<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
/X/ Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended July 3, 1998
/_/ Transition report under 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.
(Name of Small Business Issuer as Specified in Its Charter)
Delaware 04-3151064
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
542 Amherst Street, Nashua, New Hampshire 03063
(Address of Principal Executive Offices)
(603) 886-9050
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes /X/ No /_/
The number of shares outstanding of the Registrant's common stock as of
August 7, 1998 was 10,263,232.
Transitional Small Business Disclosure Format (check one):
Yes /_/ No /X/
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TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of July 3, 1998 and
December 31, 1997................................................... 3
Condensed Consolidated Statements of Income
for the three and six months ended July 3, 1998 and July 4, 1997.... 4
Condensed Consolidated Statements of Cash Flows for the six
months ended July 3, 1998 and July 4, 1997.......................... 5
Notes to Condensed Consolidated Financial Statements................ 6
Item 2. Management's Discussion and Analysis or Plan of Operation......... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 14
Item 5. Other Information................................................. 14
Item 6. Exhibits and Reports on Form 8-K.................................. 16
Signatures................................................................ 17
</TABLE>
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
White Pine Software, Inc. and Subsidiary
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
July 3, December 31,
1998 1997
----------------- -----------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 11,082 $ 14,704
Accounts receivable, net 1,626 2,403
Inventories 95 98
Prepaid expenses and other current assets 1,023 1,378
----------------- -----------------
Total current assets 13,826 18,583
Property and equipment, net 1,525 1,514
Third party licenses, net 546 669
Goodwill, net 557 676
Other long term assets 169 168
----------------- -----------------
Total assets $ 16,623 $ 21,610
----------------- -----------------
----------------- -----------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 2,058 $ 2,550
Deferred revenue 200 246
Current portion of long-term debt 54 55
----------------- -----------------
Total current liabilities 2,312 2,851
Long term debt, net of current portion 27 33
Total stockholders' equity 14,284 18,726
----------------- -----------------
Total liabilities and stockholders' equity $ 16,623 $ 21,610
----------------- -----------------
----------------- -----------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
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White Pine Software, Inc. and Subsidiary
Condensed Consolidated Statements of Income (Unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
July 3,1998 July 4,1997 July 3,1998 July 4,1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Software license fees $ 1,479 $ 2,312 $ 3,273 $ 4,575
Services and other 222 313 434 650
----------- ----------- ----------- -----------
Total revenue 1,701 2,625 3,707 5,225
Cost of revenue 307 461 720 1,020
----------- ----------- ----------- -----------
Gross profit 1,394 2,164 2,987 4,205
Operating expenses:
Sales and marketing 2,133 2,081 3,956 4,085
Research and development 1,327 1,586 2,611 3,247
General and administrative 699 603 1,270 1,554
Restructuring -- 661 -- 661
----------- ----------- ----------- -----------
Total operating expenses 4,159 4,931 7,837 9,547
----------- ----------- ----------- -----------
Loss from operations (2,765) (2,767) (4,850) (5,342)
Other income, net 152 279 332 506
----------- ----------- ----------- -----------
Loss before provision for income taxes (2,613) (2,488) (4,518) (4,836)
Other comprehensive income (1) -- (1) 7
----------- ----------- ----------- -----------
Comprehensive loss (2,614) (2,488) (4,519) (4,829)
----------- ----------- ----------- -----------
Provision for income taxes -- -- 5 --
----------- ----------- ----------- -----------
Net comprehensive loss $ (2,614) $ (2,488) $ (4,524) $ (4,829)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net loss per share: Basic: $ (0.28) $ (0.27) $ (0.49) $ (0.53)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted: $ (0.28) $ (0.27) $ (0.49) $ (0.53)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average number of common and common
equivalent shares outstanding 9,339,527 9,096,989 9,322,940 9,077,046
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
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White Pine Software, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six months Ended
----------------
July 3, July 4,
1998 1997
-------- --------
<S> <C> <C>
Operating activities
Net loss $ (4,524) $ (4,829)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 271 219
Amortization of goodwill and third-party licenses 242 380
Provision for bad debts 16 46
Changes in operating assets and liabilities:
Accounts receivable 760 986
Inventories 4 (20)
Prepaid expenses 364 (1,062)
Other assets (11) (59)
Accounts payable and accrued expenses (486) 267
Deferred revenue (46) (457)
-------- --------
Net cash used in operating activities (3,410) (4,529)
Investing activities
Purchase of property and equipment, net (285) (504)
Purchase of third-party licenses, net -- (149)
-------- --------
Net cash used in investing activities (285) (653)
Financing activities
Principal payments on long-term debt (5) (168)
Proceeds from common stock issued at $5.83 par value stock
redeemable as $.01 par value stock -- --
Proceeds from common stock issued upon exercise of stock options 57 88
Proceeds from common stock issued under Employee Stock Purchase Plan 39 --
-------- --------
Net cash provided by financing activities 91 (80)
Currency translation effect on cash and cash equivalents (18) (30)
-------- --------
Net decrease in cash and cash equivalents (3,622) (5,293)
Cash and cash equivalents at beginning of period 14,704 23,298
-------- --------
Cash and cash equivalents at end of period $ 11,082 $ 18,006
-------- --------
-------- --------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
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WHITE PINE SOFTWARE, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
July 3, 1998
1. Accounting Policies
Description of Business
The Company develops, markets and supports multiplatform desktop
multimedia software that facilitates worldwide video and audio communication and
data collaboration across the Internet, intranets and other networks that use
the Internet Protocol ("IP"). The Company's desktop videoconferencing software
products, CU-SeeMe and MeetingPoint, create a client-server solution that allows
users to participate in real-time, multipoint videoconferences over the Internet
and intranets. In November 1997, the Company began commercial shipments of
MeetingPoint, the first multimedia conferencing server software to implement the
ITU H.323 standard for conferencing over packet networks. MeetingPoint enables
any standards-based client to participate in full multipoint group conferences.
Further building upon the core CU-SeeMe and MeetingPoint technologies, the
Company developed ClassPoint, an integrated vertical solution for distance
learning and distance training, which began shipping commercially in April 1998.
The Company also offers desktop X Windows and terminal emulation software. The
Company's customers include businesses, educational institutions, government
organizations and individual consumers. The Company markets and sells its
products in the United States, Canada, Europe, and the Pacific Rim through
distributors, a combination of strategic partners and OEMs, and its direct sales
organization, as well as over the Internet. The Company was incorporated in
April 1992.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned foreign subsidiary, White Pine Software, Europe. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and investments in high
grade commercial paper having maturities of three months or less when purchased.
Commercial paper qualifying as cash equivalents totaled $10,275,000 and
$13,440,000 at July 3, 1998 and December 31, 1997, respectively. These
investments have been categorized as held to maturity under the provisions of
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Accordingly, the balances are stated
at amortized cost, which approximates fair value, because of the short maturity
of these instruments.
Revenue Recognition
The Company's revenue is derived from software license fees and fees for
services related to its software products, primarily software maintenance fees.
The Company's revenue recognition practices were substantially in compliance
with the provisions of AICPA Statement of Position No. 97-2, Software Revenue
Recognition, at the time of adoption on January 1, 1998.
Software license revenue is recognized upon receipt of a firm customer
order and shipment of the software, net of allowances for estimated future
returns, provided that no significant obligations remain on the part of the
Company and collection of the related receivable is deemed probable. Revenue
under certain license agreements is recognized upon execution of a signed
contract and fulfillment of the contractual obligations, provided that no
significant obligations remain on the part of the Company and collection is
deemed probable.
6
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Software maintenance fees, which are generally payable in advance and
are non-refundable, are recognized ratably over the period of the maintenance
contract, typically twelve months. Revenue from training and consulting services
is recognized as services are provided.
Software license fees, consulting fees, and training fees that have been
prepaid or invoiced but that do not yet qualify for recognition as revenue under
the Company's policy, and prepaid maintenance fees not yet recognized as
revenue, are reflected as deferred revenue.
Loss per Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. Pursuant to the previous
requirements of the Securities and Exchange Commission (the "SEC"), common
shares and common share equivalents issued by the Company during the
twelve-month period prior to the initial public offering of the Company's common
stock had been included in the calculations as if they were outstanding for all
periods prior to the offering in August 1996 whether or not they were
anti-dilutive. In February 1998, the SEC issued Staff Accounting Bulletin 98
which, among other things, conformed prior SEC requirements to SFAS 128 and
eliminated inclusion of such shares in the computation of earnings per share.
All earnings per share amounts for all periods have been presented, and where
appropriate, restated to conform to SFAS 128 and SEC requirements.
Basic net loss per common share is computed using the weighted average
number of shares of common stock outstanding during the period. Diluted net loss
is computed using the weighted average number of shares of common stock and
dilutive common equivalent shares outstanding during the period. Common
equivalent shares consist of the incremental common shares issuable upon the
exercise of stock options and warrants using the treasury stock method.
Subsequent Events
On July 8, 1998, the Company purchased certain assets (the "Assets"),
including intellectual property, comprising certain T.120 whiteboarding and
data collaboration technology from Labtam Communications Pty. Ltd.
("Labtam"), an Australian corporation with a principal place of business in
Braeside, Victoria, Australia.
The purchase price for the Assets consisted of (i) 900,000 shares (the
"Shares") of the Company's common stock, par value U.S. $0.01 per share; (ii)
cash payment of a total of U.S. $628,060 in July 1998; and (iii) cash payment of
A$201,606 (or approximately U.S. $119,693, based upon the average of the
exchange rates between the Australian dollar and the United States dollar as
published in THE WALL STREET JOURNAL on August 12, 1998) due on January 15,
1999. The terms of, and consideration paid in, this transaction were the result
of arm's length negotiations between the Company and Labtam, which had no
relationship prior to this transaction. The Company has used and intends to use
its existing cash and cash equivalents to pay the cash portion of the purchase
price.
An aggregate of 450,000 Shares has been deposited in escrow as security
for potential claims by the Company against Labtam for breaches of certain
representations, warranties, covenants and agreements contained in the purchase
agreement relating to the Assets. In the absence of any such claims, 225,000 of
the escrowed Shares will be released to Labtam on January 8, 1999 and the
remaining 225,000 escrowed Shares will be released on July 8, 1999.
The Company plans to incorporate the purchased technology into its
MeetingPoint and ClassPoint conferencing solutions. T.120 is the protocol that
defines whiteboarding, application sharing and data collaboration for multipoint
conferencing applications.
7
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Item 2. Management's Discussion and Analysis or Plan of Operation
THIS FORM 10-QSB CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. ANY STATEMENTS CONTAINED HEREIN THAT ARE NOT STATEMENTS OF
HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING
THE FOREGOING, THE WORDS "BELIEVES," "ANTICIPATES," "PLANS," "EXPECTS" AND
SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THE
FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS THAT MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE AND ACHIEVEMENTS OF
WHITE PINE SOFTWARE, INC. TO DIFFER MATERIALLY FROM THOSE INDICATED BY THE
FORWARD-LOOKING STATEMENTS, INCLUDING (A) THE COMPANY'S HISTORICAL AND
CONTINUING OPERATING LOSSES, (B) THE COMPANY'S RELIANCE ON ITS UNPROVEN
PRODUCTS, MEETINGPOINT AND CLASSPOINT, THAT WERE INTRODUCED RELATIVELY RECENTLY,
(C) SIGNIFICANT AND INCREASING COMPETITION, INCLUDING COMPETITION FROM FREE
VIDEOCONFERENCING CLIENT SOFTWARE SUCH AS MICROSOFT CORPORATION'S NETMEETING,
(D) POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS, (E) RELIANCE ON
TWO SIGNIFICANT DISTRIBUTORS OF THE COMPANY'S SOFTWARE PRODUCTS, (F) DEPENDENCE
UPON TECHNOLOGY LICENSED UNDER AN AGREEMENT WITH THE CORNELL RESEARCH
FOUNDATION, INC. AND (G) THE OTHER FACTORS DESCRIBED UNDER "ITEM 1A. Risk
Factors" IN THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED
DECEMBER 31, 1997, A COPY OF WHICH ITEM IS INCLUDED AS AN EXHIBIT TO THIS FORM
10-QSB AND IS INCORPORATED HEREIN BY REFERENCE.
OVERVIEW
The Company develops, markets and supports multi-platform desktop
multimedia software that facilitates worldwide video and audio communication and
data collaboration across the Internet, intranets and other networks using IP.
The Company's desktop videoconferencing software products, CU-SeeMe and
MeetingPoint, create a client-server solution that allows users to participate
in real-time, multipoint videoconferences over the Internet and intranets. In
November 1997, the Company began commercial shipments of MeetingPoint, the first
multimedia conferencing server software to implement the ITU H.323 standard for
conferencing over packet networks. MeetingPoint enables any standards-based
client to participate in full multipoint group conferences. Further building
upon the core CU-SeeMe and MeetingPoint technologies, the Company developed
ClassPoint, an integrated vertical solution for distance learning and distance
training, which began shipping commercially in the last week of April 1998. The
Company also offers desktop X Windows and terminal emulation software.
In June 1995, as a part of its continuing plan to focus on software
connectivity products, the Company entered into the License Agreement with the
Cornell Research Foundation, Inc. (the "Cornell Foundation"), which granted to
the Company the exclusive worldwide right to develop, modify, market, distribute
and sublicense commercial versions of Freeware CU-SeeMe and its related
software-only multipoint conferencing server. The Company commenced shipments of
the initial commercial versions of CU-SeeMe and the White Pine Reflector (the
predecessor of MeetingPoint) in March 1996 and May 1996, respectively. The
Company anticipates that its revenue growth, if any, will depend on increased
sales of MeetingPoint and other multimedia server solutions, such as ClassPoint.
Accordingly, the Company intends to continue to devote a substantial portion of
its research and development and sales and marketing resources to technologies
related to group conferencing.
On May 22, 1997, the Company renegotiated the terms of its License
Agreement with the Cornell Foundation. The principal changes to the agreement
were a $1,000,000 prepayment of royalties by the Company to the Cornell
Foundation and a decrease in the revenue-based royalties. The renegotiated terms
were retroactive to January 1, 1997. The Company is still subject to minimum
royalty payments.
Effective January 1, 1997, the Company changed its interim fiscal
reporting periods from calendar quarters to quarters consisting of thirteen
weeks.
8
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The Company's revenue is derived from software license fees and fees for
services related to its software products, primarily software maintenance fees.
During fiscal 1997, the Company recognized revenue in accordance with the
American Institute of Certified Public Accountants Statement of Position No.
91-1, "Software Revenue Recognition." For fiscal year 1998, the Company is
recognizing revenue in accordance with AICPA Statement of Position 97-2,
"Software Revenue Recognition." Software license revenue is recognized upon
execution of a contract or purchase order and shipment of the software, net of
allowances for estimated future returns, provided that no significant
obligations on the part of 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 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.
During the quarter ended July 3, 1998, the Company commenced
commercial shipment of ClassPoint, which the Company believes is the first
completely integrated distance learning solution with real-time, two-way
interaction with audio, video and data. ClassPoint received recognition as
Advanced Imaging Magazine's Solution of the Year 1998 in the category
"Interactive Imaging & Communication, or Multimedia", featured in Advanced
Imaging's June 1998 issue, as well as DVC's "Networked Multimedia Award" for
Best New Business Conferencing Product. The Company also commenced commercial
shipment of MeetingPoint for Solaris as part of the Company's strategy to
market a cross-platform server solution. Solaris is a UNIX-based user
environment developed by Sun Microsystems, Inc. The Company began delivery of
a version of CU-SeeMe with reduced functionality; it is intended that this
version would be bundled with camera hardware and marketed to consumers and
that the Company would seek to obtain revenue by selling upgrades to the full
commercial version of CU-SeeMe. The Company also began commercial shipment of
WebTerm X 2.0. WebTerm is the Company's implementation of the X server on
Windows 95 and NT, running in a browser environment. WebTerm X 2.0 embodies
technology previously developed in connection with the Company's eXodus for
Mac.
During the quarter ended July 3, 1998, the Company reorganized its
work force to better concentrate its resources on sales activities. The
Company sought to increase its sales resources without increasing its total
operating expenses. After the close of the second fiscal quarter of 1998, the
Company reduced its total headcount by ten persons, of which seven were
engaged in research and development, one in general and administration
activities, and two in marketing. The Company hired a new Vice President of
Sales, three sales representatives based in the Company's principal offices
in Nashua, New Hampshire, and two sales managers based in Europe during the
second quarter. The Company currently estimates that the reorganization will
provide cost savings of approximately $1,000,000 annually, which will more
than offset the base salaries of the new sales personnel.
On July 8, 1998, the Company purchased certain assets (the "Labtam
Assets"), including intellectual property, comprising certain T.120
whiteboarding and data collaboration technology from Labtam Communications
Pty. Ltd. ("Labtam"), an Australian corporation with a principal place of
business in Braeside, Victoria, Australia. The purchase price for the Labtam
Assets consisted of (i) 900,000 shares (the "Shares") of the Company's common
stock, par value U.S. $0.01 per share; (ii) cash payment of a total of U.S.
$628,060 in July 1998; and (iii) cash payment of A$201,606 (or approximately
U.S. $119,693, based upon the average of the exchange rates between the
Australian dollar and the United States dollar as published in THE WALL
STREET JOURNAL on August 12, 1998) due on January 15, 1999. The terms of, and
consideration paid in, this transaction were the result of arm's length
negotiations between the Company and Labtam, which had no relationship prior
to this transaction. The Company has used and intends to use its existing
cash and cash equivalents to pay the cash portion of the purchase price. An
aggregate of 450,000 Shares has been deposited in escrow as security for
potential claims by the Company against Labtam for breaches of certain
representations, warranties, covenants and agreements contained in the
purchase agreement relating to the Labtam Assets. In the absence of any such
claims, 225,000 of the escrowed Shares will be released to Labtam on
January 8, 1999 and the remaining 225,000 escrowed Shares will be released on
July 8, 1999.
9
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The Company plans to incorporate the purchased technology into its
MeetingPoint and ClassPoint conferencing solutions. T.120 is the protocol that
defines whiteboarding, application sharing and data collaboration for multipoint
conferencing applications.
RESULTS OF OPERATIONS
The following table sets forth line items from the Company's statement
of operations as percentages of total revenue for the three and six months ended
July 3, 1998 and July 4, 1997.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------- ---------------------
July 3, July 4, July 3, July 4,
-------- -------- ------- -------
1998 1997 1998 1997
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Revenue:
Software license fees 86.9% 88.1% 88.3% 87.6%
Services and other 13.1% 11.9% 11.7% 12.4%
-------- -------- -------- -------
Total revenue 100.0% 100.0% 100.0% 100.0%
Cost of revenue 18.1% 17.6% 19.4% 19.5%
-------- -------- -------- -------
Gross profit 81.9% 82.4% 80.6% 80.5%
Operating expenses:
Sales and marketing 125.4% 79.2% 106.7% 78.3%
Research and development 78.0% 60.4% 70.4% 62.1%
General and administrative 41.1% 23.0% 34.3% 29.7%
Restructuring 0.0% 25.2% 0.0% 12.6%
-------- -------- -------- -------
Total operating expenses 244.5% 187.8% 211.4% 182.7%
-------- -------- -------- -------
Loss from operations (162.6) (105.4%) (130.8%) (102.2%)
Other income (expense), net 8.9% 10.6% 8.9% 9.7%
-------- -------- -------- -------
Loss before provision for income taxes (153.7%) (94.8%) (121.9%) (92.5%)
Other comprehensive income 0.0% 0.0% 0.0% 0.1%
-------- -------- -------- -------
Comprehensive loss (153.7%) (94.8%) (121.9%) (92.4%)
Provision for income taxes 0.0% 0.0% 0.1% 0.0%
-------- -------- -------- -------
-------- -------- -------- -------
Net Comprehensive Loss (153.7%) (94.8%) (122.0%) (92.4%)
-------- -------- -------- -------
-------- -------- -------- -------
</TABLE>
Revenue. Total revenue decreased by 35% to $1,701,000 in the quarter ended
July 3, 1998 from $2,625,000 in the quarter ended July 4, 1997. Total revenue
decreased by 29% to $3,707,000 in the six months ended July 3, 1998 from
$5,225,000 in the comparable period of the prior year.
The decrease in revenue was attributable to several transitions among
the Company's product offerings. A portion of the decrease reflected lower
revenue from Europe and the Pacific Rim. The Company had only one sales agent
operating in Europe during the quarter ended July 3, 1998, but has subsequently
engaged two additional sales representatives targeting the United Kingdom and
Germany and a sales engineer covering all of Europe. The Company's revenue from
CU-SeeMe, its videoconferencing client software, declined by 51% to $647,000 in
the quarter ended July 3, 1998 from $1,310,000 in the quarter ended July 4,
1997, and declined by 42% to $1,404,000 in the six months ended July 3, 1998
from $2,415,000 in the same period of the prior year. Increased competition from
free videoconferencing client offerings, primarily Microsoft's NetMeeting, has
sharply driven the decline, as the Company's OEM vendors, which are principally
located in the Pacific Rim countries, migrated from bundling CU-SeeMe to
bundling free clients. As the result of these competitive pressures, the
percentage of total revenue represented by revenue from CU-SeeMe has decreased
to 38% in the quarter ended July 3, 1998 from 50% in the quarter ended July 4,
1997.
10
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The Company's legacy connectivity product sales continued to decline as
the Company focuses fewer resources on these older product lines. Legacy
connectivity revenue declined by 53% to $455,000 in the quarter ended July 3,
1998 from $960,000 in the quarter ended July 4, 1997 and decreased 43% to
$1,180,000 in the six months ended July 3, 1998 from $2,066,000 in the six
months ended July 4, 1997. The percentage of total revenue represented by
revenue from legacy connectivity products decreased to 27% in the quarter ended
July 3, 1998 from 37% in the quarter ended July 4, 1997. Maintenance and other
revenue has also decreased in conjunction with the decline of the legacy
connectivity products, as the majority of maintenance agreements were for legacy
products.
Server revenue increased by 261% to $697,000 in the quarter ended
July 3, 1998 from $193,000 in the quarter ended July 4, 1997 and increased
189% to $1,221,000 from $423,000 in the six months ended July 3, 1998 and
July 4, 1997, respectively. This increase was attributable to the Company's
most recently released server products, MeetingPoint and ClassPoint, which
were released in November 1997 and April 1998, respectively. A total of
$360,000 of the server revenue, or 21% of total revenue, in the quarter ended
July 3, 1998, was generated by sales of ClassPoint.
The Company expects that future growth in server revenues will offset
anticipated further declines of client and connectivity revenues. The rate of
server revenue growth is currently determined in part by product performance and
customer acceptance and adoption. The Company is experiencing relatively
lengthy, two-step sales cycles for its MeetingPoint and ClassPoint server
products. The first step typically extends from one to three months and results
in sales of small quantities of the server products for pilot programs. The
Company expects that the second step will extend considerably longer, from six
months to over a year, as customers decide whether to move beyond the pilot
programs to deployment of MeetingPoint on a company-wide basis or deployment of
ClassPoint as an operational long-distance learning program.
The Company believes that minimal additional investment in the legacy
connectivity products in the third fiscal quarter of 1998 will slow the decline
in connectivity revenue in the short term, providing the Company with an
additional period to build the sales base for its server products. There can be
no assurance, however, that the Company will be successful in generating server
revenue in an amount sufficient to offset declines in revenue from its client
and legacy connectivity products, or at all. The actual amount of revenue
generated by the Company's server products may vary significantly depending on a
number of factors, including the unproven market status and acceptability of the
products, significant and increasing competition for those products and other
factors described under "Item 1A. Risk Factors" in the Company's Form 10-KSB for
the year ended December 31, 1997, a copy of which Item is filed as an exhibit
hereto and incorporated by reference herein. Even if the Company meets its
internally projected revenue targets, the Company expects to incur a net loss
for the fiscal year ending December 31, 1998 and further expects that net losses
will continue into the fiscal year ending December 31, 1999.
Cost of Revenue. Cost of revenue consists principally of royalties and
associated amortization of paid license fees relating to third-party software
included in the Company's products, and costs of product media, manuals,
packaging materials, product localization for international markets, duplication
and shipping.
Cost of revenue as a percentage of total revenue remained flat at 18%
for the quarter ended July 3, 1998 and the quarter ended July 4, 1997. The fixed
portion of cost of sales represented a larger percentage of revenue in the most
recent quarter, but was offset by relatively higher ClassPoint margins during
the first two months of shipment.
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 3% to $2,133,000 in the quarter ended July 3, 1998 as compared
to the respective period in the prior year, and decreased by 3% to $3,956,000
in the six months ended July 3, 1998 as compared to the respective period in
the prior year. The Company added six sales personnel in the quarter ended
July 3, 1998, including a new Vice President of Sales whose employment began
in April 1998. See "Overview".
11
<PAGE>
The quarter increase was also attributable to increased advertising,
public relations, and trade show activity, largely resulting from the ClassPoint
product launch. ClassPoint was released in the last week of April 1998. The
year-over-year decrease was due to higher marketing program expense in the first
half of fiscal 1997.
Research and Development. Research and development expense consists primarily of
costs of personnel and equipment. Research and development expense decreased by
16% to $1,327,000 in the quarter ended July 3, 1998, and by 20% to $2,611,000 in
the six months ended July 3, 1998, compared with the comparable periods in the
previous year. The decrease was principally attributable to reduced headcount
and consulting fees in comparison with the same periods in the prior year.
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 16% to $699,000 for the quarter ended July 3, 1998, and
decreased by 18% to $1,554,000 for the six months ended July 3, 1998, versus
the corresponding periods in the prior year. The quarterly increase was
primarily due to expenses associated with a reduction in force and the
elimination of the administrative and production functions in the Company's
LaGaude, France office in May 1998 and, to a lesser extent, the one-time
travel and communication expenses associated with the purchase of the Labtam
Assets. The year-over-year decrease was due to lower headcount, legal fees,
and bad debt expense compared with the relative period in fiscal 1997.
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 made no provision for income taxes for the three or six months ended
July 3, 1998 or July 4, 1997 as the result of the Company's net losses incurred
during those periods and the Company's expectation that it will incur a net loss
for the fiscal year ending December 31, 1998. 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
The Company used cash of $3,622,000 in the six months ended July 3, 1998,
as compared with $5,293,000 cash used in the six months ended July 4, 1997.
Cash used in the six months ended July 3, 1998 was comprised largely of the
net loss of $4,524,000, offset by receivables collections and the benefit of
prepaid expenses. Cash used in the six months ended July 4, 1997 consisted
primarily of the net loss of $4,829,000 and prepayment to the Cornell Foundation
of $1,000,000 for software royalties. The Company's investing activities,
predominantly the investment of in computer equipment and third-party software
licenses, used cash of $285,000 and $653,000 in the six months ended July 3,
1998 and July 4, 1997, respectively.
On December 20, 1996, the Company entered into a new commercial loan
agreement with Fleet Bank-NH (the "Bank") providing for a $3,000,000 revolving
line of credit and a separate term loan in the initial principal amount of
$53,000. The revolving line of credit expired on June 30, 1998, and was extended
through August 30, 1998. Borrowings 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% (8.5% at August 13,
1998).
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 cumulative profitability levels for the years 1997 and
1998. At July 3, 1998 and July 4, 1997, no borrowings were outstanding under the
revolving line of credit and $23,000 and $34,000 were outstanding under the term
loan, respectively.
12
<PAGE>
At July 3, 1998, the Company had cash and cash equivalents of $11,082,000
and working capital of $11,514,000. The Company believes that its current cash
and cash equivalents (including proceeds from its initial public offering),
funds generated from operations (if any) and borrowings under its bank line of
credit, will be sufficient to fund the Company's operations and capital
expenditures through fiscal 1998. 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.
There can be no assurance that the Company will be able to secure these funds or
the partnerships necessary to finance its operations.
YEAR 2000 COMPLIANCE
The Company has completed its Year 2000 compliance testing with
respect to its client/server videoconferencing products (CU-SeeMe,
MeetingPoint, and ClassPoint) and believes, based on its testing, that each
of those products is Year 2000 compliant. However, each of those products is
subject to the compliancy of the third party vendors whose technology the
company has integrated. Similarly, the Company has completed its compliance
testing with respect to its terminal emulation connectivity products
(WebTerm, WebTermX, and eXodus), and believes, based on its testing, that each
of those products is Year 2000 compliant. However, their Year 2000 compliancy
is dependent upon the compliancy of the host systems to which they connect.
As a result of the completion of the compliance testing, the
Company does not expect to incur any material additional cost in connection
with Year 2000 compliance testing, and does not believe it is at material
risk of noncompliance with respect to the Company's products. The Company
does not extend any warranty for its products with respect to Year 2000
compliance. There can be no assurance, however, that certain of the utility
companies, including telephone companies, and other suppliers to the
Company's business will be Year 2000 compliant. Any significant failure of
any of those utilities or other vendors to comply may have an adverse effect
on the Company's business.
INFLATION
Although certain of the Company's expenses increase with general
inflation in the economy, inflation has not had a material impact on the
Company's financial condition or results of operations to date.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income and AICPA Statement of Position No. 97-2, Software Revenue Recognition.
The adoption of these pronouncements has not had a material effect on the
Company's financial position or results of operations.
In June 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information ("SFAS No. 131"), which is effective
for fiscal 1998. SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
stockholders. The adoption of SFAS No. 131 has not had a material effect on the
Company's financial position, results of operations or cash flows.
13
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a defendant in six 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. See
"Item 1. Description of Business Overview." The RSI Suits, which seek money
damages, were brought from February 1992 to June 1996 by employees of New
York Telephone, which purchased the Keyboards from Lockheed Electronics
Corporation. One or more of Visual, Ontel Corporation, Lockheed Electronic
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 are also proceeding with 29 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 (the "Insurers") 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 a reserve of approximately $291,000 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 filing this Form
10-QSB, the Company is not engaged in any legal proceedings of a material
nature, other than the RSI Suits.
Item 5. Other Information
Any stockholder intending to present a proposal at the Company's 1999
Annual Meeting of Stockholders must submit such proposal to the Company at
its offices no later than February 25, 1999 in order to be considered for
inclusion in the proxy statement relating to that meeting. If the date of
such meeting is subsequently changed by more than thirty calendar days from
July 29, 1999, the Company will, in a timely manner, inform its stockholders
of such change and the date by which proposals of stockholders must be
received for inclusion in the proxy statement.
In addition, in accordance with the Company's By-Laws, any stockholder
wishing to bring an item of business before the 1999 Annual Meeting of
Stockholders must deliver notice of such item of business to the Company at
14
<PAGE>
its offices by at least sixty days before the date of such meeting (or, if
the meeting is held prior to the date specified in the Company's By-Laws and
less than seventy days notice or prior public disclosure of the date is
given, by the tenth day following the earlier of the date on which notice of
the date of such meeting was mailed or the day on which public disclosure was
made of the date of such meeting), even if such item is not to be included in
the proxy statement relating to that meeting.
15
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Description
<S> <C>
11.1 Statement re computation of per share earnings
27.1 Financial Data Schedule for fiscal quarter ended July 3,
1998
99.1 Disclosure set forth under "Item 1A. Risk Factors" in the
Registrant's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1997 (incorporated by reference
from pages 15 to 25 of such Annual Report).
</TABLE>
(b) Reports on Form 8-K
The Company filed with the Securities and Exchange Commission on
July 23, 1998, a Current Report on Form 8-K dated July 8, 1998 relating
to the Company's acquisition of the Labtam Assets. See "Item 1.
Management's Discussion and Analysis or Plan of Operation" - "Overview".
No financial statements were required to be filed as a part of such
Form 8-K.
16
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, as of August 17, 1998.
WHITE PINE SOFTWARE, INC.
By: /s/ KILLKO A. CABALLERO
-----------------------------
Killko A. Caballero
President
By: /s/ CHRISTINE J. COX
-----------------------------
Christine J. Cox
Vice President - Finance
(Principal Financial and
Accounting Officer)
17
<PAGE>
Statement Re: Computation of Earnings Per Share Exhibit 11.1
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
July 3, 1998 July 4, 1997 July 3, 1998 July 4, 1997
----------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Weighted average shares outstanding 9,339,527 9,096,989 9,322,940 9,077,046
------------- ------------- ------------- -------------
Total shares 9,339,527 9,096,989 9,322,940 9,077,046
------------- ------------- ------------- -------------
Net Loss $ (2,613,562) $ (2,487,713) $ (4,523,800) $ (4,829,404)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net Loss per share: Basic $ (0.28) $ (0.27) $ (0.49) $ (0.53)
Diluted $ (0.28) $ (0.27) $ (0.49) $ (0.53)
</TABLE>
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001006591
<NAME> WHITE PINE SOFTWARE, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUL-03-1998
<CASH> 11,081,683
<SECURITIES> 0
<RECEIVABLES> 1,765,159
<ALLOWANCES> 139,453
<INVENTORY> 94,761
<CURRENT-ASSETS> 1,023,527
<PP&E> 4,118,026
<DEPRECIATION> 2,592,827
<TOTAL-ASSETS> 16,622,682
<CURRENT-LIABILITIES> 2,311,741
<BONDS> 0
0
0
<COMMON> 93,632
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 16,622,682
<SALES> 0
<TOTAL-REVENUES> 3,706,949
<CGS> 0
<TOTAL-COSTS> 720,399
<OTHER-EXPENSES> 7,836,603
<LOSS-PROVISION> 15,870
<INTEREST-EXPENSE> 603
<INCOME-PRETAX> (4,518,494)
<INCOME-TAX> 5,306
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,523,800)
<EPS-PRIMARY> (0.49)
<EPS-DILUTED> (0.49)
</TABLE>
