<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
- ---
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________to____________
Commission File Number: 000-21415
WHITE PINE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3151064
(State or other jurisdiction (I.R.S. employer
of incorporation or jurisdiction) identification number)
542 Amherst Street
Nashua, New Hampshire 03063
(Address of principal executive offices, including Zip Code)
(603) 886-9050
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes No X
_ -
As of October 31, 1996, there were 9,030,384 shares of the registrant's common
stock, $.01 par value, outstanding.
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WHITE PINE SOFTWARE, INC.
Form 10-Q for the Quarter Ended September 30, 1996
Table of Contents
PART I. FINANCIAL INFORMATION Page No.
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Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets as of December 31, 1995 and
September 30, 1996............................................ 3
Consolidated Statements of Operations for the three and nine
months ended September 30, 1995 and September 30, 1996........ 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1995 and September 30, 1996............... 5
Notes to Consolidated Financial Statements.................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 8
PART II. OTHER INFORMATION Page No.
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Item 1. Legal Proceedings............................................. 14
Item 4. Submission of Matters to a Vote of
Securityholders............................................... 14
Item 6. Exhibits and Reports on Form 8-K.............................. 15
Signature..................................................... 16
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
White Pine Software, Inc. and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
(Unaudited)
--------------- ---------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,773,855 $ 642,181
Accounts receivable, less allowance of $116,449 at December 31,
1995 and $202,000 at September 30, 1996 1,438,528 2,172,567
Inventories 178,546 116,607
Prepaid expenses 149,607 850,077
Other current assets 19,210 41,467
--------------- ---------------
Total current assets 3,559,746 3,822,899
Property and equipment:
Computer equipment 1,429,560 1,797,870
Furniture and fixtures 371,189 513,046
Software 330,972 360,583
Equipment 105,204 145,751
Leasehold improvements 25,175 62,488
--------------- ---------------
2,262,100 2,879,738
Accumulated depreciation and amortization (1,648,839) (1,936,186)
--------------- ---------------
613,261 943,552
Other assets:
Third party licenses, less accumulated amortization of $241,529 at
December 31, 1995 and $572,933 at September 30, 1996 765,983 604,541
Goodwill, less accumulated amortization of $39,750 at December 31,
1995 and $218,628 at September 30, 1996 1,152,768 973,894
Other assets 345,650 348,137
--------------- ---------------
2,264,401 1,926,572
--------------- ---------------
Total assets $ 6,437,408 $ 6,693,023
=============== ===============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $465,924 $759,892
Accrued expenses and other accrued liabilities 1,648,260 2,166,277
Deferred revenue 445,786 808,975
Current portion of long-term debt 217,986 240,885
--------------- ---------------
Total current liabilities 2,777,956 3,976,029
Long term debt, less current portion 385,017 227,275
Long term portion of accrued third-party licenses 494,074 325,090
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares - 7,500,000
Issued and outstanding shares - 5,589,764 at December 31, 1995
and 5,613,359 at September 30, 1996 55,898 56,133
Common stock, $5.83 par value:
Authorized shares - 500,000
Issued and outstanding shares - 0 at December 31, 1995
and 394,511 at September 30, 1996 -- 2,300,000
Additional paid-in capital 12,637,430 12,596,456
Accumulated deficit (9,974,900) (12,832,747)
Currency translation adjustments 61,933 44,787
--------------- ---------------
Total stockholders' equity 2,780,361 2,164,629
--------------- ---------------
Total liabilities and stockholders' equity $ 6,437,408 $ 6,693,023
=============== ===============
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
White Pine Software, Inc. and Subsidiary
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1995 1996 1995 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue:
Software license fees $ 1,530,513 $ 2,809,627 $ 4,444,874 $ 7,114,221
Services and other 289,077 278,952 799,887 834,559
-------------- -------------- -------------- --------------
Total revenue 1,819,590 3,088,579 5,244,761 7,948,780
Cost of revenue 388,869 596,665 784,494 1,517,503
-------------- -------------- -------------- --------------
Gross profit 1,430,721 2,491,914 4,460,267 6,431,277
Operating expenses:
Sales and marketing 530,933 1,671,634 1,704,191 4,481,950
Research and development 463,081 1,006,827 1,511,016 2,707,671
General and administrative 333,927 778,334 975,944 2,061,762
-------------- -------------- -------------- --------------
Total operating expenses 1,327,941 3,456,795 4,191,151 9,251,383
-------------- -------------- -------------- --------------
Income/(Loss) from operations 102,780 (964,881) 269,116 (2,820,106)
Other income (expense):
Interest income 21,103 9,524 65,642 52,793
Other, net (9,892) 5,527 17,623 (15,018)
-------------- -------------- -------------- --------------
11,211 15,051 83,265 37,775
-------------- -------------- -------------- --------------
Income (loss) before provision for income taxes 113,991 (949,830) 352,381 (2,782,331)
Provision for income taxes 6,061 19,851 18,413 75,516
-------------- -------------- -------------- --------------
Net income (loss) $ 107,930 $ (969,681) $ 333,968 $ (2,857,847)
============== ============== ============== ==============
Net income (loss) per common and common
equivalent share $ 0.02 $ (0.16) $ 0.05 $ (0.48)
============== ============== ============== ==============
Weighted average number of common and common
equivalent shares outstanding 6,123,363 6,005,227 6,125,855 5,935,776
============== ============== ============== ==============
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
White Pine Software, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, September 30,
1995 1996
----------------- ----------------
<S> <C> <C>
Operating activities
Net income (loss) $ 333,968 $ (2,857,847)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 201,982 886,732
Changes in operating assets and liabilities:
Accounts receivable (129,725) (941,320)
Inventories 43,433 61,027
Prepaid expenses 83,517 (733,886)
Other assets 5,980 (58,142)
Accounts payable (3,177) 314,234
Accrued expenses and other accrued liabilities (137,503) 522,991
Deferred revenue (654) 368,665
----------------- ----------------
Net cash provided by (used in) operating activities 397,821 (2,437,546)
Investing activities
Purchase of property and equipment, net (574,839) (642,336)
Purchase of third party licenses, net -- (169,961)
Other -- 0
----------------- ----------------
Net cash used in investing activities (574,839) (812,297)
Financing activities
Proceeds from long-term debt 53,000 --
Principal payments on long-term debt (883) (105,935)
Proceeds from sale of common stock, net 6,915 2,259,261
----------------- ----------------
Net cash provided by financing activities 59,032 2,153,326
Currency translation effect on cash and cash equivalents -- (35,157)
----------------- ----------------
Net decrease in cash and cash equivalents (117,986) (1,131,674)
Cash and cash equivalents at beginning of period 1,871,032 1,773,855
----------------- ----------------
Cash and cash equivalents at end of period $ 1,753,046 $ 642,181
================= ================
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
WHITE PINE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited consolidated financial statements included herein have been
prepared by White Pine Software, Inc. (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission (the "Commission").
Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. The
Company believes, however, that the disclosures made are adequate to make the
information not misleading. It is suggested that these financial statements be
read in conjunction with the consolidated financial statements and notes
thereto, together with the related information set forth under "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
contained in the Company's Registration Statement on Form SB-2, File No. 333-
9525, filed with the Commission.
The consolidated financial statements at September 30, 1996 and for the three
and nine months ended September 30, 1995 and September 30, 1996 are unaudited
and include all adjustments which are, in the opinion of management, necessary
for a fair presentation of the financial position and operating results for the
interim periods. The results of operations for the period ended September 30,
1996 are not necessarily indicative of results for the entire year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. Net Income (Loss) Per Common and Common Equivalent Share
Net income (loss) per common and common equivalent share is computed using the
weighted average number of shares of common stock and dilutive common equivalent
shares outstanding during the period. All shares, options and warrants issued
during the 12 month period prior to the effective date of the Company's initial
public offering consummated on October 17, 1996 have been included in the
calculation as if they were outstanding for the six month period ended June 30,
1996 and the year ended December 31, 1995 using the treasury stock method.
Common equivalent shares consist of the incremental common shares issuable upon
the exercise of stock options and warrants using the treasury stock method.
3. Customer Concentration
Revenue from sales to one customer, Ingram Micro Inc., comprised 13% and 19% of
total revenue for the nine months ended September 30, 1996 and 1995,
respectively.
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<PAGE>
4. Recent Accounting Pronouncement
In November 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123 addresses the financial
accounting and reporting standards for stock-based employee compensation plans.
SFAS No. 123 permits an entity either to record the effects of stock-based
employee compensation plans in its financial statements or to present pro forma
disclosures in the notes to its financial statements. In connection with its
adoption of SFAS No. 123 during 1996, the Company intends to elect to provide
the appropriate disclosures in the notes to its financial statements.
5. Subsequent Events
On October 17, 1996, subsequent to the end of the third quarter, the Company
completed its initial public offering of common stock. The Company issued and
sold 3,000,000 shares of common stock in the public offering for net proceeds of
approximately $24,160,000, after deducting the applicable underwriting discount
and an estimated $950,000 of offering expenses.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
THIS REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES, SUCH AS STATEMENTS OF PLANS, OBJECTIVES, EXPECTATIONS AND
INTENTIONS. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN.
FACTORS THAT MIGHT CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE SET FORTH IN WHITE PINE SOFTWARE, INC.'S REGISTRATION
STATEMENT ON FORM SB-2 (FILE NO. 333-9525) UNDER THE CAPTION "RISK FACTORS,"
WHICH ARE FILED AS AN EXHIBIT TO THIS REPORT AND INCORPORATED HEREIN BY
REFERENCE.
EXODUS and WHITE PINE are trademarks of White Pine Software, Inc. CU-SEEME is a
registered trademark of Cornell Research Foundation, Inc.
Overview
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White Pine Software, Inc. (the "Company") develops, markets and supports
multiplatform desktop connectivity software that facilitates worldwide video and
audio communication and data collaboration across the Internet, intranets and
other networks that use the Internet Protocol ("IP"). The Company's desktop
videoconferencing software products, Enhanced CU-SeeMe and the White Pine
Reflector, create a client-server solution that allows users to participate in
real-time, multipoint videoconferences over the Internet and intranets. The
Company also offers its eXodus line of desktop X Windows software, which enables
seamless interoperability between local and remote environments, and its 5PM
line of terminal emulation software, which provides desktop access to data and
applications residing on enterprise legacy systems.
In June 1995, as a part of its continuing plan to focus on software connectivity
products, the Company entered into a License Agreement with Cornell Research
Foundation, Inc., which granted to the Company the exclusive worldwide right to
develop, modify, market, distribute and sublicense commercial versions of such
Foundation's freeware CU-SeeMe and its related software-only multipoint
conferencing server. The Company commenced shipments of the initial commercial
versions of Enhanced CU-SeeMe and the White Pine Reflector in March 1996 and May
1996, respectively. The Company anticipates that its revenue growth, if any,
will depend on increased sales of Enhanced CU-SeeMe and the White Pine Reflector
and on sales of new software connectivity products for the Internet and
intranets. Accordingly, the Company intends to devote a substantial portion of
its research and development and sales and marketing resources to technologies
related to the Internet and intranets.
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 American Institute of
Certified Public Accountants Statement of Position No. 91-1, "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 the Company remain outstanding and collection of the related receivable is
deemed probable by management. An allowance for product returns is recorded by
the Company 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
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<PAGE>
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.
Research and development expenses are charged to income as incurred. In
accordance with the Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," the Company capitalizes software development costs once the
technological feasibility of a product has been established, which the Company
considers to occur when a commercially viable working model of a product has
been produced and tested. The total amount of capitalized software development
costs is included in other assets.
Effective April 1, 1994, the Company changed its fiscal year end from March 31
to December 31.
Results of Operations
- ---------------------
The following table sets forth, for the periods indicated, line items from the
Company's statement of operations as a percentage of total revenue.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------- ---------------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Software license fees 84.1 % 91.0 % 84.7 % 89.5 %
Services and other 15.9 9.0 15.3 10.5
------ ------- ------ -------
Total revenue 100.0 100.0 100.0 100.0
Cost of revenue 21.4 19.3 15.0 19.1
------ ------- ------ -------
Gross profit 78.6 80.7 85.0 80.9
------ ------- ------ -------
Operating expenses:
Sales and marketing 29.2 54.1 32.5 56.4
Research and development 25.4 32.6 28.8 34.1
General and administrative 18.4 25.2 18.6 25.9
------ ------- ------ -------
Total operating expenses 73.0 111.9 79.9 116.4
------ ------- ------ -------
Income (loss) from operations 5.6 (31.2) 5.1 (35.5)
Interest income and other, net 0.6 0.5 1.6 0.5
Provision for income taxes 0.3 0.6 0.4 1.0
------ ------- ------ -------
Net income (loss) 5.9 % (31.3) % 6.3 % (36.0) %
====== ======= ====== =======
</TABLE>
The Company acquired all of the stock of About Software Corporation S.A. ("ASC")
effective as of November 1, 1995 and accounted for the acquisition as a purchase
transaction. As a result, comparisons of the Company's results of operations
for the nine months ended September 30, 1995 and 1996 are not necessarily
meaningful. ASC developed the Company's 5PM line of terminal emulators.
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<PAGE>
Revenue. Total revenue increased by 70% to $3,089,000 in the three months ended
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September 30, 1996 from $1,820,000 in the three months ended September 30, 1995.
Total revenue increased by 52% to $7,949,000 in the nine months ended September
30, 1996 from $5,245,000 in the nine months ended September 30, 1995. The
increase in total revenue for both the three and nine month periods ended
September 30, 1996, when compared to the corresponding period in 1995, resulted
primarily from the revenues generated from Enhanced CU-SeeMe since its
introduction in March 1996, and to a lesser extent from the acquisition of ASC
effective as of November 1, 1995. The increase was offset in part by a moderate
decrease in revenue from the Company's eXodus products for both the three and
nine month periods ended September 30, 1996.
Revenue from sales outside the United States comprised 30% and 15% of total
revenue for the three months ended September 30, 1996 and 1995, respectively,
and 30% and 17% of total revenue for the nine months ended September 30, 1996
and 1995, respectively. The increase in revenue from sales outside the United
States for both the three and nine month periods ended September 30, 1996 was
directly related to the acquisition of ASC, which generates a majority of its
revenue from sales in Europe, and to a lesser extent to increased sales of
Enhanced CU-SeeMe through distributors in the Asia-Pacific region.
Cost of Revenue. Cost of revenue consists principally of costs of product
- ---------------
media, manuals, packaging materials, product localization for international
markets, duplication and shipping, as well as royalties and associated
amortization of paid license fees relating to third-party software included in
the Company's products. In addition, cost of revenue includes a warranty
reserve, measured on a periodic basis, for the costs of upgrades and services.
Cost of revenue as a percentage of total revenue decreased to 19% for the three
months ended September 30, 1996 as compared to 21% for the three months ended
September 30, 1995. The cost of revenue decrease related primarily to increased
sales within the three months ended September 30, 1996 in comparison to the same
period ended September 30, 1995.
Cost of revenue as a percentage of total revenue increased to 19% for the nine
months ended September 30, 1996 as compared to 15% for the nine months ended
September 30, 1995. The percentage increase in cost of revenue for the nine
month period ended September 30, 1996 resulted primarily from the higher cost of
revenue attributable to the new Enhanced CU-SeeMe product line as compared to
the Company's other products. Certain third-party software incorporated within
Enhanced CU-SeeMe bears higher royalty rates than the software incorporated in
the Company's other product lines and also requires payment of upfront fees that
are amortized over the respective periods of the software licenses. The Company
intends to continue its strategy of improving the features and functionality of
its products, particularly Enhanced CU-SeeMe, through the incorporation of
third-party software and, as a result, the cost of revenue as a percentage of
total revenue may continue to fluctuate.
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. Sales and marketing expense increased by
215% to $1,672,000 in the three months ended September 30, 1996 from $531,000 in
the three months ended September 30, 1995, and increased as a percentage of
total revenue to 54% in the three months ended September 30, 1996 from 29% in
the three months ended September 30, 1995. Sales and marketing expense
increased by 163% to $4,482,000 in the nine months ended September 30, 1996 from
$1,704,000 in the nine months ended September 30, 1995, and increased as a
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<PAGE>
percentage of total revenue to 56% in the nine months ended September 30, 1996
from 33% in the nine months ended September 30, 1995.
The increase in sales and marketing expense for both the three and nine month
periods ended September 30, 1996 was attributable to (i) the strengthening of
the Company's sales and marketing organization through the hiring of additional
personnel in channel development, marketing communication, technical support and
sales, (ii) the launch of Enhanced CU-SeeMe, which included increased
advertising, trade show participation and other marketing-related programs, and
(iii) to a lesser extent the additional sales force in Europe employed as part
of the acquisition of ASC, effective as of November 1, 1995. The Company
intends to continue to increase sales and marketing efforts in connection with
the first year of its marketing and sales of Enhanced CU-SeeMe and to hire sales
and marketing personnel, but at a slower rate of increase than during the nine
months ended September 30, 1996.
Research and Development. Research and development expense consists primarily
- ------------------------
of costs of personnel and equipment. Research and development expense increased
by 117% to $1,007,000 in the three months ended September 30, 1996 from $463,000
in the three months ended September 30, 1995; research and development expense
represented 33% and 25% of total revenue for the three months ended September
30, 1996 and 1995, respectively. Research and development expense increased by
79% to $2,708,000 in the nine months ended September 30, 1996 from $1,511,000 in
the nine months ended September 30, 1995; research and development expense
represented 34% and 29% of total revenue for the nine months ended September 30,
1996 and 1995, respectively.
The increase in research and development expenses for both the three and nine
month periods ended September 30, 1996 was attributable primarily to the hiring
of additional personnel for the Enhanced CU-SeeMe product development team, and
for the introduction of new products, such as Web-enabled versions of the
Company's access connectivity products, and to a lesser extent to the employment
of additional engineers as a result of the acquisition of ASC.
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
increased by 133% to $778,000 in the three months ended September 30, 1996 from
$334,000 in the three months ended September 30, 1995, and increased as a
percentage of total revenue to 25% in the three months ended September 30, 1996
from 18% in the three months ended September 30, 1995. General and
administrative expense increased by 111% to $2,062,000 in the nine months ended
September 30, 1996 from $976,000 in the nine months ended September 30, 1995 and
increased as a percentage of total revenue to 26% in the nine months ended
September 30, 1996 from 19% in the nine months ended September 30, 1995.
The increase in general and administrative expenses for both the three and nine
month periods ended September 30, 1996 was attributable primarily to (i) the
administrative support of the Company's new office in LaGaude, France as a
result of the acquisition of ASC and (ii) to a lesser extent increased personnel
and systems costs related to the improved communications infrastructure for the
Company's Internet and intranet access and the strengthening of the Company's
finance organization in preparation for the Company's initial public offering.
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<PAGE>
Provision for Income Taxes. The Company's provision for income taxes consists
- ---------------------------
of federal alternative minimum taxes and state and foreign income taxes. The
Company expects that its effective tax 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.
Liquidity and Capital Resources
- -------------------------------
During the nine months ended September 30, 1996, the Company financed its
operations primarily through the use of cash and other liquid assets and through
a private placement of equity securities in March and April 1996.
The Company's operating activities used cash of $2,438,000 in the nine months
ended September 30, 1996, primarily as a result of increased sales and marketing
and research and development activities related to the release of Enhanced CU-
SeeMe in March 1996. Accounts receivable increased to $2,173,000 from $1,439,000
on December 31, 1995, primarily related to the increase in revenue in the three
months ended September 30, 1996 as compared to the three months ended December
31, 1996.
The Company's investing activities used cash of $812,000 in the nine months
ended September 30, 1996. Cash used in investing activities was primarily for
the purchase of capital expenditures, and for third-party software licenses.
Capital expenditures totaled $642,000 for the nine months ended September 30,
1996. These expenditures consisted principally of purchases of computer and
networking systems and office equipment.
The Company's financing activities provided cash of $2,153,000 in the nine
months ended September 30, 1996. The Company received gross proceeds of
$2,300,000 from a private placement of equity securities in March and April
1996. On October 17, 1996, subsequent to the end of the third quarter, the
Company completed its initial public offering of common stock. The Company
issued and sold 3,000,000 shares of common stock in the public offering for net
proceeds of approximately $24,160,000, after deducting the applicable
underwriting discount and an estimated $950,000 of offering expenses.
On December 30, 1994, the Company entered into a commercial loan agreement with
Fleet Bank-NH (the "Bank") providing for a $1,000,000 revolving line of credit.
The commercial loan agreement was amended on August 29, 1995 to include a term
loan in the initial principal amount of $53,000. The revolving line of credit
expires on January 1, 1997, and the Company and the Bank have entered into
negotiations for a successor credit line of $3,000,000 to be effective after
January 1, 1997. Borrowing under the line of credit and the term loan are
secured by substantially all of the Company's assets, including a $515,000
certificate of deposit and all of the Company's computer software products
(including all source code, object code, copyrights, trademarks and patents, if
any, relating thereto). Amounts outstanding under the line of credit and the
term loan bear interest at the Bank's prime rate plus 0.5% (8.75% at September
30, 1996).
The commercial loan agreement requires that the Company provide the Bank with
certain periodic financial reports and comply with certain financial and other
ratios, including maintenance of a minimum net worth, a maximum ratio of total
liabilities to tangible net worth, a minimum ratio of current assets to current
liabilities and profitability determined on a rolling three-month basis. On
July 31, 1996, the Company obtained a waiver from the Bank with respect to the
Company's failure to satisfy the minimum
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<PAGE>
ratio of current assets to current liabilities as of December 31, 1995 and the
profitability covenant during the quarters ended December 31, 1995 and March 31,
1996; the waiver also extends to any and all further violations of these
covenants occurring on or prior to September 30, 1996. At December 31, 1995 and
September 30, 1996, no borrowings were outstanding under the revolving line of
credit and $49,000 and $42,000 were outstanding under the term loan,
respectively.
At September 30, 1996, the Company had cash and cash equivalents of $642,000 and
working capital of ($153,000). The Company believes that the net proceeds of
its initial public offering, together with current cash, cash equivalents and
marketable securities, funds (if any) generated from operations and borrowings
under its bank line of credit, will be sufficient to fund the Company's
operations and capital expenditures for at least the next twelve months.
Thereafter, the Company's liquidity will be materially dependent upon its
internally generated funds and its ability to obtain funds from additional
equity or debt financings from external sources.
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<PAGE>
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a defendant in 13 lawsuits pending in New York federal and state
courts (the "RSI Suits") in which the plaintiffs claim to suffer from carpal
tunnel syndrome, or "repetitive stress injuries," as a result of having used
computer keyboards (the "Keyboards") that are alleged to have been defectively
designed. The Keyboards were supplied, and possibly designed and manufactured,
by Ontel Corporation. The assets of Ontel Corporation were purchased in 1982 by
Visual Technology, Inc. ("Visual"), a predecessor of Visual T.I., Inc. ("VTI"),
which in turn is a predecessor of the Company. The RSI Suits, which seek money
damages, have been brought by employees of New York Telephone, which purchased
the Keyboards from Lockheed Electronics Corporation. One or more of Visual,
Ontel Corporation, Lockheed Electronics Corporation and Key Tronics Corporation,
a subcontractor for certain of the Keyboards, are named as co-defendants in
certain of the RSI Suits. New York Telephone employees have also commenced 38
suits that name as defendants only Visual and/or Ontel Corporation. The Company
could be named as a defendant in these cases. None of the RSI Suits has reached
trial and additional information detrimental to the Company could be developed
in the course of discovery.
In May 1993, VTI's product liability coverage terminated. Certain of the RSI
Suits appear to be based on claims that allegedly arose after May 1993, and
therefore may be uninsured. The insurers for VTI, the Company and others are
defending the RSI Suits under a reservation of rights. To date, the Company's
proportionate share of the defense costs of the RSI Suits has not been material.
There can be no assurance, however, that the Company will not incur material
legal expenses defending the RSI Suits. The Company has established a reserve
of approximately $300,000 in connection with the RSI Suits, based upon the
Company's belief that (i) certain of the RSI Suits are covered by product
liability insurance, (ii) the Company is contractually indemnified by Lockheed
Electronics Corporation and/or Key Tronics Corporation against all or a portion
of the damages to which the Company may be subject and (iii) the Company has
defenses to substantially all of the claims under the RSI Suits. Although the
Company believes that its reserve for the RSI Suits is adequate, there can be no
assurance that the Company's liabilities under the RSI Suits will not
substantially exceed that reserve. New York Telephone and others may continue
to use certain of the Keyboards and, accordingly, there can be no assurance that
additional product liability claims will not be asserted against the Company in
the future.
From time to time, the Company has received and may receive in the future notice
of claims of infringement of other parties' proprietary rights. Although the
Company believes that its 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 the Company or
that any infringement claims will not be successful.
From time to time, the Company may be exposed to litigation arising out of its
products, services and operations. As of the date of this filing, the Company
is not engaged in any legal proceedings of a material nature, other than the RSI
Suits.
Item 4. Submission of Matters to a Vote of Securityholders
Certain votes by the Company's stockholders were adopted with respect to, or in
anticipation of, the Company's initial public offering. These matters were
described in the Company's Registration Statement on Form SB-2 (File No. 333-
9525).
-14-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Statement Re: computation of earnings per share
27.1 Financial Data Schedule for the three months ended
September 30, 1996.
99.1 Risk Factors as excerpted from pages 6 through 17 of the
Company's Registration Statement on Form SB-2 (File No. 333-
9525).
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended September 30, 1996.
-15-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WHITE PINE SOFTWARE, INC.
(Registrant)
Dated: November 13, 1996 By: /s/ Richard M. Darer
-----------------------------------------
Richard M. Darer
Chief Financial Officer and
Vice President of Administration
(Principal Financial and Accounting
Officer)
-16-
<PAGE>
Exhibit 11.1
Statement Re: Computation of Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 29 September 29
------------------------------ --------------------------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average shares outstanding 3,594,465 6,005,227 3,588,863 5,728,874
Net dilutive effect of stock
options-based on the treasury
stock method using the initial
public offering price of
$9.00 per share...................... 670,023 678,117
Effect of common and common
equivalent shares issued by the
Company during the twelve
month period immediately
preceeding the Company's
registration for initial public
offering on August 2, 1996,
as if they were outstanding for
all periods presented prior to
the registration for initial public
offering, using the treasury stock
method, as described above........... 1,858,875 1,858,875 206,902
------------ ------------ ------------ ------------
Total shares 6,123,363 6,005,227 6,125,855 5,935,776
============ ============ ============ ============
Net income (loss) $ 107,930 $ (969,681) $ 333,968 $(2,857,847)
============ ============ ============ ============
Net income (loss) per common and
common share equivalent $ 0.02 $ (0.16) $ 0.05 $ (0.48)
============ ============ ============ ============
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5 EXHIBIT 27.1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 642,181
<SECURITIES> 0
<RECEIVABLES> 2,374,567
<ALLOWANCES> 202,000
<INVENTORY> 116,607
<CURRENT-ASSETS> 3,822,899
<PP&E> 2,879,738
<DEPRECIATION> 1,936,186
<TOTAL-ASSETS> 6,693,023
<CURRENT-LIABILITIES> 3,976,029
<BONDS> 0
0
0
<COMMON> 2,356,133
<OTHER-SE> (191,504)
<TOTAL-LIABILITY-AND-EQUITY> 6,693,023
<SALES> 0
<TOTAL-REVENUES> 3,088,579
<CGS> 0
<TOTAL-COSTS> 596,665
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 8,412
<INTEREST-EXPENSE> 8,589
<INCOME-PRETAX> (949,830)
<INCOME-TAX> 19,851
<INCOME-CONTINUING> (969,681)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (969,681)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.16)
</TABLE>
<PAGE>
Exhibit 99.1
RISK FACTORS
Recent Operating Losses
The Company incurred losses from operations of $3,646,000 in the fiscal year
ended December 31, 1995 (including a non-recurring write-off of purchased
research and development costs of $3,200,000) and $1,855,000 in the six months
ended June 30, 1996. At June 30, 1996, the Company had an accumulated deficit of
approximately $11,863,000. In the fiscal year ended December 31, 1995 and the
six months ended June 30, 1996, the Company made significant expenditures for
product development and sales and marketing in support of the product launch of
Enhanced CU-SeeMe, which became commercially available in March 1996. The
Company expects that it will be required to continue to invest heavily in
product development and sales and marketing programs in order to be competitive
and capture market share, particularly in the videoconferencing market. In
addition, the Company has hired a significant number of employees since January
1995 and expects to continue hiring additional sales, customer service,
management, software development and technical support employees during the
remainder of 1996 as the Company continues to develop and expand its operations.
This significant increase in its workforce may negatively impact the Company's
results of operations in the future, particularly if sales of new products fall
below expectations.
Sales to Ingram Micro, Inc. represented 21% and 16% of the Company's total
revenue in the fiscal years ended December 31, 1994 and 1995, respectively. The
loss of, or a significant curtailment of purchases by, Ingram Micro, Inc.,
including a loss or curtailment due to factors outside of the Company's control,
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Customers" and Note 1 of
Notes to the Company's Consolidated Financial Statements.
As a result of the foregoing factors, the Company may incur further losses in
the future. There can be no assurance that the Company will achieve profitable
operations in any future period. In addition, as a result of the Company's
acquisition of ASC on a purchase accounting basis in the fourth quarter of
fiscal 1995 and the Company's decision to shift its focus to the development,
marketing and support of videoconferencing software, the Company believes that
period-to-period comparisons of its financial results are not necessarily
meaningful and should not be relied upon as an indication of future performance.
See "--Transition of Product Focus; Dependence on New Products," "The
Company," "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Developing Market; Unproven Acceptance of the Company's New Products
The market for audio and video services and related software products for the
Internet and intranets, such as Enhanced CU-SeeMe and the White Pine Reflector,
has only recently begun to develop, is evolving rapidly and is expected to be
characterized by an increasing number of market entrants. The Company's future
success will depend in large part on the continued expansion of the
videoconferencing market in general and the adoption of the Internet as a
principal medium for commercial and consumer videoconferencing in particular. As
is typical in a new and rapidly evolving industry, demand for and market
acceptance of recently introduced products, such as Enhanced CU-SeeMe and the
White Pine Reflector, are subject to a high level of uncertainty. Certain
factors, including the present inability of subscribers of certain widely used
on-line Internet access providers to use Enhanced CU-SeeMe over these providers'
networks, the present inability to videoconference with users of other vendors'
videoconferencing systems, difficulties in locating people on the Internet and
uncertainty regarding
<PAGE>
vendors' willingness to adopt industry standards, may limit demand for and
market acceptance of Enhanced CU-SeeMe and the White Pine Reflector. The
continuation of such uncertainty or of such limitations may have a material
adverse effect on sales of Enhanced CU-SeeMe and the White Pine Reflector and on
the Company's business, financial condition and results of operations. Also,
enterprises that have already invested substantial resources in other means of
communicating information may be reluctant or slow to adopt videoconferencing
generally and Internet videoconferencing in particular. As a result of
networking latencies, data packet loss and significant variations in Internet
infrastructure and users' set-ups and configurations, the quality of audio
communications over the Internet is inferior to the quality of conventional
telephone conversations and the quality of video communications over the
Internet may vary from connection to connection and in certain instances may be
inferior to the quality of hardware-based videoconferencing systems. As a
result, there can be no assurance that videoconferencing communications over the
Internet and intranets will become widespread or that Enhanced CU-SeeMe or the
White Pine Reflector will become widely installed.
Moreover, the market for Internet services and software has developed only
recently. Commercial use of the Internet has been constrained by customer
demands for increased accessibility, reliability, speed, security and support,
and there can be no assurance that the infrastructure or complementary products
necessary for the Internet to become a viable medium of business communications
and activity in general, and as a medium of videoconferencing communications in
particular, will develop. In particular, there can be no assurance that access
to the Internet will continue to be available on a widespread basis, that the
Internet will not experience dramatic and unforeseen technological difficulties,
that the Internet will not be plagued by computer viruses or other destructive
technologies, that the introduction of complementary products and technologies
such as high speed modems and security procedures for commercial transactions
will not be delayed, that the development and adoption of new standards and
communications protocols will not be delayed, that the current pricing structure
for access to the Internet will continue, or that growth in the number of users
or the level of usage of the Internet will not exceed the capacity of the
Internet infrastructure to serve all potential users. Moreover, critical issues
concerning the commercial use of, distribution of information on, and
governmental regulation of the Internet (including access, security, quality of
services, price, ease of use, property ownership, and liability and other legal
issues) remain unresolved and may affect both the growth of the Internet and the
Company's business. As the Internet and the related infrastructure continue to
evolve, there can be no assurance that the Internet will not develop in
unforeseen directions that will have a material adverse effect on the Company's
business, financial condition and results of operations. For example, because
the performance of the Company's products depends on, among other things, the
availability of adequate bandwidth on network connections, any significant
reduction in the rate of improvement of the available speed of network data
transmission could have a material adverse effect on the Company's business,
financial condition and results of operations.
If for any reason the market for Internet videoconferencing services fails to
grow, grows more slowly than anticipated or becomes saturated with competitors'
products, the Company's business, financial condition and results of operations
will be materially and adversely affected.
Competition
The market for videoconferencing products and services is extremely
competitive, and the Company expects that competition will intensify in the
future. The Company believes that the principal competitive factors in the
videoconferencing industry are price, video and audio quality, interoperability,
functionality, reliability, service and support, hardware platforms supported,
and vendor and product reputation. The Company believes that its ability to
compete successfully will depend on a number of factors both within and outside
its control, including the adoption and evolution of industry standards, the
pricing policies of its competitors and suppliers, the timing of the
introduction of new software products and services by the Company and others,
the Company's ability to hire and retain employees, and industry and general
economic trends. The Company anticipates that in the near future the
videoconferencing market will experience intense competition in the form of
product bundling or significant price reductions. The
<PAGE>
Company currently competes, or expects to compete, directly or indirectly with
the following categories of companies: (i) traditional hardware-based
videoconferencing companies, such as PictureTel Corporation, VTEL Corporation
and Compression Labs, Incorporated; (ii) emerging videoconferencing technology
companies, such as Cinecom Corporation, Connectix Corporation, Creative Labs,
Inc. and VDONet Corp.; (iii) vendors of operating systems and browsers such as
Microsoft Corporation, which recently introduced NetMeeting, a product that
enables point-to-point audio and data communication over the Internet, and
Netscape Communications Corporation, which recently acquired Insoft, Inc. and
its audio and videoconferencing technology; (iv) videoconferencing support
companies, such as VideoServer, Inc., Lucent Technologies, Inc. and Accord Ltd.;
and (v) other companies developing videoconferencing systems. PictureTel
Corporation and Intel Corporation each recently announced plans to license
products competitive with Enhanced CU-SeeMe to manufacturers of personal
computers and modems for inclusion in prepackaged multimedia and other systems.
In July 1996, Intel Corporation also announced a cross-licensing agreement with
Microsoft Corporation to share implementations of certain industry standards and
application frameworks, which the Company expects will enhance the
competitiveness of the products offered by both companies. In addition, because
the barriers to entry in the software market are relatively low and the
potential market is large, the Company anticipates continued growth in the
industry and the entrance of new competitors in the future. Enhanced CU-SeeMe
and the White Pine Reflector also compete with videoconferencing software that
is available on the Internet and can be downloaded by users for either no charge
or extended evaluation. Cornell Research Foundation, Inc. (the "Cornell
Foundation") makes CU-SeeMe ("Freeware CU-SeeMe") and a related server freely
available over the Internet. See "Business--Proprietary Rights."
In the market for X Windows products, the Company faces significant direct
competition from a number of PC X server software vendors, including Hummingbird
Communications Ltd., NetManage, Inc., Network Computing Devices, Inc. and Walker
Richer and Quinn Inc., as well as indirect competition from manufacturers of
dedicated X terminals. The Company's principal competitor in this market is
Hummingbird Communications Ltd., 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, the Company will face
increased competition.
In the terminal emulation market, the Company currently competes with the
following categories of companies: (i) vendors of International Business
Machines Corporation host connectivity products, including Attachmate Corp. and
Wall Data Incorporated; (ii) vendors of TCP/IP terminal emulation products,
including FTP Software, Inc. and NetManage, Inc.; and (iii) vendors of Digital
Equipment Corporation and Hewlett-Packard Company host connectivity products,
including Walker Richer and Quinn Inc.
Many of the Company's current and potential competitors, including Hummingbird
Communications Ltd., Intel Corporation, Microsoft Corporation, Netscape
Communications Corporation and PictureTel Corporation, have significantly longer
operating histories and/or significantly greater managerial, financial,
marketing, technical and other competitive resources, as well as greater name
recognition, than the Company. As a result, the Company's competitors 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 products and services. There can be no assurance
that the Company 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
the Company and could have a material adverse effect on the Company's business,
financial condition and results of operations.
To remain competitive, the Company will need to continue to invest in research
and development and sales and marketing. There can be no assurance that the
Company will have sufficient resources to make such investments or that the
Company 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 whom the
<PAGE>
Company may have relationships, 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 significant market shares. Such an
eventuality could have a material adverse effect on the Company's business,
financial condition and results of operations.
Potential Fluctuations in Quarterly Results
The Company has experienced fluctuations in its quarterly results of
operations and anticipates that such fluctuations will continue and could
increase. The Company's quarterly results of operations may vary significantly
depending on a number of factors, some of which are outside of the Company's
control. These factors include the timing of the introduction or acceptance of
new products offered by the Company or its competitors, changes in demand for
Internet services, changes in the mix of products provided by the Company,
changes in pricing strategies by the Company and its competitors, changes in the
markets served by the Company, changes in regulations affecting the industry,
changes in the Company's operating expenses, capital expenditures and other
costs relating to the expansion of operations, changes in its personnel and
general economic conditions. In addition, fluctuations in exchange rates may
render the Company's products less competitive relative to local product
offerings or result in foreign exchange losses. To date, the Company has not
engaged in exchange rate hedging activities to minimize the risks of such
fluctuations. Although the Company may seek to implement hedging techniques in
the future with respect to its foreign currency transactions, there can be no
assurance that such hedging techniques will be successful. Historically, the
Company's revenue in the third quarter of each calendar year has been adversely
affected by seasonal reductions in business activity in Europe and certain other
parts of the world during the summer months. There can be no assurance that the
Company will be able to achieve or maintain profitability in the future or that
its levels of profitability will not vary significantly among quarterly periods.
Fluctuations in results of operations may result in volatility in the price of
the Common Stock.
A significant portion of the Company's expenses are fixed and difficult to
reduce in the event that revenue does not meet the Company's expectations, thus
magnifying the adverse effect of any revenue shortfall. Furthermore,
announcements by the Company or its competitors of new products, services or
technologies could cause customers to defer or cancel purchases of the Company's
products. Any such deferral or cancellation could have a material adverse effect
on the Company's business, financial condition and results of operations.
Accordingly, revenue shortfalls can cause significant variations in results of
operations from quarter to quarter and could have a material adverse effect on
the Company's business, financial condition and results of operations.
As a result of the foregoing factors, it is possible that in some future
quarter the Company's results of operations will be below prior results or the
expectations of public market analysts and investors. In such event, the price
of the Common Stock would likely be materially and adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Ability to Manage Change
The Company has recently experienced significant growth in the number of its
employees, the demands on its operating and financial systems, and the
geographic area of its operations. In particular, the Company acquired ASC, a
French corporation, and its California-based subsidiary in the fourth quarter of
1995. This growth has resulted in new and increased responsibilities for the
Company's administrative, operational, development and financial personnel.
Additional expansion by the Company may further strain the Company's management,
financial and other resources. Certain executive officers of the Company have
joined the Company only recently, including Brian L. Lichorowic, its Vice
President of Marketing, who joined the Company in August 1996; Richard M. Darer,
its Chief Financial Officer and Vice President of Administration, who joined the
Company in May 1996; Killko A. Caballero, its Senior
<PAGE>
Vice President of Research and Development and Chief Technology Officer, who
joined the Company in November 1995; and Jack A. Dutzy, its Vice President of
Sales, Americas, who joined the Company in October 1995. There can be no
assurance that the Company will be successful in hiring the personnel necessary
to manage its changing business. The Company's success depends to a significant
extent on the ability of its new executive officers to operate effectively, both
independently and as a group, and this ability may be impeded by past and future
geographic expansion of the Company internationally and domestically. In
addition, the Company relocated its corporate headquarters to larger facilities
in Nashua, New Hampshire in late August 1996 to accommodate its expanded
operations, and this relocation may result in delays and interruptions as the
Company seeks to build its marketing infrastructure and relationships, to
develop significant new versions of its products and to consummate the offering
made hereby. The Company also recently moved the remainder of its servers
offsite to a third party's facilities in order to decrease the likelihood of
system failures. There can be no assurance that the Company's systems,
procedures, controls and space will be adequate to support expansion of the
Company's operations. The Company's future results of operations will depend on
the ability of its officers and key employees to manage changing business
conditions and to continue to improve its operational and financial control and
reporting systems. Any failure of the Company's management to manage change
effectively could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Employees," "--
Facilities" and "Management."
Transition of Product Focus; Dependence on New Products
Since its inception, the Company has derived a substantial majority of its
revenue from licenses of terminal emulation and X Windows software products.
These products are expected to continue to generate a significant but declining
portion of the Company's revenue for the foreseeable future. As a result, any
factor adversely affecting sales of these products, such as shifting of
management focus and Company resources, increased price competition, the
introduction of technologically superior products by competitors or the release
of competing products by companies with significantly greater resources and name
recognition, could have a material adverse effect on the Company's business,
financial condition and results of operations.
In June 1995, the Company and the Cornell Foundation entered into an Exclusive
Software License Agreement (the "License Agreement") that granted to the
Company the exclusive worldwide right to develop, modify, market, distribute and
sublicense commercial versions of Freeware CU-SeeMe and its related server.
Since that time, the Company has significantly redirected its efforts, and
particularly its product development and marketing efforts, to focus on its
videoconferencing products. As of September 30, 1996, 31 of the Company's 43
research and development employees were devoted to developing Internet
videoconferencing technologies. The Company began shipping Enhanced CU-SeeMe and
the White Pine Reflector in March 1996 and May 1996, respectively, and therefore
has not had the opportunity to determine the extent to which these products will
succeed in the marketplace. A number of companies have introduced, or have
announced plans to introduce, videoconferencing software that will compete with
Enhanced CU-SeeMe and the White Pine Reflector, including software for use over
the Internet. The Company's future success will depend in significant part on
its ability to develop and introduce new products and to continue to improve the
performance, features and reliability of its products, including Enhanced CU-
SeeMe and the White Pine Reflector, in response to both competing product
offerings and evolving marketplace demands. There can be no assurance that the
Company will be successful in developing new products or that any new products
will be accepted in the marketplace. The Company's future success will also
depend on its ability to comply with developing industry standards for
videoconferencing over the Internet. The introduction of competing products that
incorporate new technology or the emergence of new industry standards may render
the Company's existing products obsolete and unmarketable. Any failure or
inability of Enhanced CU-SeeMe, the White Pine Reflector or other new products
to perform substantially as anticipated or to achieve market acceptance would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--Products" and "--Competition."
<PAGE>
Dependence Upon License Agreement; Limited Proprietary Protection
The Company's success is heavily dependent upon its proprietary technology.
The Company's videoconferencing products, Enhanced CU-SeeMe and the White Pine
Reflector, are commercial versions of Freeware CU-SeeMe and its related server.
The Company's ability to develop, modify, market, distribute and sublicense
Enhanced CU-SeeMe and the White Pine Reflector, as well as the right to use the
trademark "CU-SeeMe," derives entirely from the License Agreement with the
Cornell Foundation. In order to maintain the exclusivity provisions of the
License Agreement, the Company must meet certain staffing, product introduction
and sublicensing obligations. There can be no assurance that the Company will
meet these obligations. Any failure to meet such obligations will permit the
Cornell Foundation to grant licenses to other companies, including competitors
of the Company, to develop, sell and sublicense commercial versions of Freeware
CU-SeeMe and its related server. In addition, the Company's right to issue
sublicenses is contingent upon the Company's continued marketing of commercial
versions of Freeware CU-SeeMe and its related server. Even if the Company
fulfills such obligations, the License Agreement has a fixed term ending
December 1, 1998. Although the License Agreement contains certain provisions for
automatic annual renewal, the License Agreement may be terminated by the Cornell
Foundation for "cause." Under the License Agreement, "cause" includes
failure by the Company to pay any amount due under the License Agreement, if not
cured within 30 days of written notice of such failure to pay, or any "material
breach" of the License Agreement by the Company, if not cured within 90 days of
written notice of such breach. "Material breach" includes failure to exercise
due diligence to develop, manufacture and market commercial versions of Freeware
CU-SeeMe and its related server, failure to grant sublicenses as required by the
License Agreement, failure to maintain quality control over the Company's
commercial versions of Freeware CU-SeeMe and its related server, and failure to
develop and exploit the market to the extent necessary to meet the Company's
minimum royalty obligations under the License Agreement. Any termination of the
License Agreement would have a material adverse effect on the Company's
business, financial condition and results of operations. The License Agreement
requires that the Company pay royalties based on the Company's net revenue from
its commercial versions of Freeware CU-SeeMe and its related server (subject to
certain minimum per-copy royalties) and share sublicensing income with the
Cornell Foundation. The License Agreement also requires that the Company make
certain annual minimum royalty payments, including minimum payments based on
royalties from sublicensing. As of the date of this Prospectus, the Company has
not paid the minimum amount payable with respect to sublicensing royalties for
the period from June 1, 1995 through November 30, 1996; the failure to pay this
minimum amount by November 30, 1996 would constitute "cause" for termination
of the License Agreement, as described above. Moreover, Freeware CU-SeeMe and
its related server are freely available on the Internet. Such availability may
adversely affect sales of licenses for Enhanced CU-SeeMe and the White Pine
Reflector. The Company also depends upon the Cornell Foundation, as the owner of
the trademark "CU-SeeMe," to protect and enforce rights in the trademark. Any
failure of the Cornell Foundation to protect or enforce such rights could
substantially impair the value of such trademark and the Company's rights to use
such trademark.
The Company currently has no patents and relies primarily on copyright,
trademark and trade secrets law, as well as employee and third-party non-
disclosure agreements, to protect its intellectual property. There can be no
assurance that the steps taken by the Company to protect its proprietary rights
will be adequate to prevent misappropriation of its technology or independent
development by others of similar technology. Certain of the Company's products,
including Enhanced CU-SeeMe and the White Pine Reflector, are licensed to
customers under "shrink wrap" licenses included as part of the product
packaging. Although in certain sales the Company's shrink wrap licenses are
accompanied by specifically negotiated agreements signed by the licensee, in
most cases its shrink wrap licenses are not negotiated with or signed by
individual licensees. Certain provisions of the Company's shrink wrap licenses,
including provisions limiting the Company's liability and protecting against
unauthorized use, copying, transfer and disclosure of the licensed program, may
be unenforceable under the laws of certain jurisdictions. Also, the Company has
delivered certain technical data and information relating to Enhanced CU-SeeMe
and the White Pine
<PAGE>
Reflector to the United States government and, as a result, the United States
government may have unlimited rights to use such technical data and information
or to authorize others to use such technical data and information. There can be
no assurance that the United States government will not authorize others to use
such technical data and information for purposes competitive with those of the
Company. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as do laws in the United States.
There can be no assurance that the protections afforded by the laws of such
countries will be adequate to protect the Company's proprietary rights, the
unenforceability of any of which could have a material adverse effect on the
Company's business, financial condition and results of operations. Litigation
may be necessary to enforce the Company's intellectual property rights or to
protect the Company's trade secrets. Any such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business, financial condition and results of operations.
Although the Company believes that its 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 the Company or that such
claims will not be successful. From time to time, the Company has 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. Third parties may assert exclusive patent, trademark,
copyright and other intellectual property rights to technologies that are
important to the Company. There can be no assurance that infringement or
invalidity claims (or claims for indemnification resulting from infringement
claims) will not be asserted or prosecuted against the Company or that any such
assertion or prosecution will not have a material adverse effect on the
Company's business, financial condition or results of operations. Regardless of
the validity or the successful assertion of any such claims, the Company could
incur significant costs and diversion of resources in defending such claims,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. Furthermore, any party making such claims
could secure a judgment awarding substantial damages, as well as injunctive or
other equitable relief, which could effectively block the Company's ability to
make, use, sell, distribute or market its products and services in the United
States or abroad. Any such judgment could have a material adverse effect on the
Company's business, financial condition and results of operations. In
circumstances where claims relating to proprietary technology or information are
asserted against the Company, the Company may seek licenses to such intellectual
property. There can be no assurance, however, that such licenses would be
available or, if available, that such licenses could be obtained on terms that
are commercially reasonable and acceptable to the Company. The failure to obtain
the necessary licenses or other rights could preclude the sale, manufacture or
distribution of the Company's products and, therefore, could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Proprietary Rights."
Risks Associated with International Operations
Revenue from international sales represented 11%, 20% and 30% of the Company's
total revenue in the fiscal years ended December 31, 1994 and 1995 and the six
months ended June 30, 1996, respectively. The increased level of international
revenue in the six months ended June 30, 1996 reflected the acquisition of ASC
on a purchase accounting basis effective as of November 1, 1995. ASC generates a
majority of its revenue from outside the United States. As part of its business
strategy, the Company intends to seek opportunities to expand its product and
service offerings into additional international markets. The Company believes
that expansion into new international markets is critical to the Company's
ability to continue to grow and to market its products and services. In
marketing its products and services internationally, the Company will likely
face new competitors. There can be no assurance that the Company will be
successful in developing localized versions of its products for new
international markets or in marketing or distributing products and services in
these markets or that its international revenue will be adequate to offset the
expense of establishing and maintaining international operations. The Company's
<PAGE>
international business may be adversely affected by changing economic conditions
in foreign countries. The majority of the Company's 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 the Company makes sales denominated in currencies other than U.S.
dollars, gains and losses on the conversion of those sales to U.S. dollars may
contribute to fluctuations in the Company's business, financial condition and
results of operations. In addition, fluctuations in exchange rates could affect
demand for the Company's products and services. Conducting an international
business inherently involves a number of other difficulties and risks, such as
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. There can be no assurance that one or more of these factors will
not have a material adverse effect on any international operations established
by the Company and, consequently, on the Company's business, financial condition
and results of operations. See "Business--Strategy."
Dependence on Key Personnel
The Company's success to date has depended to a significant extent on Howard
R. Berke, its Chairman, President and Chief Executive Officer, David O. Bundy,
its Vice President of Engineering, Killko A. Caballero, its Senior Vice
President of Research and Development and Chief Technology Officer, and a number
of other key management, engineering, research and development, sales and
operational personnel. The loss of the services of Mr. Berke, Mr. Bundy or Mr.
Caballero or any of the Company's other key personnel could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company believes that its future success will depend in large
part on its ability to attract and retain highly qualified management,
engineering, research and development, sales and operational personnel. In
particular, the Company will need to hire and train additional software
developers in order to support and increase its recent software licensing
activities. Competition for all of these personnel is intense and there can be
no assurance that the Company will be successful in attracting and retaining key
personnel. The failure of the Company to hire, train and retain qualified
personnel could have a material adverse effect upon the Company's business,
financial condition and results of operations. The Company does not maintain key
person life insurance policies on its key personnel, except for a policy with
respect to Mr. Berke in the amount of $1.0 million. See "Business--Employees"
and "Management."
Risks Associated with Creating and Accessing New Distribution Channels
The Company's primary strategy for marketing Enhanced CU-SeeMe and the White
Pine Reflector is to form channel relationships in key markets with major
distributors. The Company also intends to license Enhanced CU-SeeMe and the
White Pine Reflector to original equipment manufacturers ("OEMs"), value-added
resellers ("VARs") and additional distributors for bundling with their
products and services. The Company expects that its future success will depend
in large part upon these OEMs, VARs and distributors. The performance of these
OEMs, VARs and distributors will be outside the control of the Company, and the
Company is unable to predict the extent to which these organizations will be
successful in marketing and selling Enhanced CU-SeeMe or the White Pine
Reflector or products incorporating Enhanced CU-SeeMe or the White Pine
Reflector. The Company's failure to establish relationships with OEMs, VARs and
distributors could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the Company is
currently seeking to establish distribution relationships with retail channels,
including store chains, superstores and catalog sales, for Enhanced CU-SeeMe.
The Company has no prior experience in selling software through retail channels,
and no assurance can be given that it will succeed in establishing a retail
network for Enhanced CU-SeeMe or that, if established, such a network will not
result in unexpected expenses for inventory, returned software, distribution or
otherwise. The Company's distributors typically carry the products of
competitors of the
<PAGE>
Company, many of whom have substantially greater financial resources than the
Company. The distributors have limited capital to invest in inventory, and their
decisions to purchase the Company's 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 the Company and its competitors, over which the
Company has no control and which it cannot predict. See "Business--Marketing and
Distribution."
The Company also distributes certain of its products electronically through
the Internet. By distributing its products through the Internet, the Company may
decrease demand for its products and increase the likelihood of unauthorized
copying and use of its software. The Company has allowed and intends to continue
to allow customers to download certain of its products for a free evaluation
period.
Risk of Product Defects
Software developed and incorporated by the Company may contain significant
undetected errors when first released or as new versions are released. Although
the Company tests its software before commercial release, there can be no
assurance that errors in the software will not be found after customers begin to
use the software. Enhanced CU-SeeMe 2.1 for Windows, the release of which was
announced on September 30, 1996, corrects a number of such errors in Enhanced
CU-SeeMe 2.0. The Company intends to ship Enhanced CU-SeeMe 3.0, which the
Company expects will support relevant Internet and International
Telecommunications Union standards and incorporate a number of new features, in
the first quarter of 1997. Any error in Enhanced CU-SeeMe 3.0, the White Pine
Reflector or the Company's other products may result in decreased revenue or
increased expenses because of adverse publicity, reduced orders, product
returns, uncollectible accounts receivable, delays in collecting accounts
receivable, and additional and unexpected costs of further product development
to correct the errors. Any of these results could have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company is a defendant in 13 lawsuits pending in New York federal and
state courts 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 by a predecessor of
the Company. None of these suits has reached trial and additional information
detrimental to the Company could be developed in the course of discovery.
Although the Company has established a reserve for these suits that the Company
believes is adequate, there can be no assurance that the Company's liabilities
under these suits will not substantially exceed that reserve. See "Business--
Legal Proceedings."
Dependence on Third-Party Software
In addition to Freeware CU-SeeMe and its related server, the Company depends
upon certain other software that it licenses from third parties, including voice
compression technology from Voxware, Inc., global Internet conferencing "white
pages" software from Four11 Corporation, video compression/decompression
software ("codec") from Crystal Net Corporation and whiteboard software from
Group Technologies, Inc. d/b/a Group Logic, Inc. and DataBeam Corporation.
Certain of these licenses are for limited terms, have certain minimum royalty
obligations or may be terminated if the Company breaches the terms of the
license. There can be no assurance that these suppliers will continue to license
this software to the Company on commercially reasonable terms. Most of the
Company's third-party licenses are non-exclusive and there can be no assurance
that the Company's competitors will not obtain licenses to and utilize such
software in competition with the Company. There can be no assurance that
licensors of software utilized in the Company's products will continue to
provide, enhance or support such software in the form utilized by the Company,
nor can there be any assurance that the Company will be able to modify its own
software to adapt to any changes in the licensed software. In addition, there
can be no assurance that financial or other difficulties that may be experienced
by such third-party suppliers will not have a material adverse effect on the
availability, quality or support of software incorporated in the Company's
products, or that, if such software becomes unavailable, the Company would be
able to find
<PAGE>
suitable alternatives on a timely basis and on commercially reasonable terms.
The loss of or inability to maintain any of these licenses could result in the
discontinuation of, or delays or reductions in, product shipments unless and
until equivalent technology is identified, licensed and integrated with the
Company's software, and could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--
Proprietary Rights."
Risks Associated with Potential Acquisitions
The Company may use a portion of the net proceeds of this offering to acquire
or invest in companies, technologies or products that complement the Company's
business or its product offerings. Any future acquisitions may result in a
potentially dilutive issuance of equity securities, the incurrence of additional
debt, the write-off of software development costs or the amortization of
expenses related to goodwill and other intangible assets, any of which could
have a material adverse effect on the Company's business, financial condition
and results of operations. Future acquisitions would involve numerous additional
risks, including difficulties in the assimilation of the operations, services,
products and personnel of any acquired company, the diversion of management's
attention from other business concerns, the disruption of the Company's
business, the entry into markets in which the Company has little or no direct
prior experience and the potential loss of key employees of any acquired
company. There can be no assurance that the Company would be successful in
overcoming these risks or any other problems encountered in connection with any
such acquisition. The Company is not currently involved in negotiations with
respect to, and has no agreement or understanding regarding, any such
acquisition or investment.
Government Regulation and Legal Uncertainties
At present, there are few laws or regulations that specifically address access
to or commerce on the Internet. The increasing popularity and use of the
Internet, however, enhance the risk that the governments of the United States
and other countries in which the Company sells or expects to sell its products
will seek to regulate videoconferencing and the Internet with respect to, among
other things, user privacy, pricing, and the characteristics and quality of
products and services. Any such regulation could have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, because the Internet has only recently come into widespread use, it is
not yet clear how existing laws governing issues such as libel, privacy and the
ownership of intellectual property will apply to communications over the
Internet. The Company is unable to predict the impact, if any, that existing or
future legislation, legal decisions or regulations may have on its business,
financial condition or results of operations. The Telecommunications Act of
1996, which was enacted in February 1996, purports to impose criminal liability
on (i) any person that sends or displays in a manner available to minors
indecent or patently offensive material on an interactive computer service such
as the Internet and (ii) any entity that knowingly permits facilities under its
control to be used for such activities. In June 1996, a special three-judge
panel in federal district court found these provisions unconstitutional and
issued a preliminary injunction against their enforcement. The U.S. Department
of Justice has appealed this decision to the U.S. Supreme Court. If these
provisions are upheld or if similar provisions are enacted in the future, they
may inhibit the growth or use of the Internet and chill the development of
Internet content, thereby decreasing the demand for the Company's Internet
videoconferencing products or otherwise having a material adverse effect on the
Company's business, financial condition and results of operations. In March
1996, the America's Carriers Telecommunication Association ("ACTA"), a group
of telecommunications common carriers, filed a petition (the "ACTA Petition")
with the Federal Communications Commission (the "FCC"), arguing that providers
(such as the Company) 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
<PAGE>
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. The Company is unable
to predict the outcome of this proceeding. Any action by the FCC 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 the Company's business, financial condition and
results of operations. See "Business--Government Regulation."
Future Capital Requirements
Expansion of the Company's business will require significant additional
expenditures for research and development, sales and marketing, capital
equipment and working capital. The Company expects that the net proceeds of this
offering and its current cash balances will be sufficient to fund its operations
for at least the next twelve months. The Company's capital requirements will
depend on many factors, including the progress of its research and development
efforts, the receipt of software license fees and other product revenue, and the
demand for the Company's products. The Company's existing bank line of credit
will expire on January 1, 1997. There can be no assurance that the Company will
not need to raise additional funds through public or private financings or that,
if needed, such funds will be available on acceptable terms. The inability of
the Company to raise needed funds would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Absence of Public Market; Possible Volatility of Stock Price
Prior to this offering, there has been no public market for the Common Stock,
and there can be no assurance that an active trading market will develop or be
sustained after the offering. The initial public offering price of the Common
Stock has been determined through negotiations between the Company and the
Representatives of the Underwriters and may not be indicative of the market
price of the Common Stock after the offering. For a description of the factors
considered in determining the initial public offering price, see
"Underwriting." Factors such as quarterly variations in the Company's results
of operations, announcements of technological innovations or new products by the
Company, its competitors and others, market conditions in the industry and
changes in financial estimates by public market analysts may cause the market
price of the Common Stock to fluctuate significantly. In addition, the stock
market in general has recently experienced substantial price and volume
fluctuations, which have affected the market prices of many high technology
companies, particularly Internet-related companies, and which have often been
unrelated to the operating performance of such companies. These broad market
fluctuations may materially and adversely affect the market price of the Common
Stock. Following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted against
such a company. Any such litigation against the Company could result in
substantial costs and diversion of management's attention and other resources,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
Substantial Influence of Existing Stockholders
After the sale of the shares of Common Stock offered hereby, the Company's
executive officers, directors and five percent stockholders will beneficially
own an aggregate of approximately 48% of the outstanding shares of Common Stock
(approximately 46% if the Underwriters' over-allotment option is exercised in
full). As a result, these stockholders, if acting together, would effectively be
able to control most matters requiring the approval of stockholders of the
Company, including the election of directors or the approval of significant
corporate matters. This concentration of ownership by existing stockholders
<PAGE>
may also have the effect of delaying or preventing a change in control of the
Company. See "Principal Stockholders."
Shares Eligible for Future Sale; Possible Adverse Effect on Market Price
Sales of substantial numbers of shares of Common Stock in the public market
following this offering could adversely affect the market price of the Common
Stock and could impair the Company's ability to raise capital through sales of
its equity securities. Upon completion of this offering, there will be 9,030,384
shares of Common Stock outstanding (assuming no exercise of options outstanding
after October 10, 1996), of which the 3,000,000 shares of Common Stock sold in
this offering (plus an additional 450,000 shares which will be outstanding if
the Underwriters' over-allotment option is exercised in full) will be freely
tradeable in the United States without restriction under the Securities Act of
1933, as amended (the "Securities Act"), by persons other than "affiliates"
of the Company, as defined under the Securities Act. The remaining 6,030,384
shares of Common Stock outstanding are "restricted securities" as defined in
Rule 144 under the Securities Act (the "Restricted Shares"). Of the Restricted
Shares, 5,946,321 shares are subject to lock-up agreements, pursuant to which
the holders of such shares have severally agreed that, without the prior written
consent of Cowen & Company, they will not offer, sell, assign, transfer,
encumber, contract to sell, grant an option, right or warrant to purchase or
otherwise dispose of any shares of Common Stock or any securities convertible
into, derivative of or exercisable or exchangeable for Common Stock for 180 days
commencing on the date of this Prospectus, except for shares of Common Stock
purchased in this offering or in the public market pursuant to brokers'
transactions. Cowen & Company may, in its sole discretion and at any time
without notice, release all or a portion of the shares from the restrictions
imposed by such agreements. Of the Restricted Shares not subject to such lock-up
agreements, 40,824 shares will be eligible for immediate sale in the public
market on the effective date of the registration statement of which this
Prospectus forms a part (the "Effective Date") pursuant to Rule 144(k) under
the Securities Act and an additional 417 shares will first become eligible for
sale in the public market 90 days after the Effective Date pursuant to Rule 144,
subject in certain cases to the volume limitations and other conditions imposed
by Rule 144. Upon the expiration of the lock-up agreements 180 days after the
date of this Prospectus, an additional 3,543,100 Restricted Shares will be
eligible for sale in the public market pursuant to Rule 144. The Securities and
Exchange Commission (the "Commission") has proposed certain amendments to Rule
144 that would reduce by one year the holding periods required for shares to
become eligible for sale in the public market pursuant to Rule 144. Based on
securities outstanding as of October 10, 1996, it is expected that after the
closing of this offering the holders of 5,844,974 shares of Common Stock (plus
294,044 shares of Common Stock issuable upon exercise of outstanding options)
will have the right to cause the Company to register the sale of such shares
under the Securities Act. See "Description of Capital Stock--Registration
Rights." In addition, the Company intends to file one or more registration
statements on Form S-8 with respect to 1,612,721 shares of Common Stock issued
or issuable under its stock option plans, its employee stock purchase plan or
other outstanding options. Shares covered by any such registration statement
will be eligible for sale in the public market upon the effectiveness of such
registration statement. See "Management--Benefit Plans" and "Shares Eligible
for Future Sale."
Management's Discretion as to Use of Unallocated Net Proceeds
The principal purposes of this offering are to increase the Company's equity
capital, to create a public market for the Common Stock and to facilitate future
access by the Company to public equity markets. As of the date of this
Prospectus, the Company has no specific plans for the use of a substantial
portion of the net proceeds of this offering. The Company expects to use such
proceeds to repay approximately $274,000 of indebtedness and to use the
remaining approximately $23,886,000 of such proceeds for general corporate
purposes, including working capital. Consequently, the Board of Directors and
management of the Company will have significant flexibility in applying the net
proceeds of this offering. See "Use of Proceeds."
<PAGE>
Anti-Takeover Effect of Charter Provisions, By-Laws and Delaware Law
The Restated Charter and the Restated By-Laws contain provisions that could
discourage takeover attempts or make more difficult the acquisition of a
substantial block of the Common Stock. The Restated Charter provides that
stockholders may act only at meetings of stockholders and not by written consent
in lieu of a stockholders' meeting. The Restated By-Laws provide that special
meetings of the Company's stockholders may be called by the President and must
be called by the President or the Secretary at the written request of a majority
of the directors. The Restated By-Laws 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 the Company of its
intentions a specified number of days in advance of the meeting and furnishes to
the Company certain information regarding itself and the intended nominee. The
Restated By-Laws also require a stockholder to provide to the Secretary of the
Company advance notice of business to be brought by such stockholder before any
annual or special meeting of stockholders as well as certain information
regarding such stockholder and others known to support such proposal and any
material interest they may have in the proposed business. These provisions could
delay any stockholder actions that are favored by the holders of a majority of
the outstanding stock of the Company until the next stockholders' meeting. These
provisions may also discourage another person or entity from making a tender
offer for the Common Stock, because such person or entity, even if it acquired a
majority of the outstanding stock of the Company, could only take action at a
duly called stockholders' meeting and not by written consent. In addition, the
Board of Directors is authorized to issue shares of Common Stock and Preferred
Stock which, if issued, could dilute and adversely affect various rights of the
holders of Common Stock and, in addition, could be used to discourage an
unsolicited attempt to acquire control of the Company.
Following this offering, the Company will become subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law, which will
prohibit the Company from engaging in a "business combination" with an
"interested stockholder" 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. 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. The foregoing and other provisions
of the Restated Charter and the Restated By-Laws and the application of Section
203 of the Delaware General Corporation Law could deter certain takeovers or
tender offers or could delay or prevent certain changes in control or management
of the Company, including transactions in which stockholders might otherwise
receive a premium for their shares over then current market prices. See
"Description of Capital Stock."
Absence of Dividends
The Company has never declared or paid any cash dividends on its capital stock
and does not currently expect to pay any cash dividends in the foreseeable
future. In addition, the terms of the Company's existing bank line of credit and
term loan prohibit the Company from declaring or paying cash dividends on the
Common Stock. See "Dividend Policy."
Immediate and Substantial Dilution
Purchasers in the offering will experience immediate and substantial dilution
in the pro forma net tangible book value per share of the Common Stock from the
initial public offering price, in the amount of $6.12 per share. Additional
dilution will occur upon the exercise of outstanding stock options. See
"Dilution" and "Management--Benefit Plans."
