comprised primarily of investments in managed funds consisting of German life insurance equity funds. In estimating the expected return on plan assets, Concurrent considers past performance and future expectations for the fund. Plan assets are heavily weighted toward dividend yielding equity investments that yield consistent, dependable dividends. Concurrent utilizes an active management strategy through third-party investment managers to minimize risk and maximize return. Contributions Concurrent expects to contribute $91,000 to its defined benefit pension plan in fiscal year 2007. Estimated future benefit payments The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (dollars in thousands):
PENSION BENEFITS --------- 2007 $ 167 2008 207 2009 221 2010 231 2011 256 Years 2012 and thereafter $ 1,531
74 CONCURRENT COMPUTER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- continued 13. GEOGRAPHIC INFORMATION In accordance with SFAS 131, "Disclosure about Segments of an Enterprise and Related Information", effective July 1, 2005, Concurrent operates in two segments, products and services, as disclosed within the statements of operations. A summary of Concurrent's financial data by geographic area follows (dollars in thousands):
YEAR ENDED JUNE 30, 2006 2005 2004 --------- --------- --------- United States $ 49,003 $ 52,898 $ 64,792 Japan 6,646 10,562 4,208 Other Asia Pacific countries 2,539 3,394 2,836 --------- --------- --------- Asia Pacific 9,185 13,956 7,044 Europe 10,053 8,575 5,737 Other 3,371 3,256 1,662 --------- --------- --------- Total revenue $ 71,612 $ 78,685 $ 79,235 ========= ========= =========
JUNE 30, 2006 2005 ---------- ---------- (DOLLARS IN THOUSANDS) Long lived assets: United States $ 29,300 $ 18,712 Europe 1,093 1,476 Japan 735 901 Asia/Pacific - other 354 244 Other - 32 --------- --------- Total $ 31,482 $ 21,365 ========= =========
14. SHARE-BASED COMPENSATION Concurrent has Stock Option Plans providing for the grant of incentive stock options to employees and non-qualified stock options to employees and directors. The Compensation Committee administers the Stock Option Plans. Under the plans, the Compensation Committee of the Board of Directors (the "Board") may award, in addition to stock options, shares of Common Stock on a restricted basis. The plans also specifically provide for stock appreciation rights and authorize the Compensation Committee to provide, either at the time of the grant of an option or otherwise, that the option may be cashed out upon terms and conditions to be determined by the Committee or the Board. Options issued under the Stock Option Plans prior to May 4, 2005 generally vest over four years and are exercisable for ten years from the grant date. Concurrent's 2001 Stock Option Plan became effective November 1, 2001 and replaced the 1991 Restated Stock Option Plan that expired on January 31, 2002. As of November 1, 2001 there were no options for shares of Common Stock available for future grant under the 1991 Restated Stock Option Plan. The Amended and Restated 2001 Stock Option Plan terminates on October 31, 2011. Stockholders have authorized the issuance of up to 20,889,000 shares under these plans and at June 30, 2006 and 2005 there were 1,762,000 and 1,550,000 shares available for future grants, respectively. On May 4, 2005, the Board of Concurrent, upon recommendation of the Board's Compensation and Audit 75 CONCURRENT COMPUTER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- continued Committees, approved the accelerated vesting of certain unvested and "out-of-the-money" options held by current employees and officers (the "Acceleration"). The Board did not accelerate vesting of any options held by the Chief Executive Officer or any directors. The accelerated options had been granted under Concurrent's 1991 Restated Stock Option Plan and Concurrent's Amended and Restated 2001 Stock Option Plan (collectively, the "Plans"). The only options affected by the acceleration were the unvested options with exercise prices of greater than $2.10 per share. The closing sales price of Concurrent's common stock on the NASDAQ National market on May 4, 2005, the effective date of the Acceleration, was $1.68. Pursuant to the Acceleration, options granted under the Plans to purchase approximately 1.3 million shares of Concurrent's common stock that would otherwise have vested at various times within the next four years became fully vested. The options have a range of exercise prices of $2.12 to $14.85. As a result of the Board's decision to approve the Acceleration, each agreement for options subject to the Acceleration is deemed to be amended to reflect the Acceleration as of the effective date, but all other terms and conditions of each such option agreement remain in full force and effect. This acceleration of vesting period was considered a modification of the stock option award that impacted 217 employees and resulted in the determination of any compensation expense to be recorded on the modification date. As the intrinsic value at the date of modification was $0, Concurrent recorded no compensation expense for this modification. On June 22, 2005, the Compensation Committee of the Board of Concurrent granted options to purchase an aggregate of 2,065,000 shares of Concurrent's common stock, with an exercise price of $2.15 per share to current employees and executive officers pursuant to Concurrent's Amended and Restated 2001 Stock Option Plan. The options were fully vested on the date of grant, but the shares issued upon the exercise of the options may not be transferred or encumbered until certain transfer restrictions lapse. For most employees, the transfer restrictions allow 50% of the shares underlying the options to be transferable on each one year anniversary of the date of grant. For senior management, the transfer restrictions allow 25% of the shares underlying the options to be transferable on each one year anniversary of the date of grant. The options granted to senior management have a 10 year term whereas all other options granted have a 4 year term. This option grant differs from prior grants in that all employees were granted options and the restriction schedules and option terms differ for distinct groups of employees. This one-time initiative was undertaken by the Compensation Committee to provide a retention incentive to general employees and to motivate them to approach their jobs from the perspective of shareholders while providing a traditional long-term incentive to senior management. 76 CONCURRENT COMPUTER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- continued The decisions to initiate the Acceleration under the Plans on May 4, 2005 and to subsequently grant fully vested stock options with limits on transferability on June 22, 2005, which Concurrent believes to be in the best interest of Concurrent and its shareholders, were made primarily to limit compensation expense that would be expected to be recorded in future periods following Concurrent's adoption on July 1, 2005 of SFAS 123(R). Prior to adoption of SFAS 123(R), Concurrent accounted for stock-based compensation using the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," under which Concurrent did not recognize any compensation expense for its stock option grants. As a result of the Board's decisions discussed above, Concurrent expected to reduce its aggregate compensation expense by a total of approximately $6.8 million, net of taxes over the four years subsequent to this decision (the vesting period for the accelerated options). This estimate is subject to change and is based on approximated fair value calculations using the Black-Scholes methodology. The following table illustrates the effect on net loss and loss per share if Concurrent had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation to the prior-year periods (dollars in thousands, except per-share data).
YEAR ENDED JUNE 30, 2005 2004 --------- -------- Net loss as reported $ (7,729) $(5,725) Add: employee share-based compensation included in reported net loss 169 107 Less: employee share-based compensation under SFAS No. 123 (8,688) (4,100) --------- -------- Pro forma net loss $(16,248) $(9,718) ========= ======== Net loss per share: Basic and diluted net loss per share - as reported $ (0.12) $ (0.09) ========= ======== Basic and diluted net loss per share - pro forma $ (0.26) $ (0.16) ========= ========
Option awards are granted with an exercise price equal to the market price of Concurrent's stock at the date of grant. Effective July 1, 2005, Concurrent adopted SFAS No. 123(R) which requires the recognition of the fair value of stock compensation in the Statement of Operations. Concurrent recognizes stock compensation expense over the requisite service period of the individual grantees, which generally equals the vesting period. All of Concurrent's stock compensation is accounted for as equity instruments. Prior to July 1, 2005, Concurrent accounted for these plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations. Concurrent has elected the modified prospective transition method for adopting SFAS 123(R). Under this method, the provisions of SFAS 123(R) apply to all awards granted or modified after the date of adoption. Unrecognized expense of awards not yet vested at the date of adoption shall be recognized in the Statement of Operations in the periods after the date of adoption using the same valuation method (i.e. Black-Scholes) and assumptions determined under the original provisions of SFAS 123, "Accounting for Stock-Based Compensation," as disclosed in Concurrent's previous filings. As a result of adopting SFAS 123(R), Concurrent's operating losses, losses before income taxes, and net losses for the twelve months ended June 30, 2006 are $278,000 greater, than if Concurrent had continued to account for share-based compensation under APB 25 for the twelve months ended June 30, 2006. Adoption of SFAS 123(R) did not have a material impact on loss per share and the Statement of Cash Flows for fiscal year 2006. Concurrent recorded $527,000 of share-based compensation related to vested stock options and restricted stock in the Statement of Operations for fiscal year 2006. This includes $249,000 of share-based compensation expense related to the issuance of restricted stock awards. Concurrent recorded compensation expense related to restricted stock of $169,000 and $107,000 for the years ended June 30, 2005 and 2004, respectively, which was recorded in the Consolidated Statements of Operations in accordance with APB 25. Concurrent uses the Black-Scholes valuation model to estimate the fair value of each option award on the 77 CONCURRENT COMPUTER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- continued date of grant. For fiscal year 2006, Concurrent issued 60,000 stock options with immediate vesting and 50,000 stock options with 4 year vesting. The weighted-average assumptions used to determine current fiscal year recorded expense and prior years' pro forma expense were:
2006 2005 2004 ----- ----- ------ Risk-free interest rate 4.8% 3.8% 3.4% Expected volatility 81.1% 87.3% 110.0% Expected term (in years) 6 4-6 4-6 Expected dividend yield 0.0% 0.0% 0.0%
The risk-free interest rate is derived from the average U.S. Treasury rate for the period, which approximates the rate in effect at the time of grant. Expected volatility is based on historical volatility of Concurrent's common stock over the period commensurate with the expected life of the options. The expected life calculation is based on the observed and expected time to post-vesting exercise and forfeitures of options by Concurrent's employees. The dividend yield of zero is based on the fact that Concurrent has never paid cash dividends and has no present intention to pay cash dividends. Based on historical experience of option pre-vesting cancellations, Concurrent has assumed an annualized forfeiture rate of 10% for unvested options granted prior to July 1, 2005. Concurrent has assumed a 0% forfeiture rate on options granted during the twelve months ended June 30, 2006, as many of these options vested immediately. Under the true-up provisions of SFAS 123(R), Concurrent will record additional expense if the actual forfeiture rate is lower than estimated, and will record a recovery of prior expense if the actual forfeiture is higher than estimated. A summary of option activity under the plans as of June 30, 2006, and changes during the year is presented below:
WEIGHTED- WEIGHTED- AVERAGE AVERAGE REMAINING AGGREGATE EXERCISE CONTRACTUAL INTRINSIC OPTIONS SHARES PRICE TERM (IN YEARS) VALUE --------------------------------------- --------------- ---------------- --------------- ---------------- Outstanding as of July 1, 2005 6,877,062 $ 4.68 Granted 110,000 2.28 Exercised (167,327) 2.07 Forfeited or expired (692,111) 4.02 --------------- ---------------- Outstanding as of June 30, 2006 6,127,624 $ 4.78 5.71 $ 2,242,191 =============== ================ =============== ================ Vested and exercisable at June 30, 2006 5,563,374 $ 5.10 5.99 $ 1,689,091 =============== ================ =============== ================
78 CONCURRENT COMPUTER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- continued The following table summarizes information about stock options outstanding and exercisable at June 30, 2006:
OUTSTANDING OPTIONS OPTIONS EXERCISABLE -------------------------------------------- --------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF REMAINING AVERAGE AVERAGE EXERCISE CONTRACTUAL EXERCISE EXERCISE PRICES LIFE (IN YEARS) AT JUNE 30, 2006 PRICE AT JUNE 30, 2006 PRICE ---------------- --------------- ---------------- --------- ---------------- --------- $0.37 - $2.13 7.13 1,238,443 $ 1.68 724,193 $ 1.78 $2.15 5.57 1,934,603 2.15 1,934,603 2.15 $2.16 - $6.25 6.05 1,232,914 3.33 1,182,914 3.33 $6.38 - $12.25 4.71 1,325,664 9.99 1,325,664 9.99 $12.43 - $19.63 4.28 396,000 14.41 396,000 14.41 ---------------- ---------------- 5.71 6,127,624 4.78 5,563,374 5.10 ================ ================
The weighted average grant-date fair value of options granted during the fiscal years ended June 30, 2006, 2005 and 2004 was $1.65, $1.55, and $3.22, respectively. The total intrinsic value of options exercised during the fiscal years ended June 30, 2006, 2005 and 2004 was $115,000, $134,000, and $1,104,000, respectively. Total compensation cost of options granted but not yet vested as of June 30, 2006 is $590,000, which is expected to be recognized over the weighted average period of 2.5 years. Concurrent generally issues new shares to satisfy option exercises. Cash received from option exercise under all share-based payment arrangements for the fiscal years ended June 30, 2006, 2005 and 2004 was $357,000, $58,000 and $1,184,000. The Compensation Committee approved and Concurrent issued 73,470 shares of restricted stock during fiscal year 2006 that vests over time. During 2005, the Compensation Committee approved and Concurrent issued 1,041,000 shares of restricted stock and initially recorded $1,946,000 of unearned compensation as a contra-equity account, which, prior to adoption of SFAS No. 123(R) on July 1, 2005, was amortized over the vesting period. A portion of the restricted stock vests over time (four years) and a portion vests based upon performance criteria. Because a portion of this restricted stock is performance based, that portion was originally accounted for using variable accounting, requiring interim estimates of compensation expense, prior to adoption of SFAS 123(R). Effective July 1, 2005, Concurrent records expense for remaining unvested performance-based restricted stock awards, based upon the grant date fair-value and an assessment of whether the performance criteria will ultimately be met. During fiscal year 2006, Concurrent retired $184,000 of restricted stock issued to employees that left Concurrent prior to vesting of their restricted stock awards. A summary of the status of Concurrent's non-vested restricted shares as of June 30, 2006, and changes during the twelve months ended June 30, 2006, is presented below:
WEIGHTED-AVERAGE GRANT-DATE NON-VESTED SHARES SHARES FAIR-VALUE --------------------------- --------- ----------------- Non-vested at July 1, 2005 872,486 $ 1.87 Granted 73,470 2.45 Vested (132,999) 1.88 Forfeited (98,301) 1.87 --------- ----------------- Non-vested at June 30, 2006 714,656 $ 1.93 ========= =================
79 CONCURRENT COMPUTER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- continued Total compensation cost of restricted stock awards issued, but not yet vested as of June 30, 2006 is $945,000, which is expected to be recognized over the weighted average period of 2.2 years. Unearned Compensation Prior to adoption of SFAS 123(R), Concurrent recorded a grant of non-vested restricted stock in capital with an offsetting contra-equity account, unearned compensation, which was amortized to expense over the vesting period. Upon adoption of SFAS 123(R), any remaining balance of unearned compensation as of July 1, 2005 was reversed (i.e., netted against additional paid-in capital). Effective July 1, 2005, Concurrent reversed $1,562,000 of unearned compensation associated with remaining unvested restricted stock by reducing additional paid-in capital by $1,553,000 and par value of common stock by $9,000. As restrictions lapse over the vesting period, Concurrent will record share-based compensation to income (loss) from operations and additional paid-in capital. 15. ISSUANCE AND ACCRUAL OF NON-CASH WARRANTS Comcast Cable Communications Inc. Warrants On March 29, 2001, Concurrent entered into a definitive purchase agreement with Comcast Cable, providing for the purchase of on-demand products. As part of that agreement Concurrent agreed to issue warrants to purchase shares of its common stock based upon the volume of purchases of Concurrent's products. Through March 31, 2004, the expiration date of the agreement, Comcast earned a total of 268,543 warrants, which have all been issued and expire at various dates through June 4, 2008. These warrants are exercisable over a four year term. As of June 30, 2006, 106,942 of these warrants had expired. The remaining 161,601 warrants outstanding have exercise prices between $2.62 and $5.71. Concurrent recognized the value of the warrants over the term of the agreement as Comcast purchased additional on-demand servers from Concurrent and made the service available to its customers. As this agreement expired during fiscal 2004, Concurrent did not recognize any increase in, or reduction to, revenue during the twelve months ended June 30, 2006 and June 30, 2005. For fiscal year 2004, Concurrent recognized $202,000 as a reduction in revenue for the warrants that were earned during this period. The exercise prices of the warrants are subject to adjustment for stock splits, combinations, stock dividends, mergers, and other similar recapitalization events. The exercise prices are also subject to adjustment for issuance of additional equity securities at a purchase price less than the then current fair market value of Concurrent's common stock. The exercise prices of the warrants issued to Comcast equaled the average closing price of Concurrent's common stock for the 30 trading days prior to the applicable warrant issuance date and will be exercisable over a four-year term. As the agreement with Comcast expired on March 31, 2004, Concurrent is no longer obligated to issue any additional warrants to Comcast. The warrants issued to Comcast did not exceed 1% of Concurrent's outstanding shares of common stock. Scientific Atlanta, Inc. Warrants In accordance with a five year definitive agreement with Scientific Atlanta, Inc. ("SAI") executed in August of 1998, Concurrent agreed to issue warrants to SAI upon achievement of pre-determined revenue targets. Concurrent accrued for this cost as a part of cost of sales at the time of recognition of applicable revenue. Concurrent issued warrants to purchase 261,164 of its common stock to SAI upon reaching the first $30 million threshold on April 1, 2002, exercisable at $7.106 per share over a four-year term. These warrants expired on April 1, 2006. The five year definitive agreement with SAI expired on August 17, 2003, and at that time Concurrent had not reached the second $30 million threshold of revenue using the SAI platform. As a result, Concurrent was not obligated to issue warrants under the agreement regarding the second $30 million threshold, and accordingly, reversed $1.3 million of expense in the twelve months ended June 30, 2004, which had been previously accrued in anticipation of reaching the next $30 million threshold. This reversal was recorded in product cost of sales. 80 CONCURRENT COMPUTER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- continued 16. TERM LOAN AND REVOLVING CREDIT FACILITY On December 23, 2004, Concurrent executed a Loan and Security Agreement (Credit Agreement) with Silicon Valley Bank (SVB). The Credit Agreement provides for a two year maximum of a $10,000,000 revolving credit line ("Revolver") and a three year $3,000,000 term loan (Term Loan) and is secured by substantially all of the assets of Concurrent. Based on the borrowing formula and Concurrent's financial position as of June 30, 2006, $5.8 million would have been available to Concurrent under the Revolver. The Revolver and the Term Loan expire on December 23, 2006, and December 23, 2007, respectively. Both agreements can be terminated earlier upon a default, as defined in the Credit Agreement. As of June 30, 2006, Concurrent had no amounts drawn under the Revolver and the balance of the Term Loan was as follows:
JUNE 30, JUNE 30, 2006 2005 --------- --------- Term note $ 1,583 $ 2,537 Less current portion 1,034 954 --------- --------- Total long-term debt $ 549 $ 1,583 ========= =========
Interest on all outstanding amounts under the Revolver is payable monthly at the prime rate (8.25% at June 30, 2006) plus 0.50% per annum, and interest on all outstanding amounts under the Term Loan is payable monthly at a rate of 8.0% per annum. The Term Loan is repayable in 36 equal monthly principal and interest installments of $94,000 and the outstanding principal of the Revolver is due on December 23, 2006, unless the Revolver is terminated earlier in accordance with its terms. In addition, the Credit Agreement contains certain financial covenants, including required a minimum quick ratio and a minimum tangible net worth, and customary restrictive covenants concerning Concurrent's operations. As of June 30, 2006, Concurrent was not compliant with these covenants as its tangible net worth was less than the required amount specified within the Credit Agreement covenants. Concurrent obtained a forbearance until September 15, 2006 and, during the forbearance period, worked with Silicon Valley Bank to restructure the covenants to better align with Concurrent's business expectations. On August 31, 2006, prior to expiration of the forbearance, Concurrent and Silicon Valley Bank entered into a Loan Modification Agreement that provided for the waiver of Concurrent's event of default on June 30, 2006 and revised the financial covenants to better reflect Concurrent's operations. Concurrent believes it will be in compliance with the revised covenants for at least the next twelve months subsequent to June 30, 2006. 17. RIGHTS PLAN On July 31, 1992, the Board of Directors of Concurrent declared a dividend distribution of one Series A Participating Cumulative Preferred Right for each share of Concurrent's Common Stock. The dividend was made to stockholders of record on August 14, 1992. On August 7, 2002, the Rights Agreement creating these Rights was extended for another 10 years to August 14, 2012 and American Stock Transfer & Trust Company was appointed as the successor rights agent pursuant to an Amended and Restated Rights Agreement. Under the Rights Agreement, each Right becomes exercisable when any person or group acquires 15% of Concurrent's common stock. Such an event triggers the rights plan and entitles each right holder to purchase from Concurrent one one-hundredth of a share of Series A Participating Cumulative Preferred Stock at a cash price of $30 per right. Under certain circumstances, each holder of a Right upon exercise of such Right will receive, in lieu of Series A Participating Cumulative Preferred Stock, common stock of Concurrent or its equivalent, or common stock of the acquiring entity, in each case having a value of two times the exercise price of the Right. The Rights will expire on August 14, 2012 unless earlier exercised or redeemed, or earlier termination of the plan. 81 CONCURRENT COMPUTER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- continued 18. CONCENTRATION OF RISK Intercompany transfers between geographic areas are accounted for at prices similar to those available to comparable unaffiliated customers. Sales to unaffiliated customers outside the U.S., including U.S. export sales, were $22,554,000, $25,787,000 and $14,443,000 for the years ended June 30, 2006, 2005 and 2004, respectively, which amounts represented 32%, 33% and 18% of total sales for the respective fiscal years. Sales to the U.S. government, prime contractors and agencies of the U.S. government amounted to approximately $15,079,000, $19,940,000 and $14,186,000 for the years ended June 30, 2006, 2005 and 2004, respectively, which amounts represented 21%, 25% and 18% of total sales for the respective fiscal years. Sales to three commercial customers amounted to $11,641,000 or 16% of total sales, $9,215,000 or 13% of total sales, and $9,207,000 or 13% of total sales, respectively, for the year ended June 30, 2006. Sales to two commercial customers amounted to $13,939,000 or 18% of total sales, and $10,820,000 or 14% of total sales, respectively, for the year ended June 30, 2005. Sales to three commercial customers amounted to $25,219,000 or 32% of total sales, $10,283,000 or 13% of total sales, and $8,231,000 or 10% of total sales, respectively, for the year ended June 30, 2004. There were no other customers during fiscal years 2006, 2005 or 2004 representing more than 10% of total revenues. Concurrent assesses credit risk through ongoing credit evaluations of customers' financial condition and collateral is generally not required. There were two customers that accounted for $3,642,000 or 24% of trade receivables and $2,683,000 or 17% of trade receivables, at June 30, 2006. There were two customers that accounted for $3,219,000 or 19% of trade receivables and $1,974,000 or 12% of trade receivables, at June 30, 2005. Concurrent sometimes purchases product components from a single supplier in order to obtain the required technology and the most favorable price and delivery terms. For the year ended June 30, 2006, purchases from two suppliers were in excess of 10% of Concurrent's total purchases. These two suppliers accounted for 30% and 22% of Concurrent's purchases during fiscal 2006. For the year ended June 30, 2005, purchases from three suppliers were in excess of 10% of Concurrent's total purchases. These three suppliers accounted for 25%, 25% and 10% of Concurrent's purchases during fiscal 2005. 19. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED) The following is a summary of quarterly financial results for the years ended June 30, 2006 and 2005:
THREE MONTHS ENDED -------------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, 2005 2005 2006 2006 -------------- -------------- -------------- -------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2006 Net sales $ 16,207 $ 18,856 $ 20,633 $ 15,916 Gross margin $ 8,094 $ 9,917 $ 10,233 $ 7,125 Operating loss $ (2,895) $ (1,596) $ (1,067) $ (4,022) Loss before cumulative effect of accounting change $ (2,183) $ (1,604) $ (1,048) $ (4,187) Cumulative effect of accounting change (net of income tax) $ - $ - $ - $ (323) (1) Net loss $ (2,183) $ (1,604) $ (1,048) $ (4,510) (1) Net loss per share-basic $ (0.03) $ (0.02) $ (0.01) $ (0.06) (1) Net loss per share-diluted $ (0.03) $ (0.02) $ (0.01) $ (0.06) (1)
82 CONCURRENT COMPUTER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- continued
THREE MONTHS ENDED --------------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, 2004 2004 2005 2005 --------------- -------------- -------------- -------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2005 Net sales $ 17,330 $ 20,024 $ 19,849 $ 21,482 Gross margin $ 7,139 $ 9,896 $ 10,970 $ 10,771 Operating loss $ (5,024) $ (1,138) $ (173) $ (1,122) Net loss $ (5,021) $ (1,447) (2) $ (177) $ (1,084) (3) Net loss per share-basic $ (0.08) $ (0.02) (2) $ (0.00) $ (0.02) (3) Net loss per share-diluted $ (0.08) $ (0.02) (2) $ (0.00) $ (0.02) (3) (1) In March 2005, the FASB issued Financial Interpretation No. 47. FIN 47 requires the recognition of a liability for the fair value of a legally-required conditional asset retirement obligation when incurred, if the liability's fair value can be reasonably estimated. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. Concurrent is required to record an asset and a corresponding liability for the present value of the estimated asset retirement obligation associated with the leasehold improvements at some of its international locations. The asset is depreciated over the life of the corresponding lease while the liability accretes to the amount of the estimated retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. Concurrent adopted FIN 47 on June 30, 2006 with a $0.3 million cumulative effect of accounting change (net of tax) recorded in Concurrent's results of operations. This charge is a combination of depreciation and accretion expense. (2) The net income for the quarter ended December 31, 2004 includes an impairment charge for the Everstream investment of $0.4 million, partially offset by a partial recovery of the previously recognized impairment charge for the Thirdspace investment of $0.1 million. (3) The net income for the quarter end June 30, 2005 includes a reversal of tax contingency reserves of $0.3 million that Concurrent determined were no longer required and was reversed as an income tax benefit.
20. COMMITMENTS AND CONTINGENCIES Concurrent leases certain sales and service offices, warehousing, and equipment under various operating leases. The leases expire at various dates through 2012 and generally provide for the payment of taxes, insurance and maintenance costs. Additionally, certain leases contain escalation clauses that provide for increased rents resulting from the pass through of increases in operating costs, property taxes and consumer price indexes. At June 30, 2006, future minimum lease payments for the years ending June 30 are as follows (dollars in thousands):
2007 $2,287 2008 1,268 2009 618 2010 537 2011 428 2012 and thereafter 229 ------ $5,367 ======
Rent expense under all operating leases amounted to $3,942,000, $4,006,000 and $3,851,000 for the years ended June 30, 2006, 2005 and 2004, respectively. 83 CONCURRENT COMPUTER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- continued Concurrent, from time to time, is involved in litigation incidental to the conduct of its business. Concurrent believes that such pending litigation will not have a material adverse effect on Concurrent's results of operations or financial condition. Concurrent has entered into an agreement with a vendor in which the vendor performed nonrecurring customization services. Concurrent may be obligated to pay as much as $750,000 for these services. Concurrent had made payments to this vendor totaling $602,000 as of June 30, 2006, and totaling $175,000 as of June 30, 2005. This asset is amortized over the estimated life of the new product and as of June 30, 2006 and June 30, 2005, the unamortized portion of these payments is recorded in the line item "Prepaid expenses and other current assets" in the amounts of $221,000 and $175,000, respectively. Concurrent enters into agreements in the ordinary course of business with customers, resellers, distributors, integrators and suppliers that often require Concurrent to defend and/or indemnify the other party against intellectual property infringement claims brought by a third party with respect to Concurrent's products. For example, Concurrent was notified that certain of its customers were served with a complaint by Acacia Media Technologies, Corp. (U.S. District Court, Northern District of California) for allegedly infringing U.S. Patent Nos. 5,132,992, 5,253,275, 5,550,863, 6,002,720, and 6,144,702 by providing broadcast video and video-on-demand products. Concurrent received similar notice from some of its on-demand customers regarding a lawsuit brought by U.S.A. Video Inc. (U.S. District Court, Eastern District of Texas, Marshall Division) alleging infringement of U.S Patent No. 5,130,792. Some of these customers have requested indemnification under their customer agreement. Concurrent continues to review its potential obligations under its indemnification agreements with these customers, in view of the claims by Acacia and the indemnity obligations to these customers from other vendors that also provided systems and services to these customers. From time to time, Concurrent also indemnifies customers and business partners for damages, losses and liabilities they may suffer or incur relating to personal injury, personal property damage, product liability, and environmental claims relating to the use of Concurrent's products and services or resulting from the acts or omissions of Concurrent, its employees, authorized agents or subcontractors. Concurrent has not made any significant payments as a result of these indemnification clauses and, in accordance with FIN No. 45, "Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," Concurrent has not accrued a liability in relation to these items because such an amount is immaterial. The maximum potential amount of future payments that Concurrent could be required to make is unlimited. Pursuant to the terms of the employment agreements with the executive officers of Concurrent, employment may be terminated by either Concurrent or the respective executive officer at any time. In the event the executive officer voluntarily resigns (except as described below) or is terminated for cause, compensation under the employment agreement will end. In the event an agreement is terminated directly by Concurrent without cause or in certain circumstances constructively by Concurrent, the terminated employee will receive severance compensation for a period from 6 to 12 months, depending on the officer, in an annualized amount equal to the respective employee's base salary then in effect. At June 30, 2006, the maximum contingent liability under these agreements is approximately $1.9 million. Concurrent's employment agreements with certain of its officers contain certain offset provisions, as defined in their respective agreements. 84
SCHEDULE II CONCURRENT COMPUTER CORPORATION VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 2006, 2005 AND 2004 (DOLLARS IN THOUSANDS) BALANCE AT CHARGED TO BALANCE BEGINNING COSTS AND DEDUCTIONS AT END DESCRIPTION OF YEAR EXPENSES (a) OF YEAR ------------------------------------------------- Reserves and allowances deducted from asset accounts: 2006 ---- Reserve for inventory obsolescence and shrinkage $ 1,961 $ (4) $ (364) $ 1,593 Allowance for doubtful accounts 200 184 (4) 380 Warranty accrual 702 95 (421) 376 2005 ---- Reserve for inventory obsolescence and shrinkage $ 2,956 $ 11 $ (1,006) $ 1,961 Allowance for doubtful accounts 200 - - 200 Warranty accrual 1,122 392 (812) 702 2004 ---- Reserve for inventory obsolescence and shrinkage $ 3,004 $ 924 $ (972) $ 2,956 Allowance for doubtful accounts 868 (601) (67) 200 Warranty accrual 2,131 668 (1,677) 1,122 (a) Charges and adjustments to the reserve accounts for write-offs and credits issued during the year.
85 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CONCURRENT COMPUTER CORPORATION By: /s/ T. Gary Trimm ----------------------------------------- T. Gary Trimm President and Chief Executive Officer Date: September 1, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of Registrant and in the capacities indicated on September 1, 2006. NAME TITLE ---- ----- /s/ Steve G. Nussrallah Chairman of the Board and Director ----------------------- Steve G. Nussrallah President, Chief Executive Officer and Director /s/ T. Gary Trimm (Principal Executive Officer) ----------------------- T. Gary Trimm Chief Financial Officer /s/ Gregory S. Wilson (Principal Financial and Accounting Officer) ----------------------- Gregory S. Wilson /s/ Alex B. Best Director ----------------------- Alex B. Best /s/ Charles Blackmon Director ----------------------- Charles Blackmon /s/ Larry L. Enterline Director ----------------------- Larry L. Enterline /s/ C. Shelton James Director ----------------------- C. Shelton James 86 EXHIBIT DESCRIPTION OF DOCUMENT 3.1 --Restated Certificate of Incorporation of the Registrant (incorporated by reference to the Registrant's Registration Statement on Form S-2 (No. 33-62440)). 3.2 --Amended and Restated Bylaws of the Registrant (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 2003). 3.3 --Certificate of Correction to Restated Certificate of Incorporation of the Registrant (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2002). 3.4 --Amended Certificate of Designations of Series A Participating Cumulative Preferred Stock (incorporated by reference to the Form 8-A/A, dated August 9, 2002). 3.5 --Amendment to Amended Certificate of Designations of Series A Participating Cumulative Preferred Stock (incorporated by reference to the Form 8-A/A, dated August 9, 2002). 4.1 --Form of Common Stock Certificate (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 2003). 4.2 --Form of Rights Certificate (incorporated by reference to the Registrant's Current Report on Form 8-K/A filed on August 12, 2002). 4.3 --Amended and Restated Rights Agreement dated as of August 7, 2002 between the Registrant and American Stock Transfer & Trust Company, as Rights Agent (incorporated by reference to the Registrant's Current Report on Form 8-K/A filed on August 12, 2002). 4.4 --Warrant to purchase 50,000 shares of common stock of the Registrant dated March 29, 2001 issued to Comcast Concurrent Holdings, Inc. (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2002). 4.5 --Warrant to purchase 4,431 shares of common stock of the Registrant dated October 9, 2001 issued to Comcast Concurrent Holdings, Inc. (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2002). 4.6 --Warrant to purchase 261,164 shares of common stock of the Registrant dated April 1, 2002 issued to Scientific-Atlanta, Inc. (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2002). 4.7 --Warrant to purchase 52,511 shares of common stock of the Registrant dated January 15, 2002 issued to Comcast Concurrent Holdings, Inc. (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2002). 4.8 --Warrant to purchase 1,502 shares of common stock of the Registrant dated August 10, 2002 issued to Comcast Concurrent Holdings, Inc. (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2002). 4.9 --Warrant to purchase 14,355 shares of common stock of the Registrant dated March 22, 2004 issued to Comcast Concurrent Holdings, Inc. (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2004). 4.10 --Warrant to purchase 5,261 shares of common stock of the Registrant dated March 22, 2004 issued to Comcast Concurrent Holdings, Inc. (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2004). 4.11 --Warrant to purchase 27,332 shares of common stock of the Registrant dated March 22, 2004 issued to Comcast Concurrent Holdings, Inc. (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2004). 87 4.12 --Warrant to purchase 6 shares of common stock of the Registrant dated March 22, 2004 issued to Comcast Concurrent Holdings, Inc. (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2004). 4.13 --Warrant to purchase 63,145 shares of common stock of the Registrant dated June 4, 2004 issued to Comcast Concurrent Holdings, Inc. (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2004). 4.14 --Warrant to purchase 50,000 shares of common stock of the Registrant dated June 4, 2004 issued to Comcast Concurrent Holdings, Inc. (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2004). 10.1 --Loan and Security Agreement (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed on February 4, 2005). 10.2 --Schedule of Officers who have entered into the Form Indemnification Agreement (incorporated by reference to the Registrant's Quarterly report on Form 10-Q for the quarter ended December 31, 2004). 10.3 --1991 Restated Stock Option Plan (as amended as of October 26, 2000) (incorporated by reference Exhibit A to the Registrant's Proxy Statement dated September 18, 2000). 10.4 --Richard Rifenburgh Non-Qualified Stock Option Plan and Agreement (incorporated by reference to the Registrant's Registration Statement on Form S-8 (No. 333-82686)). 10.5 --Concurrent Computer Corporation 2001 Stock Option Plan (incorporated by reference to Annex II to the Registrant's Proxy Statement dated September 19, 2001). 10.6 --Concurrent Computer Corporation Amended and Restated 2001 Stock Option Plan (incorporated by reference to the Registrant's Registration Statement on Form S-8 (No. 333-125974)). 10.7 --Form of Option agreement with transfer restrictions (incorporated by reference to the Registrant's Current Report on Form 8-K dated June 24, 2005). 10.8 --Form of Incentive Stock Option Agreement between the Registrant and its executive officers (incorporated by reference to the Registrant's Registration Statement on Form S-1 (No. 33-45871)). 10.9 --Form of Non-Qualified Stock Option Agreement between the Registrant and its executive officers (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1997). 10.10 --Summary of Performance Grants (incorporated by reference to the Registrant's Current Report on Form 8-K filed March 3, 2005). 10.11 --Amended and Restated Employment Agreement dated as of November 15, 1999 between the Registrant and Steve G. Nussrallah (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 1999). 10.12 --Employment Agreement dated as of February 1, 2005 between the Registrant and Greg Wilson (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed on February 4, 2005). 10.13 --Protective Agreement dated as of February 1, 2005 between the Registrant and Greg Wilson (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed on February 4, 2005). 10.14 --Employment Agreement dated as of November 26, 2001 between the Registrant and Kirk Somers (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2002). 10.15 --Employment Agreement dated as of June 24, 2004 between the Registrant and T. Gary Trimm (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2004). 88 10.16 --Employment Agreement dated as of June 24, 2004 between the Registrant and Warren Neuburger (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2004). 10.17 --Video-on-demand Purchase Agreement, dated March 29, 2001, by and between Concurrent Computer Corporation and Comcast Cable Communications of Pennsylvania, Inc. (portions of the exhibit have been omitted pursuant to a request for confidential treatment) (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2001). 10.18 --Entry into a Material Definitive Agreement between the Registrant and Stream Acquisitions, Inc. to acquire Everstream Holdings, Inc. (incorporated by reference to the Registrant's Current Report on Form 8-K filed on August 25, 2005). 10.19 --Amendment of Material Definitive Agreement between the Registrant and Stream Acquisitions, Inc. to acquire Everstream Holdings, Inc. (incorporated by reference to the Registrant's Current Report on Form 8-K filed on August 31, 2005). 10.20 --Amended and Restated Employment Agreement dated as of August 8, 2006 between the Registrant and T. Gary Trimm and adjustment to executive officers' salaries (incorporated by reference to the Registrant's Current Report on Form 8-K filed on August 10, 2006). 10.21 --Entry into a Material Definitive Agreement between the Registrant and Silicon Valley Bank in the form of a Forbearance to Loan and Security Agreement (incorporated by reference to the Registrant's Current Report on Form 8-K filed on August 14, 2006). 10.22 --Entry into a Material Definitive Agreement between the Registrant and Silicon Valley Bank in the form of a Waiver and Third Loan Modification Agreement (incorporated by reference to the Registrant's Current Report on Form 8-K filed on August 31, 2006). 14.1 --Code of Ethics for Senior Executives & Financial Officers (incorporated by reference to the Registrant's Proxy for the fiscal year ended June 30, 2003). 21.1* --List of Subsidiaries. 23.1* --Consent of Deloitte & Touche LLP. 31.1* --Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* --Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1* --Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2* --Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Included herewith. 89