AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 27, 2000
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
WHITE PINE SOFTWARE, INC.
(Name of small business issuer in its charter)
DELAWARE 7372 04-3151064
(State or other jurisdiction (Primary Standard Industrial (I.R.S. employer
of incorporation or organization) Classification Code Number) identification number)
542 AMHERST STREET
NASHUA, NEW HAMPSHIRE 03063
(603) 886-9050
(Address and telephone number of principal executive offices and principal place
of business)
------------------------------
KILLKO CABALLERO
WHITE PINE SOFTWARE, INC.
542 AMHERST STREET
NASHUA, NEW HAMPSHIRE 03063
(603) 886-9050
(Name, address and telephone number of agent for service)
------------------------------
COPIES TO:
MARK L. JOHNSON, ESQ.
EMILY HAYES
FOLEY, HOAG & ELIOT LLP
ONE POST OFFICE SQUARE
BOSTON, MASSACHUSETTS 02109
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / / ____________
------------------------
CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
Common stock, $.01 par value............ 1,302,084 shares $22.625 $29,459,651 $7,778
(1) Estimated solely for the purpose of determining the registration fee. In
accordance with Rule 457(c) under the Securities Act of 1933, the above
calculation is based on the average of the high and low sale prices
reported in the consolidated reporting system of the Nasdaq National Market
on January , 2000.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS (SUBJECT TO COMPLETION)
DATED JANUARY 27, 2000
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND THE SELLING STOCKHOLDERS ARE
NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR
SALE IS NOT PERMITTED.
1,302,084 SHARES
[LOGO] WHITE PINE SOFTWARE, INC.
COMMON STOCK
The selling stockholders named on page 44 are offering 1,302,084 shares of
common stock. We will not receive any of the proceeds from sales of shares by
the selling stockholders.
Our common stock trades on the Nasdaq National Market under the symbol "WPNE."
On January 26, 2000, the last reported sale price of our common stock on the
Nasdaq National Market was $22.25 per share.
The selling stockholders may sell the shares from time to time on the Nasdaq
National Market or otherwise. They may sell the shares at prevailing market
prices or at prices negotiated with buyers. The selling stockholders will be
responsible for any commissions or discounts due to brokers or dealers. The
amount of those commissions or discounts will be negotiated before the sales. We
will pay all of the other offering expenses, which we estimate will total
$100,000.
------------------------
INVESTING IN THESE SHARES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE
6.
---------------------
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT
APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
, 2000
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS.
NEITHER WE NOR THE SELLING STOCKHOLDERS HAVE AUTHORIZED ANYONE TO PROVIDE YOU
WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. THE SELLING
STOCKHOLDERS ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF COMMON
STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. IN THIS
PROSPECTUS, REFERENCES TO "WE," "US" AND"OUR" REFER TO WHITE PINE
SOFTWARE, INC. AND ITS SUBSIDIARY.
------------------------
TABLE OF CONTENTS
PAGE
--------
Prospectus Summary.......................................... 3
Risk Factors................................................ 6
Use of Proceeds............................................. 13
Dividend Policy............................................. 13
Price Range of Our Common Stock............................. 13
Capitalization.............................................. 14
Selected Consolidated Financial Data........................ 15
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 16
Business.................................................... 23
Management.................................................. 37
Related Party Transactions.................................. 43
Principal and Selling Stockholders.......................... 44
Description of Capital Stock................................ 46
Plan of Distribution........................................ 48
Legal Matters............................................... 49
Experts..................................................... 49
Where You Can Find More Information......................... 49
Index to Consolidated Financial Statements.................. F-1
------------------------
We own or have rights to trademarks or trade names that we use in
conjunction with the sale of our products and services. Our trademarks include
ClassPoint, CU-SeeMe, CU-SeeMe Web, eXodus, MeetingPoint, WebTerm, White Pine
and 5PM Term.
2
PROSPECTUS SUMMARY
BECAUSE THIS IS ONLY A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION
THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING
"RISK FACTORS" AND THE INFORMATION INCORPORATED BY REFERENCE, BEFORE DECIDING TO
INVEST IN SHARES OFFERED BY THIS PROSPECTUS.
OUR COMPANY
OUR BUSINESS.............................. We develop, market and support desktop multimedia
software that facilitates worldwide video and audio
communication and data collaboration across the
Internet, intranets, extranets and other computer
networks.
OUR PRODUCTS:............................. Our group conferencing software products, CU-SeeMe and
MeetingPoint, create a client-server solution that
allows users to participate in real-time, multipoint,
multimedia conferences from the users' desktop
computers, using existing Internet, intranet and
extranet connections. Our CU-SeeMe Web software provides
multipoint video instant messaging over the Internet. By
developing multimedia conferencing products that require
no proprietary hardware, we are able to offer multimedia
conferencing at a substantially lower price than vendors
of traditional hardware-based systems and thereby to
encourage businesses and others to adopt multimedia
conferencing as a mass communication medium.
We also offer desktop X Windows and terminal emulation
software. Our legacy emulation products, WebTerm X,
eXodus and 5PM Term, allow businesses and other
organizations to access data and applications residing
on host workstations, mini-computers and mainframe
computers from most widely used desktop operating
systems. WebTerm is our implementation of the X server
on Windows 95, 98 and NT, running in a browser
environment.
OUR MARKET:............................... Our customers include Internet service providers, Web
portal sites, businesses, educational institutions,
government organizations and individual consumers. We
market and sell our products in the United States,
Europe and the Pacific Rim through distributors,
resellers, strategic partners, original equipment
manufacturers and our direct sales organization, as well
as directly over the Internet.
OUR ADDRESS:.............................. Our principal executive offices are located at 542
Amherst Street, Nashua, New Hampshire 03063. Our
telephone number is (603) 886-9050. Our website is
located at WWW.WPINE.COM or WWW.CUSEEME.COM; information
contained in our website is not a part of this
prospectus.
3
ADDITIONAL CONSIDERATIONS:................ Since inception, we have incurred substantial losses,
resulting in an accumulated deficit of $32.6 million at
October 1, 1999. We expect to incur additional
substantial losses for the foreseeable future. Market
acceptance of our MeetingPoint and ClassPoint software
is critical to our future success, and in selling these
products we fact intense competition form many
participants in the group conferencing industry. For a
discussion of these and other risks relating to an
investment in our common stock, see "Risk Factors"
below.
4
THE OFFERING
Common Stock Offered: All of the 1,302,084 shares offered by this prospectus
are being sold by the selling stockholders. The selling
stockholders acquired the shares from us in private
placements completed in December 1999.
Use of Proceeds: We will not receive any of the proceeds from sales of
shares by the selling stockholders.
Nasdaq National Market Symbol: WPNE
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following tables summarize the financial data of our business. The pro
forma column in the consolidated balance sheet data as of October 1, 1999
reflects our sale of 1,302,084 shares of common stock in private placements
completed in December 1999 and our application of the net proceeds of those
private placements.
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, ----------------------
------------------------------ OCTOBER 2, OCTOBER 1
1996 1997 1998 1998 1999
-------- -------- -------- ---------- ---------
STATEMENT OF OPERATIONS DATA:
Revenue:
Software license fees....................... $10,500 $ 9,797 $ 6,948 $ 5,034 $ 7,125
Services and other.......................... 1,166 1,255 845 607 864
Total revenue............................. 11,666 11,052 7,793 5,641 7,989
Gross profit.................................. 9,454 9,162 6,148 4,548 6,300
Loss from operations.......................... (3,790) (7,746) (8,911) (6,842) (6,842)
Net loss...................................... (3,637) (6,826) (8,424) (6,413) (6,413)
Basic and diluted net loss per share.......... $ (0.55) $ (0.75) $ (0.86) $ (0.67) $ (0.36)
======= ======= ======= ======= =======
Basic and diluted weighted average shares
outstanding................................. 6,618 9,798 9,178 9,621 10,570
======= ======= ======= ======= =======
OCTOBER 1, 1999
-------------------
PRO
ACTUAL FORMA
-------- --------
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 3,513 $23,288
Working capital............................................. 3,703 23,478
Total assets................................................ 12,402 32,177
Long-term debt, net of current portion...................... -- --
Total stockholders' equity.................................. 8,954 28,729
5
RISK FACTORS
AN INVESTMENT IN SHARES OF OUR COMMON STOCK IS RISKY. YOU SHOULD CONSIDER
CAREFULLY THE FOLLOWING RISK FACTORS IN ADDITION TO THE REMAINDER OF THIS
PROSPECTUS, INCLUDING INFORMATION INCORPORATED BY REFERENCE, BEFORE PURCHASING
SHARES OFFERED BY THIS PROSPECTUS.
SOME OF THE INFORMATION IN THIS PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES. YOU CAN IDENTIFY
THEE STATEMENTS BY FORWARD-LOOKING WORDS SUCH AS "MAY," "WILL," "EXPECT,"
"ANTICIPATE," "BELIEVE," "ESTIMATE," "CONTINUE" AND SIMILAR WORDS. YOU SHOULD
READ STATEMENTS THAT CONTAIN THESE WORDS CAREFULLY BECAUSE THEY (1) DISCUSS OUR
FUTURE EXPECTATIONS, (2) CONTAIN PROJECTIONS OF OUR FUTURE OPERATING RESULTS OR
FINANCIAL CONDITION OR (3) STATE OTHER "FORWARD-LOOKING" INFORMATION. WE BELIEVE
IT IS IMPORTANT TO COMMUNICATE CERTAIN OF OUR EXPECTATIONS TO OUR INVESTORS.
THERE MAY BE EVENTS IN THE FUTURE, HOWEVER, THAT WE ARE NOT ACCURATELY ABLE TO
PREDICT OR OVER WHICH WE HAVE NO CONTROL. THE RISK FACTORS LISTED IN THIS
SECTION, AS WELL AS ANY OTHER CAUTIONARY LANGUAGE IN THIS PROSPECTUS, PROVIDE
EXAMPLES OF RISKS, UNCERTAINTIES AND EVENTS THAT MAY CAUSE OUR ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THE EXPECTATIONS WE DESCRIBE IN OUR FORWARD-LOOKING
STATEMENTS. BEFORE YOU INVEST IN OUR COMMON STOCK, YOU SHOULD BE AWARE THAT THE
OCCURRENCE OF ANY OF THE EVENTS DESCRIBED IN THESE RISK FACTORS AND ELSEWHERE IN
THIS PROSPECTUS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. IN SUCH CASE, THE TRADING PRICE OF OUR
COMMON STOCK COULD DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
WE MAY NOT BE PROFITABLE IN THE FUTURE.
We may never generate significant revenue or be profitable. Since we began
operations, we have incurred substantial losses. We incurred net losses of
$8.4 million in 1998 and $3.8 million in the first three fiscal quarters of
1999. We had an accumulated deficit of $32.6 million at October 1, 1999.
We expect to incur substantial losses for the foreseeable future, because we
intend to continue investing heavily in the development and marketing of
MeetingPoint and related follow-on applications such as ClassPoint. We expect
that the dollar amount of sales of our legacy connectivity products will
continue to decline for the foreseeable future. Sales of our legacy connectivity
products comprised 29% of total revenue in 1998 and 19% of total revenue in the
first three fiscal quarters of 1999. In addition, we expect that revenue from
CU-SeeMe will not increase substantially, and may decrease, during the
foreseeable future. We cannot be certain that sales of MeetingPoint, ClassPoint
and other new products will offset any declines in revenue from CU-SeeMe and our
legacy connectivity products in the fourth fiscal quarter of 1999 or in later
fiscal years.
WE FACE INTENSE COMPETITION FROM MANY PARTICIPANTS IN THE GROUP CONFERENCING
INDUSTRY.
The market for multimedia conferencing products and services is extremely
competitive. Because the barriers to entry in the multimedia conferencing market
are relatively low and the potential market is large, we expect continued growth
in the industry and the entrance of new competitors in the future. Our
competitors vary among our different group conferencing products:
- In offering CU-SeeMe, we compete, or expect to compete, with
(a) traditional hardware-based videoconferencing companies such as
PictureTel and VTEL, (b) vendors of operating systems and browsers such as
Microsoft, which offers NetMeeting, a product that competes directly with
CU-SeeMe and is bundled with Windows 98, (c) group conferencing support
companies such as Accord, Lucent Technologies and VideoServer, and
(d) distance learning solution vendors such as Centra Software and Lotus.
- A number of companies have announced multimedia conferencing server
products that compete directly with MeetingPoint, including PictureTel,
RADVision and VideoServer.
6
- ClassPoint competes with other distance learning and distance training
products, including (a) Contigo Itinerary, which features Web-based Java
PowerPoint delivery, (b) Lotus LearningSpace, which has Domino-based
materials delivery and asynchronous discussions, (c) RealNetworks, which
provides for one-to-many streaming video and media, (d) PlaceWare
Auditorium, which delivers interactive presentations to multiple sites,
and (e) Ilinc's LearnLinc, which has instructor-controlled, multipoint
audio and Web tours, with point-to-point video supplied by Intel at an
additional cost.
Many of our current and potential competitors in the multimedia conferencing
market, particularly Intel, Microsoft, PictureTel and VideoServer, have
significantly longer operating histories and significantly greater managerial,
financial, marketing, technical and other competitive resources, as well as
greater name recognition, than we do. As a result, these companies may be able
to adapt more quickly to new or emerging technologies and changes in customer
requirements and may be able to devote greater resources to the promotion and
sale of their conferencing products and services.
As a result, we cannot assure you that we will be able to compete
successfully with existing or new competitors in the multimedia conferencing
market. We believe that our ability to compete successfully in this market will
depend on a number of factors both within and outside our control, including:
- the adoption and evolution of industry standards;
- the pricing policies of our competitors and suppliers;
- the timing of the introduction of new software products and services by us
and our competitors; and
- our ability to hire and retain highly qualified employees.
To remain competitive in the multimedia conferencing market, we must
continue to invest heavily in research and development and in sales and
marketing. We may not have sufficient resources to make those investments, or we
may not be able to make the technological advances necessary to continue to be
competitive. In addition, current and potential competitors have established or
may establish collaborative relationships among themselves and with third
parties to increase the visibility and utility of their products and services.
Accordingly, it is possible that new competitors or alliances may emerge and
rapidly acquire a significant market share, which could have a material adverse
effect on our business.
WE MUST MARKET MEETINGPOINT AND CLASSPOINT SUCCESSFULLY.
We expect that sales of our legacy connectivity products will decline during
the foreseeable future and that sales of CU-SeeMe will not increase
significantly, and may decline, during the foreseeable future. As a result, our
future success will depend significantly on our ability to market MeetingPoint
and ClassPoint. MeetingPoint was first released in November 1997 and ClassPoint
was first released in April 1998, and we have had only a limited opportunity to
determine the extent to which these software products will succeed in the
marketplace. Moreover, the market for these products is developing and changing
rapidly, and there is a high level of uncertainty about the demand for and
market acceptance of these products.
In the longer term, our success will also depend upon our ability to develop
and introduce additional products based on our core technology and to continue
to improve the performance, features and reliability of our products, including
MeetingPoint and ClassPoint. We cannot assure you that we will be successful in
introducing these new and improved products, particularly if our limited capital
requirements us to reduce our projected research and development activities.
7
OUR QUARTERLY RESULTS MAY FLUCTUATE AND CAUSE THE PRICE OF OUR COMMON STOCK TO
FALL.
Our quarterly revenue and operating results are difficult to predict and
have fluctuated significantly from quarter to quarter. If our quarterly revenue
or operating results fall below the expectations of investors or public market
analysts, the price of our common stock could fall substantially. Our quarterly
operating results may vary significantly depending on a number of factors, some
of which are outside of our control. These factors include:
- the timing of the introduction or acceptance of new products offered by us
or our competitors;
- changes in demand for Internet services;
- changes in the mix of products sold by us;
- announcements of new products, services or technologies by us or our
competitors that cause customers to defer or cancel purchases of our
products;
- changes in pricing strategies by us or competitors;
- changes in regulations affecting the multimedia conferencing industry; and
- changes in currency exchange rates.
As a result of these factors, we may not be able to predict our operating
results accurately. In addition, MeetingPoint and ClassPoint continue to undergo
long evaluation and sale cycles by potential users. The lengths of these cycles,
combined with the newness of these software products, make it particularly
difficult for us to predict the amount and timing of revenue from these
products.
We base our expense levels on our product development plans and our
estimates of future revenue. To a large extent, our expenses are fixed. We may
be unable to adjust our spending in time to compensate for any unexpected
revenue shortfall, thus magnifying the adverse effect of any revenue shortfall.
WE RELY ON TWO DISTRIBUTORS FOR A SIGNIFICANT PORTION OF OUR TOTAL REVENUE.
Sales to Ingram Micro represented 26% of our total revenue in fiscal 1998
and 14% of our total revenue in fiscal 1997. Sales to Tech Data represented 14%
of our total revenue in fiscal 1997. The loss of, or a significant curtailment
of purchases by, these distributors, including a loss or curtailment due to
factors outside of our control, would have a material adverse effect on our
business.
WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY.
Our business could be seriously harmed if we are unable to protect
adequately our proprietary software and our other proprietary intellectual
property rights. We may be unable to deter misappropriation of our proprietary
technology, detect unauthorized use and take appropriate steps to enforce our
intellectual property rights. Our competitors could, without violating our
proprietary rights, develop technologies that are as good or better than our
technology.
Our multimedia conferencing products are licensed to customers under "shrink
wrap" licenses included as part of the product packaging. In most cases our
shrink wrap licenses are not negotiated with or signed by individual licensees.
Some of the provisions of our shrink wrap licenses, including provisions
limiting our liability and protecting us against unauthorized use, copying,
transfer and disclosure of the licensed program, may be unenforceable under the
laws of certain jurisdictions. Also, we have delivered technical data and
information relating to CU-SeeMe and MeetingPoint to the United States
government, and as a result, the United States government may have unlimited
rights to use the technical data and information or to authorize others to use
the technical data and information. We can not assure you that the United States
government will not authorize others to use our technical
8
data and information for purposes competitive with our products. In addition,
the laws of some foreign countries do not protect our proprietary rights to the
same extent as do laws in the United States.
Because the protection of intellectual property rights is often critically
important to the success of companies in the multimedia conferencing industry,
our competitors or others could assert claims that our technologies infringe
their proprietary rights. From time to time, we have received and may receive in
the future notice of claims of infringement of other parties' proprietary
rights. Many participants in the software industry have an increasing number of
patents and have frequently demonstrated a readiness to commence litigation
based on allegations of patent or other intellectual property infringement. For
example, a third party has objected to our use of the name "MeetingPoint." We
may not have the financial resources necessary to pursue any resulting
litigation to a final judgment, and we may not prevail in any litigation. In
defending against such litigation, we could incur significant legal and other
expenses and our management could be distracted from our principal business
operations. If any party making a claim against us were to prevail in litigation
against us, we may have to pay substantial damages. The court could also grant
injunctive or other equitable relief that could prevent us from offering our
products and services without a license or other permission from others. Any of
these outcomes could seriously harm our business.
WE FACE ADDITIONAL RISKS FROM OUR INTERNATIONAL OPERATIONS.
Our international business involves a number of risks that could hurt our
operating results or contribute to fluctuations in those results. Our revenue
from international sales represented 26% of our total revenue during fiscal 1998
and 27% of our total revenue during the first three fiscal quarters of 1999. We
intend to seek opportunities to expand our product and service offerings into
additional international markets, although we cannot be certain that we will
succeed in developing localized versions of our products for new international
markets or in marketing or distributing products and services in those markets.
The majority of our sales are currently denominated in U.S. dollars, but
there can be no assurance that a significantly higher level of future sales will
not be denominated in foreign currencies. To the extent we make sales
denominated in currencies other than U.S. dollars, fluctuations in exchange
rates may render our products less competitive relative to local product
offerings or result in foreign exchange losses. We have no experience in
implementing hedging techniques that might minimize our risks from exchange rate
fluctuations.
Our international business also involves a number of other difficulties and
risks, including risks associated with: changing economic conditions in foreign
countries; export restrictions; export controls relating to technology;
compliance with existing and changing regulatory requirements; tariffs and other
trade barriers; difficulties in staffing and managing international operations;
longer payment cycles; problems in collecting accounts receivable; software
piracy; political instability; seasonal reductions in business activity in
Europe and certain other parts of the world during the summer months; and
potentially adverse tax consequences.
OUR SOFTWARE PRODUCTS MAY CONTAIN UNDETECTED DEFECTS.
Software developed and incorporated by us may contain significant undetected
errors when first released or as new versions are released. Although we test our
software before commercial release, we cannot be certain that errors in the
software will not be found after customers begin to use the software. Our
current versions of CU-SeeMe and MeetingPoint were released in the last twelve
months. These releases correct a number of errors in prior releases, support
relevant standards and incorporate new features. Any defects in these versions
of CU-SeeMe or MeetingPoint or in ClassPoint may result in significant decreases
in revenue or increases in expenses because of adverse publicity,
9
reduced orders, product returns, uncollectible accounts receivable, delays in
collecting accounts receivable, and additional and unexpected costs of further
product development to correct the defects.
OUR SUCCESS DEPENDS ON THE PERFORMANCE OF PARTICIPANTS IN OUR DISTRIBUTION
CHANNELS.
We market our group conferencing products by forming channel relationships
in key markets with major distributors. We also license our group conferencing
products to original equipment manufacturers, value-added resellers and
additional distributors for bundling with their products and services. We expect
that our future success will depend in large part upon these original equipment
manufacturers, value-added resellers and distributors. The performance of these
original equipment manufacturers, value-added resellers and distributors is
outside our control, and we are unable to predict the extent to which these
organizations will be successful in marketing and selling our group conferencing
products or products incorporating our group conferencing products. We cannot
assure you that we will be successful in establishing relationships with
original equipment manufacturers, value-added resellers and distributors, and if
we fail, our business could be seriously harmed.
Our distributors typically carry the products of some of our competitors.
The distributors have limited capital to invest in inventory, and their
decisions to purchase our products and, in the case of retail stores, to give
them critical shelf space, are partly a function of pricing, terms and special
promotions offered by our competitors, which we cannot predict or control.
We distribute certain of our products directly over the Internet. By
distributing our products over the Internet, we may increase the likelihood of
unauthorized copying and use of our software.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES MAY ADVERSELY AFFECT OUR BUSINESS.
The application of existing laws to the Internet is uncertain and may take
years to resolve, particularly with respect to property ownership, user privacy,
freedom of expression, pricing, characteristics and quality of products and
services, taxation, advertising, intellectual property rights, information
security and the convergence of traditional telecommunications services with
Internet communications. Because the Internet is becoming increasingly popular,
various foreign or domestic governmental bodies may seek to adopt laws and
control use of the Internet. We cannot predict the nature of any such laws.
Legislation could subject us or our customers to potential liability or could
decrease the growth of the Internet, either of which could have an adverse
effect on our business.
In March 1996, ACTA, a group of telecommunications common carriers, filed
the ACTA Petition with the FCC, arguing that providers (such as us) of computer
software products that enable voice transmission over the Internet ("Internet
telephone" services) are operating as common carriers without complying with
various regulatory requirements and without paying certain charges required by
law. The ACTA Petition argues that the FCC has the authority to regulate both
the Internet and the providers of "Internet telephone" services and requests
that the FCC declare its authority over interstate and international
telecommunications services using the Internet, initiate rulemaking proceedings
to consider rules governing the use of the Internet for the provision of
telecommunications services, and order providers of "Internet telephone"
software to immediately cease the sale of such software pending such rulemaking.
Certain parties have filed comments with the FCC regarding the ACTA Petition. We
are unable to predict the outcome of this proceeding. In December 1996 the FCC
stated that it intended to address the legal questions raised by the ACTA
Petition in a future proceeding but has not yet done so. ACTA has submitted
petitions, similar to its FCC filing, to certain state regulators, including
public service commissions. Any action by the FCC or state regulators to grant
the relief sought by ACTA or otherwise to regulate use of the Internet as a
medium of communication, including any action to permit local exchange carriers
to impose additional charges for connections used for Internet access, could
have a material adverse effect on our business.
10
THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE.
The market price of our common stock may be volatile for many reasons,
including:
- actual or anticipated variations in our revenue and operating results;
- announcements of the development of improved technology;
- changes in estimates of our financial performance, or the dropping of
coverage, by securities analysts;
- conditions and trends in the Internet and group conferencing industries;
- adoption of new accounting standards; and
- general market conditions.
Recently the stock markets have experienced extreme price and volume
fluctuations that have dramatically affected the market prices of the stocks of
many technology companies, particularly companies associated with the Internet.
These fluctuations often have been unrelated or disproportionate to the
operating performance of those companies. These factors may adversely affect the
market price of our common stock..
VOLATILITY IN OUR STOCK PRICE MAY LEAD TO LITIGATION.
Stockholders frequently commence securities class action litigation against
a company after a significant decrease in the company's stock price. If our
stock price drops and our stockholders commence litigation against us, we could
incur significant legal and other expenses defending the litigation and our
management could be distracted from our principal business operations. Either of
these outcomes could seriously harm our business.
DELAWARE LAW AND OUR CHARTER DOCUMENTS CONTAIN ANTI-TAKEOVER AND INDEMNIFICATION
PROVISIONS THAT MAY ADVERSELY AFFECT STOCKHOLDERS.
Delaware corporate law and our charter documents contain provisions that
could delay or prevent a change of control, merger or other form of takeover
that our stockholders might find attractive. These provisions:
- prohibit us from engaging in a certain types of business combinations with
certain "interested stockholders" for a period of three years after the
date of the transaction in which the person becomes an interested
stockholder, unless the business combination is approved in a prescribed
manner;
- provide that stockholders may act only at meetings of stockholders and not
by written consent in lieu of a stockholders' meeting;
- provide that special meetings of our stockholders may be called by our
President and must be called by our President or Secretary at the written
request of a majority of the directors;
- provide that nominations for directors may not be made by a stockholder at
any annual or special meeting thereof unless the stockholder intending to
make a nomination notifies us of its intentions a specified number of days
in advance of the meeting and furnishes us with certain information
regarding itself and the intended nominee;
- require a stockholder to provide to our Secretary with advance notice of
business to be brought by the stockholder before any annual or special
meeting of stockholders as well as certain information regarding the
stockholder and others known to support such proposal and any material
interest they may have in the proposed business; and
11
- authorize our board to cause us to issue shares of common stock and
preferred stock that, if issued, could dilute and adversely affect various
rights of the holders of our common stock and, in addition, could be used
to discourage an unsolicited attempt to acquire control of our company.
These provisions could limit the price that investors will pay for shares of
our common stock.
Our charter documents require us to indemnify our officers and directors
against certain liabilities and expenses that they may incur while defending
lawsuits brought against them as officers or directors. In most cases, these
indemnification provisions will prevent our stockholders from recovering damages
from our officers and directors for their acts or omissions on our behalf.
12
USE OF PROCEEDS
All of the shares of common stock offered by this prospectus are being
offered by the selling stockholders. For information about the selling
stockholders, see "Principal and Selling Stockholders." We will not receive any
proceeds from sales of these shares. We received approximately $19.8 million
from the sale of those shares to the selling stockholders in private placements
completed in December 1999.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently anticipate that we will retain future earnings, if any, to fund the
development and growth of our business, and therefore we do not expect to pay
any cash dividends in the foreseeable future. Payment of future dividends, if
any, will be at the discretion of our board of directors after taking into
account various factors, including our financial condition, results of
operations, current and anticipated cash needs, and plans for expansion. The
terms of our existing bank line of credit and term loan prohibit us from
declaring or paying cash dividends on common stock..
PRICE RANGE OF OUR COMMON STOCK
Our common stock commenced trading on the Nasdaq National Market on
October 11, 1996 under the symbol "WPNE." The following table sets forth the
high and low closing sales price for the common stock for each quarter during
the past two fiscal years and the first quarter of 2000 to date, as reported by
the Nasdaq National Market.
HIGH LOW
-------- --------
Fiscal 1998:
First Quarter......................................... $3.125 $2.000
Second Quarter........................................ 3.28125 1.500
Third Quarter......................................... 2.15625 .84375
Fourth Quarter........................................ 2.375 .75
Fiscal 1999:
First Quarter......................................... 4.00 1.875
Second Quarter........................................ 8.75 3.5625
Third Quarter......................................... 7.625 4.00
Fourth Quarter........................................ 28.5625 6.875
Fiscal 2000:
First Quarter (through January 26, 2000).............. 27.875 22.125
As of January 15, 2000, there were 175 holders of record of common stock who
held an aggregate of 12,049,476 shares of common stock as nominees for an
undisclosed number of beneficial holders.
13
CAPITALIZATION
The following table sets forth our capitalization as of October 1, 1999
(i) on an actual basis and (ii) on a pro forma basis giving effect to our sale
of 1,302,084 shares of common stock in private placements completed in
December 1999 and our application of the net proceeds of those private
placements. The following table should be read in conjunction with our
consolidated financial statements and related notes appearing elsewhere in this
prospectus.
OCTOBER 1, 1999
--------------------
ACTUAL PRO FORMA
-------- ---------
(IN THOUSANDS,
EXCEPT SHARE DATA)
Stockholders' equity (deficit):
Preferred stock (undesignated), $0.01 par value; 5,000,000
shares authorized, actual and pro forma; no shares
issued or outstanding, actual and pro forma.............
Common stock, $0.01 par value; 30,000,000 shares
authorized, actual and pro forma; 10,667,701 shares
issued and outstanding, actual; 11,969,785 shares issued
and outstanding......................................... $ 106 $ 120
Additional paid-in capital................................ 41,380 61,141
Accumulated deficit....................................... (32,637) (32,637)
Accumulated other comprehensive income/currency
translation adjustments................................. 105 105
------- -------
Total stockholders' equity............................ $ 8,954 $28,729
======= =======
14
SELECTED CONSOLIDATED FINANCIAL DATA
The following financial data for the years ended December 31, 1997 and 1998,
and as of December 31, 1998, are derived from our consolidated financial
statements audited by Ernst & Young, LLP and appearing elsewhere in this
prospectus. Financial data for the periods ended December 31, 1994, 1995 and
1996 are derived from our audited consolidated financial statements not included
in this prospectus. Financial data for the nine months ended October 2, 1998 and
October 1, 1999, and as of October 1, 1999, are derived from our unaudited
financial statements appearing elsewhere in this prospectus. In the opinion of
management, the unaudited interim financial data presented reflect all
adjustments, consisting only of normal, recurring adjustments, necessary for a
fair presentation of the financial data for the periods presented. The financial
data should be read in conjunction with our consolidated financial statements
and related notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere in this prospectus.
Historical results are not necessarily indicative of operating results to be
expected in the future.
NINE MONTHS NINE MONTHS ENDED
ENDED YEAR ENDED DECEMBER 31, -----------------------
DECEMBER 31, ----------------------------------------- OCTOBER 2, OCTOBER 1,
1994 1995 1996 1997 1998 1998 1999
------------ -------- -------- -------- -------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue:
Software license fees...................... $4,365 $ 6,018 $10,500 $ 9,797 $ 6,948 $ 5,034 $ 7,125
Services and other......................... 600 1,166 1,166 1,255 845 607 864
------ ------- ------- ------- ------- ------- -------
Total revenue............................ 4,965 7,184 11,666 11,052 7,793 5,641 7,989
Cost of revenue.............................. 655 1,247 2,212 1,890 1,645 1,093 1,689
------ ------- ------- ------- ------- ------- -------
Gross profit................................. 4,310 5,937 9,454 9,162 6,148 4,548 6,300
------ ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing........................ 1,637 2,517 6,632 7,939 7,739 5,675 5,209
Research and development................... 1,301 1,866 3,819 5,722 5,042 3,855 3,373
General and administrative................. 1,106 2,000 2,793 2,586 2,278 1,860 1,562
Write-off of purchased search and
development costs........................ -- 3,200 -- -- -- -- --
Restructuring.............................. -- -- -- 661 -- -- --
------ ------- ------- ------- ------- ------- -------
Total operating expenses................. 4,044 9,583 13,244 16,908 15,059 11,390 10,144
------ ------- ------- ------- ------- ------- -------
Income (loss) from operations................ 266 (3,646) (3,790) (7,746) (8,911) (6,842) (3,844)
------ ------- ------- ------- ------- ------- -------
Other income (expense):
Interest income............................ 66 82 251 1,037 577 489 142
Other, net................................. 80 68 (20) (110) (85) (55) (74)
------ ------- ------- ------- ------- ------- -------
Other income, net........................ 146 150 231 927 492 439 68
------ ------- ------- ------- ------- ------- -------
Income (loss) before provision for income
taxes...................................... 412 (3,496) (3,559) (6,819) (8,419) (6,408) (3,776)
Provision for income taxes................... 18 30 78 7 5 5 --
------ ------- ------- ------- ------- ------- -------
Net income (loss)............................ $ 394 $(3,526) $(3,637) $(6,826) $(8,424) $(6,413) $(3,776)
====== ======= ======= ======= ======= ======= =======
Basic and diluted net loss per share......... $ 0.06 $ (0.65) $ (0.55) $ (0.75) $ (0.86) $ (0.67) $ (0.36)
====== ======= ======= ======= ======= ======= =======
Basic and diluted weighted average shares
outstanding................................ 6,085 5,451 6,618 9,148 9,798 9,621 10,570
====== ======= ======= ======= ======= ======= =======
DECEMBER 31, OCTOBER 1,
1998 1999
------------ ----------
BALANCE SHEET DATA:
Cash and cash equivalents................................... 6,421 3,513
Working capital............................................. 6,626 3,703
Total assets................................................ 15,996 12,402
Long-term debt, net current portion......................... 7 --
Total stockholders' equity.................................. 12,415 8,954
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Our revenue is derived from software license fees and fees for services
related to our software products, primarily software maintenance fees. During
1997, we recognized revenue in accordance with the American Institute of
Certified Public Accountants Statement of Position No. 91-1, "Software Revenue
Recognition." Beginning in 1998, we have recognized revenue in accordance with
AICPA Statement of Position 97-2, Software Revenue Recognition.
- Software license revenue is recognized upon execution of a contract or
purchase order and shipment of the software, net of allowances for
estimated future returns, provided that no significant obligations on our
part remain outstanding and collection of the related receivable is deemed
probable by our management. We record an allowance for product returns at
the time of sale and measure the allowance periodically in order to adjust
to changing circumstances, including changes in retail sales.
- Software maintenance fees, which generally are payable in advance and are
non-refundable, are recognized ratably over the period of the maintenance
contract, typically twelve months.
- Revenue from training and consulting services is recognized as services
are provided.
- Software license fees, consulting fees and training fees that have been
prepaid or invoiced but that do not yet qualify for recognition as revenue
under our policy, and prepaid maintenance fees not yet recognized as
revenue, are reflected as deferred revenue.
Research and development expenses typically are charged to income as
incurred. Statement of Financial Accounting Standards No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed, requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based upon our product development
process, technological feasibility is established upon completion of a
commercially viable working model. Costs incurred prior to the establishment of
technology feasibility are charged to research and development expense. Costs
incurred completion of the commercially viable working model and the point at
which the product is ready for general release have been capitalized.
Capitalized software is amortized based on its estimated economic life. We
capitalized $3.1 million of software costs in 1998 and did not capitalize any
software costs in the nine months ended October 1, 1999 or in 1997.
We purchased technology from Cornell Research Foundation and Labtam in 1998.
None of the purchased software was amortized in 1998, because the first
commercial shipments of products incorporating the acquired technology were not
made until the second quarter of 1999. We began amortizing the Labtam technology
in June 1999.
Effective January 1, 1997, we changed our interim fiscal reporting periods
from calendar quarters to quarters consisting of thirteen weeks.
16
RESULTS OF OPERATIONS
The following table sets forth operating data expressed as percentages of
total revenue for each period indicated.
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, -----------------------
---------------------- OCTOBER 2, OCTOBER 1,
1997 1998 1998 1999
-------- -------- ---------- ----------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Software license fees................................. 88.6% 89.2% 89.2% 89.2%
Services and other.................................... 11.4 10.8 10.8 10.8
------ ------ ------ ------
Total revenue....................................... 100.0 100.0 100.0 100.0
Cost of revenue......................................... 17.1 21.1 19.4 21.1
------ ------ ------ ------
Gross profit............................................ 82.9 78.9 80.6 78.9
------ ------ ------ ------
Operating expenses:
Sales and marketing................................... 71.8 99.3 100.6 65.2
Research and development.............................. 51.8 64.7 68.3 42.2
General and administrative............................ 23.4 29.2 33.0 19.6
Restructuring......................................... 6.0 -- -- --
------ ------ ------ ------
Total operating expenses............................ 153.0 193.2 201.9 127.0
------ ------ ------ ------
Loss from operations.................................... (70.1) (114.3) (121.3) (48.1)
Other income (expense).................................. 8.4 6.3 7.7 0.8
Provision for income taxes.............................. (0.1) (0.1) 0.1 --
------ ------ ------ ------
Net loss................................................ (61.8)% (108.1)% (113.7)% (43.3)%
====== ====== ====== ======
NINE MONTHS ENDED OCTOBER 1, 1999 COMPARED TO NINE MONTHS ENDED OCTOBER 2, 1998
Total revenue increased 42%, from $5,641,000 to $7,989,000 in the nine month
periods ended October 2, 1998 and October 1, 1999, respectively. For the nine
month periods ended October 2, 1998 and October 1, 1999, conferencing server
revenues increased 83% from $2,078,000 to $3,799,000, respectively. Conferencing
server revenue growth resulted from a combination of (a) price increases
effective in the last week of the 1998 fiscal quarter ended October 2, 1998,
(b) sales of MeetingPoint 4.0 and its associated add-ons, Continuous Presence,
Streaming Integration and ClassPoint, all of which began shipping in the second
quarter of 1999, and (c) increased sales of the MeetingPoint server. Continuous
Presence enables non-White Pine conferencing clients to display four video feeds
where they previously viewed one. Streaming media integration enables a
real-time videoconference to be broadcast to a large audience of
nonparticipants.
For the nine months ended October 2, 1998 and October 1, 1999, conferencing
client revenues increased 29%, from $2,031,000 to $2,625,000. Conferencing
client revenue growth was predominantly due to the release of the most recent
version of our CU-SeeMe client, CU-SeeMe Pro, which began shipping in
March 1999. The release of CU-SeeMe Pro also increased sales over our website,
growing 67% from $712,000 in the nine months ended October 2, 1998 to $1,191,000
in the nine months ended October 1, 1999.
We are experiencing relatively lengthy, two-step sales cycles for its
MeetingPoint server products. The first step typically extends from one to three
months and results in sales of small quantities of the server products for pilot
programs. The second step extends considerably longer, from six months to over a
year, as customers decide whether to move beyond the pilot programs to
deployment of MeetingPoint on a company-wide basis.
17
Our legacy connectivity product revenues have continued to decline,
experiencing a sharp drop in the quarter ended October 1, 1999 as a result of
purchasing delays associated with customer Year 2000 budgets. For the nine
months ended October 1, 1999, legacy connectivity revenue declined 7% to
$1,495,000 or 19% of total revenue from $1,613,000 or 29% in the nine months
ended October 2, 1998.
We continue to invest minimally in our legacy connectivity products, but
believes that we are no longer dependent on the revenue streams generated by
these product lines. There can be no assurance, however, that we will continue
to be successful in generating server revenue in an amount sufficient to offset
declines in revenue from our legacy connectivity products, or at all. The actual
amount of revenue generated by our server products may vary significantly
depending on a number of factors, including the unproven market status and
acceptability of the products and significant and increasing competition for
those products.
COST OF REVENUE
Cost of revenue consists principally of royalties and associated
amortization of paid license fees relating to third-party software included in
our products, and costs of product media, manuals, packaging materials, product
localization for international markets, duplication and shipping. For the nine
months ended October 1, 1999, cost of revenue increased to 21% from 19% in the
nine months ended October 2, 1998. The increase in cost was attributable to the
higher volume of camera bundles, which carry a higher cost than software-only
products. The cost of revenue is expected to be lower in the future as the
result of significantly lower royalty payments to a third party for T.120
technology.
SALES AND MARKETING
Sales and marketing expense consists primarily of costs associated with
sales and marketing personnel, sales commissions, trade shows, advertising and
promotional materials. For the nine months ended October 1, 1999, sales and
marketing expense declined 8% to $5,209,000 from $5,675,000 in the nine months
ended October 2, 1998. The increase in sales and marketing expense was driven
primarily by increased trade show activity, marketing programs, and commission
expense on higher sales volume.
RESEARCH AND DEVELOPMENT
Research and development expense consists primarily of costs of personnel
and equipment. For the nine months ended October 1, 1999, research and
development expense declined 13% to $3,373,000 from $3,855,000 from the nine
months ended October 2, 1998. This decrease was principally attributable to
lower headcount, contractors, and associated expenses.
GENERAL AND ADMINISTRATIVE
General and administrative expense consists of administrative, financial and
general management activities, including legal, accounting and other
professional fees. General and administrative expense decreased by 16% to
$1,562,000 from $1,860,000 in the nine month periods ended October 1, 1999 and
October 2, 1998. This decrease was primarily due to reduced telephone and
communications expense, reduced rent, and lower supplies and freight expenses,
all reflective of cost control measures in effect throughout 1999.
PROVISION FOR INCOME TAXES
Our provision for income taxes consists of federal alternative minimum taxes
and state and foreign income taxes. We made no provision for income taxes for
the nine months ended October 1, 1999 and October 2, 1998, as the result of net
losses incurred during those periods and our expectation that we would incur a
net loss for the fiscal year ending December 31, 1999. We expect that our
effective tax
18
rate for the foreseeable future will be lower than the combined federal and
state statutory rate, primarily as a result of the realization of net operating
loss carryforwards.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUE
Total revenue decreased by 30% to $7,793,000 in 1998 from $11,052,000 in
1997.
Revenue from conferencing software decreased by 9% to $5,781,000 in 1998
from $6,369,000 in 1997. This decrease resulted from a 41% decline in revenue
from client conferencing software, which decreased to $2,833,000 in 1998 from
$4,777,000 in 1997. The decline in client conferencing revenue was offset in
part by an 85% increase in revenue from server conferencing software, which grew
to $2,948,000 in 1998 from $1,592,000 in 1997. The growth in server conferencing
revenue principally resulted from the release of MeetingPoint in November 1997
and ClassPoint in April 1998. The growth rate of server conferencing revenue has
been determined in part by product performance and customer acceptance and
adoption.
Our legacy connectivity product sales continued to decline as we focused
fewer resources on these older product lines. Legacy connectivity revenue
declined by 43% to $2,226,000 in 1998 from $3,880,000 in 1997. The percentage of
total revenue represented by revenue from legacy connectivity products decreased
to 29% in 1998 from 35% in 1997. Maintenance and other revenue has decreased in
conjunction with the decline in legacy connectivity revenue, as the majority of
maintenance agreements historically have related to legacy connectivity
products.
Revenue from sales outside the United States comprised 26% of total revenue
in 1998 and 27% of total revenue in 1997. See "Risk Factors--We face additional
risks from our international operations."
Sales to Ingram Micro represented 26% and 14% of our total revenue in each
of 1998 and 1997. In addition, sales to Tech Data represented 14% of our total
revenue in 1997. See "Risk Factors--We rely on two resellers for a significant
portion of our total revenue."
COST OF REVENUE
Cost of revenue as a percentage of total revenue increased to 21% in 1998 as
compared to 17% in 1997. The percentage increase resulted primarily from the
increased sales volume of lower-margin servers as compared with higher-margin
legacy connectivity products and, to a lesser extent, increased sales of
lower-margin camera bundles in the fourth fiscal quarter of 1998.
In May 1997, we renegotiated the terms of the license agreement to provide
for a $1,000,000 prepayment of royalties in exchange for a decrease in the level
of revenue-based royalties payable to the Cornell Research Foundation. The
renegotiated terms were retroactive to January 1, 1997, and we remained subject
to minimum royalty payments. In the fourth fiscal quarter of 1998, we acquired
the Cornell Research Foundation's trademark and other intellectual property
rights in CU-SeeMe, upon which our current versions of CU-SeeMe are based, and
the related server technology, which underlies MeetingPoint. The purchase price
for these rights consisted of (1) a note in the principal amount of $900,000, of
which $300,000 is due on each of June 30, 2000, June 30, 2001 and June 30, 2002,
and (2) warrants to purchase 150,000 shares of our common stock at a price of
$1.00 per share. The warrants were issued in exchange for outstanding warrants
issued previously to the Cornell Research Foundation; these prior warrants had
an exchange price of $6.00 per share but otherwise had terms substantially
identical to those of the new warrants. As a result of this acquisition, we are
no longer required to pay any royalties to Cornell Research Foundation. See
"Business--Proprietary Rights."
19
SALES AND MARKETING
Sales and marketing expense decreased by 3% to $7,739,000 in 1998 from
$7,939,000 in 1997, and increased as a percentage of total revenue to 99% in
1998 from 72% in 1997. The dollar decrease in sales and marketing expense in
1998 was primarily attributable to decreased advertising, offset in part by
increases in sales headcount and travel expense.
RESEARCH AND DEVELOPMENT
Research and development expense decreased by 12% to $5,042,000 in 1998 from
$5,722,000 in 1997. Research and development expense represented 65% of total
revenue for 1998 and 52% of total revenue for 1997. The dollar decrease in
research and development expense was attributable primarily to reduced headcount
and consulting support, as well as limited software supply spending. A
company-wide restructuring in June 1997 reduced the number of research and
development personnel, cost benefits of which were fully realized in 1998. See
"Business" below.
GENERAL AND ADMINISTRATIVE
General and administrative expense decreased by 12% to $2,278,000 in 1998
from $2,586,000 in 1997. It represented 29% of total revenue in 1998 and 23% of
total revenue in 1997. The dollar decrease in general and administrative expense
was due primarily to reduced headcount, consolidation of operations conducted at
our office in La Gaude, France, decreased legal fees, and a one-time $240,000
reversal of a portion of the reserve for the RSI Suits. See "Business--Legal
Proceedings."
RESTRUCTURING CHARGE
In the second fiscal quarter of 1997, we reorganized our operations and
recorded a restructuring charge in the amount of $661,000 as a result of a
change in senior management and a reduction in our workforce. This amount
consisted primarily of severance payments, outplacement expenses, and related
fees for 26 employees who were laid off at the quarter end. The reorganization
reflected our decision to focus our resources on our Web-based conferencing and
connectivity products, and to terminate support, development, and sales of
certain older product lines.
In the third fiscal quarter of 1998, we reduced our total headcount by ten
persons, of whom seven were engaged in research and development, one in general
and administration activities, and two in marketing. We estimate that the
reorganization will provide cost savings of approximately $1,000,000 annually.
There was no restructuring charge recorded as a result of this transaction, and
severance payments were charged to their respective operating expense line
items. Severance payments outstanding at December 31, 1998 were immaterial.
PROVISION FOR INCOME TAXES
We recorded a tax provision of $5,000 for 1998 and $7,000 for 1997. At
December 31, 1998, we had cumulative federal net operating loss carryforwards of
$22,000,000.
LIQUIDITY AND CAPITAL RESOURCES
We used cash of $8,283,000 in 1998, as compared with $8,594,000 in 1997.
Cash used in 1998 was comprised largely of the following:
- the net loss of $8,424,000;
- cash payments of $770,000 in connection with the acquisition of assets
from Labtam Communications (see "Business--Proprietary Rights");
- $340,000 in licensing renewal fees; and
- $191,000 in severance payments.
20
These cash outlays were offset in part by receivable collections of $284,000
and the benefit of prepaid expenses in the amount of $436,000.
Cash used in the nine months ended October 1, 1999 was $2,908,000, compared
with $6,457,000 in the nine months ended October 2, 1998. The $2,908,000 was
comprised primarily of the net loss of $3,776,000 and an increase in accounts
receivable of $475,000, offset in part by the noncash impact of depreciation and
amortization in the amount of $1,276,000. Cash used in the nine months ended
October 2, 1998 consisted of the net loss of $6,413,000, approximately $700,000
in cash paid out in conjunction with the Labtam asset purchase, $543,000 in
purchases of property, equipment, and third party software licenses, offset in
part by the noncash effect of depreciation, amortization, and provision for bad
debt of $830,000, and an increase in prepaid expenses of $284,000.
On December 20, 1996, we entered into a commercial loan agreement with Fleet
Bank-NH (the "Bank") providing for a $3,000,000 revolving line of credit and a
separate term loan in the initial principal amount of $53,000. The revolving
line of credit was subsequently extended through August 30, 1998. On
October 27, 1998, the line of credit was renewed and reduced to $1,000,000. On
March 31, 1999, we elected to terminate our commercial loan agreement. We
continue to maintain the term loan, which had a balance of $10,000 at
October 1, 1999. Borrowings under the term loan are secured by substantially all
of our assets, including a $515,000 certificate of deposit and all of our
computer software products. Amounts outstanding under the term loan bear
interest at the Bank's prime rate plus 0.5%.
At December 1, 2000, we had cash and cash equivalents of $22.1 million and
working capital of $23.0 million. We believe that our current cash and cash
equivalents and funds generated from operations (if any) will be sufficient to
fund our operations and capital expenditures through fiscal 2000. Thereafter,
our liquidity will be materially dependent upon our internally generated funds
and our ability to obtain funds from additional equity or debt financings from
external sources. We continue to experience a negative cash flow each quarter.
Our capital requirements may vary materially from those we now anticipate,
depending on a number of factors including:
- the level of our research and development activities;
- the expansion of our facility and Network Operating Center and related
staffing;
- the rate of market acceptance of our software offerings; and
- the success of our sales, marketing and distribution strategy.
If we do not meet our goals with respect to revenue or if our costs are
higher than anticipated, substantial additional funds may be required.
YEAR 2000 COMPLIANCE
We formed a Year 2000 readiness team to evaluate all of our systems,
including our information technology systems. Our internal team compiled a list
of all computer applications and infrastructure to determine Year 2000
compliance. We identified and tested our seven mission-critical software
programs and determined those systems to be Year 2000 compliant. These software
programs represent Our mail server, web server (electronic storefront), ftp
server, joint support/customer service/sales system, accounting and
manufacturing system, source code monitoring system, and credit card
authentication system. We have received Year 2000 readiness statements from a
majority of our vendors. These vendors will be required to address compliance
issues and to ensure these issues are resolved in a timely manner. In the event
that our vendors are not fully year 2000 compliant, we could experience
disruption and delays that could have a material adverse impact on operations.
We have developed contingency plans to help alleviate potential problems
resulting from vendor Year 2000 readiness issues.
In addition, we tested our multimedia conferencing and legacy connectivity
products for Year 2000 compliance. We determined that our conferencing products
and most of our connectivity products are
21
Year 2000 compliant. A few older connectivity products are not Year 2000
compliant. We have no plans to update the code on these older connectivity
products and will not market these products in 2000. We have offered to sell the
code for these older products to customers in the installed base, in order to
allow the customers to choose to fix the code or to migrate to a new software
package. The revenue amount related to selling these older non-compliant
connectivity products will not be material.
We did not engage any outside support to assist in the Year 2000 compliance
process. Our out-of-pocket expenses for this process totalled less than $50,000
and related principally to the purchase of testing equipment and software.
To date, we have not experienced any Year 2000 related problems with any of
our systems.
INFLATION
Although certain of our expenses increase with general inflation in the economy,
inflation has not had a material impact on our financial condition or results of
operations to date.
RECENT ACCOUNTING PRONOUNCEMENTS
We adopted Statement of Financial Accounting Standards No. 131, Disclosures
about Segments of an Enterprise and Related Information ("SFAS 131"), in fiscal
1998. SFAS 131 establishes standards for reporting information regarding
operating segments in annual financial statements and requires selected
information for those segments to be presented in interim financial reports
issued to stockholders. SFAS 131 also establishes standards for related
disclosures about products and services and geographic areas. Operating segments
are identified as components of an enterprise about which separate discrete
financial information is available for evaluation by the chief operating
decision maker, or decision making group, in making decisions how to allocate
resources and assess performance. Our chief decision maker, as defined under
SFAS 131, is Killko Caballero, our Chief Executive Officer and President. To
date, we have viewed our operations as principally one segment, software sales
and associated services. As a result, the financial information disclosed in our
consolidated financial statements materially represents all of the financial
information related to our principal operating segment.
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"), requires companies
to record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS 133 is effective for fiscal
years beginning after June 15, 2000. The adoption of SFAS 133 is not expected to
have a material impact on our financial position or results of operations.
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use, requires companies to capitalize
qualifying computer software costs that are incurred during the application
development stage and amortize them over the estimated useful life of the
software. Statement of Position 98-1 is effective for us as of January 1, 1999.
The adoption of Statement of Position 98-1 has not had a material impact on our
financial position or results of operations.
Statement of Position 98-4, Deferrral of the Effective Date of a Provision
of Statement of Position 97-2, Software Revenue Recognition, with Respect to
Certain Transactions, modifies certain provisions of Statement of Position 97-2.
Our accounting policy on software revenue recognition currently is in compliance
with Statement of Position 97-2, as amended by Statement of Position 98-4, and
adoption of this Statement of Position, as currently issued, has not had a
material impact on our financial position or results of operations.
22
BUSINESS
OVERVIEW
We develop, market and support desktop multimedia software that facilitates
worldwide video and audio communication and data collaboration across the
Internet, intranets, extranets and other networks using the Internet protocol.
Our group conferencing software products, CU-SeeMe, CU-SeeMe Web and
MeetingPoint, create a client-server solution that allows users to participate
in real-time, multipoint, multimedia conferences from the users' desktop
computers, using existing Internet, intranet and extranet connections. By
developing multimedia conferencing products that require no proprietary
hardware, we are able to offer multimedia conferencing at a substantially lower
price than vendors of traditional hardware-based systems and thereby encourage
businesses and others to adopt multimedia conferencing as a mass communication
medium.
- CU-SEEME is our desktop multimedia conferencing client software for
interacting with others using full color video, audio, typed text and
whiteboard communication. CU-SeeMe can be used over the Internet or any
Internet protocol-based network. CU-SeeMe has afforded us brand name
recognition, an installed base and a time-to-market advantage over other
vendors seeking to develop software multimedia conferencing solutions. We
continue to develop and expand our CU-SeeMe offering. In November 1998, we
began delivering CU-SeeMe 3.1.2, which includes an improved Contact List
feature. In March 1999, we began delivering CU-SeeMe Pro, a
next-generation multimedia conferencing client targeted at the enterprise
market. CU-SeeMe Pro includes a new user interface, feature and
performance enhancements that make it particularly suited for business and
educational applications, and integrated T.120 data collaboration via
Microsoft NetMeeting. T.120 is the protocol that defines whiteboard,
application sharing and data collaboration for multipoint conferencing
applications. We offer CU-SeeMe as packaged software and directly over the
Internet. We also offer CU-SeeMe as a bundled package with MeetingPoint,
with our private label camera, the CU-SeeMe Cam, and with third-party
cameras.
- MEETINGPOINT is our Internet multimedia conferencing server software.
Introduced in November 1997, MeetingPoint was the first multimedia
conferencing server software to implement the International
Telecommunications Union H.323 standard for conferencing over packet
networks. MeetingPoint enables multipoint group conferences and full
interoperability between users of H.323 standard clients, including
Microsoft NetMeeting, Intel ProShare and PictureTel LiveLAN. In
September 1998, we released MeetingPoint 3.5, which incorporated major
improvements in audio mixing, video switching and interoperability, as
well as improved conference administration capabilities for scheduling,
bandwidth management and security. In May 1998, we commenced commercial
shipment of MeetingPoint for Solaris, a UNIX-based user environment
developed by Sun Microsystems. MeetingPoint for Solaris is the only
software-only conferencing server available on a UNIX platform.
Building upon our core CU-SeeMe and MeetingPoint technologies, we introduced
ClassPoint, our distance learning and training software, in April 1998.
ClassPoint is a MeetingPoint add-on offering instructor-controlled learning
environment with multipoint video and audio, instructor-led Web tours, Web-based
class set-up and scheduling, and whiteboard and application sharing. We believe
ClassPoint was the first completely integrated distance learning solution with
real-time, two-way interaction with audio, video and data. ClassPoint received
recognition as ADVANCED IMAGING magazine's Solution of the Year 1998 in the
category "Interactive Imaging & Communication, or Multimedia," as well as DVC's
"Networked Multimedia Award" for Best New Business Conferencing Product.
23
We also offer desktop X Windows and terminal emulation software. Our legacy
emulation products, WebTerm X, eXodus and 5PM Term, allow businesses and other
organizations to access data and applications residing on host workstations,
mini-computers and mainframe computers from most widely used desktop operating
systems. WebTerm is our implementation of the X server on Windows 95, 98 and NT,
running in a browser environment. In November 1998, we introduced WebTerm X 2.0,
which embodies technology previously developed in connection with our eXodus for
Mac.
In 1998, we enhanced our internally developed technology through two
technology acquisitions:
- In December 1998 we acquired from Cornell Research Foundation the
trademark and other intellectual property rights underlying certain
CU-SeeMe and MeetingPoint technologies. We previously had licensed these
technologies from Cornell Research Foundation.
- In July 1998 we purchased certain assets, including intellectual property,
comprising certain T.120 whiteboard and data collaboration technology from
Labtam Communications, an Australian corporation. We are incorporating the
purchased technology into our MeetingPoint and ClassPoint conferencing
solutions.
- In March 1999 we filed a patent for systems and methods for continuous
presence video conferencing.
- In October 1999, we introduced our CU-SeeMe Web software which provides
multipoint video instant messaging over the Internet.
STRATEGY
Our objective is to be a leading supplier of multimedia conferencing
solutions. To achieve this objective, we are implementing the following
strategies:
MAINTAIN TECHNOLOGICAL LEADERSHIP. Since 1996, we have developed and
introduced leading-edge technology for the Internet protocol-based group
conferencing market.
- CU-SeeMe Web was named INTERNET TECHNOLOGY magazine's 1999 "Product of the
Year" in the multimedia conferencing category, and CALL CENTER SOLUTION
magazine's "1999 Product of the Year" in the interactive video
webcommunications category.
- CU-SeeMe, introduced in March 1996, was the first commercially available
Internet-based multimedia conferencing product. CU-SeeMe has been featured
in a number of on-line and industry publications and won a substantial
number of awards in its three years of commercial availability, including:
CTI MAGAZINE's 1998 "Editors' Choice Award," C/net's Best Buy designation
in January 1997, PC COMPUTING magazine's five-star rating in
February 1997, its "A-List" designation in September 1997 and its "1997
Most Valuable Product Award" in the Web Communications category, CTI
MAGAZINE's 1997 "Editors' Choice Award," NEW MEDIA magazine's "1996 Hyper
Award for Best Conferencing Software," and BYTE magazine's "Best of PC
Expo '96 Winner." CU-SeeMe currently is the only desktop conferencing
client capable of displaying up to twelve simultaneous video windows.
- MeetingPoint, introduced in November 1997, was the industry's first H.323
compliant multimedia conferencing server and remains the only H.323
compliant multimedia conferencing server on a Solaris platform.
MeetingPoint has received a number of awards, including CTI MAGAZINE's
"1997 Product of the Year," "1998 Product of the Year," and "1999 Product
of the Year" in the "Video Conferencing" category and INTERNET TELEPHONY
magazine's "1997 Editors' Choice Award" and "1998 Product of the Year."
The announcement of continuous presence, which began shipping commercially
in the second fiscal quarter of 1999, further demonstrated our
technological leadership in the fledgling H.323 server market.
24
- ClassPoint, which began shipping commercially in April 1998, builds upon
the CU-SeeMe and MeetingPoint group conferencing technology to create an
innovative distance learning and distance training solution for
educational, corporate and governmental organizations. ClassPoint was
named "Solution of the Year 1998" by ADVANCED IMAGING magazine and "Best
New Business Conferencing Product" at DVC '98 Spring. ClassPoint won MEDIA
AND METHODS magazine's 1999 Portfolio Award.
We intend to extend our leadership position in Internet protocol-based
conferencing by continuing to invest in research and development and to build
upon our existing technology. For example, we have identified growing market
demand for voice over Internet protocol networks, or "VoIP," and believe that
much of the technology needed to enable VoIP is embedded in our H.323
standards-based solutions.
FOCUS ON MARKET FOR MEETINGPOINT. We believe our future success will depend
significantly on our ability to market MeetingPoint. We believe that
opportunities exist to market MeetingPoint to Internet service providers,
corporations and other entities seeking to enable and promote multimedia group
conferencing. Based on the number of concurrent ports sold in a highly nascent
market space, we estimate that, since the introduction of MeetingPoint in 1997,
MeetingPoint has accounted for substantially all of the revenue from the
software H.323 market and a significant majority of the revenue from the
combined hardware and software H.323 market. We believe that our leadership
position in this market space has positioned us to achieve revenue growth as the
H.323 market matures and expands.
LEVERAGE CORE CONFERENCING TECHNOLOGY TO DEVELOP APPLICATIONS FOR VERTICAL
MARKETS. We intend to build on our core CU-SeeMe and MeetingPoint technology in
order to develop and market integrated and application-oriented solutions for
key vertical markets, including applications that evidence the market trend
toward converged networks:
- We believe the market for group conferencing is in the early stages of a
migration from the large, proprietary room-based conferencing systems
embodying the H.320 standard to desktop conferencing solutions based on
the newer H.323 standard. Desktop multimedia conferencing is a relatively
new phenomenon. Since the majority of potential group conferencing sites
today have no solution whatsoever, we believe that users will find an
H.323 videoconferencing solution less expensive and more easily integrated
than an H.320 product. Also, our software products seamlessly allow H.320
users to communicate visually with H.323 users, providing a cost effective
migration path for corporate entities that wish to preserve their
investment in H.320 equipment as they migrate to an Internet
protocol-based H.323 environment.
- We have identified market segments that desire simple data collaboration,
such as whiteboard sharing, that can be enabled using our technology.
Enterprises in these market segments are seeking data collaboration until
their internal networks are upgraded to manage the increased bandwidth
required by multiparty group conferencing. Our existing products offer
data collaboration support and can migrate easily to full multimedia
application support.
- The increasing pervasiveness and comparatively low cost of Internet
protocol-based networks are driving enterprises to investigate the use of
Internet protocol-based networks as a transport mechanism for voice
applications. Much of the technology required to enable VoIP is already
embedded within our products.
Our scalable, cost-effective, software-based support for converged network
applications offers a platform for enterprises to reduce their costs while
enabling improvements in productivity.
25
BUILD INTELLECTUAL PROPERTY PORTFOLIO. Our success depends heavily upon our
proprietary technology. We have taken several steps designed to increase and
strengthen our portfolio of proprietary rights:
- In July 1998, we purchased certain assets, including intellectual
property, comprising certain T.120 whiteboard and data collaboration
technology from Labtam Communications. We have incorporated the purchased
technology into our MeetingPoint and ClassPoint conferencing solutions.
- In November 1998, we acquired ownership of the trademark, source code and
all intellectual property rights to the CU-SeeMe and MeetingPoint
technologies from Cornell Research Foundation. This acquisition not only
strengthened our intellectual property portfolio, enabling further
development and improvement upon the existing technologies, but also
secured the worldwide CU-SeeMe community that existed in large part
through Cornell's freeware population while providing that same community
with a logical upgrade path.
- In December 1998, we acquired from RADVision a one-time source code
snapshot of H.323 protocol stack. This acquisition will allow us to modify
and enhance the code embedded in our products.
- In March 1999, we applied for a patent on a portion of the technology
underlying the continuous presence feature of MeetingPoint.
- In October 1999, we introduced CU-SeeMe Web.
We intend to continue to build our intellectual property portfolio in order
to provide it with maximum control over the use of the technology underlying our
group conferencing products.
PRODUCTS
MULTIMEDIA CONFERENCING
Our multimedia conferencing products, CU-SeeMe, MeetingPoint and ClassPoint,
provide real-time, multipoint video and audio communication and data solution
over the Internet, intranets, extranets and other networks using the Internet
protocol. By developing multimedia conferencing products that require no
proprietary hardware, we are able to offer multimedia conferencing at a
substantially lower price than vendors of traditional hardware-based systems and
thereby encourage businesses and others to adopt multimedia conferencing as a
mass communication medium. Our CU-SeeMe product has afforded us brand name
recognition, an installed base and a time-to-market advantage over other vendors
seeking to develop software multimedia conferencing solutions.
CU-SEEME WEB
CU-SeeMe Web, building on the CU-SeeMe technology, enables live audio, video
and text chat to be embedded in a standard web browser. CU-SeeMe Web can enhance
existing interactive, collaborative applications with real-time video and audio,
enabling on-demand Visual Instant Messaging, web-based videochat, live
interactive web events, and face-to-face, on-line call centers for ecommerce and
support services.
Internet portals and web sites can utilize CU-SeeMe Web to customize their
web pages with new interactive features that will attract more visitors to their
sites and keep them there for longer periods of time. Internet Service
Providers, or ISPs, and Applications Service Providers, or ASPs, can offer
value-added services to their business and consumer customers. Electronic
commerce sites can offer live, personalized assistance to buyers while they are
in the process of shopping online. CU-SeeMe Web gives Internet web sites a new
set of tools to grow membership, create online communications, increase revenue
streams, and offer services that have not previously been available.
26
Introduced in October 1999, CU-SeeMe Web began shipping in January 2000.
CU-SeeMe Web was named 1999 INTERNET TELEPHONY magazine's "Product of the Year"
award for the multimedia conferencing category, and CALL CENTER SOLUTION
magazine's "1999 Product of the Year" in the interactive video web
communications category.
CU-SEEME
CU-SeeMe is our desktop multimedia conferencing software for real time
person-to-person or group conferencing. CU-SeeMe works in conjunction with our
MeetingPoint conference server to provide a complete software-based, multipoint
conferencing solution.
CU-SeeMe can be used over the Internet or any Internet protocol-based
network, providing the user with the power to communicate globally without
expensive hardware. By operating over the Internet, CU-SeeMe substantially
broadens the base of businesses, organizations and individuals able to engage in
multimedia conferencing. This software-only solution runs on both Windows and
Macintosh platforms and offers full-color video, audio, chat window and
whiteboard communications. The user can participate in "live over the Internet"
conferences, broadcasts or chats. CU-SeeMe can be launched directly from Web
pages with the user's favorite Web browser, using 28.8 Kbps modem, ISDN link or
better. For audio-only telephony use, CU-SeeMe works effectively over a 14.4
Kbps modem. CU-SeeMe is the only desktop conferencing client capable of
displaying up to twelve simultaneous video windows, allowing the user to see
everyone in a small-group conference without video switching. CU-SeeMe also is
the only cross-platform product capable of H.323 interoperability on Windows 95,
98 and NT and MacOS.
The initial version of CU-SeeMe, introduced in March 1996, was the first
commercially available Internet-based multimedia conferencing product. CU-SeeMe
has been featured in a number of on-line and industry publications and has won a
substantial number of awards in its three years of commercial availability,
including:
- C/net's Best Buy designation in January 1997,
- PC COMPUTING magazine's five-star rating in February 1997, "A-List"
designation in September 1997 and "1997 Most Valuable Product Award" in
the Web Communications category,
- CTI MAGAZINE'S 1997 "Editors' Choice Award,"
- NEW MEDIA magazine's "1996 Hyper Award for Best Conferencing Software,"
and
- BYTE magazine's "Best of PC Expo "96 Winner."
We currently offer two versions of CU-SeeMe:
- CU-SeeMe 3.1.2 began shipping in February 1999 and includes Contact List
feature. CU-SeeMe 3.1.2 is available on Windows 95, 98 and NT and MacOS
platforms, but with the introduction of CU-SeeMe Pro, we expects future
sales of CU-SeeMe 3.1.2 to be made principally to Macintosh users and
original equipment manufacturers. CU-SeeMe has a suggested retail price of
$99.
- CU-SeeMe Pro began shipping in March 1999. CU-SeeMe Pro represented the
first major release of CU-SeeMe in nearly two years and is available on
Windows 95, 98 and NT platforms. CU-SeeMe Pro, which has a suggested
retail price of $99, includes the following features:
- full H.323 support, enabling direct interoperability with other H.323
clients such as Microsoft NetMeeting, Intel ProShare and PictureTel
LiveLAN;
- integrated desktop application sharing, whiteboard and data collaboration
via Microsoft NetMeeting;
27
- a set-up wizard that automatically defines the optimal settings based on
the user's network connection and capture device; and
- a "Conference Companion" that simplifies the way users make connections,
keep a contact list and access directory services. This new feature
replaces the address list found in prior versions and enables a user to
make a connection using only an e-mail address as opposed to an Internet
protocol address. It includes a Web-based home page that can be
customized for internal use by businesses.
We ship CU-SeeMe as packaged software and also make CU-SeeMe available for
downloading over the Internet. We also offer CU-SeeMe as a bundled package with
MeetingPoint and with third-party cameras. In December 1998, we began shipping
CU-SeeMe bundled with our private label camera, the CU-SeeMe Cam, a parallel
port, 256 color desktop camera. The CU-SeeMe Cam bundled package has a suggested
list price of $99.
In March 1999, we introduced our portal Web site, WWW.CUSEEMEWORLD.COM. We
believe CU-SeeMe World will help promote CU-SeeMe and MeetingPoint sales by:
- building a centralized community of group conferencing users;
- facilitating user interaction through the utilization of member
directories, Web-based Internet Locator Service for locating users online,
"safe" e-mail interchange in which e-mail addresses are masked and users
exchange e-mail via user names, and threaded discussion groups;
- generating strategic alliances through sponsorships and partnering
opportunities; and
- encouraging content providers to offer structured conferencing and
programming.
We believe that successful management of the site will not only promote
CU-SeeMe and MeetingPoint sales, but will generate advertising revenue and
strategic alliances through sponsorships and partnering opportunities.
MEETINGPOINT
MeetingPoint, the software-only server component of our multimedia
conferencing solution, allows users of CU-SeeMe to participate in multipoint,
multimedia conferences with a nearly unlimited number of users. Administrators
create and host conferences using MeetingPoint. End-users then connect to the
conference, using either CU-SeeMe or any other third-party H.323 compliant
multimedia conferencing client product. MeetingPoint's core "multimedia router"
technology enables the group interaction to take place by "routing" it to the
other conference participants. MeetingPoint solves the complex problem of
enabling real-time multipoint communication over the Internet between users
operating at different connection speeds without degrading the quality of the
entire conference to that of the slowest connection speed.
MeetingPoint, introduced in November 1997, was the industry's first H.323
compliant multimedia conferencing server. MeetingPoint's software-only
architecture makes it scalable and deployable over a variety of hardware
platforms and operating systems, including Windows NT and Solaris, a UNIX-based
user environment developed by Sun Microsystems. MeetingPoint for Solaris is the
only software-only conferencing server available on a UNIX platform.
MeetingPoint received two leading industry awards within the first few months of
its release: "1997 Product of the Year" by CTI MAGAZINE in the "Video
Conferencing" category and the "1997 Editors' Choice Award" from INTERNET
TELEPHONY magazine. It garnered "1998 Product of the Year" from both CTI
MAGAZINE and INTERNET TELEPHONY magazine during its first year of shipment.
In September 1998, we released MeetingPoint 3.5, which incorporated major
improvements in audio mixing, video switching and interoperability, as well as
improved conference administration
28
capabilities for scheduling, bandwidth management and security. MeetingPoint
3.5.1, the current version of MeetingPoint for both NT and Solaris platforms,
was initially shipped in February 1999. In addition, in May 1998 we commenced
commercial shipment of MeetingPoint for Solaris, a UNIX-based user environment
developed by Sun Microsystems. MeetingPoint for Solaris is the only conferencing
server software available on a UNIX platform.
MeetingPoint server version 4.0, introduced in July 1999, includes core
optimizations, as well as add-on components for specialized functions. These
include continuous presence, the ability to view multiple video windows
simultaneously, and streaming media integration, features that have not
previously been available for standards-based conferencing over the Internet or
an IP network. Both enhance the conferencing experience for end-users and extend
the potential reach of live, face-to-face communication. Version 4.0 of
MeetingPoint also includes full integration of the Labtam T.120 technology that
White Pine purchased in July 1998. This integration improves the performance and
scalability for data collaboration across networks.
The continuous presence option for MeetingPoint enables the server to
combine four streams of video into one split-screen image that is delivered to
participating client endpoints. Standard H.323 endpoints such as Microsoft
NetMeeting and Intel Proshare, which have previously been limited to showing a
single incoming video window, can now show multiple video windows. MeetingPoint
with continuous presence allows the end user a more user-friendly and intuitive
conference experience than traditional video switching. If there are more than
four participants in a conference, the end user will see the last four
participants who have spoken.
MeetingPoint is able to manage the amount of network resources that are
consumed as it hosts any type of group conference. The use of Internet
protocol-based networks for real-time communication is beginning a phase of
significant growth, with thousands of new users every day and creative new
applications being discovered weekly. However, multimedia requires significant
bandwidth. While emerging technologies like Fast Ethernet, ADSL and high-speed
cable modems promise expanded bandwidth in the near future, today most users
face network constraints. Home users, for example, are usually limited to 28.8
Kbps modem connections. Business, governmental and educational enterprises may
have 10 Mbps modem local area networks, but these are used for a variety of
traditional, mission-critical applications such as file sharing, e-mail and
printing. Even network service providers are challenged to stretch their network
resources to cover rapidly growing customer traffic. In those rare instances
where bandwidth is plentiful, it comes at a relatively high cost, especially for
wide area network links. Because of these network constraints, MeetingPoint's
bandwidth management capability allows users to make the most of the new
collaboration, entertainment and learning possibilities that network-based
multimedia communications create, without having to make expensive upgrades to
the user's existing network infrastructure.
MeetingPoint's ability to manage the use of network resources while hosting
group conferencing arises from its core multimedia router technology. This
technology is focused on a single, very specific task: routing real-time
multimedia information among clients participating in group communications.
MeetingPoint manages and limits bandwidth use by using built-in intelligence
regarding the specific nature of multimedia data and real-time group
communications. Increased economies are achieved when wide-area communications
are routed through servers spread out across an organization's network, either
to network service provider "points of presence" or to remote offices on an
intranet.
In October 1998, we became the first company to demonstrate continuous
presence for H.323 conferencing, as an add-on to MeetingPoint. Continuous
presence enhances the conferencing experience by enabling the conference
participants to see up to four video windows at one time. Prior to the
continuous presence capability, H.323 client users could only see the
participant that was talking, and not any of the other participants. We made it
possible, for the first time, for many popular H.323 clients in a multipoint
group conferencing environment to utilize continuous presence, including users
29
of Microsoft NetMeeting, Intel ProShare and PictureTel LiveLAN. Continuous
Presence is delivered to these desktop H.323 clients through a software add-on
option to our MeetingPoint and represents a feature add previously only
available through H.320 conferencing. Continuous presence was made generally
available to the public in the second fiscal quarter of 1999.
MeetingPoint 4.0 has a suggested retail price of $8,995 for a server with 10
user connections. We also offer MeetingPoint 4.0 at higher prices for up to 100
users; capacity beyond 100 users may be obtained by linking two or more
MeetingPoint servers. We also license CU-SeeMe and MeetingPoint as a bundled
package and offer site licenses and volume discounts for larger purchases.
CLASSPOINT
ClassPoint, our first server solution, builds upon our CU-SeeMe and
MeetingPoint group conferencing technology to create a distance learning and
distance training solution. ClassPoint creates an instructor-led "virtual
classroom" that facilitates distance learning in any environment where an
instructor and students are in different locations. Because it enables the
fundamental interaction between the instructor and students, ClassPoint can be
used in classes for kindergarten through high school, or "K-12," in courses for
colleges and universities, and in home schooling. ClassPoint also offers
opportunities for distance training by businesses, government organizations and
others. ClassPoint enables simultaneous, real-time audio and video
communications, text chat, whiteboard sharing and Web touring. It also provides
a Web-based framework for materials to be shared before and after classes and
training sessions.
ClassPoint, which began shipping commercially in April 1998, was named
"Solution of the Year 1998" by ADVANCED IMAGING magazine and "Best New Business
Conferencing Product" at DVC '98 Spring. ClassPoint provides a framework for
education that can be used in a number of applications. K-12 schools can use
ClassPoint to connect children and classrooms together from different cultures,
bring in guest lecturers, facilitate home schooling, enable teacher mentoring
programs and conduct moderated parent conferences. Colleges and universities can
use ClassPoint to increase their full-time enrollment by offering distance
learning courses. ClassPoint also enables colleges and universities to conduct
on-line lab and tutoring sessions, and to offer adult continuing education in
partnership with business and government. ClassPoint makes corporate training
increasingly accessible to all levels of employees by bringing it to the
desktop, enabling businesses to improve the availability and reach of their
training programs with a cost-efficient solution.
We offer licenses of ClassPoint in 10-, 25- and 50-user bundles, with prices
ranging from $6,395 to $22,995 for businesses and from $5,095 to $17,995 for
education, government and non-profit organizations. We also offer site licenses
and volume discounts for larger purchases.
30
LEGACY SYSTEM CONNECTIVITY
Our legacy emulation products, WebTerm X, eXodus and 5PM Term, allow
businesses and other organizations to access data and applications residing on
host workstations, mini-computers and mainframe computers from most widely used
desktop operating systems. WebTerm X, which allows users to access host
applications from within a Web browser, is a suite of products geared to
providing advanced intranet solutions to corporations, educational organizations
and government agencies. Our eXodus and 5PM Term products allow users throughout
an enterprise to access mission-critical data and applications residing on
legacy systems. These software products are competitively priced and designed to
be easy to use, and they include a comprehensive set of features allowing for
seamless integration with existing enterprise systems and newer intranet
applications.
BACKGROUND
Terminal emulators were developed in the early 1980s to mimic "dumb"
terminals that linked users to mainframe computers through a variety of
proprietary communication protocols. Subsequently, vendors developed
cost-effective, software-only products that both enabled personal computers to
emulate text terminals for a variety of mainframe platforms and capitalized on
the expanded graphical capabilities of personal computers by developing
high-end, graphical software emulators. Software terminal emulation, which can
now be performed over the Internet through the Internet protocol, continues to
provide easier and wider access to mission-critical data and applications
residing on enterprise legacy systems.
In 1984, software engineers at the Massachusetts Institute of Technology
broadly expanded enterprise connectivity by developing X Windows as a standard,
independent of platforms, networks and operating systems, for workstations and
personal computers. X Windows, which is based on a client-server computing
model, permits a user to run multiple graphical applications simultaneously on a
variety of platforms from a single X Windows terminal. Since 1990, virtually all
X Windows applications have used Internet protocol-based networks to establish
connectivity for desktop personal computers, enabling large numbers of personal
computers to access data and applications across the enterprise, regardless of
the platform, network or operating system.
WEBTERM X
WebTerm X provides the means for Windows and MacOS users to access critical
information on a corporate intranet through their Web browsers. WebTerm X can be
used to:
- embed live, interactive terminal emulators and X Windows applications
within users' Web browser;
- centrally administer all configurations and updates from one location with
no user involvement; and
- automate interactions in the host window, reducing or eliminating end-user
application training.
In April 1998 we introduced WebTerm X 2.0, which embodies technology
previously developed in connection with our eXodus for Mac. WebTerm X 2.0 gives
Windows 95, 98 and NT users access to X Windows applications from their Web
browser and as a stand-alone application. The WebTerm X Administrator is a
Webmaster or system administrator tool that centrally configures Web pages with
X Windows sessions.
Single-user WebTerm X products have suggested retail prices of $169 to $229.
We also offer site licenses and volume discounts for larger purchases.
31
EXODUS
eXodus is our family of X Windows connectivity products. Running on all
Windows-based systems and Macintosh platforms, eXodus is a comprehensive
connectivity package that provides easy access to all X Windows applications, as
well as many other legacy applications. eXodus provides the solution for
connecting to Unix, VMS and Windows NT environments via the X Windows protocol.
Connections to popular X Windows environments such as Common Desktop
Environment, Sun Open Windows, Hewlett Packard HP-VUE and Digital DECwindows are
seamless and simple.
The eXodus software for a single-user has a suggested retail price of $295
for either Windows or Macintosh. We also offer site licenses and volume
discounts for larger purchases.
5PM TERM
5PM Term is a modular terminal emulation solution providing connections from
Windows and Macintosh desktops to IBM Mainframe, AS/400, UNIX, VAX and HP hosts.
5PM Term replaces terminal screens and offers value-added features that enable
organizations to customize their environment with productivity enhancements like
multiple sessions, WatchMe macro scripting, HotKeys, HotSpots, keyboard macros,
toolbars, graphical keyboard mapping, full-screen support, and on-line help. 5PM
Term also has its own script editor with macro recording function, which allows
the non-technical user to create and modify the user's own macros directly in
5PM Term.
5PM Term for a single user has a suggested retail price of between $249 and
$399, depending upon the platform. We also offer site licenses and volume
discounts for larger purchases.
RESEARCH AND DEVELOPMENT
Our research and development activities traditionally have been separated
between legacy connectivity products and group conferencing products. We believe
our future success depends on our group conferencing solutions, and we have been
migrating our research and development resources from legacy connectivity
technology to group conferencing technology. Approximately 93% of research and
development expense in 1998 was attributable to development of group
conferencing products, compared with 87% in 1997 and 42% in 1996. We expect the
percentage of our research and development resources devoted to group
conferencing products to increase further in the foreseeable future, as we
intend to continue to limit our legacy connectivity research and development to
maintenance of existing products.
MARKETING AND DISTRIBUTION
We market and sell our products through a combination of distributors,
original equipment manufacturers and strategic partners, our Certified Alliance
Partners program for resellers, our direct sales organization, and directly over
the Internet. Our sales force is located in Nashua, New Hampshire and La Gaude,
France. We maintain a Web site at WWW.WPINE.COM and WWW.CUSEEME.COM where
prospective customers can obtain information about our products and services and
download our multimedia conferencing products and WebTerm X. We conduct
marketing programs, including direct mail, advertising, public relations and
product literature, to support each of our sale channels and to position and
promote our products and services. Marketing personnel provide price lists and
product descriptions and assist the direct sales force through lead generation
and sales training.
Our primary strategy for marketing and distributing our group conferencing
products is to establish new strategic and original equipment manufacturer
relationships and extend existing relationships with multinational firms that
provide particular marketing or distribution opportunities or technological
capabilities for our group conferencing products. We have already established
distribution relationships in Austria, Australia, Belgium, Egypt, Finland,
France, Germany, Greece, Hong Kong, Hungary, Israel,
32
Italy, Japan, Korea, Netherlands, Norway, Slovania, South Africa, Spain, Sweden,
Switzerland and the United Kingdom. We have also formed original equipment
manufacturer or bundling relationships in order to provide customers with
turnkey solutions and to facilitate product sales through distribution channels.
Since 1996, we have employed Tech Data and Ingram Micro as distributors to
deliver CU-SeeMe to consumers through retail channels including store chains and
superstores.
On March 1, 1999, we announced our portal Web site, CU-SeeMe World. We
believe this Web site will help to promote CU-SeeMe and MeetingPoint sales by:
- building a centralized community of all group conferencing users;
- facilitating user interaction through the utilization of member
directories, Web-based ILS lookup, "safe" e-mail interchange (e-mail
addresses are masked and users exchange e-mail via user names), and
threaded discussion groups;
- generating strategic alliances through sponsorships and partnering
opportunities; and
- encouraging content providers to offer structured conferencing and
programming.
We market and sell our legacy connectivity products in the United States
through our direct sales force and distributors and in other countries primarily
through distributor relationships.
CUSTOMERS
Our customers include businesses, educational institutions, government
organizations and individual consumers. We sell our software to end users and to
original equipment manufacturers that bundle our software with other products.
Sales to Ingram Micro represented 26% of our total revenue in 1998 and 14%
of our total revenue in 1997. Sales to Tech Data represented 14% of our total
revenue in 1997. The loss, of or a significant curtailment of purchases by,
these distributors, including a loss or curtailment due to factors outside of
our control, would have a material adverse effect on our business.
CUSTOMER SERVICE AND SUPPORT
We are committed to maintaining customer satisfaction and loyalty. We employ
technical customer representatives located in Nashua, New Hampshire and La
Gaude, France to support and service our customer base. Certain of our
distributors and original equipment manufacturer customers maintain separate
customer support organizations for their respective customers. We provide
back-up support to those organizations.
We maintain a technical support hotline to answer customer inquiries and
provide an on-line database of technical product information. Our support staff
also responds to e-mail inquiries and monitors several e-mail mailing lists.
Customer support specialists diagnose and solve technical problems related not
only to our products but also to other hardware and software with which our
products may interact. We track all support requests, including current status
reports and historical customer interaction logs, using a series of customer
databases. We use customer feedback as a source of ideas for product
improvements and enhancements.
In February 1999, we began charging CU-SeeMe customers for technical support
on a per-incident basis if they are not covered by a maintenance contract.
Customers of MeetingPoint, ClassPoint and our legacy connectivity products can
obtain service and support through our support program, which for a fee entitles
customers to priority service through a toll-free number. The support program
also affords customers, at no additional cost, automatic shipments of all
enhancements and upgrades for licensed products.
33
PROPRIETARY RIGHTS
Our success is heavily dependent upon our proprietary technology. We
currently have no patents and rely primarily on copyright, trademark and trade
secrets law, as well as employee and third-party non-disclosure agreements, to
protect our intellectual property. We have applied for a patent on a portion of
the technology underlying the continuous presence feature of MeetingPoint. There
can be no assurance that the steps taken by us to protect our proprietary rights
will be adequate to prevent misappropriation of our technology or independent
development by others of similar technology. Litigation may be necessary to
enforce our intellectual property rights or to protect our trade secrets. Any
such litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on our business, financial condition and
results of operations. Moreover, while we believe that our products and
technology do not infringe the proprietary rights of others, there can be no
assurance that third parties will not assert infringement and other claims
against us or that such claims will not be successful. See "Risk Factors--We may
be unable to protect our proprietary technology."
ACQUISITION OF TECHNOLOGY FROM CORNELL RESEARCH FOUNDATION
Our multimedia conferencing products, CU-SeeMe and MeetingPoint, are
commercial, enhanced versions of Freeware CU-SeeMe and its related server.
Freeware CU-SeeMe and its related server were developed by a research institute
at Cornell University and are freely available on the Web. In June 1995, we
entered into a software license agreement with Cornell Research Foundation that
granted to us the exclusive worldwide right to develop, modify, market,
distribute and sublicense commercial versions of Freeware CU-SeeMe and its
related server, as well as the rights to appoint licensee distributors and to
use the trademark "CU-SeeMe."
We commenced shipments of the initial commercial versions of CU-SeeMe in
March 1996 and the Web Reflector (the predecessor of MeetingPoint) in May 1996.
In May 1997, we renegotiated the terms of the license agreement to provide for a
$1,000,000 prepayment of royalties in exchange for a decrease in the level of
revenue-based royalties payable to Cornell Research Foundation. The renegotiated
terms were retroactive to January 1, 1997, and we remained subject to minimum
royalty payments.
In November 1998, we acquired Cornell Research Foundation's trademark and
other intellectual property rights in Freeware CU-SeeMe, upon which our current
versions of CU-SeeMe are based, and the related server technology, which
underlies MeetingPoint. Our management anticipates that the acquisition will
facilitate further development and improvement of currently existing
technologies. In addition, we believe that the acquisition will secure the
worldwide CU-SeeMe community that existed in large part through the users of
Freeware CU-SeeMe and will providing that community with a logical upgrade path.
The purchase price for these rights consisted of (a) a note in the principal
amount of $900,000, of which $300,000 is due on each of June 30, 2000, June 30,
2001 and June 30, 2002, and (b) warrants to purchase 150,000 shares of our
common stock at a price of $1.00 per share. The warrants were issued in exchange
for outstanding warrants issued previously to Cornell Research Foundation; these
prior warrants had an exercise price of $6.00 per share but otherwise had terms
substantially identical to those of the new warrants.
ACQUISITION OF TECHNOLOGY FROM LABTAM COMMUNICATIONS
In July 1998, we purchased certain assets, including intellectual property,
comprising certain T.120 whiteboard and data collaboration technology from
Labtam Communications, an Australian corporation. The purchase price for these
assets consisted of 900,000 shares of our common stock and cash payments of
U.S.$628,000 in July 1998 and A$201,606 (or U.S.$133,000) in January 1999. The
terms of, and consideration paid in, this transaction were the result of arm's
length negotiations with Labtam Communications, which had no relationship to us
prior to the transaction. We have
34
incorporated the purchased T.120 technology into our MeetingPoint and ClassPoint
software. T.120 is the protocol that defines whiteboard, application sharing and
data collaboration for multipoint conferencing applications.
TECHNOLOGY ACQUISITION FROM RADVISION
In December 1998, we acquired from RADVision a one-time source code snapshot
of a H.323 protocol stack. This acquisition will allow us to modify and enhance
certain source code embedded in our products.
COMPETITION
The market for multimedia conferencing products and services is extremely
competitive, and we expect that competition will intensify in the future. We
believe that the principal competitive factors in the multimedia group
conferencing industry are price, video and audio quality, interoperability,
functionality, reliability, service and support, hardware platforms supported,
and vendor and product reputation. We believe that our ability to compete
successfully will depend on a number of factors both within and outside our
control, including the adoption and evolution of industry standards, the pricing
policies of our competitors and suppliers, the timing of the introduction of new
software products and services by us and others, our ability to hire and retain
quality employees, and industry and general economic trends. In addition,
because the barriers to entry in the software market are relatively low and the
potential market is large, we anticipate continued growth in the industry and
the entrance of new competitors in the future.
In offering CU-SeeMe, we currently compete, or expect to compete, directly
or indirectly with the following categories of companies:
- traditional hardware-based videoconferencing companies such as PictureTel
and VTEL;
- vendors of operating systems and browsers such as Microsoft, which offers
NetMeeting, a product that enables video, audio and data communication
over the Internet;
- videoconferencing support companies such as VideoServer, Lucent
Technologies and Accord; and
- distance learning solution vendors, such as Centra Software and Lotus.
Currently Microsoft's NetMeeting, introduced in 1997, presents the most
direct competition for CU-SeeMe. Microsoft is able to bundle NetMeeting with its
Windows 98 operating system. NetMeeting supports Windows 98, Windows 95 and
Windows NT and complies with H.323.
H.323 is being rapidly adopted by the industry as the global standard for
group conferencing products. A number of companies have announced
standards-based server products that compete directly with MeetingPoint,
including PictureTel, VideoServer and RADVision. It is likely that other
companies will also enter this market in the near future.
ClassPoint competes with other distance learning and distance training
products in educational, corporate and governmental markets. Competing products
include (a) Contigo Itinerary, which features Web-based Java PowerPoint
delivery, (b) Lotus LearningSpace, which has Domino-based materials delivery and
asynchronous discussions, (c) RealNetworks, which provides for one-to-many
streaming video and media, (d) PlaceWare Auditorium, which delivers interactive
presentations to multiple sites, and (e) Ilinc's LearnLinc, which has
instructor-controlled, multipoint audio and Web tours, with point-to-point video
supplied by Intel at an additional cost.
In the market for X Windows products, we face significant direct competition
from a number of PC X server software vendors, including Hummingbird
Communications, NetManage, Network
35
Computing Devices and Walker Richer and Quinn, as well as indirect competition
from manufacturers of dedicated X terminals. Our principal competitor in this
market is Hummingbird Communications, the largest supplier of X server software
products for the PC platform. To the extent that these and other companies
introduce new or enhanced PC X server software products, we will face increased
competition.
In the terminal emulation market, we currently compete with the following
categories of companies:
- vendors of IBM host connectivity products, including Attachmate and Wall
Data;
- vendors of TCP/IP terminal emulation products, including NetManage; and
- vendors of Digital Equipment Corporation and Hewlett-Packard host
connectivity products, including Walker Richer and Quinn.
In the Web-based terminal emulation environment, we expect to compete,
directly or indirectly, with IBM, Open Connect, Wall Data, Attachmate, and
Walker Richer and Quinn.
Many of our current and potential competitors, including Hummingbird
Communications, Intel, IBM, Microsoft, PictureTel and VideoServer, have
significantly longer operating histories and significantly greater managerial,
financial, marketing, technical and other competitive resources, as well as
greater name recognition, than us. As a result, our competitors may be able to
adapt more quickly to new or emerging technologies and changes in customer
requirements or may be able to devote greater resources to the promotion and
sale of their products and services. There can be no assurance that we will be
able to compete successfully with existing or new competitors. In addition,
competition could increase if new companies enter the market or if existing
competitors expand their service offerings. An increase in competition could
result in material price reductions or loss of market share by us and could have
a material adverse effect on our business, financial condition and results of
operations.
To remain competitive, we will need to continue to invest in research and
development and sales and marketing. There can be no assurance that we will have
sufficient resources to make such investments or that we will be able to make
the technological advances necessary to remain competitive. In addition, current
and potential competitors have established or may in the future establish
collaborative relationships among themselves or with third parties, including
third parties with which we have a relationship, to increase the visibility and
utility of their products and services. Accordingly, it is possible that new
competitors or alliances may emerge and rapidly acquire a significant market
share. Such an eventuality could have a material adverse effect on our business,
financial condition and results of operations.
EMPLOYEES
At January 1, 2000, we had 117 full-time employees, including 47 in research
and development, 35 in sales and marketing, 13 in technical support, and 22 in
general and administrative and software manufacturing. Sixteen of these
employees were located in France and, in accordance with applicable French law,
were represented by a labor union. Our other employees were located in the
United States and were not represented by any labor organization. We have
experienced no work stoppages and believe that our relations with our employees
are good.
FACILITIES
We conduct our operations from our headquarters in Nashua, New Hampshire and
our facilities in La Gaude, France.
36
The facility in New Hampshire contains approximately 27,000 square feet,
including 20,200 square feet for engineering and office space, 4,500 square feet
for production space and 2,300 square feet for storage. We lease our office in
New Hampshire from an unaffiliated party under the terms of a five-year lease
ending July 1, 2001 under which we are responsible for maintenance, repairs,
taxes, insurance and utilities. Base rent is $157,000 for 2000 and $82,000 for
the first half of 2001. Renewal options for 3 two-year terms are available to
us.
The facility in La Gaude contains approximately 8,000 square feet of
engineering and office space. We lease our office in France from several
unaffiliated parties under a series of similar leases under which we are
responsible for maintenance, repairs, taxes, insurance, and utilities.
LEGAL PROCEEDINGS
We are a defendant in two lawsuits pending in New York federal court in
which the plaintiffs claim to suffer from carpal tunnel syndrome, or "repetitive
stress injuries," as a result of having used computer keyboards that are alleged
to have been defectively designed. The keyboards were supplied, and possibly
designed and manufactured, by Ontel. The assets of Ontel were purchased in 1982
by Visual Technology, a predecessor of our company. The suits, which seek money
damages, were brought by employees of New York Telephone, which purchased the
keyboards from Lockheed Electronics. One or more of Visual Technology, Ontel,
Lockheed Electronics and Key Tronics, a subcontractor for certain of the
keyboards, are named as co-defendants in a number of suits, including the two
suits in which we are a defendant. Neither of the suits has reached trial.
We have established a reserve for legal fees and losses that could arise
from these suits and a number of similar actions against us. The amount of this
reserve is based upon our belief that (a) the suits may be covered by product
liability insurance, (b) we are contractually indemnified by Lockheed
Electronics and Key Tronics against all or a portion of the damages to which we
may be subject and (c) we have defenses to substantially all of the claims under
the suits. We reduced this reserve from $291,000 to $51,000 as of December 31,
1998, in recognition of the fact that four similar lawsuits had been resolved at
no expense to us. Although we believe that our reserve for the suits is
adequate, there can be no assurance that our liabilities under the suits will
not substantially exceed the reserve.
From time to time, we have received and may receive in the future notice of
claims of infringement of other parties' proprietary rights. Although we believe
that our products and technology do not infringe the proprietary rights of
others, there can be no assurance that additional third parties will not assert
infringement and other claims against us or that any infringement claims will
not be successful. See "Risk Factors--We may be unable to protect our
proprietary technology."
37
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors and their ages as of January 15, 2000
are as follows:
NAME AGE POSITION
- ---- -------- ------------------------------------------------------------
Killko A. Caballero..... 40 Chief Executive Officer, President and Chairman
David O. Bundy.......... 41 Chief Technology Officer
Christine J. Cox........ 41 Chief Financial Officer and Vice President of Finance
John E. Kelly........... 46 Vice President of Worldwide Sales and Marketing
Joseph J. Esposito(1)... 48 Director
Jonathan G. 45 Director
Morgan(1)(2)............
Adam Stettner(2)........ 35 Director
- ------------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
KILLKO A. CABALLERO HAS BEEN OUR CHIEF EXECUTIVE OFFICER SINCE
DECEMBER 1998 AND OUR PRESIDENT SINCE AUGUST 1997. HE HAS SERVED AS A DIRECTOR
SINCE NOVEMBER 1995 AND AS OUR CHAIRMAN SINCE JANUARY 2000. HE SERVED AS OUR
INTERIM PRESIDENT DURING JUNE AND JULY 1997 AND AS OUR SENIOR VICE PRESIDENT OF
RESEARCH AND DEVELOPMENT AND CHIEF TECHNOLOGY OFFICER FROM NOVEMBER 1995 UNTIL
JUNE 1997. MR. CABALLERO WAS A CO-FOUNDER OF WHITE PINE SOFTWARE, EUROPE AND
SERVED AS PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD OF WHITE
PINE SOFTWARE, EUROPE FROM JULY 1991 UNTIL NOVEMBER 1995.
DAVID O. BUNDY has been our Chief Technology Officer since July 1998. He was
our Vice President of Engineering from January 1994 to July 1998 and our Vice
President and Principal Engineer from September 1991 to December 1993.
CHRISTINE J. COX has been our Chief Financial Officer since December 1998
and our Vice President of Finance since August 1997. She was our Corporate
Controller from October 1996 to August 1997. Ms. Cox served as Division
Controller and Treasurer of Sequoia Systems, Inc., a fault-tolerant and
business-critical microcomputer company, from May 1996 to October 1996,
Operations Controller of Sequoia from June 1995 to May 1996, and held other
financial management positions at Sequoia from August 1993 to June 1995.
JOHN E. KELLY has been our Vice President of Worldwide Sales and Marketing
since March 1999. He founded Aura Networks, a developer of datacentric digital
Worldwide Sales loop carrier products, in May 1997 and was President of Aura
from May 1997 until November 1998. From 1993 to April 1997, Mr. Kelly was Vice
President of Marketing at Intraplex, Incorporated, a developer of digital
network products for broadcast and wireless communications, which was acquired
by Harris Corporation in November 1998.
JOSEPH J. ESPOSITO has served as a director since January 2000. He was the
President and CEO of Tribal Voice, a provider of instant messaging, interactive
communications and online community solutions, until it was sold to CMGI late in
1999. Currently he works as a consultant, focusing on strategy for the
communications and information industries. Prior to joining Tribal Voice, Mr.
Esposito worked in the publishing industry, with tenures at Simon & Schuster and
Random House. Mr. Esposito also served as CEO of Encyclopaedia Britannica.
JONATHAN G. MORGAN has served as one of our directors since May 1996. He has
been Managing Director/Group Head of Investment Banking-Technology of Prudential
Securities Incorporated, an investment banking firm, since June 1993.
38
ADAM STETTNER has served as one of our directors since March 1999. He has
been Managing Director of the Special Situations Technology Fund, an investment
fund, since April 1997 and President of Stettner Consultants, Inc., a computer
consulting company, since 1989.
Executive officers are appointed by and serve at the discretion of the
board. Directors are elected to serve until the next annual meeting of
stockholders (or special meeting in lieu thereof) and until their successors are
duly elected and qualified.
BOARD COMMITTEES
Our board of directors has appointed an Audit Committee and a Compensation
Committee. Our board has not appointed a standing Nominating Committee.
The Audit Committee reviews the results and scope of the annual audit of our
financial statements conducted by our independent auditors and our policies and
procedures with respect to our internal accounting and financial controls. The
Audit Committee also makes recommendations to our board on the engagement of our
independent auditors, as well as other matters referred by our board. The Audit
Committee currently consists of Jonathan Morgan and Adam Stettner.
The Compensation Committee provides recommendations concerning salaries,
incentives and other compensation for our directors, officers, employees and
consultants. The Compensation Committee also administers our stock option plans
and our employee stock purchase plan. The Compensation Committee currently
consists of Joseph Esposito and Jonathan Morgan.
DIRECTOR COMPENSATION
We do not pay fees to our directors, and we presently have no plans to pay
directors' fees. We grant stock options to our non-employee directors pursuant
to our director stock option plan. The purpose of the director stock option plan
is to encourage ownership of common stock by our non-employee directors in order
to help us attract and retain directors of exceptional competence and to furnish
an added incentive for non-employee directors to increase their efforts on our
behalf. Joseph Esposito, Jonathan Morgan and Adam Stettner are non-employee
directors for purposes of the director stock option plan.
Under the terms of the director stock option plan, we grant automatic
formula stock options to non-employee directors as follows:
- upon a non-employee director's initial election, he or she is entitled to
receive a stock option to purchase 15,000 shares of common stock; and
- upon a non-employee director's re-election, he or she is entitled to
receive a stock option to purchase 10,000 shares of common stock, as long
as he or she has served as a non-employee director for at least the three
months immediately preceding the meeting at which he or she is re-elected.
The exercise price of the options granted under the director stock option
plan must equal the fair market value of our common stock on the grant date.
Each option granted under the director stock option plan is subject to vesting
under the terms of such plan and expires upon the earlier of (a) the tenth
anniversary of the grant date and (b) the first anniversary of the date on which
the option holder ceased serving as a non-employee director.
Pursuant to the director stock option plan, Mr. Morgan received an option to
purchase 15,000 shares of common stock in September 1997 upon the adoption of
the director stock option plan by our stockholders. Mr. Stettner received an
option to purchase 15,000 shares of common stock in March 1999 upon his election
to the board. Mr. Esposito received an option to purchase 15,000 shares of
common stock in January 2000 upon his election to the board.
39
In addition, on December 16, 1998, our board voted to grant to Mr. Morgan
options to purchase 35,000 shares of common stock at an exercise price of $1.875
per share, which represented the closing price of common stock on the grant
date. These options were issued under our 1996 stock option plan. They vest over
a two-year period.
EXECUTIVE OFFICER COMPENSATION
SUMMARY COMPENSATION TABLE FOR 1996, 1997 AND 1998
The following table summarizes certain information with respect to the
annual and long-term compensation that we paid for the past three fiscal years
to the following persons (the "Named Officers"):
- Killko Caballero, our only chief executive officer in 1998; and
- David Bundy and Christine Cox, our other two executive officers whose
compensation for services rendered in all capacities to us exceeded
$100,000 during 1998.
All of the options described in the following table have a maximum term of
seven to ten years, subject to earlier termination in the event of the
optionee's cessation of service with us. The options are exercisable during the
optionee's lifetime only by the optionee. They are exercisable by the optionee
only while the optionee is one of our employees or advisors and for certain
limited periods of time after termination of employment.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
------------
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)
- --------------------------- -------- --------- -------- ------------ ---------------
Killko A. Caballero..................... 1998 $150,445 -- 35000 --
Chief Executive Officer and President 1997 124347 $20,000 50000 --
1996 90420 15000 --
David O. Bundy.......................... 1998 132405 -- 20000 $20,000
Chief Technology Officer 1997 119909 15000 60000 --
1996 110000 15000 10000 --
Christine J. Cox........................ 1998 105467 -- 20000 --
Chief Financial Officer and 1997 83384 15000 37000 --
Vice President of Finance 1996 11688 1,000 6000 --
The other compensation paid to Mr. Bundy in 1998 consisted of amounts paid in
connection with Mr. Bundy's relocation, at our request, to New Hampshire.
OPTION GRANTS IN 1998
The following table summarizes (a) option grants to the Named Officers
during 1998 and (b) the value of options held by the Named Officers at
December 31, 1998. The amounts shown in the last two columns represent
hypothetical gains that could be achieved for the respective options if
exercised at the end of their option terms. These gains are based on assumed
rates of stock appreciation of five percent and ten percent, compounded annually
from the date the respective options were granted to the date of their
expiration. The gains shown are net of the option price, but do not include
deductions for taxes or other expenses that may be associated with the exercise.
Actual gains, if any, on stock option exercises will depend on the future
performance of our common stock, the option holders' continued employment
through the option term, and the date on which the options are exercised.
40
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------- VALUE AT ASSUMED
PERCENT OF ANNUAL RATES
NUMBER OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM
OPTIONS EMPLOYEES IN BASE PRICE PER EXPIRATION ---------------------
NAME GRANTED(#) FISCAL YEAR SHARE($/SH) DATE 5%($) 10%($)
- ---- ---------- ------------ -------------- ---------- --------- ---------
Killko A. Caballero................ 35000 7% $1.875 12/16/08 $41,271 $104,589
David O. Bundy..................... 20000 4 1.875 12/16/08 23,584 59765
Christine J. Cox................... 20000 4 1.875 12/16/08 23,584 59765
AGGREGATED OPTION EXERCISES IN 1998 AND OPTION VALUES AT DECEMBER 31, 1998
The following table summarizes information about options exercised during
1998, and the value of unexercised options held at the end of 1998, by the Named
Officers. The closing sale price for our common stock as reported on the Nasdaq
National Market on December 31, 1998 was $2.375. For purposes of the last column
in the table, value is calculated on the basis of the difference between the
option exercise price and $2.375, multiplied by the number of shares of common
stock underlying the options.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
ACQUIRED AT FISCAL YEAR-END(#) FISCAL YEAR-END($)
ON VALUE ------------------------- -------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ----------- ----------- ------------------------- -------------------------
Killko A. Caballero........... -- -- 12500/72500 --/$17,500
David O. Bundy................ -- -- 60485/59,515 $58,125/$10,000
Christine J. Cox.............. -- -- 11375/42,625 --/$10,000
BENEFIT PLANS
In each of 1992, 1993, 1994, 1995 and 1996, our board adopted a stock option
plan, each of which was approved by our stockholders in the year of adoption.
Options may no longer be granted under these plans. In addition, in July 1996
our board adopted, and our stockholders approved, our 1996 stock option plan,
under which a total of 1,600,000 shares of common stock have been reserved for
issuance. As of December 31, 1999, options to purchase an aggregate of 1,656,204
shares of common stock having a weighted average exercise price of $9.6334 per
share were outstanding under our option plans.
The 1996 option plan is administered by the Compensation Committee. Under
the 1996 option plan, the Compensation Committee selects the individuals to whom
options will be granted and determines the option exercise price and other terms
of each option, subject to the provisions of the 1996 option plan.
The 1996 option plan authorizes the grant of options to purchase common
stock intended to qualify as incentive stock options, as defined in Section 422
of the Internal Revenue Code, and the grant of options that do not so qualify,
or nonqualified options. Under the 1996 option plan, incentive stock options may
be granted only to our officers and other employees, including members of our
board who are also our employees. Nonqualified Options may be granted to
officers or other employees of our company or any subsidiary, to members of our
board or the board of directors of a
41
subsidiary, whether or not employees of our company or a subsidiary, and to
consultants and other individuals providing services to us or a subsidiary.
The 1996 option plan provides that, upon a reorganization, merger,
consolidation, liquidation or sale of substantially all of our assets, the
Compensation Committee may accelerate the time for exercise of all unexercised
and unexpired options to and after a date prior to the effective date of the
specified transaction. Alternatively, the Compensation Committee may cancel any
outstanding options as of the effective date of the specified transaction,
provided that the Compensation Committee shall have accelerated the time for
exercise of all unexercised and unexpired options that it proposes to cancel and
shall have given each optionholder notice of and a right to exercise such
options in full. If the Compensation Committee does not take either of the
foregoing actions, then after the effective date of the specified transaction
unexercised options shall remain outstanding and shall be exercisable for shares
of common stock or, if applicable, shares of such stock or other securities,
cash or property as the holders of shares of common stock shall have received in
the transaction.
STOCK PURCHASE PLAN
In July 1996, our board adopted, and our stockholders approved, our 1996
stock purchase plan, under which up to 100,000 shares of common stock could be
purchased by our employees. In July 1999, our stockholders approved an amendment
of the purchase plan to increase the total number of shares available for
issuance from 100,000 to 200,000.
During each six-month offering period under the 1996 purchase plan,
participating employees are entitled to purchase shares through payroll
deductions. The maximum number of shares that may be purchased is determined on
the first day of the offering period pursuant to a formula under which a
specific percentage of the employee's projected base pay for the offering period
is divided by 85% of the market value of one share of common stock on the first
day of the offering period, multiplied by two. During each offering period, the
price at which the employee is able to purchase shares of common stock is equal
to 85% of the last trading price of the common stock on the Nasdaq National
Market on the date that the offering period commences or the date the offering
period concludes, whichever is lower.
The Stock Purchase Plan is administered by the Compensation Committee. All
employees who meet certain minimum criteria based on hours worked per week and
length of tenure with us are eligible to participate in the Stock Purchase Plan.
No employee may be granted an option under the Stock Purchase Plan (a) if the
option would permit the employee's rights to purchase stock under the Stock
Purchase Plan to exceed $25,000 of the fair market value of the stock for each
calendar year in which such option is outstanding or (b) if, immediately after
the grant, the employee would own stock possessing three percent or more of the
total combined voting power or value of all classes of stock of our company or
any subsidiary.
EMPLOYMENT AND SEPARATION AGREEMENTS
We entered into a Nondisclosure and Noncompetition Agreement with David O.
Bundy dated February 15, 1996. Pursuant to the agreement, Mr. Bundy agreed that
while employed by us and for a period of 19 months following the termination of
his employment with us for any reason, he will not, directly or indirectly,
compete with us or solicit any of our employees, contractors, suppliers,
existing customers or prospective customers on behalf of himself or any other
entity that engages in the sale, distribution or development of or research
concerning computer software and technology in breach of the agreement. Either
party may terminate the agreement by giving the other party thirty days' prior
written notice. If Mr. Bundy's employment is terminated without cause during the
term of the agreement, he will be entitled to his base salary for six months or
until he becomes employed elsewhere, whichever occurs first; provided, however,
that if his new salary is lower than his base salary
42
at our company, we will pay the difference for the balance of this six-month
period. Pursuant to the agreement, Mr. Bundy was granted a stock option on
February 29, 1996 to purchase 5,000 shares of common stock at an exercise price
of $2.50 per share.
On March 16, 1998, Robert Hadden resigned as Vice President of Sales of
White Pine. In connection with the resignation, we entered into a separation
agreement with Mr. Hadden, effective as of March 16, 1998. Pursuant to the terms
of the agreement, Mr. Hadden received payments for a period of six months
beginning March 17, 1998 and ending on September 16, 1998. The payments were
made at an annualized rate of $100,000.
We entered into a letter agreement dated August 5, 1997 with Christine J.
Cox respect to her employment as our Vice President of Finance. The letter
agreement establishes a base salary of $100,000 per year and provides for a
maximum annual incentive bonus of $15,000, based upon achievement of specific
milestones to be established by us. If Ms. Cox's employment is terminated
without cause during the term of the agreement, she will be entitled to her base
salary for six months. The letter agreement does not provide for any minimum
period of employment, and therefore Ms. Cox continues to be an at-will employee.
43
RELATED PARTY TRANSACTIONS
In December 1999, we sold 78,125 shares of common stock to Special
Situations Private Equity Fund, LP, 65,104 shares of common stock to Special
Situations Cayman Fund, L.P., and 182,292 shares of common stock to Special
Situations Fund III, L.P., at a price of $15.36 per share. These 325,521 shares
are included in the shares being offered by this prospectus. Under SEC
regulations, these funds may be deemed to be affiliated with Austin W. Marxe and
David Greenhouse, who beneficially own 13% of our common stock on January 15,
2000, and Adam Stettner, one of our directors. The shares sold to these funds
were sold on terms identical to the terms under which we sold an additional
976,563 shares of stock to third parties in December 1999.
We have entered into employment and separation agreements with three
individuals. See "Management--Employment and Separation Agreements."
44
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of January 15, 2000, by (a) each of our
directors, (b) each of the Named Officers, (c) all of our directors and
executive officers as a group, (d) each of the persons (or groups of affiliated
persons) known by us to own beneficially more than five percent of the
outstanding shares of common stock and (e) each of the Selling Stockholders.
Unless otherwise noted:
- The address of our directors and executive officers is in care of White
Pine Software, Inc., 542 Amherst Street, Nashua, New Hampshire 03063,
except as noted below.
- Each person or group identified in the table possesses sole voting and
investment power with respect to such shares, subject to community
property laws, where applicable. Shares not outstanding but deemed
beneficially owned by virtue of the right of a person or group to acquire
them within sixty days of January 15, 2000 are treated as outstanding only
for purposes of determining the amount and percentages beneficially owned
by that person or group.
PERCENTAGE OF
SHARES
NUMBER OF SHARES BENEFICIALLY
BENEFICIALLY OWNED OWNED
---------------------------------- -------------------
OUTSTANDING RIGHT TO TOTAL SHARES BEFORE AFTER
SHARES ACQUIRE NUMBER OFFERED OFFERING OFFERING
----------- -------- --------- -------- -------- --------
Austin W. Marxe and David Greenhouse.............. 1,563,021 -- 1,563,021 325,521 13.0% 10.3
153 East 53 Street, 51st Floor
New York, New York 10022
Adam Stettner..................................... 1,563,021 -- 1,563,021 325,521 13.0 10.3
153 East 53 Street, 51st Floor
New York, New York 10022
Hambrecht & Quist Group........................... 868,028 -- 868,028 -- 7.2 7.2
One Bush Street
San Francisco, California 94104
Consortium de Realisation......................... 820,330 -- 820,330 -- 6.8 6.8
27-29 rue Le Peletier
75009 Paris, France
Charles Lingel.................................... 562,340 -- 562,340 -- 4.7 4.7
c/o Infoconix Inc.
704 228th Avenue, N.E., #414
Redmond, Washington 98053
Killko A. Caballero............................... 403,324 23,125 426,449 -- 3.5 3.5
David O. Bundy.................................... 1,005 50,625 51,630 -- * *
Joseph J. Esposito................................ -- -- -- -- -- --
Jonathan G. Morgan................................ -- 28,611 28,611 -- * *
Christine J. Cox.................................. 2,547 17,125 19,672 -- * *
All directors and executive officers as a group 1,970,897 119,486 2,090,383 325,521 17.2 14.5
(seven persons).................................
Other selling stockholders:
CFE, Inc. ........................................ 325,521 -- 325,521 325,521 2.7 --
Private Equity Holding (Cayman) Ltd. ............. 325,521 -- 325,521 325,521 2.7 --
General Electric Capital Corporation Group........ 325,521 -- 325,521 325,521 2.7 --
- --------------------------
* Represents less than 1% of the outstanding shares of common stock.
The information reported regarding Messrs. Marxe and Greenhouse is based on
Amendment No. 2 to Schedule 13D filed with the Securities and Exchange
Commission on February 11, 1999 by Special
45
Situations Fund III, L.P., MGP Advisers Limited Partnership, Special Situations
Technology Fund, L.P., SST Advisers, L.L.C., Special Situations Cayman Fund,
L.P., AWM Investment Company, Inc., Austin W. Marxe and David Greenhouse. Of the
1,563,021 shares, (a) 1,006,492 shares are beneficially owned by Special
Situations Fund III, L.P. and MGP Advisers Limited Partnership (the general
partner of and investment advisor to Special Situations Fund III, L.P.),
(b) 143,600 shares are beneficially owned by Special Situations Technology Fund,
L.P. and SST Advisers, L.L.C. (the general partner of and investment advisor to
Special Situations Technology Fund, L.P.), (c) 334,804 shares are beneficially
owned by Special Situations Cayman Fund, L.P. and AWM Investment Company, Inc.
(the general partner of and investment advisor to Special Situations Cayman
Fund, L.P.) and (d) 78,125 shares are beneficially owned by Special Situations
Private Equity Fund, L.P. Messrs. Marxe and Greenhouse, who serve as officers,
directors and members or principal shareholders of the three investment
advisors, claim sole voting and dispositive powers for all of the 1,563,021
shares. Of the shares offered, 78,125 are offered by Special Situations Private
Equity Fund, L.P., 65,104 are offered by Special Situations Cayman Fund, L.P.,
and 182,292 are offered by Special Situations Fund III, L.P.
The 1,563,021 shares deemed to be beneficially owned by Mr. Stettner consist
solely of the shares described in the preceding paragraph. Mr. Stettner is an
employee of an entity controlled by Messrs. Marxe and Greenhouse. Mr. Stettner
disclaims ownership of all of these shares, other than 143,600 shares owned by
Special Situations Technology Fund, L.P., of which he is the managing director.
The information reported regarding the Hambrecht & Quist Group is based on
Amendment No. 2 to Schedule 13G filed with the Securities and Exchange
Commission on February 12, 1999 by H&Q London Ventures, Venture Associates (BVI)
Limited, Hamquist, Hambrecht & Quist Venture Partners, H&Q Venture Partners LLC,
Hambrecht & Quist California and Hambrecht & Quist Group. Of the 868,028 shares,
(a) 623,167 shares are directly owned by H&Q London Ventures, (b) 243,861 shares
are directly owned by Hambrecht & Quist Venture Partners and (c) 1,000 shares
are directly owned by Hambrecht & Quist Group. All of the reporting parties
claim shared voting and dispositive powers for all of the 868,028 shares.
The information reported regarding the Consortium de Realisation is based on
a Schedule 13G filed with the Securities and Exchange Commission on October 2,
1997 by Consortium de Realisation, CDR Enterprises and Land Free Investment. All
of the 820,330 shares are directly owned by Land Free Investment, which is a
direct subsidiary of CDR Enterprises and an indirect subsidiary of Consortium de
Realisation. All of the reporting parties claim shared voting and dispositive
powers for all of the 820,330 shares.
The information reported regarding Mr. Lingel is based on an Amendment
No. 1 to Schedule 13G filed with the Securities and Exchange Commission on
February 11, 1998 by Mr. Lingel.
46
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 30,000,000 shares of common stock
and 5,000,000 shares of preferred stock. As of January 15, 2000, there were
outstanding 12,049,476 shares of common stock and no shares of preferred stock.
COMMON STOCK
Holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Holders of the common
stock do not have cumulative voting rights, and therefore the holders of a
majority of the shares of common stock voting for the election of directors may
elect all of our directors standing for election. Subject to preferences that
may be applicable to the holders of any outstanding shares of preferred stock,
the holders of common stock are entitled to receive such lawful dividends as may
be declared by the board of directors. In the event of a liquidation,
dissolution or winding up of the affairs of our company, whether voluntary or
involuntary, and subject to the rights of the holders of any outstanding shares
of preferred stock, the holders of shares of common stock shall be entitled to
receive pro rata all of our remaining assets available for distribution to our
stockholders. The common stock has no preemptive, redemption, conversion or
subscription rights. All outstanding shares of common stock are, and the shares
of common stock to be issued pursuant to this offering will be, fully paid and
non-assessable. The issuance of common stock or of rights to purchase common
stock could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, a majority
of our outstanding voting stock.
PREFERRED STOCK
The board of directors is authorized, subject to limitations prescribed by
Delaware law, to provide for the issuance of preferred stock in one or more
series, to establish from time to time the number of shares to be included in
each such series, to fix the voting powers, designations, preferences and rights
(and the restrictions of those preferences and rights) of the shares of each
such series and to increase (but not above the total number of authorized shares
of preferred stock) or decrease (but not below the number of shares of such
series then outstanding) the number of shares of any such series without further
vote or action by the stockholders. The board is authorized to issue preferred
stock with voting, conversion, and other rights and preferences that could
adversely affect the voting power or other rights of the holders of common
stock. Although we have no current plans to issue such shares, the issuance of
preferred stock or of rights to purchase preferred stock could have the effect
of making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, a majority of our outstanding voting
stock.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF OUR CHARTER, OUR BY-LAWS AND DELAWARE LAW
Our charter and by-laws contain provisions that could discourage potential
takeover attempts and make more difficult the acquisition of a substantial block
of the common stock. Our charter authorizes the directors to issue, without
stockholder approval, shares of preferred stock in one or more series and to fix
the voting powers, designations, preferences and rights (and the restrictions of
those preferences and rights) of the shares of each such series. Our charter
provides that stockholders may act only at meetings of stockholders and not by
written consent in lieu of a stockholders' meeting. Our by-laws provide that
nominations for directors may not be made by stockholders at any annual or
special meeting thereof unless the stockholder intending to make a nomination
notifies us of its intentions a specified number of days in advance of the
meeting and furnishes to us information regarding itself and the intended
nominee. Our by-laws also provide that special meetings of our stockholders may
be called only by the President and must be called by the President or the
Secretary at the written request of a majority of the directors. Our by-laws
also require a stockholder to provide to our Secretary
47
advance notice of business to be brought by such stockholder before any
stockholder meeting as well as information regarding the stockholder and others
known to support the proposal and any material interest they may have in the
proposed business. These provisions could delay stockholder actions that are
favored by the holders of a majority of the outstanding stock until the next
stockholders' meeting. These provisions may also discourage another person or
entity from making a tender offer for our common stock, because the person or
entity, even after acquiring a majority of the outstanding stock, could only
take action at a duly called stockholders' meeting and not by written consent.
We are subject to Section 203 of the Delaware General Corporation Law which,
subject to certain exceptions, prohibits a Delaware corporation from engaging in
any business combination with any interested stockholder for a period of three
years following the date that such stockholder became an interested stockholder,
unless;
- prior to such date, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned (a) by persons who are
directors and also officers and (b) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
- on or subsequent to such date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least two-thirds of the outstanding voting stock which is not owned by the
interested stockholder. The application of Section 203 may limit the
ability of stockholders to approve a transaction that they may deem to be
in their best interests.
Section 203 defines "business combination" to include (a) any merger or
consolidation involving the corporation and the interested stockholder; (b) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation to or with the interested stockholder; (c) subject to certain
exceptions, any transaction which results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder;
(d) any transaction involving the corporation which has the effect of increasing
the proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (e) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an "interested stockholder" as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person associated with, affiliated with,
controlling or controlled by such entity or person.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our charter provides that no director shall be personally liable to us or to
any stockholder for monetary damages arising out of such director's breach of
fiduciary duty, except to the extent that the elimination or limitation of
liability is not permitted by Delaware law. The Delaware law, as currently in
effect, permits charter provisions eliminating the liability of directors for
breach of fiduciary duty, except that such provisions do not eliminate or limit
the liability of directors for (a) any breach of the director's duty of loyalty
to a corporation or its stockholders, (b) any acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(c) any payment of a dividend or approval of a stock purchase that is illegal
under Section 174 of the Delaware General
48
Corporation Law or (d) any transaction from which the director derived an
improper personal benefit. A principal effect of this provision of our charter
is to limit or eliminate the potential liability of our directors for monetary
damages arising from any breach of their duty of care, unless the breach
involves one of the four exceptions described in (a) through (d) above.
Our charter and by-laws further provide for the indemnification of our
directors and officers to the fullest extent permitted by Section 145 of the
Delaware General Corporation Law, including circumstances in which
indemnification is otherwise discretionary. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to our directors,
officers and controlling persons pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the SEC that
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Boston EquiServe
L.P.
PLAN OF DISTRIBUTION
The shares offered by this prospectus may be sold from time to time by the
selling stockholders, who consist of the persons identified as offering shares
under "Principal and Selling Stockholders" above and those persons' pledgees,
donees, transferees or other successors in interest. The selling stockholders
may sell the shares on the Nasdaq National Market or otherwise, at market prices
or at negotiated prices. They may sell shares by one or a combination of the
following:
- a block trade in which a broker or dealer so engaged will attempt to sell
the shares as agent, but may position and resell a portion of the block as
principal to facilitate the transaction;
- purchases by a broker or dealer as principal and resale by the broker or
dealer for its account pursuant to this prospectus; and
- ordinary brokerage transactions and transactions in which a broker
solicits purchasers.
In effecting sales, brokers or dealers engaged by the selling stockholders
may arrange for other brokers or dealers to participate. Brokers or dealers will
receive commissions or discounts from selling stockholders in amounts to be
negotiated prior to the sale. The selling stockholders and any broker-dealers
that participate in the distribution may be deemed to be "underwriters" within
the meaning of Section 2(11) of the Securities Act, and any proceeds or
commissions received by them, and any profits on the resale of shares sold by
broker-dealers, may be deemed to be underwriting discounts and commissions.
If any selling stockholder notifies us that a material arrangement has been
entered into with a broker-dealer for the sale of shares through a block trade,
special offering, exchange distribution or secondary distribution or a purchase
by a broker or dealer, we will file, a prospectus supplement, if required
pursuant to the Securities Act, setting forth:
- the name of each of the participating broker-dealers,
- the number of shares involved,
- the price at which the shares were sold,
- the commissions paid or discounts or concessions allowed to the
broker-dealers, where applicable,
- a statement to the effect that the broker-dealers did not conduct any
investigation to verify the information set out or incorporated by
reference in this prospectus, and
- any other facts material to the transaction.
49
LEGAL MATTERS
Foley, Hoag & Eliot LLP, Boston, Massachusetts, has advised us with respect
to the validity of the shares of common stock offered by this prospectus. Mark
L. Johnson, a partner at Foley, Hoag & Eliot LLP, is our Secretary.
EXPERTS
Our consolidated financial statements as of, and for the years ended,
December 31, 1997 and 1998 appearing in this prospectus have been audited by
Ernst & Young LLP, as set forth in their report appearing elsewhere in this
prospectus. Those consolidated financial statements are included in reliance
upon the report given upon the authority of Ernst & Young LLP as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form SB-2 with the SEC for our
common stock offered hereby. This prospectus does not contain all of the
information set forth in the registration statement. You should refer to the
registration statement and its exhibits for additional information. Whenever we
make reference in this prospectus to any of our contracts, agreements or other
documents, the references are not necessarily complete and you should refer to
the exhibits attached to the registration statement for the copies of the actual
contract, agreement or other document. When we complete this offering, we will
also be required to file annual, quarterly and special reports, proxy statements
and other information with the SEC.
You can read our SEC filings, including the registration statement, over the
Internet at the SEC's Web site at HTTP://WWW.SEC.GOV. You may also read and copy
any document we file with the SEC at its public reference facilities at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549; Suite
1400, 500 West Madison Street, Chicago, Illinois 60661 and 7 World Trade Center,
Thirteenth Floor, New York, New York 10048. You may also obtain copies of the
documents at prescribed rates by writing to the Public Reference Section of the
SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of the public reference facilities.
50
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors.......................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1997................................................... F-2
Consolidated Statements of Operations for the years
ended December 31, 1998 and 1997....................... F-3
Consolidated Statements of Stockholders' Equity......... F-4
Consolidated Statements of Cash Flows................... F-5
Notes to Consolidated Financial Statements.............. F-6
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of October 1,
1999 and December 31, 1999............................. F-
Condensed Consolidated Statements of Operations for the
nine months ended October 1, 1999 and October 2,
1998................................................... F-
Condensed Consolidated Statements of Cash Flows for the
nine months ended October 1, 1999 and October 2,
1998................................................... F-
Notes to Condensed Consolidated Financial Statements.... F-
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors
White Pine Software, Inc.
We have audited the accompanying consolidated balance sheets of White
Pine Software, Inc. and subsidiary as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of White
Pine Software, Inc. and subsidiary at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1998 and 1997, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Manchester, New Hampshire
March 30, 1999
F-2
WHITE PINE SOFTWARE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------------
1998 1997
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents..................................................... $6,420,686 $14,703,644
Accounts receivable, less allowance of $146,000 at
December 31, 1998 and $124,000 at December 31, 1997........................ 2,122,275 2,403,194
Inventories................................................................... 64,916 98,455
Prepaid expenses.............................................................. 328,562 1,263,223
Other current assets.......................................................... 108,871 114,943
------------ ------------
Total current assets...................................................... 9,045,310 18,583,459
------------ ------------
Property and equipment:
Computer equipment............................................................ 1,227,647 2,282,583
Furniture and fixtures........................................................ 245,823 546,726
Software...................................................................... 536,285 623,641
Equipment..................................................................... 88,733 185,185
Leasehold improvements........................................................ 240,552 201,251
------------ ------------
2,339,040 3,839,386
Accumulated depreciation and amortization..................................... (985,405) (2,325,827)
------------ ------------
Property and equipment, net............................................... 1,353,635 1,513,559
------------ ------------
Other assets:
Third party licenses, less accumulated amortization of $460,000
at December 31, 1998 and $1,140,000 at December 31, 1997................... 933,914 669,044
Purchased software, less accumulated amortization
of $0 at December 31, 1998................................................. 3,141,521 --
Trademark, less amortization of $13,000 at December 31, 1998.................. 951,104 --
Goodwill, less accumulated amortization of $756,000 at
December 31, 1998 and $517,000 at December 31, 1997........................ 437,463 676,078
Other assets.................................................................. 132,823 168,000
------------ ------------
Total other assets........................................................ 5,596,825 1,513,122
------------ ------------
Total assets....................................................................... $15,995,770 $21,610,140
------------ ------------
------------ ------------
(CONTINUED)
F-3
WHITE PINE SOFTWARE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS(CONTINUED)
DECEMBER 31,
---------------------------
1998 1997
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $491,626 $ 573,704
Accrued expenses and other accrued liabilities................................ 1,555,055 1,976,538
Deferred revenue.............................................................. 345,945 246,440
Current portion of long-term debt............................................. 26,521 55,010
------------ ------------
Total current liabilities................................................. 2,419,147 2,851,692
Long-term debt, less current portion............................................... 7,067 32,588
Other long-term liabilities........................................................ 1,154,808 --
Stockholders' equity:
Preferred stock (undesignated), $.01 par value; 5,000,000 shares
authorized; no shares issued or outstanding at December 31, 1998
or December 31, 1997....................................................... -- --
Common stock, $.01 par value; 30,000,000 shares authorized;
10,460,227 shares issued and outstanding at December 31, 1998
and 9,305,714 shares issued and outstanding at December 31, 1997........... 104,602 93,057
Additional paid-in capital.................................................... 41,137,186 38,984,024
Accumulated deficit........................................................... (28,861,083) (20,437,194)
Accumulated other comprehensive income/
currency translation adjustments........................................... 34,043 85,973
------------ ------------
Total stockholders' equity................................................ 12,414,748 18,725,860
------------ ------------
Total liabilities and stockholders' equity......................................... $15,995,770 $21,610,140
------------ ------------
------------ ------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
WHITE PINE SOFTWARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
------------------------------
1998 1997
------------ ------------
Revenue:
Software license fees .............. $ 6,948,222 $ 9,797,290
Services and other ................. 844,936 1,254,487
------------ ------------
Total revenue ..................... 7,793,158 11,051,777
------------ ------------
Cost of revenue ....................... 1,645,249 1,889,893
------------ ------------
Gross profit .......................... 6,147,909 9,161,884
Operating expenses:
Sales and marketing ................ 7,739,075 7,939,254
Research and development ........... 5,041,872 5,721,856
General and administrative ......... 2,277,849 2,585,709
Restructuring ...................... -- 660,871
------------ ------------
Total operating expenses .......... 15,058,796 16,907,690
------------ ------------
Loss from operations .................. (8,910,887) (7,745,806)
Other income (expense):
Interest income .................... 577,393 1,036,723
Other, net ......................... (85,089) (109,792)
------------ ------------
Other income, net ................. 492,304 926,931
------------ ------------
Loss before provision for income taxes (8,418,583) (6,818,875)
Provision for income taxes ............ 5,306 6,761
------------ ------------
Net loss .............................. $ (8,423,889) $ (6,825,636)
------------ ------------
------------ ------------
Net loss per share: Basic.......... $ (0.86) $ (0.75)
------------ ------------
------------ ------------
Diluted ....... $ (0.86) $ (0.75)
------------ ------------
------------ ------------
Weighted average number of common and
common equivalent shares outstanding 9,798,307 9,147,661
------------ ------------
------------ ------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
WHITE PINE SOFTWARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME/
COMMON STOCK ADDITIONAL CURRENCY TOTAL
----------------------- PAID-IN ACCUMULATED TRANSLATION STOCKHOLDERS'
SHARES PAR VALUE CAPITAL DEFICIT ADJUSTMENTS EQUITY
--------- ------------ ------------ ------------- ------------ ------------
BALANCES AT DECEMBER 31, 1996... 9,030,730 $ 90,307 $ 38,669,653 $(13,611,558) $ 87,942 $ 25,236,344
Net loss........................ (6,825,636) (6,825,636)
Common stock issued
upon exercise of stock options 249,086 2,491 239,989 242,480
Common stock issued
as payment for license fees... 11,111 111 41,555 41,666
Common stock issued
under Employee Stock Purchase
Plan......................... 14,787 148 32,827 32,975
Foreign currency trans-
lation adjustment........... (1,969) (1,969)
---------- --------- ------------ ------------ -------- -----------
BALANCES AT DECEMBER 31, 1997.. 9,305,714 93,057 38,984,024 (20,437,194) 85,973 18,725,860
Net loss....................... (8,423,889) (8,423,889)
Common stock issued
upon exercise of stock
options...................... 198,111 1,981 199,036 -- -- 201,017
Common stock issued
under Employee Stock
Purchase Plan................ 56,402 564 70,456 -- -- 71,020
Common stock issued
upon purchase of intangible
assets....................... 900,000 9,000 1,819,170 -- -- 1,828,170
Warrants....................... 64,500 64,500
Foreign currency trans-
lation adjustment........... (51,930) (51,930)
---------- --------- ------------ ------------ -------- -----------
Balances at December 31, 1998.. 10,460,227 $104,602 $41,137,186 $(28,861,083) $34,043 $12,414,748
---------- --------- ------------ ------------ -------- -----------
---------- --------- ------------ ------------ -------- -----------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
WHITE PINE SOFTWARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------
1998 1997
------------- ------------
OPERATING ACTIVITIES
Net loss .................................................................. $(8,423,889) $ (6,825,636)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ........................................ 522,766 458,694
Amortization of goodwill and third-party licenses .................... 533,043 655,965
Loss on disposal of fixed assets ..................................... 30,000 --
Common stock issued as payment for license fees ...................... -- 41,666
Changes in operating assets and liabilities:
Accounts receivable ............................................... 283,866 117,272
Inventories ....................................................... 33,430 11,132
Prepaid expenses .................................................. 435,859 (842,139)
Other assets ...................................................... 43,821 35,441
Accounts payable .................................................. (180,912) 225,443
Accrued expenses and other accrued liabilities .................... (616,318) (507,367)
Deferred revenue .................................................. 96,929 (567,079)
------------- ------------
Net cash used in operating activities ............................ (7,241,405) (7,196,608)
------------- ------------
INVESTING ACTIVITIES
Purchase of property and equipment, net ................................... (371,310) (931,977)
Purchase of third party licenses, net ..................................... (163,846) (383,841)
Purchase of purchased software ............................................ (685,351) --
------------- ------------
Net cash used in investing activities ............................ (1,220,507) (1,315,818)
------------- ------------
FINANCING ACTIVITIES
Principal payments on long-term debt and third-party licenses ............. (55,830) (327,809)
Proceeds from common stock issued upon exercise of stock options .......... 201,017 242,480
Proceeds from common stock issued under employee stock purchase plan ...... 71,020 32,975
------------- ------------
Net cash provided by (used in) financing activities .............. 216,207 (52,354)
------------- ------------
Currency translation effect on cash and cash equivalents .................. (37,253) (29,850)
------------- ------------
Net decrease in cash and cash equivalents ................................. (8,282,958) (8,594,630)
Cash and cash equivalents at beginning of period .......................... 14,703,644 23,298,274
------------- ------------
Cash and cash equivalents at end of period ................................ $ 6,420,686 $ 14,703,644
------------- ------------
------------- ------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
WHITE PINE SOFTWARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. During 1997 and 1998, the
Company experienced significant operating losses and negative cash flows from
operations. In presenting the Company's financial statements on a going
concern basis, management has considered the Company's historical financial
results, current cash position, and a number of other factors affecting the
Company's future operating results and cash flows, including internal revenue
and expense projections and anticipated industry trends. Management expects
to seek to raise capital in fiscal 1999, and remains committed to taking all
appropriate and necessary actions to effect timely cost reductions and cash
preservation in the event management's revenue and cash flow expectations are
not substantially met during fiscal 1999. No assurance can be given that
financing can be obtained on acceptable terms or at all. Management believes
that, based on its plans, the Company will have sufficient cash to support
operations during fiscal 1999.
DESCRIPTION OF BUSINESS
The Company develops, markets and supports multiplatform desktop
multimedia software that facilitates worldwide video and audio communication and
data collaboration across the Internet, intranets and other networks using the
Internet protocol. The Company's desktop multimedia conferencing software
products, CU-SeeMe and MeetingPoint, create a client-server solution that allows
users to participate in real-time, multipoint multimedia conferences over the
Internet and intranets. Further building upon the core CU-SeeMe and MeetingPoint
technologies, the Company developed ClassPoint, an integrated vertical solution
for distance learning and distance training, that began shipping commercially in
April 1998. The Company also offers desktop X Windows and terminal emulation
software. The Company's customers include businesses, educational institutions,
government organizations and individual consumers.
The Company markets and sells its products in the United States, Canada,
Europe and the Pacific Rim through distributors, a combination of strategic
partners and original equipment manufacturers, and its direct sales
organization, as well as over the Internet.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned foreign subsidiary, White Pine Software, Europe. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and investments in high
grade commercial paper having maturities of three months or less when purchased.
Commercial paper qualifying as cash equivalents totaled $5,432,000 and
$13,440,000 at December 31, 1998 and 1997, respectively. These investments have
been categorized as held to maturity under the provisions of Statement of
Financial Accounting Standards No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN
DEBT AND EQUITY SECURITIES. Accordingly, the balances are stated at amortized
cost, which approximates fair value, because of the short maturity of these
instruments.
INTANGIBLE ASSETS
Intangible assets are amortized on a straight line basis over three to
five years, except that trademark is amortized over twelve years.
F-8
1. ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash, cash equivalents and
accounts receivable. Cash and cash equivalents include cash on deposit in
checking accounts, commercial paper and certificates of deposit. These cash and
cash equivalents are maintained with high credit-quality financial institutions.
The Company performs ongoing credit evaluations of its customers and
generally requires no collateral. The Company maintains reserves for potential
credit losses; historically, such losses have not been material and have been
within management's expectations. At December 31, 1998, two customers accounted
for approximately 59% of accounts receivable.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for the Company's cash
and cash equivalents and borrowings approximates fair value.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method)
or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are being depreciated using
the straight-line and accelerated methods over the estimated useful lives of two
to seven years. Leasehold improvements are stated at cost and are being
amortized over the lesser of the term of the lease or the estimated useful life
of the asset. A total of $1,767,000 of property and equipment was fully
depreciated and retired during 1998.
Included in the Company's balance sheets at December 31, 1998 and 1997 are
the assets of the Company's foreign subsidiary, White Pine Software, Europe, of
which $254,000 and $506,000, respectively, of tangible assets were located in
France.
THIRD-PARTY LICENSES
The costs of agreements entered into with third parties for the right to
use the third parties' technology in the Company's products are amortized on a
straight-line basis over the lives of the agreements or the expected life of the
technology, whichever is less.
INCOME TAXES
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities. These
amounts are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
F-9
1. ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company's revenue is derived from software license fees and fees for
services related to its software products, primarily software maintenance fees.
The Company recognizes revenue in accordance with the provisions of Statement of
Position No. 97-2, SOFTWARE REVENUE RECOGNITION, of the American Institute of
Certified Public Accountants ("AICPA").
Software license revenue is recognized upon receipt of a firm customer
order and shipment of the software, net of allowances for estimated future
returns, provided that no significant obligations remain on the part of the
Company and collection of the related receivable is deemed probable. Revenue
under certain license agreements is recognized upon execution of a signed
contract and fulfillment of the contractual obligations, provided that no
significant obligations remain on the part of the Company and collection is
deemed probable.
Software maintenance fees, which are generally payable in advance and are
non-refundable, are recognized ratably over the period of the maintenance
contract, typically twelve months. Revenue from training and consulting services
is recognized as services are provided.
Software license fees, consulting fees, and training fees that have been
prepaid or invoiced but that do not yet qualify for recognition as revenue under
the Company's policy, and prepaid maintenance fees not yet recognized as
revenue, are reflected as deferred revenue.
CAPITALIZED SOFTWARE
Software development costs meeting recoverability tests are capitalized
under Statement of Financial Accounting Standards No. 86, ACCOUNTING FOR THE
COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED. The cost
of software capitalized is amortized based on its estimated economic life.
During the years ended December 31, 1998 and 1997, the Company capitalized
$3,142,000 and $0, respectively, of software costs. During these years, the
Company did not amortize any purchased software, as the first commercial
shipment is not expected until the second quarter of fiscal 1999. (See
"Acquisition from Labtam Communications Pty. Ltd." in Note 2.)
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign subsidiary have been
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52, FOREIGN CURRENCY TRANSLATION. All balance sheet
amounts have been translated using the exchange rates in effect at the balance
sheet date. Statement of operations amounts have been translated using average
exchange rates. The gains and losses resulting from the changes in exchange
rates from the date of acquisition of White Pine Software, Europe to December
31, 1998, have been reported separately as a component of stockholders' equity.
The aggregate transaction gains and losses are insignificant for all periods
presented.
ADVERTISING COSTS
All costs related to advertising the Company's products are expensed in
the period incurred. Amounts charged to expense were $655,000 and $907,000
during the years ended December 31, 1998 and 1997, respectively.
F-10
1. ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("SFAS
131"), in fiscal 1998. SFAS 131 establishes standards for reporting information
regarding operating segments in annual financial statements and requires
selected information for those segments to be presented in interim financial
reports issued to stockholders. SFAS 131 also establishes standards for related
disclosures about products and services and geographic areas. Operating segments
are identified as components of an enterprise about which separate discrete
financial information is available for evaluation by the chief operating
decision maker, or decision making group, in making decisions how to allocate
resources and assess performance. The Company's chief decision maker, as defined
under SFAS 131, is its Chief Executive Officer and President. To date, the
Company has viewed its operations as principally one segment, software sales and
associated services. As a result, the financial information disclosed herein
materially represents all of the financial information related to the Company's
principal operating segment.
Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS 133"), requires companies
to record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS 133 is effective beginning in
2000. The adoption of SFAS 133 is not expected to have a material impact on the
financial position or results of operations of the Company.
Statement of Position 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE, requires companies to capitalize
qualifying computer software costs that are incurred during the application
development stage and amortize them over the software's estimated useful life.
Statement of Position 98-1 is effective for the Company as of January 1, 1999.
The adoption of Statement of Position 98-1 is not expected to have a material
impact on the financial position or results of operations of the Company.
Statement of Position 98-9, MODIFICATION OF SOP 97-2, SOFTWARE REVENUE
RECOGNITION, WITH RESPECT TO CERTAIN TRANSACTIONS, modifies certain provisions
of Statement of Position 97-2. The Company's accounting policy on software
revenue recognition is currently in compliance with Statement of Position 97-2,
as amended by Statement of Position 98-9, and adoption of this Statement of
Position, as currently issued, is not expected to have a material impact on the
financial position or results of operations of the Company.
2. TECHNOLOGY ACQUISITIONS
ACQUISITION FROM LABTAM COMMUNICATIONS PTY. LTD.
On July 8, 1998, the Company purchased certain assets, including
intellectual property, comprising certain T.120 whiteboarding and data
collaboration technology from Labtam Communications Pty. Ltd. The purchase
price for these assets consisted of 900,000 shares of the Company's Common
Stock and cash payments of U.S $628,000 in July 1998 and A$201,606 (or
U.S.$133,000) in January 1999. The Company recorded capitalized software of
$2,641,000 in connection with the acquisition, consisting of (i) $1,828,000
attributable to the Common Stock issued in the acquisition, based upon the
Common Stock's closing price of $2.03 on July 8, 1998, (ii) the two cash
payments totalling $761,000 and (iii) $52,000 of accounting, legal and other
fees incurred in connection with the acquisition.
F-11
2. TECHNOLOGY ACQUISITIONS (CONTINUED)
ACQUISITION FROM CORNELL RESEARCH FOUNDATION, INC.
In the fourth fiscal quarter of 1998, White Pine obtained certain
trademark and intellectual property rights to CU-SeeMe and the underlying
MeetingPoint technology from Cornell Research Foundation, Inc. The purchase
price for these rights consisted of (i) a note in the principal amount of
$900,000, of which $300,000 is due on each of June 30, 2000, June 30, 2001 and
June 30, 2002, and (ii) warrants to purchase 150,000 shares of the Company's
Common Stock at a price of $1.00 per share. The Company recorded as trademark a
total of $964,500 in connection with the acquisition, consisting of the $900,000
principal amount of the long-term note and $64,500 attributable to the warrants,
which were valued in accordance with SFAS 123. The warrants were issued in
exchange for outstanding warrants issued previously to Cornell Research
Foundation, Inc.; these prior warrants had an exchange price of $6.00 per share
but otherwise had terms substantially identical to those of the new warrants.
The acquired trademark rights were capitalized and are being amortized
over their estimated economic life of twelve years.
As a result of the acquisition, the Company recorded as capitalized
software a total of $500,000 previously recorded as prepaid royalties.
3. RESTRUCTURING
In the fiscal quarter ended July 4, 1997, the Company reorganized its
operations and recorded a restructuring charge in the amount of $661,000 as a
result of a change in senior management and a reduction in its workforce. This
amount consisted primarily of severance payments, outplacement expenses, and
related fees for 26 employees who were laid off at the quarter end. The
reorganization reflected the Company's decision to focus its resources on its
Web-based conferencing and connectivity products, and to terminate support,
development and sales of certain older product lines.
4. INDEBTEDNESS
LINE OF CREDIT
The Company has a line of credit with a financial institution providing
for maximum available borrowings of $1,000,000. Interest on the line is payable
monthly at the bank's prime rate plus 0.5% (8.25% at December 31, 1998).
Borrowings under the line are due on demand and are secured by substantially all
assets of the Company, including a $515,000 certificate of deposit. At December
31, 1998, there were no amounts outstanding under the line of credit.
The line of credit agreement contains two restrictive covenants, which
require maintenance of a minimum tangible net worth and a minimum cash level.
The Company did not comply with the tangible net worth covenant as of December
31, 1998, but obtained from the bank a waiver of noncompliance as of that date.
The line of credit agreement expires on June 30, 1999. The Company does
not currently expect to seek to renew or extend this agreement.
F-12
4. INDEBTEDNESS (CONTINUED)
LONG-TERM DEBT
DECEMBER 31,
-------------------
1998 1997
------- -------
Secured, non-interest bearing, term loan from a foreign,
governmental agency due in annual installments of $44,408,
with the final installment due in September 1999.............................. $16,000 $59,000
Note payable, due in monthly installments of $883 plus interest
at 9.5%, with the remaining balance due in August 2000........................ 17,000 28,000
------- -------
33,000 87,000
Less current portion.............................................................. 26,000 55,000
------- -------
$7,000 $32,000
------- -------
------- -------
Aggregate maturities of long-term debt are as follows: 1999--$26,000 and
2000--$7,000.
Total interest expense for the years ended December 31, 1998 and 1997 was
$4,000 and $59,000, respectively, and is included in other expense.
5. ACCRUED EXPENSES AND OTHER ACCRUED LIABILITIES
Accrued expenses and other accrued liabilities consist of the following:
DECEMBER 31,
--------------------------
1998 1997
---------- ----------
Accrued compensation and related benefits................................... $ 647,000 $ 782,000
Pending litigation.......................................................... 51,000 291,000
Royalties................................................................... 246,000 229,000
Other accruals.............................................................. 611,000 675,000
---------- ----------
$1,555,000 $1,977,000
---------- ----------
---------- ----------
The Company is a co-defendant in various lawsuits filed in federal and
state courts in New York. The lawsuits seek damages for alleged injuries
sustained while using products which the plaintiffs assert were designed and
manufactured by a predecessor of the Company. Although the Company is defending
these claims, exposure is partially limited by insurance and indemnification by
the primary contractor. While management believes that losses from these claims
are not probable (as defined by Statement of Financial Accounting Standards No.
5, ACCOUNTING FOR CONTINGENCIES), it has accrued a reserve for legal fees and
potential losses that could arise from such claims. The Company reduced this
reserve from $291,000 to $51,000 as of December 31, 1998, in recognition of the
fact that all but two of the lawsuits had been resolved. The other suits were
resolved without expense to the Company. The $240,000 was credited to general
and administrative expense in 1998.
6. INCOME TAXES
The Company's deferred tax assets and related valuation allowances are as
follows:
DECEMBER 31,
----------------------------
1998 1997
----------- -------------
Deferred tax assets....................................................... $ 8,866,000 $ 6,500,000
Valuation allowance for deferred tax assets............................... (8,866,000) (6,500,000)
----------- -------------
Net deferred tax asset........................................ $ 0 $ 0
----------- -------------
----------- -------------
F-13
6. INCOME TAXES (CONTINUED)
Deferred tax assets consist primarily of net operating and capital loss
carryforwards and accrued liabilities.
The Company recorded a valuation allowance of $8,866,000 and $6,500,000 at
December 31, 1998 and 1997, respectively, against its deferred tax assets, since
it is believed to be more likely than not that the net operating loss
carryforwards and other temporary differences will not provide a future tax
benefit.
At December 31, 1998, the Company had cumulative federal net operating
loss carryforwards of approximately $22,000,000 for income tax purposes. The
availability of the net operating loss carryforwards to offset future taxable
income is subject to significant annual limitations. The loss carryforwards
expire at various dates through 2012.
7. LEASE COMMITMENTS
The Company leases its office facilities under various operating leases
expiring at various times through fiscal 2001. Future minimum annual rental
commitments under the lease agreements for the years ending December 31 are as
follows:
1999......................................................................................... $271,000
2000......................................................................................... 227,000
2001......................................................................................... 170,000
----------
$668,000
----------
----------
Total rent expense for the years ended December 31, 1998 and 1997, was
approximately $253,000 and $332,000, respectively.
8. SIGNIFICANT CUSTOMERS AND GEOGRAPHICAL SALES
During the years ended December 31, 1998 and 1997, one customer accounted
for approximately 26% of the Company's total revenue.
The Company's sales by geographic location are summarized below:
YEAR ENDED DECEMBER 31,
----------------------------
1998 1997
----------- -------------
United States and Canada................................................. $5,887,000 $8,228,000
Europe................................................................... 1,449,000 1,554,000
Pacific Rim.............................................................. 457,000 1,270,000
----------- -------------
$7,793,000 $11,052,000
----------- -------------
----------- -------------
9. EMPLOYEE BENEFITS
401(k) PLAN
The Company maintains a plan under Section 401(k) of the Internal Revenue
Code of 1986 (the "401(k) Plan") for all employees meeting age and service
requirements. Eligible employees may elect to contribute up to 16% of their
compensation, subject to limitations established by the Internal Revenue Code.
The Company may elect to contribute a discretionary amount to the 401(k) Plan
which would be allocated to the employees based upon the employees'
contributions to the 401(k) Plan. There have been no discretionary contributions
to date.
F-14
9. EMPLOYEE BENEFITS (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
In 1996, the Company adopted its 1996 Employee Stock Purchase Plan (the
"ESPP"). Under the ESPP, an aggregate of 100,000 shares of Common Stock are
reserved for purchase by qualified employees, at 85% of the appropriate market
price. On December 16, 1998, the Board of Directors voted to amend the ESPP to,
among other things, increase the number of reserved shares to 200,000 shares and
delete a provision that had prohibited certain "highly compensated" officers of
the Company from participating in the ESPP. The Company expects to present the
ESPP amendments for approval at the 1999 Annual Meeting of Stockholders. In
1997, the Company issued 14,787 shares under the ESPP at $2.23 per share. In
1998, the Company issued 56,402 shares. A total of 17,474 shares were issued at
$2.23 per share, and 38,928 shares were issued at $0.82 per share.
STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"), and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, requires use of option valuation models that were not developed
for use in valuing employee stock options. No compensation expense is recognized
under APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant.
1996 INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN. In 1996, the Company
adopted its 1996 Incentive and Nonqualified Stock Option Plan (the "1996 Plan").
Under the 1996 Plan, 550,000 shares of Common Stock are available for grant to
employees. On September 30, 1997 the Company amended the 1996 Plan to increase
the number of available shares from 550,000 to 1,000,000. Option prices and
exercise periods are determined by the Board of Directors on the date of grant.
All options granted under the 1996 Plan become exercisable in installments over
a three to four year period commencing from the date of grant and expire ten
years from the date of grant. At December 31, 1998, a total of 541,902 shares
were reserved and available for issuance under the 1996 Plan.
1997 DIRECTOR STOCK OPTION PLAN. In 1997, the Company adopted the 1997
Director Stock Option Plan (the "Director Plan"). The Company has reserved
150,000 shares of Common Stock under the Director Plan. The Director Plan
authorizes a one-time automatic grant of options to acquire 15,000 shares of
Common Stock as an initial award for being an outside director. Each subsequent
year at re-election, directors are granted an additional 10,000 options. All
options granted are exercisable at the next annual meeting subsequent to being
granted. All options expire ten years from the date of grant and have an
exercise price equal to the fair market value of the Company's Common Stock on
the date of grant. At December 31, 1998, a total of 120,000 shares were
reserved and available for issuance under the Director Plan.
OPTION REPRICING. On August 5, 1997, the Board of Directors authorized the
repricing of 128,550 stock options that had a weighted average exercise price of
$5.33 to the fair market value of $2.50 per share, if elected by the option
holder. As a part of the repricing, vesting periods for the repriced options
were extended from three years to four years.
F-15
9. EMPLOYEE BENEFITS (CONTINUED)
SFAS 123 DISCLOSURES
Pro forma information regarding net loss and loss per common and common
equivalent share is required by SFAS 123, which also requires that the
information be determined as if the Company has accounted for its employee stock
options granted subsequent to December 31, 1994 under the fair value method of
that Statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions:
OPTIONS ESPP
-------------------------------------
1998 1997 1998 1997
---- ---- ---- ----
Expected life (years).............................................. 4.05 4.1 0.50 0.5
Interest rate...................................................... 5.5% 6.2% 5.5% 6.2%
Volatility......................................................... 0.97 0.6 0.97 0.6
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows (in thousands, except per share
information):
1998 1997
------- -------
Pro forma net loss............................................................... $(8,925) $(7,403)
Pro forma net loss per share: Basic............................................ $(0.91) $(0.81)
Diluted.......................................... $(0.91) $(0.81)
Option activity under the Company's stock option plans is summarized
below:
1998 1997
---------------------------------------- -------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
---------- ---------- ----------- -------------
Outstanding at beginning of year................ 1,408,248 $2.65 1,088,437 $2.29
Granted......................................... 492,650 1.82 864,050 3.46
Expired or canceled............................. (594,143) 4.12 (295,536) 5.02
Exercised....................................... (198,111) 1.01 (248,703) 0.97
---------- -----------
Outstanding at end of year...................... 1,108,644 1.88 1,408,248 2.65
---------- -----------
---------- -----------
Exercisable at end of year...................... 462,828 1.67 673,261 1.71
F-16
9. EMPLOYEE BENEFITS (CONTINUED)
The following table presents weighted-average price and fair value
information about options granted equal to and greater than fair market value
during fiscal years 1998 and 1997:
NUMBER WEIGHTED WEIGHTED
OF AVERAGE AVERAGE
OPTIONS EXERCISE FAIR
EXERCISE PRICE ON DATE OF GRANT GRANTED PRICE VALUE
------------------------------- ------- ----- -----
1998
Equal to fair market value..... 492,650 $1.82 $1.29
Less than fair market value.... -- N/A N/A
-------
492,650
-------
-------
1997
Equal to fair market value..... 797,550 $3.54 $3.54
Less than fair market value.... 66,500 $2.50 $3.47
-------
864,050
-------
-------
The following table presents weighted-average price and life information
about significant option groups outstanding at December 31, 1998 and 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------ -------------------------
WEIGHTED
RANGE AVERAGE WEIGHTED WEIGHTED
OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUT- CONTRACTUAL EXERCISE EXER- EXERCISE
PRICES STANDING LIFE PRICE CISABLE PRICE
- --------------- ----------- --------------- ----------- ---------- -----------
1998
$0.50 - $0.80 185,392 2.55 years $0.53 185,392 $0.53
0.84 - 1.25 171,454 8.74 years 1.15 37,954 1.00
1.50 - 1.88 254,350 9.69 years 1.85 18,500 1.50
2.00 - 2.63 439,148 8.29 years 2.43 178,445 2.36
3.75 - 7.88 58,300 8.58 years 4.38 42,537 4.39
--------- -------
1,108,644 462,828
--------- -------
--------- -------
1997
$0.50 - $0.80 280,392 4 years $0.52 280,392 $0.52
1.00 - 2.00 267,956 7 years 1.30 246,570 1.25
2.50 - 3.88 610,650 9 years 2.70 65,612 2.69
5.00 - 7.88 249,250 9 years 6.38 80,687 6.40
--------- -------
1,408,248 673,261
--------- -------
--------- -------
F-17
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WHITE PINE SOFTWARE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
OCTOBER 1, DECEMBER 31,
1999 1998
------- -------
ASSETS
Current assets:
Cash and cash equivalents $ 3,513 $ 6,421
Accounts receivable, net 2,616 2,122
Inventories 85 65
Prepaid expenses and other current assets 337 437
------- -------
Total current assets 6,551 9,045
Property and equipment, net 1,231 1,354
Third party licenses, net 628 934
Purchased Software, net 2,740 3,142
Trademark, net 891 951
Goodwill, net 258 437
Other long term assets 103 133
------- -------
Total assets $12,402 $15,996
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,303 $ 2,046
Deferred revenue 535 346
Current portion of long-term debt 10 27
------- -------
Total current liabilities 2,848 2,419
Long term debt, net of current portion -- 7
Other long term liabilities 600 1,155
Total stockholders' equity 8,954 12,415
------- -------
Total liabilities and stockholders' equity $12,402 $15,996
======= =======
See Notes to Condensed Consolidated Financial Statements.
F-18
WHITE PINE SOFTWARE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Nine Months Ended
--------------------------
October 1, October 2,
1999 1998
------------ -----------
Revenue:
Software license fees $ 7,125 $ 5,034
Services and other 864 607
------------ -----------
Total revenue 7,989 5,641
Cost of revenue 1,689 1,093
------------ -----------
Gross profit 6,300 4,548
Operating expenses:
Sales and marketing 5,209 5,675
Research and development 3,373 3,855
General and administrative 1,562 1,860
------------ -----------
Total operating expenses 10,144 11,390
------------ -----------
Loss from operations (3,844) (6,842)
Other income (expense):
Interest income (expense) 142 489
Other, net (74) (55)
------------ -----------
68 434
Net loss before provision for income taxes (3,776) (6,408)
Provision for income taxes -- 5
------------ -----------
Net loss $ (3,776) $ (6,413)
------------ -----------
Net loss per share: Basic: $ (0.36) $ (0.67)
============ ===========
Diluted: $ (0.36) $ (0.67)
============ ===========
Basic and diluted weighted average
shares outstanding 10,570,482 9,621,000
============ ===========
See Notes to Condensed Consolidated Financial Statements.
F-19
WHITE PINE SOFTWARE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
----------------------
OCTOBER 1, OCTOBER 2,
1999 1998
---------- ----------
OPERATING ACTIVITIES
Net loss $(3,776) $ (6,413)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 329 414
Amortization of intangible assets 947 380
Provision for bad debt (16) 36
Changes in operating assets and liabilities:
Accounts receivable (475) 531
Inventories (19) 39
Prepaid expenses 83 284
Other assets 42 11
Accounts Payable 18 (26)
Accrued Expenses and other accrued liabilities (289) (342)
Deferred revenue 191 (40)
------- --------
Net cash used in operating activities (2,965) (5,126)
INVESTING ACTIVITIES
Purchase of property and equipment, net (217) (327)
Purchase of third-party licenses, net -- (216)
Purchase of Purchased Software -- (2,642)
------- --------
Net cash used in investing activities (217) (3,185)
FINANCING ACTIVITIES
Principal payments on long-term debt and third-party
licenses (23) (52)
Proceeds from common stock issued upon exercise of stock
options 204 57
Proceeds from common stock issued under Employee Stock
Purchase Plan 41 39
Market value of common stock issued under purchase of
intangible assets -- 1,828
------- --------
Net cash provided by financing activities 222 1,872
Currency translation effect on cash and cash equivalents 52 (18)
------- --------
Net decrease in cash and cash equivalents (2,908) (6,457)
Cash and cash equivalents at beginning of period 6,421 14,704
------- --------
Cash and cash equivalents at end of period $ 3,513 $ 8,247
======= ========
See Notes to Condensed Consolidated Financial Statements.
F-20
WHITE PINE SOFTWARE, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OCTOBER 1, 1999
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
WHITE PINE DEVELOPS SOFTWARE SOLUTIONS THAT FACILITATE WORLDWIDE VIDEO AND
AUDIO COMMUNICATION AND DATA COLLABORATION ACROSS THE INTERNET AND OTHER
NETWORKS USING THE INTERNET PROTOCOL (IP). WHITE PINE'S CU-SEEME-Registered
Trademark- WEB PROVIDES THE INDUSTRY'S FIRST MULTIPOINT VIDEO INSTANT
MESSAGING OVER THE INTERNET. WHITE PINE'S CU-SEEME-Registered Trademark- PRO
AND MEETINGPOINT-TM- CREATE A CLIENT-SERVER SOLUTION THAT ALLOWS MULTIPLE
USERS TO PARTICIPATE SIMULTANEOUSLY IN CONFERENCES OVER THE INTERNET,
INTRANET AND EXTRANET CONNECTIONS. CLASSPOINT-TM- IS A MEETINGPOINT-TM-
ADD-ON THAT PROVIDES A COMPLETE SOLUTION FOR CORPORATE TRAINING AND DISTANCE
LEARNING. MEETINGPOINT, WHITE PINE'S FLAGSHIP PRODUCT, SUPPORTS MULTIPLE
PLATFORMS, INCLUDING WINDOWS 95/98, NT, SUN SOLARIS, AND RED HAT-Registered
Trademark-LINUX. BY DEVELOPING MULTIMEDIA CONFERENCING PRODUCTS THAT REQUIRE
NO PROPRIETARY HARDWARE, WHITE PINE IS ABLE TO OFFER MULTIMEDIA CONFERENCING
AT A SUBSTANTIALLY LOWER PRICE THAN VENDORS OF TRADITIONAL HARDWARE-BASED
SYSTEMS AND THEREBY ENCOURAGE BUSINESSES AND OTHERS TO ADOPT MULTIMEDIA
CONFERENCING AS A MASS COMMUNICATION MEDIUM.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of White Pine
and its wholly owned foreign subsidiary, White Pine Software, Europe. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents, consisting of cash on hand and investments in
high-grade commercial paper having maturities of three months or less when
purchased, totaled 3,089,000 and $5,432,000 at October 1, 1999 and December 31,
1998, respectively. These investments have been categorized as held to maturity
under the provisions of Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities. Accordingly,
the balances are stated at amortized cost, which approximates fair value,
because of the short maturity of these instruments.
REVENUE RECOGNITION
White Pine's revenue is derived from software license fees and fees for
services related to its software products, primarily software maintenance fees.
During fiscal 1997, White Pine recognized revenue in accordance with the
American Institute of Certified Public Accountants Statement of Position No.
91-1, "Software Revenue Recognition." Beginning in fiscal 1998, White Pine
recognized revenue in accordance with AICPA Statement of Position 97-2, SOFTWARE
REVENUE RECOGNITION.
- Software license revenue is recognized upon execution of a contract
or purchase order and shipment of the software, net of allowances
for estimated future returns, provided that no significant
obligations on the part of White Pine remain outstanding and
collection of the related receivable is deemed probable by
management. An allowance for product returns is recorded by White
Pine at the time of sale and is measured periodically to adjust to
changing circumstances, including changes in retail sales.
- Software maintenance fees, which are generally payable in advance
and are non-refundable, are recognized ratably over the period of
the maintenance contract, typically twelve months.
- Revenue from training and consulting services is recognized as
services are provided.
- Software license fees, consulting fees and training fees that have
been prepaid or invoiced but that do not yet qualify for recognition
as
F-21
revenue under White Pine's policy, and prepaid maintenance fees not
yet recognized as revenue, are reflected as deferred revenue.
F-22
[LOGO]
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law affords a Delaware
corporation the power to indemnify its present and former directors and officers
under certain conditions. Article SEVENTH of the charter of White Pine
Software, Inc. (the "Company") provides that the Company shall indemnify each
person who at any time is, or shall have been, a director or officer of the
Company, and is threatened to be or is made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason of the fact that he or she is, or was, a director or
officer of the Company, or is or was serving at the request of the Company as a
director, officer, employee, trustee, or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
incurred in connection with any such action, suit or proceeding to the maximum
extent permitted by the Delaware General Corporation Law.
Section 102(b)(7) of the Delaware General Corporation Law gives a Delaware
corporation the power to adopt a charter provision eliminating or limiting the
personal liability of directors to the corporation or its stockholders for
breach of fiduciary duty as directors, provided that such provision may not
eliminate or limit the liability of directors for (a) any breach of the
director's duty of loyalty to the corporation or its stockholders, (b) any acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) any payment of a dividend or approval of a stock
purchase that is illegal under Section 174 of the Delaware Corporation Law or
(d) any transaction from which the director derived an improper personal
benefit. Article NINTH of our charter provides that to the maximum extent
permitted by the Delaware General Corporation Law, no director of the Company
shall be personally liable to the Company or to any of its stockholders for
monetary damages arising out of such director's breach of fiduciary duty as a
director of the Company. No amendment to or repeal of the provisions of Article
NINTH shall apply to or have any effect of the liability or the alleged
liability of any director of the Corporation with respect to any act or failure
to act of such director occurring prior to such amendment or repeal. A principal
effect of such Article NINTH is to limit or eliminate the potential liability of
our directors for monetary damages arising from breaches of their duty of care,
unless the breach involves one of the four exceptions described in (a) through
(d) above.
Section 145 of the Delaware General Corporation Law also affords a Delaware
corporation the power to obtain insurance on behalf of its directors and
officers against liabilities incurred by them in those capacities. The Company
has procured a directors' and officers' liability and company reimbursement
liability insurance policy that (a) insures directors and officers of the
Company against losses (above a deductible amount) arising from certain claims
made against them by reason of certain acts done or attempted by such directors
or officers and (b) insures the Company against losses (above a deductible
amount) arising from any such claims, but only if the Company is required or
permitted to indemnify such directors or officers for such losses under
statutory or common law or under provisions of our charter or our by-laws.
II-1
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses to be paid by the
Company in connection with the issuance and distribution of the securities being
registered, other than sales commissions. All amounts shown are estimates except
for amounts of filing and listing fees.
Filing fee of SEC........................................... $ 7,778
Listing fee of Nasdaq Stock Market, Inc..................... 17,500
Accounting fees and expenses................................ 10,000
Blue sky fees and expenses (including related legal fees)... 1,500
Legal fees and expenses..................................... 30,000
Printing and engraving expenses............................. 30,000
Miscellaneous............................................... 3,222
--------
Total..................................................... $100,000
========
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following information is furnished with regard to all securities sold by
the Company within the past three years that were not registered under the
Securities Act.
- In May 1997 (5/12/97), the Company issued 11,111 shares to DataBeam
Corporation a total of 11,111 shares of common stock. The shares were
issued as part of payment for using its server program.
- In July 1998, the Company issued to Labtam Communications Pty. Ltd. a
total of 900,000 shares of common stock. The shares were issued as part of
the consideration for intellectual property purchased by the Company from
Labtam Communications Pty. Ltd.
- In November 1998, the Company issued to Cornell Research Foundation, Inc.
a warrant to purchase 150,000 shares of common stock at a price of $1.00
per share. The warrant was issued as part of the consideration for
intellectual property purchased by the Company from Cornell Research
Foundation, Inc. and for the cancelation of a previously outstanding
warrant that had been issued by the Company to Cornell Research
Foundation, Inc.
- In December 1999, the Company sold the following numbers of shares of
common stock to the parties named below. All of the shares were sold at a
price of $15.36 per share.
SHARES
PURCHASER PURCHASED
- --------- ---------
CFE, Inc.................................................... 325,521
Private Equity Holding (Caymen) Ltd......................... 325,521
Jayvee & Co A/C YARF 1208002
CIBC Mellon Global Securities............................. 162,760
Jayvee & Co A/C YARF 1203002
CIBC Mellon Global Securities............................. 99,886
Royal Trust Corp. of Canada In Trust for Account 27396004... 62,875
Special Situations Private Equity Fund, LP.................. 78,125
Special Situations Cayman Fund, L.P......................... 65,104
Special Situations Fund III, L.P............................ 182,292
-------
Total..................................................... 651,042
=======
The issuances described above were made in reliance upon the exemptions from
registration set forth in Section 4(2) of the Securities Act relating to sales
by an issuer not involving any public offering. None of the foregoing
transactions involved a distribution or public offering. No underwriters were
engaged in connection with the foregoing issuances of securities, and no
underwriting commissions or discounts were paid.
II-2
ITEM 27. EXHIBITS
(a) EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
3.1(1) Amended and Restated Certificate of Incorporation of the
Company
3.2(1) Amended and Restated By-Laws of the Company
4.1(1) Specimen certificate for common stock of the Company
5.1 Opinion of Foley, Hoag & Eliot LLP
10.1(1) White Pine Software, Inc. Stock Option Plan (1993), as
amended
10.2(1) White Pine Software, Inc. Stock Option Plan (1994), as
amended
10.3(1) White Pine Software, Inc. Stock Option Plan (1995), as
amended
10.4(1) White Pine Software, Inc. Stock Option Plan (1996), as
amended
10.5(1) White Pine Software, Inc. 1996 Incentive and Nonqualified
Stock Option Plan
10.6(4) White Pine Software, Inc. 1996 Amended and Restated Employee
Stock Purchase Plan
10.7(3) White Pine Software, Inc. 1997 Director Stock Option Plan
10.8(1) Stock Purchase Agreement dated March 19, 1996 among certain
investors and the Company, as amended
10.9(1) Stock Purchase Agreement dated April 17, 1996 between J.F.
Shea, Co., Inc. and the Company, as amended
10.10(1) Amended and Restated Registration Rights Agreement dated
March 19, 1996 among certain stockholders of the Company and
the Company, together with the First Amendment thereto
10.11 Common Stock Purchase Warrant of the Company dated
, issued to Cornell Research Foundation,
Inc.
10.12 Stock purchase agreements dated December 1999 between White
Pine Software, Inc. and the investors identified therein
10.13(1) Commercial Loan Agreement dated December 30, 1994 between
Fleet Bank-NH and White Pine Software, Inc., as amended
10.14(1) Collateral Assignment and Security Agreement dated October
30, 1994 between Fleet Bank-NH and White Pine Software,
Inc., as amended
10.15(1) Commercial Promissory Note of White Pine Software, Inc.
dated August 25, 1995, issued to Fleet Bank-NH
10.16(2) Revolving Line of Credit Promissory Note
10.17(1) Sale of Assets Agreement dated as of July 6, 1998 by and
among White Pine Software, Inc., Labtam Communications Pty.
Ltd., Creative Software Technologies Pty. Ltd., Dawson Noy
Johns and Anthony James Oxley
10.18(4) Technology Transfer Agreement dated as of November 11, 1998
between White Pine Software, Inc. and Cornell Research
Foundation, Inc.
10.19(1) Standard Office Lease-Gross (American Industrial Real Estate
Association) dated October 24, 1996 by and between PBP
Limited Partnership, as lessor and White Pine Software,
Inc., as lessee
10.20(1) Nondisclosure and Noncompetition Agreement dated February
15, 1996 with David O. Bundy
10.21(3) Severance Agreement dated March 16, 1998 between White Pine
Software, Inc. and Robert Hadden
II-3
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
10.22(4) Letter agreement dated August 5, 1997 between White Pine
Software, Inc. and Christine J. Cox
10.23(1) Indenture of Lease dated May 15, 1996 by Nash-Tamposi
Limited Partnership, Ballinger Properties L.L.C. and the
Company
11.1(4) Statement re computation of per share earnings for year
ended December 31, 1997 and 1998
11.2(5) Statement re computation of per share earnings for nine
months ended October 1, 1998 and 1999
23.1 Consent of Ernst & Young LLP
23.2* Consent of Foley, Hoag & Eliot LLP (included in Exhibit 5.1)
24.1 Power of Attorney (contained on page II-5 of this
registration statement)
27.1(4) Financial Data Schedules for year ended December 31, 1998
27.2(5) Financial Data Schedule for nine months ended October 1,
1999
- ------------------------
(1) Incorporated by reference to White Pine's Registration Statement on Form
SB-2 (File No. 333-09525) in the form in which it was declared effective by
the Securities and Exchange Commission.
(2) Incorporated by reference to White Pine's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1996.
(3) Incorporated by reference to White Pine's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1997.
(4) Incorporated by reference to White Pine's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1998.
(5) Incorporated by reference to White Pine's Quarterly Report on Form 10-QSB
for the quarterly period ended September 30, 1999.
All exhibits not incorporated by reference will be filed by amendment.
(b) FINANCIAL STATEMENT SCHEDULES
Report of Independent Accountants
All schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or the related
notes.
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the small business issuer of expenses
incurred or paid by a director, officer or controlling person of the small
business issuer in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the small business issuer will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-4
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of Nashua,
New Hampshire on January 27, 2000.
WHITE PINE SOFTWARE, INC.
By: /s/ KILLKO A. CABALLERO
-----------------------------------------
Killko A. Caballero
President and Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned officers and directors of White Pine Software, Inc.,
hereby severally constitute and appoint Killko A. Caballero, Christine J. Cox
and Mark L. Johnson, and each of them singly, our true and lawful attorneys with
full power to them, and each of them singly, to sign for us and in our names in
the capacities indicated below, the Registration Statement on Form SB-2 filed
herewith and any and all pre-effective and post-effective amendments to said
Registration Statement, and any subsequent Registration Statement for the same
offering which may be filed under Rule 462(b) under the Securities Act of 1933
and generally to do all such things in our names and on our behalf in our
capacities as officers and directors to enable White Pine Software, Inc. to
comply with the provisions of the Securities Act of 1933 and all requirements of
the Securities and Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by our said attorneys, or any of them, to said
Registration Statement and any and all amendments thereto or to any subsequent
Registration Statement for the same offering which may be filed under said
Rule 462(b).
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on January 27, 2000.
SIGNATURE TITLE
--------- -----
/s/ KILLKO A. CABALLERO President, Chief Executive Officer and
------------------------------------------- Chairman (PRINCIPAL EXECUTIVE OFFICER)
Killko A. Caballero
/s/ CHRISTINE J. COX Chief Financial Officer and Vice President of
------------------------------------------- Finance (PRINCIPAL FINANCIAL AND ACCOUNTING
Christine J. Cox OFFICER)
/s/ JOSEPH J. ESPOSITO Director
-------------------------------------------
Joseph J. Esposito
/s/ JONATHAN G. MORGAN Director
-------------------------------------------
Jonathan G. Morgan
/s/ ADAM STETTNER Director
-------------------------------------------
Adam Stettner
II-5