<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 27, 2000.
REGISTRATION NO. 333-39008
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AVISTAR COMMUNICATIONS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3576 88-0383089
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
555 TWIN DOLPHIN DRIVE, SUITE 360
REDWOOD SHORES, CALIFORNIA 94065
(650) 610-2900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
GERALD J. BURNETT
AVISTAR COMMUNICATIONS CORPORATION
555 TWIN DOLPHIN DRIVE, SUITE 360
REDWOOD SHORES, CALIFORNIA 94065
(650) 610-2900
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
THOMAS S. LOO, ESQ. DANIEL CLIVNER, ESQ.
R. RANDALL WANG, ESQ. SIMPSON THACHER & BARTLETT
BRYAN CAVE LLP 10 UNIVERSAL CITY PLAZA-SUITE 1850
120 BROADWAY, SUITE 300 UNIVERSAL CITY, CALIFORNIA 91608
SANTA MONICA, CALIFORNIA 90401-2305 (818) 755-7000
(310) 576-2100 (818) 755-7009 (FAX)
(310) 576-2200 (FAX)
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, check the
following box and list the securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, as amended, check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, as amended, check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JULY 27, 2000
PROSPECTUS
----------------
3,600,000 SHARES
[AVISTAR LOGO]
COMMON STOCK
This is the initial public offering of common stock by Avistar
Communications Corporation. Avistar is selling 3,600,000 shares of common stock.
We anticipate that the initial public offering price will be between $13.00 and
$15.00 per share.
------------------
No public market currently exists for our common stock. Our common stock
has been approved for quotation on the Nasdaq National Market under the symbol
AVSR.
------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds to Avistar, before expenses........................ $ $
</TABLE>
Avistar has granted the underwriters an option for a period of 30 days to
purchase up to 540,000 additional shares of common stock.
------------------
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CHASE H&Q
UBS WARBURG LLC
WIT SOUNDVIEW
, 2000
<PAGE> 3
Artwork Description
Inside Front Cover
Graphics: A diagonal listing of various communications technologies along the
outer edge of a wave. Background has a faint sine wave and "1's and "0's"
running across the middle.
Text:
In the upper left hand corner is "Are You Catching the Communications Wave?"
Just below that text and slightly overlapping and in the background is "Next
Wave". The Avistar logo is to the far right. Crossing the page diagonally are 9
green balls. The lower left hand corner ball reads "Phone Enabled voice
conversations with people across distances" The next ball reads: "TV Provided
live video broadcasts to mass audiences." The next ball up and to the right
reads: "Fax Allowed transmission of text and graphics for later review." The
next ball up and to the right reads: "VCR Enabled TV recording and playback of
video anytime." The next ball up and to the right reads: "Video Conferencing
Provided live group video meetings between installed locations." The text ball
up and to the right reads: "Email Created near real-time exchange of data and
files." The next ball up and to the right reads: "Voicemail Allowed recording
and sharing of voice messages." The next ball up and to the right reads:
"Internet Created open access to information and mass audiences." The last ball
up and to the right is the Avistar logo on top of the green ball in white. Text
underneath reads, "Avistar Video-enabled networked communications."
Gatefold
Graphics: Background is a faint depiction of the world map with a sine curve
and rows of "1's and "0's" running across the map through the middle of the
page. In the center of the page is a green ball with the Avistar logo on it in
white. Out of the ball are lines leading to illustrations of individuals using
their computer or groups of people sitting in conference rooms looking at
television monitors and computer screens.
Text:
In the upper left-hand corner appears text that reads: "The Integration of
Communications." Below that text and slightly to the right is text that reads:
"Let Avistar's Networked Visual Collaboration Solution Get You on Board."
Below the upper left hand corner text is an illustration of a woman standing and
viewing her computer screen with the contents of the screen blown up to the
left. The following text is above the woman: "Chicago - Interactive Video
Calling and Data Sharing at 10:20 AM, 4:20 PM GMT. - Content Creation five
minutes after video call; Sales Director." Above her computer is a clock set at
10:20. Out of the clock is the following balloon caption: "I need to respond
quickly to a customer's product question. I will discuss this with my team in
Paris. Then, I'll record a presentation of the critical points on the Media
Server to share with our salesforce."
Moving clockwise around the page, the next illustration is with a man at a
computer viewing a woman and a graph. There is a clock above him set at 5:20 and
text to the right of the clock: "Paris at 5:20 PM, 4:20 PM GMT. Interactive
Video Calling and Data Sharing; Product Management."
Below the Product Management man in Paris is an illustration of a woman sitting
at her computer screen viewing three other people on her screen. There is a
clock to the right of the computer set at 9:00 with the following text to the
right: "Hong Kong at 9 AM, 1 AM GMT Interactive Video Calling; Customer." Below
the woman in Hong Kong is an illustration of a man sitting at a desk viewing 3
other people on his screen. There is a clock to the right of the computer
monitor set at 11:00. Under and to the right of the clock is text: "Sydney at
11:00 AM, 1:00 AM GMT Interactive Video Calling and Video-on-Demand." Below the
man is the text: "Field Sales" A balloon caption coming from the clock reads, "I
called my customer in Hong Kong on Avistar and showed her the video mail from
Chicago using the AVISTAR Media server."
In the lower left hand corner is an illustration of a man sitting at his
computer viewing a bar graph similar to the one that appeared with the woman
above. Under this man is the following text: "Chicago at 10:00 AM, 4 PM GMT.
Broadcast Video." To the left of the text is a clock set at 10:00. Above the
man's computer is the text "Regional Sales Manager." From his desktop is a line
drawn to one of the lines coming out of the Avistar ball that connects with an
illustration of people in a conference room viewing large television monitors.
The one to the left shows a man while the one to the right has the same bar
graph as appears in the woman's and man's computer screens above. To the right
of one of the monitors is a clock set at 11:00 with the following text above it:
"New York at 11:00 AM, 4 PM GMT. Broadcast video." Below the clock is text,
"Sales Headquarters." Out of the line going to the AVISTAR ball is a balloon
caption that reads, "The broadcast from our Regional Sales Manager in Chicago
helped us reach global consensus on this quarter's priorities."
In the lower right hand corner of the page is text: "Don't Be Left Behind!"
Inside Back Cover
Graphics:
The page is divided into six rows each with a photo showing a different product
or application of the Avistar system.
Text
Across the top of the page is the text, "AVISTAR(TM) Integrated Products and
Applications."
Each row has the following text:
a. AVISTAR Conference and AVISTAR Conference Center. From any desktop or
meeting room on the network, AVISTAR Conference lets you run video applications
and conduct video calls of up to four local and remote parties with shared
AVISTAR Conference Centers.
b. AVISTAR Viewer and AVISTAR Media Server. AVISTAR Viewer lets you view live
video broadcasts and video feeds, and view stored videos from the AVISTAR Media
Server. AVISTAR Media Server lets you record and store video, video calls,
conferences and broadcasts for later playback.
c. AVISTAR Broadcast Podium. AVISTAR Broadcast Podium lets you make one-way
video presentations from your desktop or from a meeting room to other AVISTAR
users locally and at remote sites.
d. AVISTAR Directory. AVISTAR Directory lets you store the names and images of
people and video sources on your AVISTAR Network, and other video-enabled
contacts including your customers and suppliers. For immediate, one-click
connections, select a name or picture of a contact in the Direct Connect list to
access anyone no matter where they are logged on."
e. SHAREBOARD(R). SHAREBOARD lets you and your colleagues whiteboard new data
or review and mark up any information you can display on your screen.
f. AVISTAR Call Reporting. Web-Based AVISTAR Call Reporting allows you to track
the usage of your AVISTAR Video Network with graphical reports available from
any web browser.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 6
Forward-Looking Statements.................................. 16
Use of Proceeds............................................. 17
Dividend Policy............................................. 17
Capitalization.............................................. 18
Dilution.................................................... 20
Selected Financial Data..................................... 21
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 23
Business.................................................... 38
Management.................................................. 56
Principal Stockholders...................................... 65
Related Party Transactions.................................. 67
Description of Capital Stock................................ 70
Shares Eligible for Future Sale............................. 74
Material U.S. Federal Income Tax Considerations............. 76
Underwriting................................................ 79
Legal Matters............................................... 82
Experts..................................................... 82
Where You Can Find More Information......................... 82
Index to Financial Statements............................... F-1
</TABLE>
Avistar Systems, the Avistar logos, Shareboard and World-on-the-Desktop are
among our registered trademarks and service marks. This prospectus also includes
references to Avistar, Avistar Conference and Avistar Directory, other
trademarks and service marks that are owned by Avistar. This prospectus includes
references to registered service marks and trademarks of other entities.
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary does not contain all of the information you should
consider before making an investment decision. You should read the entire
prospectus carefully, including "Risk Factors" beginning on page 6 and the
combined and consolidated financial statements and notes to those financial
statements beginning on page F-1 before making an investment decision. Some
technical terms not explained in this summary are described in the Business
section.
OUR COMPANY
We develop, market and support a comprehensive, internet-protocol based,
video-enabled communications network for businesses and organizations of all
sizes. Our system provides a seamless, integrated suite of video and data
collaboration applications and management software that supports users within
and among enterprises over telephony networks and the internet. From a desktop
or meeting room, any Avistar customer can use our video applications for high
quality, interactive video calling, content creation and publishing, broadcast
video, video-on-demand, and integrated data sharing. Each of these applications
can be used together simultaneously. Our system is scalable, reliable,
cost-effective, easy to use and designed to evolve with changing technologies.
We are able to offer this functionality because we have an open architecture
that leverages existing network standards, provides an intuitive user interface
and integrates network management and directory services.
For years, enterprises have relied on communication tools used principally
in a point-to-point manner, such as telephone and fax. More recently, businesses
have also embraced network-based applications, such as teleconferencing,
voicemail and email. Businesses are quickly adopting the internet as yet another
means of improving communication within and among organizations. Enterprises are
seeking a widely deployable and cost effective technology to replicate at the
desktop the integration of high quality audio and visual communication and data
or project collaboration that occurs in a face-to-face meeting. In many cases,
using video content can speed problem resolution and motivate action, trust and
understanding. We believe that just as every organization relies on a telephone
network and most businesses increasingly rely on the internet, a video
networking market is emerging in which businesses and other organizations will
choose to rely on fully integrated, high quality video, audio and data
collaboration networks.
OUR SYSTEM
Our networked video communications system enables employees, partners,
customers and suppliers to collaborate with one another more effectively across
disparate geographies and time zones. Our system helps businesses solve complex
problems, manage large projects, negotiate important issues and respond quickly
and collectively to opportunities. We believe the benefits of our system
include:
- An integrated collaboration solution. We provide the only fully
integrated internet protocol-based system that allows individuals to make
video calls, view broadcasts and produce, store and access video content
or other forms of data from the desktop.
- Increased availability of knowledge. Our system enables businesses to
utilize their knowledge base more efficiently by offering individuals the
ability to disseminate and receive valuable information from their
desktop.
- Improved productivity and cost management. Our system increases employee
productivity and speeds up time critical business discussions, while
significantly reducing travel costs and helping to manage
telecommunications costs.
- Enhanced customer and partner relationships. Our system allows companies
to develop stronger business relationships with their customers, partners
and suppliers. A number of our
1
<PAGE> 6
customers are providing Avistar networks to their clients and business
partners in order to achieve these benefits.
- Opportunity to leverage existing and future communication
infrastructures. Our system has an open architecture that uses existing
local area and wide area networks and technologies. We have designed our
system to be able to adapt to emerging standards and technologies and to
continue to work with internet protocol-based technologies as standards
evolve and quality of service improves.
OUR STRATEGY
Our objective is to establish high quality networked video as a new
communication methodology for doing business and to become the leading provider
of networked video communications. To achieve this objective, we plan to:
- Target, develop and expand vertical markets in order to ensure broad and
deep penetration within particular industries;
- Expand our customers' usage and number of users rapidly, encourage our
customers to deploy our video systems to the locations of their
customers, suppliers and partners and continue to reduce the total cost
of ownership of our system to our customers;
- Increase our sales force and add appropriate distribution and
installation partners to further expand our vertical markets, ultimately
creating a broad horizontal market;
- Establish our technology as the standard for networked video; and
- Continue to build upon our software-based business model.
We released our full video-enabled communications system including
interactive, real-time video calling, content creation and publishing, broadcast
video, video-on-demand and integrated data sharing in the third quarter of 1998.
We have focused on the financial services industry initially and are now
broadening our efforts to additional vertical markets. This focus has allowed us
to expand the number of users and their usage and to ensure the quality and
reliability of our system in large-scale implementations.
As of June 30, 2000, our customers had deployed our system in 97 cities in
30 countries. Because many of our customers operate on a decentralized basis,
decisions to purchase our systems are often made independently by individual
business units, so that in many cases a single customer represents several
separate accounts. As of June 30, 2000, we had licensed to and recognized
revenue with respect to over 2,600 users at our customers at over 225 sites.
Among our customers are Chase Manhattan Bank, UBS Warburg LLC and Boeing
Corporation and their affiliates. Each of these customers represented more than
10% of our revenue in 1999.
CORPORATE INFORMATION
We were founded as a Nevada limited partnership in 1993. We were first
incorporated in Nevada in December 1997 as Avistar Systems Corporation. We
reincorporated in Delaware in March 2000 and changed our name to Avistar
Communications Corporation in April 2000. Our principal executive offices are
located at 555 Twin Dolphin Drive, Suite 360, Redwood Shores, California 94065
and our telephone number is (650) 610-2900.
2
<PAGE> 7
THE OFFERING
Common stock offered by
Avistar......................... 3,600,000 shares
Common stock to be outstanding
after this offering............. 25,185,480 shares
Use of proceeds................. To repay our related party debt that, as of
June 30, 2000, was $12.5 million; to fund
increases in our sales and marketing; to fund
research and development, including patent
and licensing activities; for working
capital; and for general corporate purposes.
Proposed Nasdaq National Market
symbol........................ AVSR
------------------------
This information excludes 2,190,050 shares of common stock that were
subject to outstanding options under our 1997 stock option plan at June 30,
2000, at a weighted average exercise price of $6.90 per share. See
"Capitalization" on page 18 for additional information regarding the Company's
employee stock plans.
Unless otherwise noted, or clear from the context, the information in this
prospectus:
- assumes 1,850,825 shares of common stock outstanding on June 30, 2000;
- assumes that the underwriters' over-allotment option will not be
exercised;
- reflects a one-for-five reverse stock split of our shares of common and
preferred stock effective in July 2000; and
- gives effect to the automatic conversion upon completion of this
offering, of:
- all 16,000,000 outstanding shares of series A convertible preferred
stock into an estimated 18,667,286 shares of common stock which
represents the sum of (1) 16,000,000 shares of common stock plus (2) an
estimated 2,667,286 shares of common stock representing a beneficial
conversion feature equal to the quotient of (A) the conversion amount,
which was $37.3 million at June 30, 2000 and which includes an amount
equal to $0.2167 per share per annum, pro rated based on the number of
days elapsed in the year, divided by (B) an assumed initial public
offering price of $14.00 per share; and
- all 1,067,369 outstanding shares of series B convertible preferred stock
into 1,067,369 shares of common stock.
3
<PAGE> 8
The following table sets forth summary combined and consolidated financial
data for the periods indicated. It is important that you read this information
together with the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our combined and consolidated
financial statements and the notes to those financial statements included
elsewhere in this prospectus. Before 1998, we did not have any common stock
outstanding, because we were organized as Avistar Systems, Limited Partnership,
which was our predecessor. Accordingly, no per share data have been presented
for periods before 1998.
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------ ------------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- -------- ------- --------
PREDECESSOR ENTITY
---------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
COMBINED STATEMENT OF OPERATIONS DATA:
Revenue.............................. $ 1,142 $ 2,793 $ 5,057 $ 5,128 $ 9,373 $ 4,143 $ 9,251
Cost of revenue...................... 2,043 4,134 5,015 3,402 4,887 2,484 4,326
------- ------- ------- ------- -------- ------- --------
Gross profit......................... (901) (1,341) 42 1,726 4,486 1,659 4,925
------- ------- ------- ------- -------- ------- --------
Operating expenses:
Research and development........ 1,677 2,591 3,347 3,348 2,718 1,259 1,791
Selling and marketing........... 2,276 2,288 2,513 3,152 3,649 1,743 2,349
General and administrative...... 1,207 862 1,182 2,289 2,872 1,294 1,779
Amortization of deferred stock
compensation.................. -- -- -- -- 618 -- 1,168
------- ------- ------- ------- -------- ------- --------
Total operating expenses.... 5,160 5,741 7,042 8,789 9,857 4,296 7,087
------- ------- ------- ------- -------- ------- --------
Loss from operations................. (6,061) (7,082) (7,000) (7,063) (5,371) (2,637) (2,162)
Other income (expense), net.......... (773) (1,496) (2,703) (578) (979) (330) (616)
------- ------- ------- ------- -------- ------- --------
Net loss............................. $(6,834) $(8,578) $(9,703) $(7,641) $ (6,350) $(2,967) $ (2,778)
======= ======= ======= ======= ======== ======= ========
Net loss per share -- basic and
diluted............................ $(86.83) $ (54.27) $(26.49) $ (12.40)
======= ======== ======= ========
Weighted average shares used in
calculating basic and diluted net
loss per share..................... 88 117 112 224
Pro forma:
Net loss............................. $ (6,350) $ (2,778)
Beneficial conversion related to
convertible preferred stock........ $(35,608) $(37,342)
-------- --------
Pro forma net loss attributable to
common stockholders................ $(41,958) $(40,120)
======== ========
Pro forma net loss per share -- basic
and diluted........................ $ (2.24) $ (2.01)
Weighted average shares used in
calculating pro forma basic and
diluted net loss per share......... 18,728 19,958
</TABLE>
See note 10 of the notes to the financial statements for an explanation of
the calculation of pro forma net loss attributable to common stockholders and
the determination of the numbers of shares and share equivalents used in
computing pro forma per share amounts.
4
<PAGE> 9
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 7,285 $ 7,285 $40,284
Working capital (deficit)............................... 633 (9,011) 36,461
Total assets............................................ 13,695 13,695 46,694
Notes payable and accrued interest due to related
parties
Current portion.................................... 2,829 12,473 --
Noncurrent portion................................. 9,644 -- --
Preferred stock......................................... 17 -- --
</TABLE>
The pro forma data above assumes the conversion, upon completion of this
offering, of:
- all 16,000,000 outstanding shares of series A convertible preferred stock
into an estimated 18,667,286 shares of common stock, which represents the
sum of (1) 16,000,000 shares of common stock plus (2) an estimated
2,667,286 shares of common stock representing a beneficial conversion
feature equal to the quotient of (A) the conversion amount, which was
$37.3 million at June 30, 2000 and which includes an amount equal to
$0.2167 per share per annum, pro rated based on the number of days
elapsed in the year, divided by (B) an assumed initial public offering
price of $14.00 per share;
- all 1,067,369 outstanding shares of series B convertible preferred stock
into 1,067,369 shares of common stock; and
- the reclassification of approximately $9.7 million of noncurrent debt to
current debt.
The pro forma as adjusted data above adjusts the pro forma amounts to
reflect:
- the application of the net proceeds from the sale of 3,600,000 shares of
common stock offered at the assumed initial public offering price of
$14.00 per share, after deducting underwriting discounts and commissions
and estimated offering expenses; and
- repayment of our related party debt that, as of June 30, 2000, was $12.5
million.
5
<PAGE> 10
RISK FACTORS
You should carefully consider the risks described below and all other
information contained in this prospectus before making an investment decision.
If any of the following risks, or other risks and uncertainties that are not yet
identified or that we currently think are immaterial, actually occur, our
business, financial condition and results of operations could be materially and
adversely affected. In that event, the trading price of our shares could
decline, and you may lose part or all of your investment.
RISKS RELATED TO OUR BUSINESS
YOU MAY HAVE DIFFICULTY EVALUATING OUR BUSINESS AND OPERATING RESULTS BECAUSE WE
ARE STILL IN THE EARLY STAGES OF DEVELOPMENT.
Although we commenced operations in November 1993, the first two and a half
years of our operations were primarily dedicated to research and development. We
did not begin delivering our initial two-way video calling and data sharing
applications until mid-1996, and we did not release our full product suite,
including video-publishing, one-way broadcast viewing and video-on-demand, until
the third quarter of 1998. Because we have only recently begun to offer our full
system and services, it may be difficult for you to evaluate our historical
performance and project our future operating results.
In addition, as an early stage company in an industry with rapidly changing
technology, we face numerous risks and uncertainties associated with our need to
grow and develop as discussed in more detail below. If we are unsuccessful in
addressing these risks, sales of our system and services, as well as our ability
to maintain or increase our customer base, will be substantially diminished.
WE HAVE INCURRED SUBSTANTIAL LOSSES IN THE PAST AND MAY NOT BE PROFITABLE IN THE
FUTURE.
We incurred a net loss of $2.8 million for the six months ended June 30,
2000 and a net loss of $6.4 million in 1999. Our cumulative losses from 1993
through June 30, 2000 were $45.4 million. Our revenue may not continue to
increase or even remain at its current level. In addition, we expect our
operating expenses to increase significantly as we develop and expand our
business. As a result, to become profitable, we will need to increase our
revenue by increasing sales to existing customers and by attracting additional
customers. If our expenses increase more rapidly than our revenue, we may never
become profitable. Furthermore, we will recognize significant additional charges
relating to non-cash compensation in connection with options that we granted in
1999 and 2000. These additional charges will further decrease our ability to
become profitable. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview -- Operating Expenses" beginning
on page 25 for more information regarding these charges.
Our business plan depends on our attaining profitability; however, we
cannot predict whether or when we will become profitable. If we do become
profitable, we may not be able to sustain or increase profitability on a
quarterly or annual basis. In addition, if we fail to reach profitability or to
sustain or grow our profits within the time frame expected by investors, the
market price of our common stock may fall.
OUR LENGTHY SALES CYCLE TO ACQUIRE NEW CUSTOMERS OR LARGE FOLLOW-ON ORDERS MAY
CAUSE OUR QUARTERLY OPERATING RESULTS TO VARY SIGNIFICANTLY AND MAKE IT MORE
DIFFICULT TO FORECAST OUR REVENUE.
We have generally experienced an estimated product sales cycle of four to
nine months, for new customers or large follow-on orders, due to the time needed
to educate potential customers about the uses and benefits of our system and the
significant investment decisions that our prospective customers must make when
they decide to buy our system. Many of our prospective customers have neither
budgeted expenses for networked video communications systems nor
6
<PAGE> 11
personnel specifically dedicated to the procurement, installation or support of
these systems. As a result, our customers spend a substantial amount of time
before purchasing our system performing internal reviews and obtaining capital
expenditure approvals.
Our lengthy sales cycle is one of the factors that has caused, and may in
the future continue to cause, our operating results to vary significantly from
quarter to quarter. This makes it difficult for us to forecast revenue and could
cause volatility in the market price of our common stock. A lost or delayed
order could result in lower revenue than expected in a particular quarter.
SINCE A MAJORITY OF OUR REVENUE IN THE PAST HAS COME FROM FOLLOW-ON ORDERS, OUR
FINANCIAL PERFORMANCE COULD BE HARMED IF WE FAIL TO OBTAIN THESE FOLLOW-ON
ORDERS.
Our customers typically place limited initial orders for our networked
video communications system, which allows them to evaluate its usefulness and
value. Our future financial performance will depend on our ability to secure
follow-on orders from existing customers. Our strategy is to pursue additional
and larger follow-on orders after these initial orders. Revenue generated from
follow-on orders accounted for approximately 76% of our revenue in 1999. Our
future financial performance will significantly depend on successful initial
installations of our system that in turn lead to follow-on orders. If our system
does not meet the needs and expectations of customers who order our system, we
may not be able to generate follow-on orders.
BECAUSE WE DEPEND ON A FEW CUSTOMERS FOR A MAJORITY OF OUR REVENUE, ORDERS FROM
THESE CUSTOMERS CONTRIBUTE TO THE UNPREDICTABILITY OF OUR QUARTERLY OPERATING
RESULTS, AND THE LOSS OF ONE OR MORE OF THEM COULD CAUSE A SIGNIFICANT DECREASE
IN OUR REVENUE.
We have historically derived the majority of our revenue from a select
number of customers, particularly Chase Manhattan Bank, UBS Warburg LLC and
Boeing Corporation and their affiliates. These customers collectively accounted
for 77.1% of our revenue in 1999. Chase Securities Inc., an affiliate of Chase
Manhattan Bank, together with their affiliates, accounted for 43% of our revenue
in 1999. UBS Warburg LLC, together with its affiliates accounted for 23% of our
revenue in 1999. See "-- Perceived or actual conflicts of interest in the
conduct of this offering could arise from the fact that two of our underwriters
are, and are affiliated with, significant customers, and one is affiliated with
a principal stockholder" on page 14. None of our customers is obligated to
purchase additional systems or services from us. We currently depend upon these
major customers for a substantial portion of our revenue.
The loss of a major customer or the reduction, delay or cancellation of
orders from one or more of our significant customers could cause our revenue
and, therefore, any profits we may make to decline or our losses to increase.
Because we currently depend on a limited number of customers with lengthy
budgeting cycles and unpredictable buying patterns, our revenue from quarter to
quarter may be volatile. Adverse changes in our revenue or operating results as
a result of these budgeting cycles or any other reduction in capital
expenditures by our large customers could substantially reduce the trading price
of our common stock.
WE MAY NOT BE ABLE TO MODIFY OUR SYSTEM IN A TIMELY AND COST EFFECTIVE MANNER TO
RESPOND TO TECHNOLOGICAL CHANGE OR TO SHIFTS AWAY FROM THE MICROSOFT OPERATING
SYSTEM.
Future hardware and software platforms embodying new technologies and the
emergence of new industry standards could render our system obsolete or
noncompetitive. The market for our system is characterized by:
- rapid technological change;
- significant development costs;
- frequent new stand-alone introductions;
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- changes in the requirements of our customers and their communities of
users; and
- evolving industry standards.
Our system is designed to work with a variety of hardware and software
configurations and data networking infrastructures used by our customers,
including primarily Microsoft Windows NT servers. However, our software may not
operate correctly on other hardware and software platforms and programming
languages, database environments and systems that our customers use. Also, we
must constantly modify and improve our system to keep pace with changes made to
our customers' platforms, data networking infrastructures and their evolving
ability to transport video and other applications. This may result in
uncertainty relating to the timing and nature of our new release announcements,
introductions or modifications, which may cause confusion in the market and
thereby harm our business. If we fail to promptly modify or improve our system
in response to evolving industry standards or customers' demands, our system
could rapidly become obsolete, which would harm our financial condition and
reputation.
IF OUR NETWORKED VIDEO COMMUNICATIONS SYSTEM CANNOT BE DEPLOYED EFFECTIVELY ON A
LARGE SCALE TO MANY USERS ACROSS AN ENTERPRISE, WE MAY LOSE ORDERS AND SUFFER
DECREASED REVENUE.
Our strategy requires that our video-enabled communications network be
highly scaleable, or able to accommodate substantial increases in the number of
individuals simultaneously using our system. We are only just beginning to
deploy large-scale implementations within organizations and none of these
installations has been operating at any customer site for an extended period of
time. If our system does not perform adequately when deployed on an increasingly
larger scale, we may lose orders and our revenue may decrease.
DIFFICULTIES IN INSTALLING OUR PRODUCTS COULD HARM OUR REVENUE AND MARGINS.
We recognize revenue upon the installation of our system in those cases
where we are responsible for installation, which often entails working with
sophisticated software, computing and communications systems. If we experience
difficulties with installation or do not meet deadlines in a timely manner, due
to delays caused by our customers or ourselves, we could be required to devote
more customer support, technical and other resources to a particular
installation. If new or existing customers have difficulty installing our
products or require significant amounts of our professional services support,
our revenue recognition could be delayed and our costs could increase, causing
increased variability in our operating results, and our margins may suffer.
COMPETITION COULD REDUCE OUR MARKET SHARE AND DECREASE OUR REVENUE.
Currently, our competition comes from many other kinds of companies,
including communication equipment providers, integrated solution providers,
broadcast video providers and stand-alone point solution providers. The market
in which we operate is highly competitive and fragmented and we expect
competition to increase significantly in the future. In addition, because our
industry is new and characterized by rapid technological change, evolving user
needs, developing industry standards and protocols and the frequent introduction
of new products and services, it is difficult for us to predict whether or when
new competing technologies or new competitors will enter our markets.
We may be required to reduce prices or increase spending in response to
competition in order to retain or attract customers, to pursue new market
opportunities or to invest in additional research and development efforts. As a
result, our revenue, margins and market share may be harmed. We cannot assure
you that we will be able to compete successfully against current and future
competitors or that competitive pressures faced by us will not harm our
business, financial condition and results of operations.
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INFRINGEMENT OF OUR PROPRIETARY RIGHTS COULD AFFECT OUR COMPETITIVE POSITION,
HARM OUR REPUTATION OR COST US MONEY.
We regard our system as open but proprietary. In an effort to protect our
proprietary rights, we rely primarily on a combination of patent, copyright,
trademark and trade secret laws, as well as licensing, non-disclosure and other
agreements with our consultants, suppliers, customers and employees. However,
these laws and agreements provide only limited protection of our proprietary
rights. In addition, we may not have signed agreements in every case, and the
contractual provisions that are in place and the protection they provide may not
provide us with adequate protection in all circumstances. Although we hold
patents and have filed patent applications covering some of the inventions
embodied in our systems, our means of protecting our proprietary rights may not
be adequate. It may be possible for a third party to copy or otherwise obtain
and use our technology without authorization and without our detection. A third
party may also develop similar technology independently without infringing our
patents and copyrights. In addition, the laws of some countries in which we sell
our system may not protect our software and intellectual property rights to the
same extent as the laws of the United States. Unauthorized copying, use or
reverse engineering of our system could harm our business, financial condition
or results of operations.
INFRINGEMENT CLAIMS COULD REQUIRE US TO EXPEND SIGNIFICANT FINANCIAL AND
MANAGERIAL RESOURCES.
A third party could claim that our technology infringes its proprietary
rights. As the number of software systems in our target market increases and the
functionality of these systems overlap, we believe that the number of
infringement suits filed by software developers will increase. Although we have
no knowledge that our system infringes the proprietary rights of any third
parties, we could nevertheless be sued in the future for infringement. Claims of
infringement against us, if successful, could harm us. Defending against any
infringement claims, even those that are not meritorious, could result in the
expenditure of significant financial and managerial resources. In addition, if
we are found liable for infringement, we may have to pay damages or royalties to
a third party and may not be able to continue offering that portion of our
system that is found to be infringing. Redesigning our system components to
avoid any alleged or actual infringement could result in the expenditure of
significant financial and managerial resources and diminish the value of our
system, which could harm our business, financial condition or results of
operations.
OUR SYSTEM COULD HAVE DEFECTS FOR WHICH WE COULD BE HELD LIABLE AND THAT COULD
RESULT IN LOST REVENUE, INCREASED COSTS, LOSS OF OUR CREDIBILITY OR DELAY IN
ACCEPTANCE OF OUR SYSTEM IN THE MARKET.
Our system may contain errors or defects, especially when new products are
introduced or when new versions are released. Despite internal system testing,
we have in the past discovered software errors in some of the versions of our
system after their introduction. Errors in new systems or versions could be
found after commencement of commercial shipments, and this could result in
additional development costs, diversion of technical and other resources from
our other development efforts, or the loss of credibility with current or future
customers. Any of these events could result in a loss of revenue or a delay in
market acceptance of our system and could harm our reputation.
In addition, we have warranted to some of our customers that our software
is free of viruses. If a virus infects a customer's computer software, the
customer could assert claims against us, which, regardless of their merits,
could be costly to defend and could require us to pay damages and harm our
reputation.
Our license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability and some contract
claims. Our license agreements also typically limit a customer's entire remedy
to either a refund of the price paid or modification of our system to satisfy
our warranty. However, these provisions vary as to their terms and may not be
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effective under the laws of some jurisdictions. Although we maintain product
liability insurance coverage, we cannot assure you that such coverage will be
adequate and a product liability, warranty or other claim may be brought against
us that could harm our business, financial condition and results of operations.
Performance interruptions at a customer's site could negatively affect demand
for our system or give rise to claims against us.
The third party software we license with our system may also contain errors
or defects for which we do not maintain insurance. Typically our license
agreements transfer any warranty from the third party to our customers to the
extent permitted. Product liability, warranty or other claims brought against us
with respect to such warranties could, regardless of their merits, harm our
business, financial condition or results of operation.
THE LOSS OF ANY OF OUR OUTSIDE CONTRACT MANUFACTURERS OR THIRD PARTY EQUIPMENT
SUPPLIERS THAT PRODUCE KEY COMPONENTS OF OUR SYSTEM COULD SIGNIFICANTLY DISRUPT
OUR MANUFACTURING PROCESS.
We depend on outside contract manufacturers to produce components of our
systems. Most of our compression and decompression product, or gateway, is
currently supplied by a single source, Tandberg, Inc. In addition, we depend on
various third party suppliers for the cameras, microphones, speakers and
monitors that we install at desktops and in conference rooms as a part of each
video communications network system. Our reliance on these third parties
involves a number of risks, including:
- the possible unavailability of critical services and components on a
timely basis, on commercially reasonable terms or at all;
- if the components necessary for our system were to become unavailable,
the need to qualify new or alternative components for our use or
reconfigure our system and manufacturing process, each of which could be
lengthy and expensive;
- the likelihood that, if particular components are not available, we would
suffer an interruption in the manufacture and shipment of our systems
until these components or alternatives become available;
- reduced control by us over the quality and cost of our system and over
our ability to respond to unanticipated changes and increases in customer
orders; and
- the possible unavailability of, or interruption in, access to some
technologies.
If these manufacturers or suppliers cease to provide us with the assistance or
the components necessary for the operation of our business, we may not be able
to identify alternate sources in a timely fashion. Any transition to alternate
manufacturers or suppliers would be likely to result in operational problems and
increased expenses and could cause delays in the shipment of, or limit our
ability to provide our products. In the case of the gateway component, we
believe the delay could be several months or more. We cannot assure you that we
would be able to enter into agreements with new manufacturers or suppliers on
commercially reasonable terms or at all. Any disruptions in product flow may
limit our revenue, seriously harm our competitive position and result in
additional costs or cancellation of orders by our customers.
OUR MARKET IS IN AN EARLY STAGE OF DEVELOPMENT, AND OUR SYSTEM MAY NOT BE
ADOPTED.
Our ability to attain profitability depends in large part on the widespread
adoption by end users of networked video communications systems. If the market
for our system fails to grow or grows more slowly than we anticipate, we may not
be able to increase revenue or attain profitability. The market for our system
is relatively new and rapidly evolving. We will have to devote substantial
resources to educating prospective customers about the uses and benefits of our
system. Our efforts to educate potential customers may not result in our system
achieving market acceptance. In addition, businesses that have invested
substantial resources in video products may
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be reluctant or slow to adopt our system, which might replace their existing
equipment. Similarly, customers using existing information systems in which they
have made significant investments may refuse to adopt our system if they
perceive that our offerings will not complement their existing systems.
Consequently, the conversion from dependence on traditional methods of
communication to the extensive use of video networking may not occur as rapidly
as we expect it will.
IF WE DO NOT MAINTAIN AND IMPROVE OUR CURRENT NETWORKED VIDEO COMMUNICATIONS
SYSTEM AND DEVELOP NEW SYSTEMS, APPLICATIONS AND FEATURES, OUR FUTURE BUSINESS
PROSPECTS MAY SUFFER.
We believe that our future business prospects depend in large part on our
ability to maintain and improve our current system and to develop new systems,
applications and features on a timely basis. Our system will have to achieve
additional market acceptance, maintain technological competitiveness and meet an
expanding range of customer requirements. As a result of the complexities
inherent in our system, major new releases, applications and system features
require long development and testing periods. We may not be successful in
developing and marketing, on a timely and cost effective basis, new releases,
applications or features that respond to technological change, evolving industry
standards and protocols or customer requirements. Significant delays or problems
in the installation or implementation of new releases of our system could harm
our business, financial condition and results of operations.
IF WE ARE UNABLE TO EXPAND OUR DIRECT SALES FORCE AND DISTRIBUTION CHANNELS, OUR
BUSINESS WILL SUFFER.
To increase our revenue, we must increase the size of our direct sales
force and add indirect distribution channels, such as systems integrators or
value-added resellers, or effect sales through our customers. Our inability to
increase our direct sales force and to add indirect distribution channels may
limit our future revenue growth and harm our future operating results. As of
June 30, 2000, our sales force consisted of 16 professionals. We intend to
double this sales force over the next twelve months. However, there is intense
competition for sales personnel in the communications marketplace and we cannot
assure you that we will be successful in attracting, integrating, motivating and
retaining new sales personnel. Furthermore, it can take several months before a
new hire becomes a productive member of our sales force. The failure of new
salespeople to develop the necessary skills in a timely manner could reduce our
revenue growth.
WE MAY NOT BE ABLE TO RETAIN OUR EXISTING KEY PERSONNEL, OR HIRE AND RETAIN THE
ADDITIONAL PERSONNEL THAT WE NEED TO SUSTAIN AND GROW OUR BUSINESS.
We depend on the continued services of our executive officers and other key
personnel. We do not carry any key man life insurance. The loss of the services
of any of our executive officers or key personnel could harm our business,
financial condition and results of operations.
As of June 30, 2000, we had 86 employees, up from 64 employees as of
December 31, 1999. We expect to hire a significant number of new employees in
the future to support our business. If we are unable to manage our growth
effectively, our business, financial condition and results of operations could
be harmed.
In addition, we need to attract and retain highly skilled technical and
managerial personnel for whom there is intense competition. We have had some
difficulty hiring highly skilled technical people due to the high market demand
for their services. If we are unable to attract and retain qualified technical
and managerial personnel, our results of operations could suffer and we may
never achieve profitability.
OUR PLANS CALL FOR US TO GROW RAPIDLY, AND OUR INABILITY TO MANAGE THIS GROWTH
COULD HARM OUR BUSINESS.
We have rapidly and significantly expanded our operations and expect to
continue to do so. This growth has placed, and is expected to continue to place,
a significant strain on our managerial,
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operational and financial resources and information systems. Failure to manage
our growth effectively will harm our business, financial condition and operating
results. Furthermore, in order to remain competitive or to expand our business,
we may find it necessary or desirable to acquire other businesses, products or
technologies. If we identify an appropriate acquisition candidate, we may not be
able to negotiate the terms of the acquisition successfully, to finance the
acquisition or to integrate the acquired businesses, products or technologies
into our existing business and operations. In addition, completing a potential
acquisition and integrating an acquired business may strain our resources and
require significant management time.
OUR INTERNATIONAL OPERATIONS EXPOSE US TO POTENTIAL TARIFFS AND OTHER TRADE
BARRIERS, UNEXPECTED CHANGES IN FOREIGN REGULATORY REQUIREMENTS AND LAWS AND
ECONOMIC AND POLITICAL INSTABILITY AS WELL AS OTHER RISKS THAT COULD ADVERSELY
AFFECT OUR RESULTS OF OPERATIONS.
We intend to expand our international business in Western Europe and enter
additional international markets. Expansion will require significant management
attention and financial resources as we establish additional foreign operations,
hire additional personnel and establish indirect distribution channels. Revenue
from this international expansion may be inadequate to cover the related
expenses.
Other risks we may encounter in conducting international business
activities generally could include the following:
- tariffs and other trade barriers;
- unexpected changes in foreign regulatory requirements and laws;
- economic and political instability;
- increased risk of infringement claims;
- restrictions on the repatriation of funds;
- potentially adverse tax consequences;
- timing, cost and potential difficulty of adapting our system to the local
language standards in those foreign countries that do not use the English
alphabet;
- fluctuations in foreign currencies; and
- limitations in communications infrastructures in some foreign countries.
IF OUR CUSTOMERS DO NOT PERCEIVE OUR SYSTEM OR SERVICES TO BE EFFECTIVE OR OF
HIGH QUALITY, OUR BRAND AND NAME RECOGNITION WOULD SUFFER.
We believe that establishing and maintaining brand and name recognition is
critical for attracting and expanding our targeted customer base. We also
believe that the importance of reputation and name recognition will increase as
competition in our market increases. Promotion and enhancement of our name will
depend on the success of our marketing efforts and on our ability to continue to
provide high quality systems and services, neither of which can be assured. If
our customers do not perceive our system or services to be effective or of high
quality, our brand and name recognition will suffer, which would harm our
business.
OUR HEADQUARTERS AND MANY OF OUR CONTRACT MANUFACTURERS AND SUPPLIERS ARE
LOCATED IN CALIFORNIA WHERE NATURAL DISASTERS OCCUR.
Currently, our corporate headquarters and many of our contract
manufacturers and suppliers are located in California. California historically
has been vulnerable to natural disasters and other risks, such as earthquakes
and fires, which at times have disrupted the local economy and posed
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physical risks to our property. We presently do not have redundant multiple site
capacity in the event of a natural disaster. In the event of such a disaster,
our business would suffer.
RISKS RELATED TO THIS OFFERING
OUR SHARE PRICE MAY BE HIGHLY VOLATILE AND COULD DROP UNEXPECTEDLY.
Following this offering, the price for our shares of common stock could be
highly volatile and subject to wide fluctuations in response to the following
factors:
- quarterly variations in our operating results due to prolonged sales
cycles and deviations between actual and expected sales;
- announcements of technical innovations, new systems or services by us or
our competitors;
- changes in investor perception of us or the market for our system;
- changes in financial estimates by securities analysts; and
- changes in general economic and market conditions.
The stocks of many technology companies have experienced significant
fluctuations in trading price and volume. Often these fluctuations have been
unrelated to operating performance. In particular, following initial public
offerings, the market prices for stocks of technology companies often reach
unsustainable levels that bear no established relationship to the operating
performance of these companies. These broad market and industry factors may
significantly affect the market price of our common stock, regardless of our
actual operating performance. Declines in the market price of our common stock
could also harm employee morale and retention, our access to capital and other
aspects of our business.
IF OUR SHARE PRICE IS VOLATILE, WE MAY BE THE TARGET OF SECURITIES LITIGATION,
WHICH IS COSTLY AND TIME-CONSUMING TO DEFEND.
In the past, following periods of market volatility in the price of a
company's securities, security holders have often instituted class action
litigation. Many technology companies have been subject to this type of
litigation. If the market value of our common stock experiences adverse
fluctuations, and we become involved in this type of litigation, regardless of
the outcome, we could incur substantial legal costs and our management's
attention could be diverted, causing our business, financial condition and
operating results to suffer.
NO PUBLIC MARKET HAS EXISTED FOR OUR SHARES AND AN ACTIVE TRADING MARKET MAY NOT
DEVELOP OR BE SUSTAINED.
Before this offering, there has been no public market for our common stock.
We cannot assure you that an active trading market will develop or be sustained
after this offering. You may not be able to resell your shares at or above the
initial public offering price. Through negotiations with the underwriters, we
will determine the initial public offering price of the shares. This price will
not necessarily relate to our book value, assets, past operating results,
financial condition or other established criteria of value. Therefore, the
initial public offering price may not be indicative of the market price for our
shares of common stock after this offering.
OUR EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS CONTROL US AND MAY
MAKE DECISIONS THAT YOU DO NOT CONSIDER TO BE IN YOUR BEST INTEREST.
Immediately after this offering, our executive officers, directors and
principal stockholders will, in the aggregate, directly or indirectly hold
approximately 71.5% of our outstanding shares, based upon an assumed initial
public offering price of $14.00 per share. Accordingly, these stockholders
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will be able to control us through their ability to determine the outcome of the
election of our directors, to amend our certificate of incorporation and bylaws
and to take other actions requiring the vote or consent of stockholders,
including mergers, going private transactions and other extraordinary
transactions, and the terms of any of these transactions. The ownership position
of these stockholders may have the effect of delaying, deterring or preventing a
change in control or a change in the composition of our board of directors.
PERCEIVED OR ACTUAL CONFLICTS OF INTEREST IN THE CONDUCT OF THIS OFFERING COULD
ARISE FROM THE FACT THAT TWO OF OUR UNDERWRITERS ARE, AND ARE AFFILIATED WITH,
SIGNIFICANT CUSTOMERS, AND ONE IS AFFILIATED WITH A PRINCIPAL STOCKHOLDER.
Chase Securities Inc., one of our underwriters, is an affiliate of Chase
Manhattan Bank, a significant customer. UBS Warburg LLC, together with its
affiliates, is a significant customer and is also one of our underwriters. One
of UBS Warburg LLC's affiliates, UBS (USA) Inc., owns 5.6% of our outstanding
shares as of June 30, 2000. Because of these relationships with our
underwriters, it is possible that a conflict of interest as to their roles may
arise or that others may perceive a conflict of this type in connection with
this offering.
THE SALE OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK AFTER THIS
OFFERING MAY CAUSE OUR STOCK PRICE TO FALL.
The market price of our shares of common stock could decline as a result of
sales of substantial amounts of our common stock in the public market after the
closing of this offering or the perception that substantial sales could occur.
These sales also might make it difficult for us to sell shares in the future at
a time and at a price that we deem appropriate.
After this offering, we will have 25,185,480 outstanding shares of common
stock, based upon an assumed initial public offering price of $14.00 per share.
This number includes 3,600,000 shares we are selling in this offering, which may
be resold immediately in the public market. The remaining 21,585,480 shares, or
85.7% of our total outstanding shares, based upon an assumed initial public
offering price of $14.00 per share, are restricted from immediate resale under
the federal securities laws and lock-up agreements between our current
stockholders and the underwriters, but may be sold into the market in the near
future. These shares will become available for sale at various times following
the expiration of the lock-up agreements, which is 180 days after the effective
date of the registration statement that includes this prospectus, subject to
volume limitations under Rule 144 of the Securities Act of 1933. In addition,
following the expiration of the 180 day lock-up period, holders of the shares
reserved for issuance under our stock option and stock purchase plans, other
than members of management who are deemed to be affiliates, will be able to
resell these shares without restriction.
INVESTORS WILL INCUR IMMEDIATE DILUTION AND MAY EXPERIENCE FURTHER DILUTION.
If you purchase shares in this offering, you will experience immediate and
substantial dilution of $12.54 in pro forma net tangible book value per share
based on our book value as of June 30, 2000 and an assumed initial public
offering price of $14.00 per share. Net tangible book value per share represents
the amount of our total assets less our total liabilities, divided by the number
of shares of our common stock outstanding immediately after the offering. Our
existing stockholders paid an average price per share of $0.30, as of June 30,
2000, and will therefore, have an average unrealized gain of $13.70 per share
based upon an assumed initial public offering price of $14.00. We also have
outstanding a large number of stock options with exercise prices significantly
below the initial public offering price of the shares. To the extent these
options are exercised, there will be further dilution. We intend to continue to
grant stock options to our employees as part of our general compensation
practices.
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PROVISIONS OF OUR CERTIFICATE OF INCORPORATION, OUR BYLAWS AND DELAWARE LAW MAY
MAKE IT DIFFICULT FOR A THIRD PARTY TO ACQUIRE US, DESPITE THE POSSIBLE BENEFITS
TO OUR STOCKHOLDERS.
Our certificate of incorporation, our bylaws and Delaware law contain
provisions that may inhibit changes in our control that are not approved by our
board of directors. For example, the board of directors will have the authority
to issue up to 10,000,000 shares of preferred stock and to determine the terms
of preferred stock, without any further vote or action on the part of the
stockholders.
These provisions may have the effect of delaying, deferring or preventing a
change in our control despite possible benefits to our stockholders, may
discourage bids at a premium over the market price of our common stock and may
adversely affect the market price of our common stock and the voting and other
rights of our stockholders.
WE WILL HAVE BROAD DISCRETION IN APPLYING THE NET PROCEEDS OF THIS OFFERING AND
MAY NOT USE THE PROCEEDS IN WAYS THAT WILL ENHANCE OUR MARKET VALUE.
We have significant flexibility in applying the proceeds we receive in this
offering. Other than repayment of a portion of our indebtedness to related
parties, including accrued interest, we are not required to allocate the
proceeds we receive in this offering to any specific investment or transaction.
As part of your investment decision, you will not be able to assess or direct
how we apply the net proceeds. If we do not apply the funds we receive
effectively, our accumulated deficit will increase and we may lose significant
business opportunities. Furthermore, our stock price could decline if the market
does not view our use of the proceeds from this offering favorably.
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FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. The forward-looking
statements are principally contained in the sections "Prospectus Summary"
beginning on page 1, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" beginning on page 23, and "Business"
beginning on page 38. These statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performances
or achievements to be materially different from any future results, performance
or achievements expressed or implied by the forward-looking statements.
Forward-looking statements include, but are not limited to:
- business strategy;
- the market opportunity for our systems, including the willingness of
businesses to adopt video networking technologies;
- plans for hiring additional personnel;
- our estimates regarding our capital requirements and our needs for
additional financing; and
- plans, objectives, expectations and intentions contained in this
prospectus that are not historical facts.
In some cases, you can identify forward-looking statements by terms such as
"may," "will," "should," "could," "would," "expects," "intends," "plans,"
"anticipates," "believes," "estimates," "projects," "predicts," "potential" and
similar expressions intended to identify forward-looking statements. These
statements reflect our current views with respect to future events and are based
on assumptions and subject to risks and uncertainties. Given these
uncertainties, you should not place undue reliance on these forward-looking
statements. We discuss many of these risks in greater detail under the heading
"Risk Factors" beginning on page 6. Also, these forward-looking statements
represent our estimates and assumptions only as of the date of this prospectus.
You should read this prospectus completely and with the understanding that
our actual future results may be materially different from what we expect. We
may not update these forward-looking statements, even though our situation may
change in the future unless we have obligations under the federal securities
laws to update and disclose material developments related to previously
disclosed information. We qualify all of our forward-looking statements by these
cautionary statements.
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USE OF PROCEEDS
We estimate that the net proceeds we will receive from this offering will
be approximately $45.1 million, or approximately $52.1 million if the
underwriters fully exercise their over-allotment option, at the assumed initial
public offering price of $14.00 per share, in each case after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses.
We plan to use approximately $12.5 million of the net proceeds of this
offering to repay our debt to related parties as follows:
- To repay notes payable to Dr. Gerald J. Burnett, Mr. R. Stephen Heinrichs
and Mr. William L. Campbell, our three founders, including interest, that
totaled approximately $2.8 million as of June 30, 2000 for advances made
to our intellectual property subsidiary. These notes bear interest at 10%
per annum and are due on demand.
- To repay notes payable to Collaborative Holdings, whose partners include
Dr. Burnett, Mr. Heinrichs and Mr. Campbell, our three founders,
including interest, that totaled approximately $9.7 million as of June
30, 2000. The notes payable, which represent a line of credit established
in December 1997, bear interest at 10% per annum and are due 180 days
from the completion date of this offering.
We currently expect to use the balance of the net proceeds of this offering
as follows:
- to fund increases in our sales and marketing capabilities;
- to fund research and development programs, including patent and licensing
activities;
- to provide working capital; and
- for general corporate purposes.
The amounts we actually expend for each of the categories above will vary
significantly depending on a number of factors, including revenue growth, if
any, the amount of cash we generate from operations, changing technologies,
shifts in customer demand and the success of our patent and licensing
activities. As a result, we will retain broad discretion in the allocation and
use of the net proceeds of this offering. Pending the uses described above, we
intend to invest the net proceeds from this offering in short-term, investment
grade, interest bearing securities.
DIVIDEND POLICY
We have not declared or paid dividends on our common stock in the past and
do not intend to pay dividends on our common stock in the foreseeable future.
Any future determination to pay dividends will be at the discretion of our board
of directors and will depend on our financial condition, results of operations,
capital requirements and other factors the board of directors deems relevant.
17
<PAGE> 22
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000:
- on an actual basis, giving effect to a one-for-five reverse stock split
of our shares of common and preferred stock effected in July 2000;
- on an unaudited pro forma basis giving effect to the conversion, upon
completion of this offering, of:
- all 16,000,000 outstanding shares of series A convertible preferred
stock into an estimated 18,667,286 shares of common stock, which
represents the sum of (1) 16,000,000 shares of common stock plus (2) an
estimated 2,667,286 shares of common stock representing a beneficial
conversion feature equal to the quotient of (A) the conversion amount,
which was $37.3 million at June 30, 2000 and which includes an amount
equal to $0.2167 per share per annum, pro rated based on the number of
days elapsed in the year, divided by (B) an assumed initial public
offering price of $14.00 per share;
- all 1,067,369 outstanding shares of our series B convertible preferred
stock into 1,067,369 shares of our common stock; and
- the reclassification of approximately $9.7 million of noncurrent debt to
current debt.
- on an unaudited, pro forma as adjusted basis to reflect:
- the sale by us of 3,600,000 shares of common stock in this offering at
an assumed initial public offering price of $14.00 per share, after
deducting underwriting discounts and commissions and estimated offering
expenses; and
- the repayment of our related party debt that as of June 30, 2000, was
$12.5 million, with a portion of the estimated net proceeds from this
offering.
The table should be read in conjunction with the unaudited consolidated
financial statements and notes to those consolidated financial statements
included elsewhere in this prospectus.
This information excludes:
- 3,090,000 shares of common stock reserved for issuance under our 2000
stock option plan and 2000 director stock option plan;
- 2,190,050 shares that were subject to outstanding options under our 1997
stock option plan at June 30, 2000, at a weighted average exercise price
of $6.90 per share;
- 1,500,000 shares of common stock reserved for issuance under our 2000
employee stock purchase plan;
- 10,000,000 shares of preferred stock that will be authorized upon
completion of this offering; and
- shares of authorized but unissued non-voting common stock that will cease
to be authorized upon completion of this offering.
18
<PAGE> 23
<TABLE>
<CAPTION>
JUNE 30, 2000
--------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- ----------- -----------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Notes payable and accrued interest due to related
parties:
Current portion........................................ $ 2,829 $ 12,473 $ --
Noncurrent portion..................................... $ 9,644 -- --
-------- -------- --------
Stockholders' equity (deficit):
Series A convertible preferred stock, $0.001 par value,
80,000,000 shares authorized; 16,000,000 issued and
outstanding actual; no shares issued and outstanding
pro forma and pro forma as adjusted................. 16 -- --
Series B convertible preferred stock, $0.001 par value,
6,000,000 shares authorized; 1,067,369 issued and
outstanding actual; no shares issued and outstanding
pro forma and pro forma as adjusted................. 1 -- --
Common stock, $0.001 par value, 250,000,000 shares
authorized; 2,994,450 issued and outstanding actual,
and 22,729,105 and 26,329,105 issued and outstanding
pro forma and pro forma as adjusted................. 3 23 26
Treasury common stock, 1,143,625 shares, at cost,
actual, pro forma and pro forma as adjusted......... (1) (1) (1)
Additional paid in capital............................. 11,137 48,476 93,945
Deferred stock compensation............................ (2,746) (2,746) (2,746)
Accumulated deficit.................................... (16,975) (54,317) (54,317)
-------- -------- --------
Total stockholders' equity (deficit)................ (8,565) (8,565) 36,907
-------- -------- --------
Total capitalization........................... $ 3,908 $ 3,908 $ 36,907
======== ======== ========
</TABLE>
19
<PAGE> 24
DILUTION
Our pro forma net tangible book value (deficit) as of June 30, 2000, was
approximately $(8.6) million or $(0.40) per share of common stock. Pro forma net
tangible book value (deficit) per share represents the amount of our total
tangible assets less total liabilities divided by the number of shares of common
stock outstanding after giving effect to the conversion of all our outstanding
convertible preferred shares based on an assumed initial public offering price
of $14.00 per share.
After giving effect to the issuance and sale by us of 3,600,000 shares of
common stock offered by this prospectus at an assumed initial public offering
price of $14.00 per share and after deducting estimated underwriting discounts
and commissions and offering expenses, our pro forma, as adjusted, net tangible
book value as of June 30, 2000 would have been $36.9 million, or $1.86 per
share. This represents an immediate increase in the pro forma net tangible book
value of $1.46 per share to existing stockholders and an immediate dilution of
$12.54 per share to new investors in this offering illustrated by the following
table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $14.00
Pro forma net tangible book value (deficit) per share
before this offering.................................. $(0.40)
Increase per share attributable to new investors....... 1.86
------
Pro forma, as adjusted, net tangible book value per share
after the offering........................................ 1.46
------
Dilution per share to new investors......................... $12.54
======
</TABLE>
The following table sets forth on a pro forma, as adjusted, basis as of
June 30, 2000 the number of shares of common stock purchased from us, the total
consideration paid and the average price per share paid by existing stockholders
and new stockholders at an assumed initial public offering price of $14.00 per
share before deducting underwriting discounts and commissions and offering
expenses payable by us:
<TABLE>
<CAPTION>
AVERAGE PRICE
SHARES PURCHASED TOTAL CONSIDERATION PER SHARE
-------------------- --------------------- -------------
NUMBER PERCENT AMOUNT PERCENT
---------- ------- ----------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 21,585,480 85.7% $ 6,459,000 11.3% $ 0.30
New stockholders......... 3,600,000 14.3 50,400,000 88.7 14.00
---------- ---- ----------- ----
Total.......... 25,185,480 100% $56,859,000 100%
========== ==== =========== ====
</TABLE>
The foregoing discussion and tables assume no exercise of any stock options
outstanding. As of June 30, 2000, there were options outstanding to purchase a
total of approximately 2,190,050 shares of common stock with a weighted average
exercise price of $6.90 per share. An additional 4,690,000 shares are available
for future issuances under our stock option and stock purchase plans. To the
extent that any of these options are exercised or that shares reserved for
issuance under our plans are issued, your investment will be further diluted.
20
<PAGE> 25
SELECTED FINANCIAL DATA
You should read the following selected combined and consolidated financial
data in conjunction with our combined and consolidated financial statements and
related notes and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing elsewhere in this prospectus. The statement
of operations and balance sheet data for the years ended and as of December 31,
1995, 1996, 1997, 1998 and 1999 are derived from our combined financial
statements. Our audited combined financial statements as of December 31, 1998
and 1999 and for each of the three years in the period ended December 31, 1999
are included elsewhere in this prospectus. Prior to 1998, we did not have any
common stock outstanding because we were organized as Avistar Systems, Limited
Partnership, our predecessor. Accordingly, no per share data have been presented
for periods prior to 1998. The statement of operations and balance sheet data
for the six months ended and as of June 30, 1999 and 2000 have been derived from
the unaudited interim combined and consolidated financial statements included
elsewhere in this prospectus. In the opinion of management, our unaudited
combined and consolidated financial statements have been prepared on a basis
consistent with our audited combined financial statements and include all
adjustments, which are only normally recurring adjustments, necessary for a fair
presentation of the financial position and results of operations for the
unaudited periods. Operating results for the six months ended June 30, 2000 are
not necessarily indicative of the results for the year ending December 31, 2000
or for any future period.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------ ------------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- -------- ------- --------
PREDECESSOR ENTITY
---------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
COMBINED STATEMENT OF OPERATIONS DATA:
Revenue:
Product........................................ $ 812 $ 2,253 $ 3,196 $ 3,342 $ 6,146 $ 2,761 $ 7,081
Services, maintenance and support.............. 330 540 1,861 1,786 3,227 1,382 2,170
------- ------- ------- ------- -------- ------- --------
Total revenue................................ 1,142 2,793 5,057 5,128 9,373 4,143 9,251
Cost of revenue:
Product........................................ 1,214 2,474 2,661 1,959 3,190 1,640 3,272
Services, maintenance and support.............. 829 1,660 2,354 1,443 1,697 844 1,054
------- ------- ------- ------- -------- ------- --------
Total cost of revenue........................ 2,043 4,134 5,015 3,402 4,887 2,484 4,326
------- ------- ------- ------- -------- ------- --------
Gross profit..................................... (901) (1,341) 42 1,726 4,486 1,659 4,925
------- ------- ------- ------- -------- ------- --------
Operating expenses:
Research and development....................... 1,677 2,591 3,347 3,348 2,718 1,259 1,791
Sales and marketing............................ 2,276 2,288 2,513 3,152 3,649 1,743 2,349
General and administrative..................... 1,207 862 1,182 2,289 2,872 1,294 1,779
Amortization of deferred stock compensation.... -- -- -- -- 618 -- 1,168
------- ------- ------- ------- -------- ------- --------
Total operating expenses..................... 5,160 5,741 7,042 8,789 9,857 4,296 7,087
------- ------- ------- ------- -------- ------- --------
Loss from operations............................. (6,061) (7,082) (7,000) (7,063) (5,371) (2,637) (2,162)
------- ------- ------- ------- -------- ------- --------
Other (expense) income:
Interest expense............................... (786) (1,501) (2,394) (276) (1,012) (331) (730)
Interest income................................ 1 1 1 1 54 3 114
Other.......................................... 12 4 (310) (303) (21) (2) --
------- ------- ------- ------- -------- ------- --------
Total other expense.......................... (773) (1,496) (2,703) (578) (979) (330) (616)
------- ------- ------- ------- -------- ------- --------
Net loss......................................... $(6,834) $(8,578) $(9,703) $(7,641) $ (6,350) $(2,967) $ (2,778)
======= ======= ======= ======= ======== ======= ========
Net loss per share -- basic and diluted.......... $(86.83) $ (54.27) $(26.49) $ (12.40)
======= ======== ======= ========
Weighted average shares used in calculating basic
and diluted net loss per share................. 88 117 112 224
Pro forma:
Net loss......................................... $ (6,350) $ (2,778)
Beneficial conversion related to convertible
preferred stock................................ $(35,608) $(37,342)
-------- --------
Net loss attributable to common stockholders..... $(41,958) $(40,120)
======== ========
Pro forma net loss per share -- basic and
diluted........................................ $ (2.24) $ (2.01)
Weighted average shares used in calculating pro
forma basic and diluted net loss per share..... 18,728 19,958
</TABLE>
21
<PAGE> 26
See note 10 of the notes to the financial statements for an explanation of
the calculation of pro forma net loss attributable to common stockholders and
the determination of the numbers of shares and share equivalents used in
computing pro forma per share amounts.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
------------------------------------------------ JUNE 30,
1995 1996 1997 1998 1999 2000
-------- -------- ------ ------- ------- --------
PREDECESSOR ENTITY
----------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
COMBINED AND CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 20 $ 32 $ 15 $ 139 $ 6,232 $ 7,285
Working capital (deficit)................................. (11,010) (20,351) (910) (2,881) 1,656 633
Total assets.............................................. 2,203 2,919 4,333 2,763 10,523 13,695
Notes payable and accrued interest due to related parties
Current portion....................................... 11,291 19,648 429 1,300 2,533 2,829
Noncurrent portion.................................... -- -- -- 5,152 9,190 9,644
Preferred stock........................................... -- -- 16 16 17 17
Stockholders' equity (deficit)............................ (10,559) (19,137) 36 (7,609) (6,997) (8,565)
</TABLE>
22
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and our combined and consolidated financial statements
and the notes to those financial statements included elsewhere in this
prospectus. Our discussion contains forward-looking statements based upon
current expectations that involve risks and uncertainties, such as our plans,
objectives, expectations and intentions. Our actual results and the timing of
events could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth under "Risk
Factors," "Business" and elsewhere in this prospectus.
OVERVIEW
We operate through two segments:
- Avistar Systems Corporation, our wholly owned subsidiary, engages in the
design, development, manufacturing, sale and marketing of networked video
communications products; and
- Collaboration Properties, Inc., our wholly owned subsidiary, engages in
the development, prosecution, maintenance and support of the intellectual
property used in our system.
Revenue
We derive product revenue principally from the sale and licensing of our
video-enabled networked communications system, consisting of Avistar-designed
software and hardware, including third party components. In addition, we derive
revenue from fees for installation, maintenance, support and training services.
As a percentage of total revenue, product revenue was 63.2% in 1997, 65.2% in
1998, 65.6% in 1999 and 76.5% in the six months ended June 30, 2000. We expect
the hardware component of product revenue as a percentage of total product
revenue to decline over time as technology evolves and we are no longer required
to provide as many hardware components.
We market our systems throughout North America, Europe and Asia through our
direct sales force, with sales offices in North America and the United Kingdom.
We enter into sales and licensing contracts with our customers and we also
offer installation, maintenance, support and training services pursuant to
separate contracts. Some of our customers install our systems themselves and
others use third party firms to do the installation. Our customers sign contract
addenda for additional purchases of our system and services. Our contracts
contain provisions regarding, among other things, the following:
- system pricing and description;
- license terms;
- confidentiality;
- warranties; and
- installation, maintenance, support and training services.
Typically, these contracts provide that the exclusive remedy for breach is
limited to the price paid or modification of our system to satisfy our customer.
Typically, the warranty period is three months from system shipment and the
revenue attributed to warranty is deferred and recognized at the end of the
three month period.
23
<PAGE> 28
We have generally experienced an estimated product sales cycle of four to
nine months for new customers or large follow-on orders. The length of the sales
cycle depends on a number of factors, including:
- customer concerns regarding the introduction of new products by us or our
competitors that would render our current system obsolete or
non-competitive;
- the amount of customer education required;
- the customer's perception of the capabilities of the type of solution we
sell and our ability to service and upgrade our system;
- customer concerns over our size and our limited operating history;
- customer budgetary constraints and the timing of customer budgeting
cycles; and
- general economic conditions.
Revenue from customers outside the United States accounted for 14.8% of our
revenue in 1997, 14.1% of our revenue in 1998, 18.6% of our revenue in 1999 and
37.3% of our revenue in the six months ended June 30, 2000. To date, a
significant portion of our revenue has resulted from sales to a limited number
of customers. In 1999, we recorded revenue of approximately $7.2 million from
our three largest customers and their affiliates, which represented 77.1% of
total revenue. In the six months ended June 30, 2000, we recorded revenue of
approximately $6.6 million from our four largest customers and their affiliates,
which represented 72.0% of total revenue. We anticipate that our operating
results for any given period will depend to a significant extent on a select
number of customers.
Payment terms are net 30 days after date of shipment. We recognize revenue
in accordance with Statement of Position 97-2, "Software Revenue Recognition",
and Statement of Position 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions." Although we may enter into
separate contracts for various elements such as installation, maintenance and
training, our arrangements with customers to provide products and related
services are accounted for as a single arrangement. We recognize revenues from
product sales when all of the following conditions are met:
- the product has been shipped;
- an arrangement exists with the customer at a fixed price and we have the
right to invoice the customer;
- collection of the receivable is probable; and
- we have fulfilled all of our material contractual obligations to the
customer.
We stipulate the price charged for maintenance in the contract. The price
is based on a percentage of product revenue. Customers have the option to renew
the maintenance at the rate established in the original agreement. We have
historically charged all customers the same percentage of product revenue for
maintenance. Training services can be offered independent of the purchase of
product. The value of these training courses is determined in a multiple element
arrangement based on the price charged when such services are sold separately.
Although not required, historically customers have always purchased maintenance
when ordering products. Consequently, the fair value of the products is not
readily determinable. Because the fair value of all undelivered elements in an
arrangement is known, we recognize revenue related to delivered elements using
the residual value method in accordance with Statement of Position 98-9.
24
<PAGE> 29
When we provide installation services, we recognize product and
installation revenues upon completion of installation and after customer
acceptance is received. When the customer or a third party provides installation
services, the product revenue is recognized upon shipment. Payment for product
is due upon shipment based on specific payment terms. Installation and training
services are due upon providing the services. If payments for systems are made
in advance of the completion of installation, those amounts are deferred and
recorded as deferred revenue until installation has occurred and the customer
has accepted the product. Revenue from the provision of services, including
training, is recognized as the work is performed. Revenue from maintenance is
offered based on a percentage of product sales as stipulated in the agreement
and is recognized pro-rata over the maintenance term, which is typically one
year. Payments for services and maintenance made in advance of the provision of
services and maintenance are recorded as deferred revenue.
Cost of Revenue
Our cost of revenue consists primarily of:
- the cost of software and hardware, including third party components;
- the cost of compensation for installation, maintenance, support and
training personnel; and
- other costs related to facilities and office equipment for professional
services, technical support and training personnel.
We recognize product costs and costs of installation, maintenance, support,
and training services as revenue is recorded. The gross margins on service
revenue have been comparable to our product revenue margins. This is due in part
to the fact that a significant percentage of service revenue is derived from our
higher margin maintenance business. Maintenance has higher margins than other
service revenue due to the recurring nature of maintenance business.
Operating Expenses
We generally recognize our operating expenses as we incur them in three
general operational categories: research and development, sales and marketing
and general and administrative. Our operating expenses also include compensation
charges related to stock options. These charges are amortized over the vesting
period of the options, generally four years. Our research and development
expenses consist primarily of compensation expenses for our personnel, patent
and licensing costs and, to a minor extent, independent contractors. We expense
all patent and licensing costs. Our sales and marketing expenses consist
primarily of compensation, commission and travel expenses along with other
marketing expenses. Our general and administrative expenses consist primarily of
compensation for our administrative, financial, and contractual personnel and a
number of non-allocable costs, including professional fees, legal fees,
accounting fees and provisions for bad debts.
Over time, we anticipate that research and development expenses, sales and
marketing expenses, and general and administrative expenses will increase in
absolute dollars and decrease as a percentage of revenues. However, we cannot
predict how quickly this will take place, if at all.
We allocate the total cost of overhead and facilities to each of the
functional areas that use overhead and facilities based upon the number of
employees assigned to each of these areas. These allocated charges include
facilities rent and utilities and depreciation expense for office furniture and
equipment.
The non-cash compensation charge related to stock options represents the
difference between the exercise price of options granted to acquire our shares
of common stock during the period and
25
<PAGE> 30
the deemed fair value for financial reporting purposes of our shares of common
stock on the measurement date, which is the same as the date of grant of those
options. In 1999, we recorded a non-cash compensation charge associated with
stock options of $618,000. Based on the outstanding options at June 30, 2000, we
will record a charge of approximately $2.0 million in 2000, $1.1 million in
2001, $575,000 in 2002 and $202,000 in 2003, to record the remainder of the
costs associated with these grants.
Interest income and expenses
We generate interest income by investing the cash we raised in a December
1999 equity financing. Interest expense consists primarily of amounts we owe
under our line of credit, short-term debt and long-term debt.
Income taxes
We have made no provision for and have received no benefit from income
taxes for any period due to our operating losses. As of December 31, 1999, we
had $10.4 million of net operating loss carry-forwards for federal income tax
purposes, which expire beginning on various dates through the year 2019. Our use
of these net operating losses may be limited in future periods. See note 9 to
our combined financial statements regarding our net operating loss
carry-forwards.
26
<PAGE> 31
RESULTS OF OPERATIONS
The following table sets forth data expressed as a percentage of total
revenue for the periods indicated.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUE
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------------- --------------
1997 1998 1999 1999 2000
------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue:
Product........................................ 63.2% 65.2% 65.6% 66.6% 76.5%
Services, maintenance and support.............. 36.8 34.8 34.4 33.4 23.5
------ ------ ----- ----- -----
Total revenue............................... 100.0 100.0 100.0 100.0 100.0
------ ------ ----- ----- -----
Cost of revenue:
Product........................................ 52.6 38.2 34.0 39.6 35.4
Services, maintenance and support.............. 46.5 28.1 18.1 20.4 11.4
------ ------ ----- ----- -----
Total cost of revenue....................... 99.1 66.3 52.1 60.0 46.8
------ ------ ----- ----- -----
Gross profit..................................... 0.9 33.7 47.9 40.0 53.2
Operating expenses:
Research and development....................... 66.2 65.3 29.0 30.4 19.4
Sales and marketing............................ 49.7 61.5 38.9 42.0 25.4
General and administrative..................... 23.4 44.6 30.7 31.2 19.2
Amortization of deferred stock compensation.... -- -- 6.6 -- 12.6
------ ------ ----- ----- -----
Total operating expenses.................... 139.3 171.4 105.2 103.6 76.6
------ ------ ----- ----- -----
Loss from operations............................. (138.4) (137.7) (57.3) (63.6) (23.4)
------ ------ ----- ----- -----
Other (expense) income:
Interest expense............................... (47.3) (5.4) (10.8) (8.0) (7.9)
Interest income................................ -- -- 0.6 0.1 1.3
Other.......................................... (6.1) (5.9) (0.2) (0.1) --
------ ------ ----- ----- -----
Total other expense......................... (53.5) (11.3) (10.4) (8.0) (6.6)
------ ------ ----- ----- -----
Net loss......................................... (191.9)% (149.0)% (67.7)% (71.6)% (30.0)%
====== ====== ===== ===== =====
</TABLE>
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000
Revenue
Our total revenue increased by 123.3% from $4.1 million in the six months
ended June 30, 1999 to $9.3 million in the six months ended June 30, 2000.
International revenue was $1.0 million in the six months ended June 30, 1999 and
$3.4 million in the six months ended June 30, 2000. International revenue to
customers in the United Kingdom accounted for 22.3% of total revenue for the six
months ended June 30, 1999 and 26.7% of total revenue for the six months ended
June 30, 2000. Our Collaboration Properties, Inc. subsidiary generated no
revenues in either period.
Revenue from product. Revenue from the sale of product increased by 156.5%
from $2.8 million in the six months ended June 30, 1999 to $7.1 million in the
six months ended June 30, 2000. The increase resulted from the growing market
acceptance of our system, the introduction of new system features, and our
expanded sales and marketing efforts.
Revenue from services, maintenance and support. Revenue from services
increased by 57.0% from $1.4 million in the six months ended June 30, 1999 to
$2.2 million in the six months ended June 30, 2000. The increase in services
revenue in the six months ended June 30, 2000 over the six
27
<PAGE> 32
months ended June 30, 1999 was primarily due to the growth in professional
services and maintenance revenue as our client base increased over this period.
Cost of Revenue
Total cost of revenue increased by 74.2% from $2.5 million in the six
months ended June 30, 1999 to $4.3 million in the six months ended June 30,
2000. The total cost of revenue as a percentage of total revenue declined from
60.0% in the six months ended June 30, 1999 to 46.8% in the six months ended
June 30, 2000.
Cost of product revenue. The decrease in cost of product revenue as a
percentage of product revenue was attributable to improved product gross
margins, which increased from 40.6% in the six months ended June 30, 1999 to
53.8% in the six months ended June 30, 2000. Product margins improved due to
engineering improvements in the system design that reduced component costs,
higher volume purchases and procurement negotiations with vendors.
Cost of services, maintenance and support revenue. The decrease in cost of
services revenue as a percentage of services revenue declined as a result of
improved service gross margins, which improved from a gross margin of 38.9% in
the six months ended June 30, 1999 to 51.4% in the six months ended June 30,
2000. Service margins improved due to increased economies of scale and the
improved serviceability of the system.
Operating expenses
Our total operating expenses increased 65.0% from $4.3 million in the six
months ended June 30, 1999 to $7.1 million in the six months ended June 30,
2000. As a percentage of total revenue, our expenses declined from 103.7% in the
six months ended June 30, 1999 to 76.6% in the six months ended June 30, 2000.
This decrease was a result of revenue increasing at a greater rate than
operating expenses. Operating expenses attributable to our Avistar Systems
Corporation subsidiary represented approximately $3.4 million, or 79.5% of total
operating expenses in the six months ended June 30, 1999, and approximately $6.4
million, or 90.4% in the six months ended June 30, 2000. Operating expenses
attributable to our Collaboration Properties, Inc. subsidiary represented
approximately $0.9 million, or 20.5% of total operating expenses in the six
months ended June 30, 1999, and approximately $0.7 million, or 9.6% in the six
months ended June 30, 2000. Collaboration Properties expenses related primarily
to research and development and, to a lesser extent, general and administrative.
Research and development. Research and development expenses increased 42.3%
from $1.3 million in the six months ended June 30, 1999 to $1.8 million in the
six months ended June 30, 2000. As a percentage of total revenue, research and
development expenses represented 30.4% in the six months ended June 30, 1999 and
19.4% in the six months ended June 30, 2000. The increase in research and
development expenses is due to an approximate $250,000 increase in compensation
costs related to new hires, related recruiting fees and higher expenditures on
expensed equipment.
Sales and marketing. Sales and marketing expenses increased 34.8% from $1.7
million in the six months ended June 30, 1999 to $2.3 million in the six months
ended June 30, 2000. As a percentage of total revenue, sales and marketing
expenses represented 42.0% in the six months ended June 30, 1999 and 25.4% in
the six months ended June 30, 2000. The increase in sales and marketing expenses
is due to an approximate $250,000 related to increased sales and marketing
personnel, related recruiting fees and an increase in sales commission expense
of approximately $285,000 on higher revenue.
General and administrative. General and administrative expenses increased
37.5% from $1.3 million in the six months ended June 30, 1999 to $1.8 million in
the six months ended June 30,
28
<PAGE> 33
2000. As a percentage of total revenue, general and administrative expenses
represented 31.2% in the six months ended June 30, 1999 and 19.2% in the six
months ended June 30, 2000. The increase in general and administrative expenses
is due to an approximate $200,000 increase related to an increase in personnel,
equipment expense to support the revenue growth and expanding the offices in
Redwood Shores, New York and London which resulted in higher facility costs.
Amortization of deferred stock compensation. Amortization of deferred stock
compensation expense was zero in the six months ended June 30, 1999 and $1.2
million in the six months ended June 30, 2000. As a percentage of total revenue,
amortization of deferred stock expense was 12.6% in the six months ended June
30, 2000.
Interest income and interest expense
Interest income was $3,000 in the six months ended June 30, 1999 and
$114,000 in the six months ended June 30, 2000. Interest expense was $331,000 in
the six months ended June 30, 1999 and $730,000 in the six months ended June 30,
2000. The increase in interest expense in the six months ended June 30, 2000 was
due to the establishment of a $2.0 million line of credit with a financial
institution in June 1999 and the increase in the balance on the notes payable to
related parties.
Interest income attributable to our Avistar Systems Corporation subsidiary
represented 33.3% of total interest income in the six months ended June 30, 1999
and 78.9% in the six months ended June 30, 2000. Interest expense attributable
to Avistar Systems Corporation represented 78.6% of total interest expense in
the six months ended June 30, 1999 and 81.2% in the six months ended June 30,
2000. Interest income attributable to our Collaboration Properties, Inc.
subsidiary represented 66.7% of total interest income in the six months ended
June 30, 1999 and 21.1% in the six months ended June 30, 2000. Interest expense
attributable to Collaboration Properties, Inc. represented 21.4% of total
interest expense in the six months ended June 30, 1999 and 18.8% in the six
months ended June 30, 2000.
Net loss
Net loss attributable to our Avistar Systems Corporation subsidiary was
$2.0 million in the six months ended June 30, 1999 and $2.0 million in the six
months ended June 30, 2000. Net loss attributable to our Collaboration
Properties, Inc. subsidiary was $0.9 million in the six months ended June 30,
1999 and $0.8 million in the six months ended June 30, 2000.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Revenue
Our total revenue increased by 1.4% from $5.06 million in 1997 to $5.13
million in 1998 and increased 82.8% to $9.4 million in 1999. International
revenue decreased by 3.2% from $742,000 in 1997 to $718,000 in 1998 and
increased 140.1% to $1.7 million in 1999. International revenue to customers in
the United Kingdom accounted for 15.6% of total revenue in 1999. No single
foreign country accounted for more than 10% of total revenue in 1997 and 1998.
Our Collaboration Properties, Inc. subsidiary generated no revenues in either
period.
Revenue from product. Revenue from the sale of product increased 4.6% from
$3.2 million in 1997 to $3.3 million in 1998 and increased 83.9% to $6.1 million
in 1999. The increase in product revenue from 1997 to 1999 resulted from a
growing market acceptance of our system, the release of the full product suite
in the third quarter of 1998, the introduction of new system features, and our
expanded sales and marketing efforts.
29
<PAGE> 34
Revenue from services, maintenance and support. Revenue from services
decreased 4.0% from $1.9 million in 1997 to $1.8 million in 1998 and increased
80.7% to $3.2 million in 1999. The decline in services revenue from 1997 to 1998
was due to a large custom installation in 1997, which had a high component of
services revenue. The increase in services revenue from 1998 to 1999 was
primarily due to the growth in professional services and maintenance revenue
attributed to increased product sales as our client base increased over this
period.
Cost of revenue
Total cost of revenue decreased by 32.2% from $5.0 million in 1997 to $3.4
million in 1998 and increased by 43.7% to $4.9 million in 1999. Total cost of
revenue as a percentage of total revenue declined from 99.1% in 1997 to 66.3% in
1998 and 52.1% in 1999.
Cost of product revenue. The decrease in cost of product revenue as a
percentage of revenue was attributable to improved product gross margins, which
increased from 16.7% in 1997 to 41.4% in 1998 and to 48.1% in 1999. Product
margins improved in 1998 and 1999 due to engineering improvements in the system
design, which reduced component costs and allowed for higher volume purchases
and procurement negotiations with vendors. In 1998, product margins were also
improved due to a vendor credit we received of $131,000 as compensation for a
supplier quality problem.
Cost of services, maintenance and support revenue. The decrease in cost of
services revenue as a percentage of total revenue was due to improved service
gross margins, which narrowed from a negative margin of 26.5% in 1997 to a
positive margin of 19.2% in 1998 and increased to a positive margin of 47.4% in
1999. Service margins improved in 1998 and 1999 due to increased economies of
scale and the improved reliability and serviceability of the system.
Operating expenses
Our total operating expenses increased 24.8% from $7.0 million in 1997 to
$8.8 million in 1998 and increased 12.2% to $9.9 million in 1999. These
increases primarily resulted from increases in sales and marketing and general
and administrative infrastructure expenditures in each of the periods. Operating
expenses attributable to our Avistar Systems Corporation subsidiary represented
100.0% of total operating expenses in 1997, 88.5% in 1998 and 80.7% in 1999.
Operating expenses attributable to our Collaboration Properties, Inc. subsidiary
represented 0% of total operating expenses in 1997, 11.5% in 1998 and 19.3% in
1999. Collaboration Properties expenses related primarily to research and
development and, to a lesser extent, general and administrative.
Research and development. Research and development expenses decreased 9.6%
from $3.3 million in 1997 to $3.0 million in 1998 and decreased 10.2% to $2.7
million in 1999. The decrease in research and development expenses from 1998 to
1999 was attributable to a significant hardware redesign in 1998, and associated
consultant and prototype expenses.
Sales and marketing. Sales and marketing expenses increased 25.4% from $2.5
million in 1997 to $3.2 million in 1998 and 15.8% in 1999 to $3.6 million. The
increases in sales and marketing expenses from 1997 to 1999 resulted primarily
from our investment in sales and marketing personnel, including expansion of our
New York sales and service office and the opening of a sales and service office
in London, England.
General and administrative. General and administrative expenses increased
120.9% from $1.2 million in 1997 to $2.6 million in 1998 and 10.0% to $2.9
million in 1999. The increases in 1998 and 1999 were due to the additional
personnel necessary to support our growing operations, including the addition of
two senior executives in 1998, expanding the offices in Redwood Shores, New York
and London, and the increase in legal costs associated with patent activities.
30
<PAGE> 35
Amortization of deferred stock compensation. In 1999, we recorded a
non-cash compensation charge associated with stock options of $618,000.
Interest income and interest expense
Interest income was $1,000 in 1997, $1,000 in 1998 and $54,000 in 1999. The
increase in interest income was due to interest on the cash we received in
December 1999, in connection with the sale of series B preferred stock. Interest
expense was $2.4 million in 1997, $276,000 in 1998, and $1.0 million in 1999.
The decrease in interest expense in 1998 resulted from the debt associated with
our predecessor entity, Avistar Systems, Limited Partnership, being converted
into shares of series A preferred stock. The increases in interest expense in
1999 were due to the establishment of a $2.0 million line of credit with a
financial institution in June 1999 and the increase in the balance on the notes
payable to related parties.
Interest income attributable to our Avistar Systems Corporation subsidiary
represented 100.0% of total interest income in 1997, 100.0% in 1998 and 50.0% in
1999. Interest expense attributable to Avistar Systems Corporation represented
100.0% of total interest expense in 1997, 93.8% in 1998 and 81.0% in 1999.
Interest income attributable to our Collaboration Properties, Inc. subsidiary
represented 0% of total interest income in 1997, 0% in 1998 and 50.0% in 1999.
Interest expense attributable to Collaboration Properties, Inc. represented 0%
of total interest expense in 1997, 6.2% in 1998 and 19.0% in 1999.
Net loss
Net loss attributable to our Avistar Systems Corporation subsidiary was
$9.7 million in 1997, $6.1 million in 1998 and $4.3 million in 1999. Net loss
attributable to our Collaboration Properties, Inc. subsidiary was zero in 1997,
$1.5 million in 1998 and $2.1 million in 1999.
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<PAGE> 36
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, our combined
financial information for the last ten quarters expressed in dollars and as a
percentage of total revenue. We prepared this information using our unaudited
interim combined financial statements that, in our opinion have been prepared on
a basis consistent with our annual combined financial statements. We believe
that these interim combined financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of this information when read in conjunction with our financial
statements and notes to financial statements. The operating results for any
quarter do not necessarily indicate the results expected for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product................ $ 506 $ 563 $ 652 $ 1,621 $ 1,742 $ 1,019 $ 1,732 $ 1,653
Services, maintenance
and support.......... 417 388 339 642 553 829 892 953
------- ------- ------- ------- ------- ------- ------- -------
Total revenue.... 923 951 991 2,263 2,295 1,848 2,624 2,606
------- ------- ------- ------- ------- ------- ------- -------
Cost of revenue:
Product................ 395 491 311 762 1,044 596 840 710
Services, maintenance
and support.......... 352 368 342 381 417 427 466 387
------- ------- ------- ------- ------- ------- ------- -------
Total cost of
revenue........ 747 859 653 1,143 1,461 1,023 1,306 1,097
------- ------- ------- ------- ------- ------- ------- -------
Gross profit............. 176 92 338 1,120 834 825 1,318 1,509
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and
development.......... 769 873 830 876 686 573 729 730
Sales and marketing.... 713 734 760 945 905 838 879 1,027
General and
administrative....... 498 612 569 610 723 571 770 808
Amortization of
deferred stock
compensation......... -- -- -- -- -- -- 295 323
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses....... 1,980 2,219 2,159 2,431 2,314 1,982 2,673 2,888
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations..... (1,804) (2,127) (1,821) (1,311) (1,480) (1,157) (1,355) (1,379)
------- ------- ------- ------- ------- ------- ------- -------
Other (expense) income:
Interest expense....... (17) (57) (101) (101) (92) (239) (333) (348)
Interest income........ 12 (12) -- 1 11 -- 24 19
Other.................. (71) (43) (64) (125) (2) (8) (5) (6)
------- ------- ------- ------- ------- ------- ------- -------
Total other
expense........ (76) (112) (165) (225) (83) (247) (314) (335)
------- ------- ------- ------- ------- ------- ------- -------
Net loss................. $(1,880) $(2,239) $(1,986) $(1,536) $(1,563) $(1,404) $(1,669) $(1,714)
======= ======= ======= ======= ======= ======= ======= =======
<CAPTION>
QUARTER ENDED
--------------------
MARCH 31, JUNE 30,
2000 2000
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Revenue:
Product................ $ 3,190 $ 3,891
Services, maintenance
and support.......... 1,136 1,034
------- -------
Total revenue.... 4,326 4,925
------- -------
Cost of revenue:
Product................ 1,599 1,673
Services, maintenance
and support.......... 520 534
------- -------
Total cost of
revenue........ 2,119 2,207
------- -------
Gross profit............. 2,207 2,718
------- -------
Operating expenses:
Research and
development.......... 699 1,092
Sales and marketing.... 1,135 1,214
General and
administrative....... 908 871
Amortization of
deferred stock
compensation......... 579 589
------- -------
Total operating
expenses....... 3,321 3,766
------- -------
Loss from operations..... (1,114) (1,048)
------- -------
Other (expense) income:
Interest expense....... (332) (398)
Interest income........ 67 52
Other.................. -- (5)
------- -------
Total other
expense........ (265) (351)
------- -------
Net loss................. $(1,379) $(1,399)
======= =======
</TABLE>
32
<PAGE> 37
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUE
------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1998 1998 1998 1998 1999 1999
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Product................. 54.8% 59.2% 65.8% 71.6% 75.9% 55.1%
Services, maintenance
and support........... 45.2 40.8 34.2 28.4 24.1 44.9
------ ------ ------ ----- ----- -----
Total revenue..... 100.0 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ----- ----- -----
Cost of revenue:
Product................. 42.8 51.6 31.4 33.7 45.5 32.3
Services, maintenance
and support........... 38.1 38.7 34.5 16.8 18.2 23.1
------ ------ ------ ----- ----- -----
Total cost of
revenue......... 80.9 90.3 65.9 50.5 63.7 55.4
------ ------ ------ ----- ----- -----
Gross profit.............. 19.1 9.7 34.1 49.5 36.3 44.6
------ ------ ------ ----- ----- -----
Operating expenses:
Research and
development........... 83.3 91.8 83.8 38.7 29.9 31.0
Sales and marketing..... 77.3 77.2 76.7 41.8 39.4 45.3
General and
administrative........ 54.0 64.4 57.4 26.9 31.5 30.9
Amortization of deferred
stock compensation.... -- -- -- -- -- --
------ ------ ------ ----- ----- -----
Total operating
expenses........ 214.6 233.4 217.9 107.4 100.8 107.2
------ ------ ------ ----- ----- -----
Loss from operations...... (195.5) (223.7) (183.8) (57.9) (64.5) (62.6)
------ ------ ------ ----- ----- -----
Other (expense) income:
Interest expense........ (1.8) (6.0) (10.2) (4.5) (4.0) (12.9)
Interest income......... 1.3 (1.2) -- -- 0.5 --
Other................... (7.6) (4.5) (6.4) (5.5) (0.1) (0.5)
------ ------ ------ ----- ----- -----
Total other
expense......... (8.2) (11.7) (16.6) (10.0) (3.6) (13.4)
------ ------ ------ ----- ----- -----
Net loss.................. (235.4)% (235.2)% (200.4)% (67.9)% (68.1)% (76.0)%
====== ====== ====== ===== ===== =====
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUE
-------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1999 1999 2000 2000
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenue:
Product................. 66.0% 63.4% 73.7% 79.0%
Services, maintenance
and support........... 34.0 36.6 26.3 21.0
----- ------ ----- -----
Total revenue..... 100.0 100.0 100.0 100.0
----- ------ ----- -----
Cost of revenue:
Product................. 32.0 27.2 37.0 34.0
Services, maintenance
and support........... 17.8 14.9 12.0 10.8
----- ------ ----- -----
Total cost of
revenue......... 49.8 42.1 49.0 44.8
----- ------ ----- -----
Gross profit.............. 50.2 57.9 51.0 55.2
----- ------ ----- -----
Operating expenses:
Research and
development........... 27.8 28.0 16.2 22.2
Sales and marketing..... 33.5 39.4 26.2 24.6
General and
administrative........ 29.3 31.0 21.0 17.6
Amortization of deferred
stock compensation.... 11.2 12.4 13.4 12.0
----- ------ ----- -----
Total operating
expenses........ 101.8 110.8 76.8 76.4
----- ------ ----- -----
Loss from operations...... (51.6) (52.9) (25.8) (21.2)
----- ------ ----- -----
Other (expense) income:
Interest expense........ (12.7) (13.4) (7.6) (8.1)
Interest income......... 0.9 0.7 1.5 1.1
Other................... (0.2) (0.2) -- (0.1)
----- ------ ----- -----
Total other
expense......... (12.0) (12.9) (6.1) (7.1)
----- ------ ----- -----
Net loss.................. (63.6)% (65.8)% (31.9)% (28.3)%
===== ====== ===== =====
</TABLE>
Revenue
The general trend of product revenue and services revenue has been to grow
over the past ten quarters due primarily to increased client acceptance of our
systems and to the growth and increased productivity of our sales force. Revenue
in the fourth quarter of 1998 was higher than the third quarter of 1998 due to
significant customer installations being completed. During 1999, revenue
generated from follow-on orders contributed to steady revenue growth. During the
second quarter of 1999, however, revenue declined as compared to the first
quarter of 1999 due to a lower order rate in the first quarter of 1999. The
increase in revenue in the third quarter of 1999 was a result of increased
orders in the second quarter of 1999 and the subsequent large installations for
two customers. Revenue for the fourth quarter of 1999 was flat with the third
quarter of 1999 as a result of the general Year 2000 concerns at several of our
customers, which limited installations in the second half of the quarter.
Revenue for the first quarter of 2000 was higher than for the fourth quarter of
1999 as the Year 2000 concerns eased and we increased our installations.
Cost of revenue
The general trend of total cost of product and service revenue has been to
increase in absolute dollars over the past ten quarters, however, at a lower
rate than revenue. There was an overall improvement in product gross profit
margins from 14.7% for the first quarter of 1998 to 55.2% for the second quarter
of 2000. This improvement was due to increased product gross margins resulting
from lower product costs due to system design improvements and additional
discounts as a result of increased volume purchases and better procurement
negotiations, as well as the benefits of higher product revenue being allocated
over relatively fixed manufacturing overhead costs. Product
33
<PAGE> 38
margins were also partially improved in the third quarter of 1998 by $65,000 and
the fourth quarter of 1998 by $66,000 due to a vendor credit we received as
compensation for a supplier quality problem. Service gross margins improved from
4.6% for the first quarter of 1998 to 48.4% for the second quarter of 2000 due
to economies of scale and the improved reliability and serviceability of the
system. Cost of services revenue remained relatively constant over the period
from the first quarter of 1998 through the fourth quarter of 1999, due to the
fact that we had sufficient resources, primarily service personnel, available to
install and service the increasingly higher levels of business realized over the
periods. In the first quarter of 2000, service and support costs increased as we
added personnel to accommodate the higher installation and service requirements.
Operating expenses
Our total operating expenses have generally increased in absolute dollars
over the last ten quarters. Operating expenses increased in the fourth quarter
of 1998 as compared to the third quarter of 1998 as a result of approximately
$150,000 incurred related to patent filings and increased sales and marketing
expenses incurred in conjunction with our increased revenue level. Operating
expenses declined in the second quarter of 1999 as compared to the first quarter
of 1999 as a result of lower headcount in sales and marketing, lower research
and development spending of approximately $100,000 due to lower headcount and
the completion of a major hardware redesign, and reduced spending on
intellectual property activity in general and administrative of approximately
$74,000. Operating expenses increased in both the third quarter of 1999 and the
fourth quarter of 1999 as a result of increased sales and marketing expenses.
These increased expenses reflected higher sales commissions, the cost of a
headquarters office move and related overlapping rent payments of approximately
$150,000 in the third quarter of 1999 and $50,000 in the fourth quarter of 1999,
and the recording of the amortization of deferred stock compensation expense of
$295,000 in the third quarter of 1999, and $323,000 in the fourth quarter of
1999. Increased operating expenses in the first quarter of 2000 resulted from an
increase in the amount of deferred stock compensation amortized from the amount
amortized in the fourth quarter of 1999 by $256,000 and approximately $125,000
due to the addition of 13 new employees. The increase in operating expenses in
the second quarter of 2000 reflected approximately $90,000 due to the addition
of six new employees and approximately $225,000 due to having the first quarter
2000 new employees on hand for the entire quarter.
We anticipate that operating expenses will increase for the foreseeable
future as we continue to:
- invest in our sales and marketing efforts to build market awareness and
seek to enlarge our client base in the United States and internationally;
- invest in research and development, including patent and licensing
activities, in order to maintain technological leadership; and
- expand our administrative infrastructure to accommodate our growth and
incur ongoing incremental expenses associated with becoming a public
company.
Our investments in these activities could significantly precede any revenue
generated by the increased spending. If we do not experience significantly
increased revenue from these efforts, our business, financial condition and
results of operations could be harmed.
LIQUIDITY AND CAPITAL RESOURCES
Since 1993, we have funded our operations primarily through lines of credit
with related parties. To a lesser extent, our operations have been funded by a
$2.0 million line of credit with a financial institution established in June
1999 and the private placement of $6.4 million of our
34
<PAGE> 39
series B preferred stock completed in December 1999. We had cash and cash
equivalents of $6.2 million as of December 31, 1999 and $7.3 million as of June
30, 2000. Our operating activities resulted in net cash outflows of $6.6 million
in 1997, $5.7 million in 1998, $7.3 million in 1999, $3.2 million for the six
months ended June 30, 1999 and net cash inflows of $461,000 for the six months
ending June 30, 2000. The net cash outflow of $6.6 million in 1997 resulted from
a net loss of $9.7 million, an increase in accounts receivable of $1.5 million,
and an increase in inventories of $320,000 due to the growth in our business
which was partially offset by a $2.4 million increase in accrued interest
associated with borrowings from related parties and our increase in current
liabilities of $1.5 million. The net cash outflow of $5.7 million in 1998 was
due to a net loss of $7.6 million, offset by an increase in accounts receivable
of $695,000, a decrease in inventories of $436,000 and a decrease in deferred
revenue of $303,000. In 1999, the net cash outflow of $7.3 million resulted from
a net loss of $6.4 million, an increase in accounts receivable of $718,000, an
increase in inventories of $693,000, partially offset by amortization of
deferred compensation of $618,000. For the six months ended June 30, 1999, net
cash outflow of $3.2 million resulted from a net loss of $3.0 million. For the
six months ended June 30, 2000, net cash inflow of $461,000 resulted from a net
loss of $2.8 million, an increase in accounts receivable of $586,000, an
increase in inventories of $798,000, an increase in other current assets of
$826,000, partially offset by a decrease in amounts payable of $926,000, a
decrease in accrued interest of $775,000, $1.2 million of the amortization of
deferred stock compensation expense and increased deferred revenue of $2.1
million, primarily due to a large non-cancellable order that is not subject to
return, refund or forfeiture from a customer that was an unrelated party on
which a $2.9 million prepayment was received and recorded as deferred revenue.
The deferred revenues balances of $1.5 million at December 31, 1998, $1.3
million at December 31, 1999 and $3.4 million at June 30, 2000 all represented
cash already collected from customers.
Our expenditures for property and equipment were $483,000 in 1997, $175,000
in 1998 and $106,000 in 1999. At June 30, 2000, we did not have any material
commitments for future capital expenditures.
Under our previous line of credit, we had $2.0 million outstanding at
December 31, 1999 and $1.4 million at March 31, 2000. We incurred $82,000 of
interest expense on this line of credit in 1999 and $82,000 for the first six
months ended June 30, 2000, at an average interest rate of 19.1% and 15.7%. This
line of credit was retired using the proceeds from a portion of a $4.0 million
one-year line of credit with another financial institution in June 2000.
Availability of borrowings under this line is based on a formula applied against
approved collateral. This line contains various financial covenants, including a
negative pledge and a restriction on additional borrowings. The line bears
interest at prime plus 1.25%, subject to adjustment to prime plus 2.75% if a
minimum of $2.0 million of equity has not been raised by September 30, 2000,
with minimum monthly interest accruing at $20,000, and is secured by all of our
principal operating subsidiary's assets. We incurred $25,000 of interest expense
on this line of credit for the quarter ended June 30, 2000 at an average
interest rate of 12.3%.
We operated under a predecessor entity, Avistar Systems, Limited
Partnership, from its inception through December 31, 1997, when Avistar Systems
Corporation, a Nevada corporation, was formed and this Nevada corporation
acquired the assets of Avistar Systems, Limited Partnership. In March 2000,
Avistar Systems Corporation reincorporated in Delaware and was renamed as
Avistar Communications Corporation in April 2000.
Avistar Systems, Limited Partnership was majority owned and funded by
Collaborative Holdings, a general partnership controlled by our founders. In
June 2000, Avistar Systems, Limited Partnership distributed 16,000,000 shares of
our series A preferred stock and 200,000 shares of our common stock to the
general partnership. At this time, the remaining shares of our common stock held
by Avistar Systems, Limited Partnership were distributed to some of our current
and former
35
<PAGE> 40
employees. Prior to this offering, Avistar Systems, Limited Partnership and the
general partnership will have dissolved.
The series A preferred stock has a liquidation preference of $37.3 million
as of June 30, 2000 plus conversion rights to common stock. Upon completion of
this initial public offering, the series A convertible preferred stock
automatically converts into an estimated 18,667,286 shares of common stock,
which represents the sum of (1) 16,000,000 shares of common stock plus (2) an
estimated additional 2,667,286 shares of common stock representing a beneficial
conversion feature equal to the quotient of (A) the conversion amount, which was
$37.3 million at June 30, 2000 and which includes an amount equal to $0.2167 per
share per annum, pro rated based on the number of days elapsed in the year,
divided by (B) an assumed initial public offering price of $14.00 per share.
As of December 31, 1997, we established a line of credit with the
partnership controlled by our founders. As of June 30, 2000, we owed $9.6
million under the line of credit consisting of $9.1 million of principal and
$560,000 of accrued interest due in December 2002 bearing interest at 10% per
annum. Upon completion of this initial public offering, the line of credit will
instead become due in 180 days. In addition, we owed our three founders $2.8
million as of June 30, 2000 consisting of $2.6 million of principal and $219,000
of accrued interest under notes which will be repaid upon completion of this
offering. In addition, in December 1999, we received proceeds of $6.4 million
from the issuance of series B preferred stock.
We expect to use approximately $12.5 million of the net proceeds of this
offering to repay our related party indebtedness. We believe that the net
proceeds of this offering together with existing cash and cash equivalents and
amounts available under our $4.0 million line of credit will be sufficient to
meet our working capital and capital expenditure requirements for at least the
next 12 months. If the net proceeds from this offering are not sufficient to
meet our working capital and capital expenditure requirements for the next
twelve months, then we may be forced to engage in:
- equity financing that could dilute the per share value of our common
stock; and
- debt financing on terms that could restrict our ability to make capital
expenditures or incur additional indebtedness, which could impede our
ability to achieve our business plan.
Additionally, we may need to raise additional funds to fund more rapid
expansion, including significant increases in personnel and office facilities,
to develop new systems, to enhance our existing system or to respond to
competitive pressures. We cannot assure you that alternative or additional
financing will be available to us on favorable terms or at all or that any such
financing will not dilute your ownership interest in our company.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial
position, operating results or cash flows due to adverse changes in financial
and commodity market prices and rates. We are exposed to market risk due to
changes in U.S. interest rates. This exposure is directly related to our normal
operating and funding activities. Historically and as of December 31, 1999 and
June 30, 2000, we have not used derivative instruments or engaged in hedging
activities. We manage interest rate risk by investing excess funds in cash
equivalents bearing variable interest rates, which are tied to various market
indices. As a result, we do not believe that near-term changes in interest rates
will materially affect our future earnings, fair values or cash flows.
Our sales are currently denominated in U.S. dollars. Accordingly, we have
not engaged in foreign currency hedge transactions.
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YEAR 2000 COMPLIANCE
We have not experienced, and do not expect to experience, any significant
problems associated with year 2000 issues. We did not incur material
expenditures to test, repair or replace equipment. In addition, to our
knowledge, our suppliers and other third parties with whom we conduct business
have not experienced material year 2000 problems to date.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which requires
companies to record derivative financial instruments on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. The key
criterion for hedge accounting is that the hedging relationship must be highly
effective in achieving offsetting changes in fair value or cash flows. We will
be required to adopt SFAS 133 in 2001 in accordance with SFAS 137, which delays
the required implementation of SFAS 133 for one year. To date, we have not
entered into any derivative financial instrument contracts. Thus, we believe
that adoption of this statement will not have a material impact on our financial
condition or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements, which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed with the
SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue
and provides guidance for disclosures related to revenue recognition policies.
Adoption of SAB 101 was required in the second quarter of 2000. We have
historically recognized and currently recognize revenue under the guidelines as
currently provided by SAB 101.
In March 2000, the FASB issued Financial Accounting Standards Board
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation -- an interpretation of APB Opinion 25. Interpretation No. 44 is
effective July 1, 2000. Interpretation No. 44 clarifies the application of APB
Opinion 25 for various matters, specifically:
- the definition of an employee for purposes of applying APB Opinion 25;
- the criteria for determining whether a plan qualifies as a
noncompensatory plan;
- the accounting consequence of various modifications to the terms of a
previously fixed stock option or award; and
- the accounting for an exchange of stock compensation awards in a business
combination.
We do not anticipate that the adoption of Interpretation No. 44 will have a
material impact on our financial position or results of operations.
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BUSINESS
OVERVIEW
We develop, market and support a video-enabled communications network that
provides businesses and other organizations with an integrated suite of video
and data collaboration applications. Our system gives users on-demand access to
interactive video calling, content creation and publishing, broadcast video and
video-on-demand as well as integrated data sharing, directory services and
network management. Our customers use our system to improve productivity and
communication within the enterprise and to enhance relationships with customers,
suppliers and partners. Our system's open architecture works with the standards
and protocols of enterprise data networks, the internet and public
communications networks. It is designed to evolve with these networks as
bandwidth increases and as new standards and protocols emerge. Our system is
able to expand with the needs of our customers. We sell our system directly to
enterprises in selected strategic vertical markets and have focused initially on
the financial services and manufacturing industries. As of June 30, 2000, our
customers have installed Avistar systems at over 225 sites in 97 cities in 30
countries. Our objective is to establish our technology as the standard for
networked video.
We were founded as a Nevada limited partnership in 1993. We first
incorporated in Nevada in December 1997 as Avistar Systems Corporation. We
reincorporated in Delaware in March 2000 and our founders contributed the stock
of Collaboration Properties, Inc. and VCT, Inc. to us. VCT then merged into
Collaboration Properties. In April 2000, we changed our name to Avistar
Communications Corporation. We are now a holding company that conducts business
through its two direct wholly owned subsidiaries: Avistar Systems Corporation,
our principal operating subsidiary, and Collaboration Properties, Inc., our
intellectual property management and development subsidiary. See "Related Party
Transactions" beginning on page 67 for a more detailed description of these
transactions.
INDUSTRY BACKGROUND
Businesses and other organizations operating in today's increasingly time
and resource constrained world are searching for new tools that will help them
increase productivity and take advantage of revenue opportunities. Businesses
need these tools to help them address new opportunities in an environment of
rapid change and increased competition. Enterprises of all sizes have been
seeking to implement new and advanced communication tools that enable their
employees, partners, suppliers and customers to collaborate more effectively
within and across buildings and over disparate geographies and time zones.
For years, enterprises have relied on communication tools used principally
in a point-to-point manner, such as telephone and fax. More recently, businesses
have also embraced network-based applications, such as teleconferencing,
voicemail and email. The emergence of the internet has accelerated the adoption
of these network-based communication applications. Businesses are quickly
adopting the internet as yet another means of improving communication within and
among organizations. International Data Corporation, a market research firm,
estimates that the number of worldwide internet users in commercial businesses
will increase from 59 million in 1998 to 244 million by 2003. The increasing
availability and affordability of bandwidth on communication networks is further
driving businesses to utilize new tools of communication to enhance
collaboration among users. For example, International Data Corporation estimates
that the number of worldwide users of network/web-integrated collaborative
applications will increase from 84 million in 1998 to 256 million users in 2002.
Even though this figure is not a direct indicator of the market for
video-enabled collaboration that we serve, we believe it indicates the
significant growth potential in the use of network-based collaboration tools.
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As technology advances and becomes more affordable and as modes of
communication expand, enterprises are seeking a widely deployable and cost
effective technology to replicate at the desktop the integration of audio and
visual communication and document or project collaboration that occurs in a
face-to-face meeting. Individuals generally prefer face-to-face encounters to
less personal forms of communication because they can see one another and give
non-verbal cues that speed communication and deepen understanding. This is
particularly true for more complex interactions such as negotiations, sales,
product development and project management. However, face-to-face interactions
often need to be scheduled and impromptu meetings can be difficult to arrange
because all the participants need to be in close proximity, which often requires
travel. In addition, everyone needs to be available at the same time. These time
and distance constraints become increasingly difficult to deal with as the
number of potential participants increases. Beyond traditional teleconferencing
and data sharing communications, attempts to conduct virtual meetings as an
alternative to face-to-face meetings have generally been limited to conference
room-based video conferencing and specially set-up broadcasts. Most individuals
do not have immediate access to these technologies and the reservation and
set-up time make them unlikely to be used on an impromptu basis.
LIMITATIONS OF CURRENT MEANS OF COLLABORATION
To address the growing need for collaboration across distance and time,
organizations have resorted to using a patchwork of discrete technologies,
including video conferencing and teleconferencing, fax, email, internet audio
and video delivery and data sharing applications. Many of these technologies
have been widely adopted and collectively indicate the potential for a new
market for video networking. However, these discrete technologies are not good
substitutes for face-to-face meetings and presentations because they do not give
an enterprise an integrated, video-enabled communications solution. They are
unable to facilitate spontaneous real-time or recorded video collaboration
throughout the enterprise and do not maximize efficient information exchange,
effective decision making and team interaction. The ability to add video content
to a message or conference call can speed problem resolution and motivate
action, trust and understanding. Users want to be able to create and publish
this video content from their desktops either spontaneously, as with email or
voicemail, or in a more formal manner for broader distribution through the
internet or corporate data network.
Although limited video technologies are already in use at many enterprises,
businesses and other organizations require increasingly comprehensive,
integrated and scalable video-enabled communication capabilities. For example,
video conferencing is often limited to point-to-point communication from
designated rooms or through the use of "roll-about" products, where call set-up
procedures, lack of networking, bandwidth requirements and room availability
greatly constrain functionality, usability, reliability and efficiency as well
as access by individuals.
Similarly, broadcasting of stored video or television programming at a
desktop or in a conference room is of highly varying quality and generally
cannot be added on a real-time basis to a live video conference. Some products
are limited to exclusively using the enterprise data network or the internet to
carry two-way desktop video conferencing or to transmit video one-way. As a
result, they are unable to deliver television quality video in normal corporate
settings and are limited in their ability to create, publish and broadcast these
video conferences. In addition, it is difficult to expand these existing
products within an enterprise and even more difficult to do so among enterprises
because of bandwidth, functionality and quality limitations of current
enterprise networks.
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ELEMENTS OF A COMPLETE COLLABORATION SOLUTION
Complete video, audio and data collaboration networks that solve business
problems of time and distance should:
- approximate the video and audio quality of television;
- make interactions as realistic as possible by eliminating the delay when
transmitting and receiving two-way video calls;
- seamlessly integrate all forms of audio, video and data communication:
interactive video calling, content creation and publishing, broadcast
video and video-on-demand retrieval;
- operate and scale cost effectively;
- provide to video communications the ease of use, speed, quality,
functionality, flexibility and global access of the telephone while
easily and reliably supporting more complex applications and situations;
- offer an upgradeable architecture that can evolve as bandwidth
availability, protocols, standards and compression technologies change;
- leverage current and future business investments in local and wide area
networks, internet protocol and standards-based infrastructures; and
- enable the creation, publishing and broadcasting of video content from
the networked desktop.
We believe high quality video-enabled communication allows businesses to
improve collaboration and thereby offers them the opportunity to increase
productivity, enhance customer service and revenue generation, and facilitate
business-to-business interactions. We also believe that just as every
organization now relies on a telephone network and most businesses increasingly
rely on the internet, a video networking market is emerging in which businesses
and other organizations will choose to rely on fully integrated video, audio and
data collaboration networks.
THE AVISTAR SOLUTION
We develop, market and support a comprehensive, video-enabled
communications network. Our system provides a seamless, integrated suite of
collaboration applications that include on demand access to interactive video
calling, content creation and publishing, broadcast video and video-on-demand,
as well as data sharing, directory services and network management. These
applications support users within and among enterprises and over telephony
networks and the internet. Our system architecture is open and flexible in order
to embrace continued technological innovation and standardization. Our system is
designed to use existing and emerging communication and video standards to
deliver the quality and ease of use of the telephone system.
Our video applications can be used for high quality video calling as well
as for creating, publishing, broadcasting, retrieving and viewing video content.
Each of these applications can be accessed from a user's desktop and can be
used, integrated and managed in conjunction with one another. People often
conceive of video in the enterprise only as two-way, real-time conferencing. In
fact, our system allows broadcast video to be included in a video call and
allows the entire session to be recorded simultaneously and made available as
stored video. Our system joins users in a high-quality video network to improve
their ability to solve complex problems, connect to co-workers, customers and
suppliers, manage large projects, and quickly act together on opportunities. Our
system does this cost effectively and reliably, and is designed to be able to
serve both small and large enterprises.
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Our solution manages and integrates all forms of video-enabled
communication, along with data sharing and collaboration:
[Real Time/Record & Play Data Chart]
Interactive video calling. Our system allows users to participate in
spontaneous interactive video discussions from their desktops. Users can
simultaneously see and hear multiple participants in a window on their
workstations, without needing a headset. Additionally, our system provides full
duplex audio, which allows multiple users to speak and hear each other clearly
at the same time. The desktop window can be divided into four quadrants, to
permit up to three other video sources. These sources can include other
participants or broadcast or recorded video. The participants can include
individual users or conference-room groups located at multiple sites and/or
various enterprises, all without requiring advance reservations or conferencing
services. Each participant has the full ability to utilize all the call
functions of the system, such as adding or removing participants. For example, a
commercial bank's branch loan officers in seven cities use the interactive video
calling application to click and connect real-time to headquarters personnel in
order to expedite lending decisions and processing.
Video content creation and publishing. With our solution, users can create
and publish video content from their desktops by recording themselves, recording
a multi-point conference, or adding commentary to a broadcast and recording the
entire session. Users placing video calls can create videomail for recipients
who were not available at the time of the call, without overburdening the data
network. These messages can include text and video attachments as well as audio
messages and
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diagrams or other data. For example, an economist at an investment banking firm
regularly records commentary on current events and market conditions using the
Avistar system. This recorded video is then available internally on the
corporate network or through the internet to clients.
Broadcast video. Sales meetings, training seminars, analyst reports,
management presentations and live news broadcasts can be delivered real-time to
every user's workstation. For example, a customer used its Avistar video network
to maximize the reach and impact of an education seminar. The customer broadcast
the seminar to an estimated 300 desktops and meeting rooms with more than 2,000
employees and clients watching in the United States and Europe.
Video-on-demand. Users anywhere on the Avistar network can easily retrieve
stored videos. For example, a corporation uses our system to record its sales
training seminars. Salespeople who are unable to attend these face-to-face
presentations are now able to watch the seminars by retrieving and playing the
stored videos on their desktops when it is convenient for them.
Integrated data sharing. In addition to viewing the four quadrants of our
video window, multiple users can simultaneously create and annotate a shared
document using text or drawing tools color-coded specifically for each user. All
participants can share the contents of any shared window and save the marked
changes for later reference. Our system can also be utilized in conjunction with
other application sharing programs that utilize data networks or the internet.
While participating in an interactive video call, users can access Microsoft
NetMeeting's application sharing capabilities through a button on our tool bar
and revise a document. For example, multiple design engineers can share a
technical drawing in order to resolve an issue with a defective part.
Our system has the following key features necessary to make video
communications effective:
Easy to use interface. Our applications bring the rich interaction of a
face-to-face meeting and the quality and ease of use of the telephone to video
communication through:
- Click-to-connect simplicity. To initiate calls or add another user to a
session already underway, any user simply clicks on either a direct
connect button, a picture or a name in the directory. Standard
telephone-like features such as hold, hang-up, forward, leave message or
begin another call are all completed with the click of a mouse or
keyboard shortcuts. Additionally, anyone on an Avistar network can
connect to the desktop of colleagues, customers, suppliers and others on
other Avistar networks. If the person being called is logged-in but
unavailable, users can leave a call back message that allows the person
to automatically return the video call without having to look up the
address.
- "Find Me, Follow Me". To call any user in the Avistar network, it is not
necessary to know their number or current location. As long as an Avistar
user is logged into his or her Avistar network, the "Find Me, Follow Me"
application automatically registers where that user is logged in,
regardless of site or geography and routes all calls to the user's
location.
- Comprehensive directory. The Avistar network directory is a comprehensive
list of Avistar numbers that can be called with a click. All users
currently logged into an enterprise's Avistar network will be shown,
providing immediate information as to availability. The global directory
can be tailored to include only a business' community of users. In
addition, a private directory feature allows users to create their own
directory. Both global and private directories can also include other
standards-based video conferencing systems.
- Consistency across locations. The Avistar user interface is consistent
across desktops and conference rooms. Thus, a user who is familiar with
the functionality at the desktop requires no additional training or set
up to utilize an Avistar system in a conference room.
Seamless integration of system applications. All of our applications are
seamlessly integrated in one user interface. As a user adds an additional video
source during an ongoing video call -- such
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as an additional live participant, a one-way broadcast or a stored video
clip -- there is virtually no delay to launch another application or to download
data. In addition, each application is synchronized with the others so that all
participants in a video call see and hear the same content simultaneously. Thus,
recorded or broadcast video can be added to a live session and shown to all
participants. The entire session can also be recorded. Our system enables common
network and application management, so the same directory can be used for
two-way calls, one-way broadcasts and data sharing in the same session. Usage
can be determined with our integrated call reporting tool which provides summary
data for analysis and cost justification.
Network management. Our network architecture provides system administrators
the ability to flexibly and proactively manage each of the various components of
the network. Within our system, the most costly and complex equipment and
software applications are shared as networked resources. This arrangement allows
for redundancy and dynamic allocation of these resources to all users who need
them and ensures that users experience the best video quality possible at the
highest reliability and lowest cost of use. Servers and switches can be
maintained, installed and repaired centrally and many network support functions
can be performed remotely over the data network thereby only minimally
disrupting service to an individual user. Similarly, additional desktops and
meeting rooms can be easily and inexpensively added to the Avistar network with
those new users concurrently added to the Avistar directory. Additionally, our
software makes call routing decisions to minimize communications costs.
We believe our solution includes the following benefits to our customers:
- An integrated collaboration solution. We believe that we currently
provide the only fully integrated internet protocol-based system that
allows individuals to make video calls, view broadcasts and produce,
store and access video content or other forms of data from the desktop.
Other discrete technologies exist but we believe none of these
technologies integrate all of these capabilities.
- Increased availability of knowledge. Within many businesses, a limited
number of individuals who possess valuable knowledge often cannot
effectively distribute their knowledge to the rest of the organization.
Our system enables these businesses to access these individuals and
disseminate their knowledge more efficiently and effectively by offering
them the ability to call, broadcast or record from their desktops, and
offering other users the ability to receive this information real-time or
access video recordings at a convenient time and location. In addition,
our system gives every desktop the ability to create and publish valuable
visual content that can be easily distributed inside and outside the
organization to support employee and customer needs worldwide.
- Improved productivity and revenue generation. Our system enables
companies to increase the productivity of their employees and speeds up
time critical decision making. By creating a network of Avistar users,
our customers can have face-to-face meetings within the enterprise and
with customers and partners, without the costs and time delays of travel.
Negotiations, sales, advisory services, decision making and other
persuasive communications are more effective when done face-to-face. Our
solution allows these interactions to happen in real-time, speeding up
the manner in which business is done, freeing up time for employees and
enhancing business-to-business communications, and potentially increasing
revenue opportunities.
- Enhanced customer and partner relationships. Our system allows companies
to be more responsive to and develop stronger business relationships with
their customers, partners and suppliers. An Avistar call is generally as
easy and reliable as a telephone call and much more personal. A number of
our customers are providing Avistar networks to their clients and
business partners in order to facilitate interactions, improve the
relationship and gain an advantage over the competition.
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- Opportunity to leverage existing and future communication
infrastructures. We provide an open architecture that uses existing
standards and is designed to take advantage of emerging standards. Our
system seamlessly integrates into our customers' existing network
communications infrastructure and supports the protocols a company may
choose to use for video broadcasts, data sharing and transport of
information; however, the video quality varies depending on the protocol
selected. Our system utilizes the data network for transporting selected
stored video and is designed to support real-time digital networking and
video transmission. We have designed our system to continue to work with
internet protocol-based technologies as standards evolve and quality of
service improves. We expect this flexibility, together with simplified
software and hardware at the desktop, to allow companies to make
effective use of their existing local area and wide area networks, as
well as their next generation networks.
THE AVISTAR STRATEGY
Our goal is to become the leading provider of video-enabled communications
networks within and among enterprises. We believe that to establish networked
video as a new communications methodology for doing business, users must be able
to make video calls, and view, broadcast, create and publish high quality video
content from their desktop with the quality and ease of use of the telephone. To
achieve this goal, our strategies are to:
Target, develop and expand vertical markets. We concentrate on selling our
systems into vertical markets, beginning with financial services and
manufacturing. Because communities of users in vertical markets collaborate on a
regular basis and have similar needs, focusing on individual markets allows us
to better understand how our system addresses the needs of these markets and
promotes broad-based adoption among organizations in these markets. Achieving a
higher penetration rate and thus increasing the number of users within a given
community enhances the "network effect," or benefit to individual users. In the
future, we intend to offer our applications as hosted services in order to
further drive penetration and to provide solutions that address business
problems specific to a vertical market. To do this, we plan to implement
complete video communication networks and charge for applications used and call
duration.
Expand our customers' usage and number of users rapidly and reduce the
total cost of ownership to the enterprise. We believe that our existing
customers will be a significant source of revenue as they implement our systems
within and beyond their organizations. As customers use our system, we have
found that they often encourage other affiliated business units as well as their
clients, suppliers and partners to consider purchasing an Avistar system. In
some cases, customers have gone a step further and purchased an Avistar system
for their clients in order to improve the relationship with their clients. We
aggressively pursue follow-on orders as customers realize the value of the
collaboration network our system creates. Further, to drive daily increases in
video usage, we collaborate with our customers on applications and new features.
To increase user acceptance and network proliferation, we have lowered and
intend to continue to lower the total cost of ownership to our customers,
including the initial purchase price, installation, maintenance and support, and
associated communication costs.
Increase our sales force and add appropriate distribution partners. We plan
to continue to use our direct sales force to increase penetration in existing
vertical markets and to open new vertical markets. Our sales force has a high
degree of industry knowledge and works closely with our customers to design
industry-specific uses for our system, thus driving early acceptance and
proliferation. As each vertical market matures, we intend to add indirect
distribution channels such as communication service providers, equipment
vendors, systems integrators or value-added resellers.
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Establish our technology as the standard for networked video. We believe
that our open, standards-based architecture allows us to embrace new technology
and increases in the availability of bandwidth, while safeguarding the
coherency, serviceability and scalability of our customers' existing Avistar
investments. In order to increase the usage and visability of our system, we
intend to license our extensive intellectual property portfolio. We believe this
will support our effort to establish the Avistar architecture as the industry
standard for networked video applications. We aim to ensure that our system
provides the highest quality network access and availability, computer
integration and maintainability. We believe our architecture provides a natural
migration path as local data networks evolve to support high-bandwidth video
transmission with appropriate quality of service. While most other video
products are constrained by current standards, our system can add to existing
digital networks by including new compression protocols and communications
standards.
Continue to build upon our software-based business model. We will continue
to emphasize the software components of our revenue and, over time, as third
party technology becomes more widely available, we intend to de-emphasize the
lower margin hardware components of our revenue. We have focused on creating a
system that can be easily installed and supported by our customers and partners.
Correspondingly, we will continue to outsource more of the manufacturing, final
assembly, distribution, installation and support of our system in order to
increase the higher margin software and maintenance components of our revenue.
SYSTEM ARCHITECTURE AND TECHNOLOGY
Our networked video system is based on the fifth generation implementation
of our open architecture that enables users to communicate visually using
various networking protocols and transport media, including the internet. We
developed our architecture to address the necessary elements of a complete
video-enabled collaboration solution.
We believe that the following factors will transform and consolidate the
existing video services marketplace, creating a strong need for a software
platform that will support this consolidation and evolution:
- improved compression technologies;
- the widespread proliferation of broadband infrastructure;
- the developing availability of converged audio, video and data networks;
- improved computer processing speeds; and
- the adoption of critical digital video standards.
Our software platform, depicted in the diagram below, supports this
consolidation by integrating the audio, video and data transport standards
indicated in the diagram.
Since our inception we have invested in creating a Video Operating System,
or VOS, that we believe positions us to lead this transformation. Further, we
provide a suite of collaboration applications that seamlessly operate with the
Avistar VOS allowing users to access this functionality in an easy and intuitive
manner. We expect to make this platform increasingly usable by developers to
allow integration with other applications and network hardware.
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AVISTAR SOFTWARE PLATFORM GRAPH
Multi-level "Avistar Software Platform" graph. The top level illustrates
the "Avistar Video Operating System," consisting of "Graphical User Interface"
and "Network and Application Management." The middle level illustrates
"Applications," consisting of "Interactive Video Calling," "Broadcast Video,"
"Content Creation and Publishing," and "Video On Demand." The bottom level
illustrates "Audio, Video, Data Transport Standards" that correspond to those
"Applications," consisting of "NTSC*," "PAL*," "H.320*" and "H.323"; "NTSC*,"
"PAL*," "MPEG," "G2*" and "Others"; "NTSC*," "PAL*," "MPEG*" and "Others"; and
"NTSC*," "PAL*," "MPEG*," "G2*" and "Others." Directly below the graphic is the
following text, "*Standards currently supported by Avistar."
<TABLE>
<S> <C> <C>
--
NTSC The video standard for television in the United States;
--
PAL The video standard for television in Europe;
-- A standard for compressed digital video storage and
MPEG distribution;
-- The video conferencing standard using public switched
H.320 networks;
-- An audio and video conferencing standard using the internet
H.323 protocol; and
-- A proprietary video compression protocol used for internet
G2 protocol streaming video.
</TABLE>
Our system uses TCP/IP, the standard internet protocol, for initiating
video calls, for scheduling and starting broadcast presentations, and for
managing the creation and access of stored video materials. In addition, we use
TCP/IP for overall systems and network management throughout our software
platform. This approach provides us with connectivity throughout the enterprise
and allows us to leverage existing internet infrastructure. For delivery of live
local area network high-quality video streams with low delays, we use
traditional circuit switched technologies, including H.320 and our own Avistar
network technology. We use our gateways to translate between the various network
technologies used in our system. These gateways are managed and controlled by
our systems software with TCP/IP-based protocols.
Each Avistar desktop functions as a node on the network, like personal
computers, printers or file servers on a local area network. Just as color
printers and file servers are often shared network resources on the local area
network, the more costly equipment in an Avistar system, such as servers,
switches, and the compression and decompression equipment component of our
gateways, are centralized and made available to many users. Network nodes and
resources, like those of a data network, are managed through centralized,
internet protocol-based applications and administration tools, such as
internet-based reports of video call activity.
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The following diagram shows, currently, how various video network
components -- the Avistar Switch, Media Server, Conference Center, Broadcast
Podium and H.320 Gateway -- are added to the existing data network
infrastructure.
[DIAGRAM]
Diagram that is separated into two headings, "Desktop/Conference Room
Products" and "Shared Resources." Below the first heading is an image of a
desktop computer with "Camera/Microphone" capabilities, consisting of "Client
Workstations" and "Avistar Video Network Interface." The second heading, shared
resources is divided into three categories, "Server and Software Products,"
"Local Area Network Products" and "Wide Area Network Products." Beneath Server
and Software Products appears "File Server" and three Avistar products: "Avistar
Media Server," "Avistar Conference Center" and "Avistar Broadcast Podium."
Beneath Local Area Network Products appears "LAN Switch" and the "Avistar
Switch." Beneath Wide Area Products appears "TCP/IP Router" and the "Avistar
Gateway." The "LAN Switch" is connected by dashed line to the "File Server,"
"TCP/IP Router," "Avistar Media Server" and "Avistar Switch," all of which are
connected to each other and the "Client Workstation" and "Avistar Video Network
Interface." Directly below the "LAN Switch" is the "Avistar Conference Center,"
"Avistar Broadcast Podium" and "Avistar H.320 Gateway," all of which are
connected to each other by a solid line and the "Avistar Video Network
Interface." The diagram shows that a dashed line represents "Data" and a solid
line represents "Video/Audio."
Because of the tight integration of these components, our architecture has the
following key features:
- Switched services: Our video network employs a switched architecture to
ensure that our system can scale to support large numbers of users. At
the center of the network is an Avistar switch, which functions for video
networking like the local area network switch functions for data
networks. With our switch, bandwidth for video-enabled communication is
available on demand so that two or more users participating in a video
call automatically have the bandwidth required for continuous video and
audio, with virtually no delay.
- Network management: The Avistar VOS utilizes open protocols for call
set-up, call control and directory services. It also complies with
standards and interfaces and connects with video networks through shared
Avistar gateways that are further connected via private or public
telephony networks. Servers communicate through Avistar's unique
signaling system for video protocol, SSV, which is based on TCP/IP, the
standard internet protocol. Through this signaling system, servers
exchange configuration information and allocate call resources during
call setup and exchange network status information. The signaling system
selects the optimal route for wide area network calls, minimizing call
costs and performance demands on wide area network resources. Most
videoconferencing equipment using industry standard compression
technologies also can communicate with the Avistar network.
- Transport standard independence: Our system automatically selects the
appropriate transport standards for transmitting information over the
network to deliver the highest quality video possible and full duplex
audio in the most efficient manner. For all interactions, the data
network is used to transport information that can be easily and reliably
sent in that fashion, such as call set-up information from a user seat to
the Avistar switch or directory dialing information. For the transport of
video over a local area network, our system currently uses existing spare
Ethernet wires to deliver standards-compliant television quality signals.
This
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method of transport keeps video signals clear without interfering with
traffic on the data network and provides for local area network calls
with no incremental communications cost. In a wide area network, Avistar
has only slightly lower than television quality for real-time calls and
broadcasts because it uses industry video compression standards across
the public telephony network or a customer's private networks. For the
transmission of recorded content on corporate data networks or via the
internet, our system uses standard digital storage formats and transport
technologies.
- Expandable to thousands of users: Because shared resources, such as
servers, are attached to the Avistar switch and are managed through the
data network, new users and new capabilities can be added without
replacing existing infrastructure or adding costly software or hardware
at each desktop. Just as local area network switches and public telephony
networks can be linked together without the use of routers, Avistar
switches can be similarly linked without the use of video network
gateways. As a result, customers can easily add capacity as their needs
grow.
- Evolves with Digital Technology: Our VOS is designed to facilitate
utilization of all-digital, local area networks, including internet
protocol video transmission, when sufficient bandwidth and quality of
service are available. Our system will also maintain compatibility with
existing networks. To enable the highest quality video possible today
given most customers' infrastructure, we use circuit switching in the
local area network. Nevertheless, our VOS is designed to enable us to
adopt additional internet protocol-based standards allowing evolution on
the transport of audio and video on the customer's local area data
network.
SYSTEM PRODUCTS AND APPLICATIONS
Our system products and applications consist of shared resources accessible
to the entire Avistar network from desktop and conference room users.
SHARED RESOURCES
Like the architecture of data networks, our system is designed to maximize
the use of shared resources on the network. This configuration results in a thin
client, or a desktop that is not burdened with memory or processor intensive
software and hardware. Each user can access higher quality software, gateways,
multi-point conference centers, media servers and video broadcasts with lower
per user acquisition and management costs than is possible with non-networked
video solutions. These shared resources consist of the following products and
applications:
Local Area Network and Wide Area Network Products
- The Avistar Switch. At the center of each local area network Avistar
system is an Avistar switch that supports up to 120 Avistar desktop and
conference room users. The switch connects video calls placed among
Avistar desktop and conference room users, and allows those users to
access shared resources such as Avistar conference centers, media servers
and gateways, as well as television broadcasts and VCRs. Each Avistar
switch includes Windows NT-based Avistar server software that provides
application services and network management.
- The Avistar H.320 Gateway. Connectivity to the wide area network is
provided via the Avistar H.320 gateway. The gateway supports the H.320
video compression standard, using the public telephony network or a
customer's private network. With our gateway, users across the wide area
network can communicate with another Avistar network or with other H.320
compliant desktop or room systems.
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Server and Software Products
- The Avistar Conference Center. Our conference center enables multipoint
conferences for up to four video sources with continuous presence that
allows all participants to see and hear one another continuously and
simultaneously. Multiple conference centers can be installed on each
switch to support several simultaneous multi-party calls.
- The Avistar Media Server. Our media server allows users to create,
publish and view video content from any desktop or conference room. Any
form of video, including a four-way video call, can be saved on the media
server in high quality digital MPEG format. MPEG is the commonly used
Moving Pictures Expert Group standard for compressed digital video
storage and distribution. Any user can retrieve and replay video at any
time from the media server using the desktop Avistar interface or any
industry standard MPEG player.
- The Avistar Broadcast Podium. Our broadcast podium allows Avistar desktop
or conference room users to broadcast one-way, real-time presentations to
an audience of other Avistar users at both local and remote sites. The
broadcast podium allows an individual to broadcast to thousands of users
and via third party products simultaneously over the internet.
Internet Protocol-Based Applications
- Avistar Directory Software. Our directories allow a user to place a video
call by simply clicking on a picture or name in the user's directory of
local and remote Avistar users on the same Avistar network. If the other
party is logged-on, our system will route the call to the correct
location over the local area network or over the public telephony lines
or the customer's private network in the wide area. The user can look up
addresses in private and global address books, utilize browser style
type-in boxes and access speed-dial direct connect buttons. This
server-based directory simplifies administration and allows users to get
started quickly without having to manually enter many video phone numbers
into their desktop directory.
- Shareboard Software. Our Shareboard application allows users to
collaborate on graphics, data, or text during a video call. By clicking
on the Share button, users are linked to the Shareboard data sharing
application. Users can share any application window or image with all
conference participants, see all users' color-keyed pointers and text and
paintbrush annotations, and save or print shared images from any desktop
or conference room.
- Avistar Call Reporting System. With our Web-based call reporting system,
our customers can track local and wide area network calls logged by each
Avistar server. Reports show call details, device usage and calls by user
and are all viewable from any Web browser. Reports can be customized and
stored for future or specialized analysis.
DESKTOP AND CONFERENCE ROOM CLIENT PRODUCTS
Avistar Conference. We deliver a complete system that includes all hardware
and software components required to video-enable desktops and conference rooms.
The standard Avistar two-way desktop system consists of the following hardware
components:
- A high resolution camera with built-in directional microphone;
- External speakers;
- A video overlay card for a desktop or conference room that allows video
to be viewed from a computer;
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- A video network interface unit with ports for camera, microphone,
speakers, auxiliary video and audio, headset and telephone sets; and
- Built in echo-cancellation circuitry and full duplex audio, without
requiring a headset.
Avistar Viewer. Our viewer is designed for organizations that need to
provide users with view-only access to important video sources. Users can
monitor a selection of real-time, broadcast video sources, such as training
courses or senior management meetings, watch live broadcasts, such as CNN or
CNBC, or select and view stored video content from their desktops. Customers can
deploy Avistar viewers in networks of only one-way users, or add them to mixed
networks that already include Avistar two-way users. One-way users can easily be
upgraded to two-way.
Avistar Room Systems. We deliver complete video systems for a wide range of
room sizes and layouts. We believe that the key advantages of our system are
that the interface used in a conference room system is consistent with the
interface used on individual desktops and that it allows for all forms of
video-enabled communications: interactive video calling, content creation and
publishing, broadcast video and video-on-demand. Therefore, users are familiar
with the controls and do not need additional training to operate the room
system, nor do they need an additional technician to set-up and connect
conference room calls.
CUSTOMERS
As of June 30, 2000, we have licensed and recognized revenue with respect
to over 2,600 users of our customers at over 225 sites. These represent 97
cities in 30 countries. Because many of our customers operate on a decentralized
basis, decisions to purchase our systems are often made independently by
individual business units, so that in many cases a single company represents
several separate accounts. The following is a list of some of the customers in
our targeted markets that, together with their affiliates, generated the largest
portion of our revenue since our inception:
Bank of America
Boeing Corporation
Chase Manhattan Bank
Deutsche Bank AG
Goldman, Sachs & Co.
Silicon Valley Bank
UBS Warburg LLC
Each of Chase Manhattan Bank, UBS Warburg LLC, Boeing Corporation and their
affiliates, accounted for more than 10% of our revenue for 1999. These entities
collectively accounted for 77.1% of our 1999 revenue. For information regarding
some of the risks of dependence on these customers, see "Risk Factors -- Because
we depend on a few customers for a majority of our revenue, orders from these
customers contribute to the unpredictability of our quarterly operating results,
and the loss of one or more of them could cause a significant decrease in our
revenue" on page 7.
Case Studies. The following are examples of how we believe customers use
our system to solve their collaboration needs:
- After significant investigation of the market for video-enabled
communications systems, a major international investment bank made an
initial order in 1998. The order was for a limited deployment to
understand actual user acceptance and productivity impact. The bank
wanted to improve day-to-day communication across its global organization
while reducing the significant travel demands of its managers and
analysts. The system is now utilized globally by traders, analysts,
business managers, credit and legal departments and external customers to
establish a more effective communication method. The success of the
system
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within the investment banking division has led the European-based parent
bank to install the system in the offices of its key managers globally,
as well as in its various management board rooms. As of June 30, 2000,
the bank and its affiliates had purchased over 13 times the amount
included in the initial order.
- A commercial bank initially installed our system in 1998. The original
deployment was for 28 users. The network has grown to over 120 users and
has expanded to integrate and improve communication among senior
management as well as to increase the speed and accuracy of funding new
loans. Our system enables loan officers to have access to their loan
committee, resulting in accelerated loan processing and fulfillment,
greater speed to funding and improved focus on loans that have the
highest return.
- A manufacturer has deployed Avistar to seven sites in just over a year.
First deployed in January 1999 as a means to improve communications
internally among three main locations, our video network has expanded
internally and has been extended to a key supplier. Our system is
utilized to establish a virtual supply chain management solution. By
video enabling both the key internal and external suppliers, our system
allows the manufacturer to manage the nuances associated with complex
design, development and fulfillment, particularly when it is designing
products in one geographic location but building and outsourcing assembly
in another. Throughout the supply chain, team members can collaborate on
revisions, engineering, changes in orders, manufacturing challenges and
component delivery requirements. Our network has improved communication,
fostered collaboration and compressed the time required to resolve
manufacturing issues, as well as saved time and travel costs.
- Another financial services customer has demonstrated how enterprise video
can directly impact revenue. Using an Avistar network, this institution
was able to complete a complex trade involving multiple equities. Due to
the complexities associated with this trade, the process to develop and
approve this type of transaction would normally take approximately two
weeks, as it requires the involvement and approval of many different
legal, tax and other experts. Since several institutions compete
simultaneously for this business, time is of the essence. By using our
system, our customer was able to bring together all of the necessary
parties to share appropriate data. They structured the trade and won the
business in 48 hours. This real-time collaboration resulted in a
completed client transaction well before competition could respond.
SEGMENT INFORMATION
We operate through two segments:
- Avistar Systems Corporation, our wholly owned subsidiary, engages in the
design, development, manufacturing, sale and marketing of networked video
communications products.
- Collaboration Properties, Inc., our wholly owned subsidiary, engages in
the development, prosecution, maintenance and support of the intellectual
property used in our system.
To date, Collaboration Properties, Inc. has not engaged in any material
research and development or external sales or marketing activities. Additional
information regarding our segments is contained in note 11 to our notes to
consolidated financial statements.
SALES AND MARKETING
Sales. We have a direct sales force in the United States that consists of
five regional sales managers and six account development managers in Redwood
Shores, California and New York, New York. Regional sales managers have direct
responsibility for selling and account management, while account development
managers are responsible for system utilization and expansion at
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customer sites. Our international direct sales force is managed from our office
in London, England, and includes two regional sales managers and two account
development managers. Information regarding our export sales is contained in
note 11 to our notes to consolidated financial statements, which we incorporate
by reference.
Marketing. Our marketing efforts are directed towards select vertical
markets, with initial emphasis on financial services and manufacturing. We have
identified specific collaboration needs for enterprises in each of these
vertical markets. We then help our customers understand how our system can
satisfy these needs and thereby increase the number of users. We emphasize
initiatives to develop market awareness of our system and services and increase
usage of our installed systems. We also use marketing programs to build our
corporate image.
INSTALLATION, MAINTENANCE, TRAINING AND SUPPORT SERVICES
We provide a wide variety of services for installation and design of
Avistar video networks, including workflow analysis to identify patterns of
collaboration between workgroups to determine the best configuration of
networked resources for the enterprise. We generally install our systems for
customers, although in some cases, follow-on orders are installed by our
customer's information technology group or their services partner. In the
future, we expect installation of additional systems will increasingly be
performed by our customers or their services partners.
Our maintenance services ensure that customers benefit from the latest
networked video technology through software upgrades, extended warranty care and
expedited repair and replacement services. Our customer support center provides
voice and video call assistance to Avistar users and administrators throughout
the world, 24 hours per day, seven days per week. On-site support is also
available from each of our major regional offices for a separate fee. In
addition, training for users is available onsite or at Avistar and for system
administrators at Avistar on a for-fee basis.
BACKLOG
The estimated backlog of product orders believed to be firm was $2.4
million at June 30, 1999 and $9.0 million at June 30, 2000. We expect most of
the orders to be shipped within the next two fiscal quarters. Backlog is not
necessarily indicative of past or future operating results.
RESEARCH AND DEVELOPMENT
We believe that strong system development capabilities are essential to our
strategy. Our research and development efforts focus on enhancing our core
technology, developing additional applications, addressing emerging
technologies, standards and protocols, and engaging in patent and licensing
activities. Our system development team consists of engineers and software
developers with experience in video and data networking, voice communications,
video and data compression, e-mail and internet technologies. We believe that
our diverse technical expertise contributes to the highly integrated
functionality of our system. We spent $3.3 million in 1997, $3.3 million in 1998
and $2.7 million in 1999 on research and development. As of June 30, 2000, 21 of
our employees were engaged in research and development activities. We expect to
devote a significant amount of our resources to research and development in the
foreseeable future.
MANUFACTURING
We use contract manufacturers to perform component purchasing and some
material assembly. Our operations staff develops manufacturing strategies and
qualifies and audits manufacturing processes and suppliers. We work with our
contract manufacturers to reduce manufacturing costs
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and to resolve quality control issues. We believe our manufacturing strategy
enables us to utilize the manufacturing capabilities of our contract
manufacturers while allowing us to focus on rapid system development and
deployment, software architecture and development of video communication
applications. We use third party, commercially available camera components,
microphones, speakers and monitors for desktop and room systems, as well as
third party compression and decompression components for our gateways. For
information regarding some of the risks associated with our contract
manufacturers and suppliers, see "Risk Factors -- The loss of any of our outside
contract manufacturers or third party equipment suppliers that produce key
components of our system could significantly disrupt our manufacturing process"
on page 10.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
Our ability to compete and continue to provide technological innovation
depends substantially upon internally developed technology. We rely on a
combination of patent, copyright, trademark and trade secret laws, as well as
licensing, non-disclosure and other agreements with our consultants, suppliers,
customers and employees, to protect our technology. We believe that other
factors such as the technological and creative skills of our personnel, new
system developments, frequent system and feature enhancements and reliable
system support and maintenance are also essential to maintaining our leadership
position in technology.
We have pursued registration of our key trademarks and service marks in the
United States and the United Kingdom, and intend to do so as soon as we are able
to under the applicable law in other countries where we plan to establish a
significant business presence. We own several U.S. registered trademarks,
including Avistar Systems, the Avistar logos and Shareboard and have filed or
have pending registrations for these marks in the United Kingdom and other
jurisdictions.
Through Collaboration Properties, Inc., our wholly owned subsidiary, as of
June 30, 2000, we hold 12 U.S. patents and 11 non-U.S. patents and five
additional U.S. and non-U.S. patents have been allowed. The patents which have
been issued expire at varying dates between 2014 and 2017. In addition, numerous
patent applications are pending in the U.S. and several other jurisdictions.
Specifically, these patent applications, some of which relate to and claim
priority from an application originally filed in 1993, currently include both
method and apparatus claims. These patents and pending patent applications
disclose and/or claim aspects of analog or digital desktop video conferencing
technology, video and multimedia storage technology for messaging and
publishing, directory services, and public wide area networking access,
switching and services architecture. A portion of these technologies is
currently utilized in our system. To date, we have focused on expanding our
patent portfolio and expediting patent issuance. We plan to continue these
efforts and to seek to license our patents to reinforce the adoption of our
technology.
We generally enter into confidentiality, license and nondisclosure
agreements with our employees, consultants, prospective customers, licensees,
and partners that seek to limit the use and distribution of our proprietary
materials, and prohibit reverse-engineering of our proprietary technologies. In
addition, we control access to and distribution of our software, documentation,
and other proprietary information. Two of our license agreements with our
customers require us to place our software source code into escrow. In these two
cases, we have agreed to provide these customers a limited, non-exclusive right
to use the software source code if we cease to do business or fail to provide
some maintenance support services.
We maintain a strong working relationship with vendors whom we identify as
key suppliers and assign preferred provider status to these vendors under
agreements that secure ordering and extended warranty rights for us. These
agreements also generally include both marketing provisions under which these
vendors promote our system and development forums under which we have an
opportunity to participate in the vendor's development plans to include features
and functions that are favorable to us.
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For information regarding some of the risks associated with our
intellectual property and proprietary rights, see "Risk Factors -- Infringement
of our proprietary rights could affect our competitive position, harm our
reputation or cost us money" on page 9 and "-- Infringement claims could require
us to expend significant financial and managerial resources" also on page 9.
COMPETITION
The market for video communication products and systems is highly
competitive and fragmented. Until recently, the market has been slow to develop
and primarily consisted of room-based conferencing systems. As a result of
advances in technology, increases in communications capability and reductions in
communications costs in the past several years, the market is now characterized
by many competitors, rapidly changing technology, evolving user needs,
developing industry standards and protocols and the frequent introduction of new
products and services.
We believe that the principal factors affecting competition in our markets
include:
- product features, functionality and scalability;
- product quality and performance;
- product reliability and ease of installation;
- use of open standards;
- quality of service and support;
- company reputation and size; and
- price and overall cost of ownership.
Currently, our principal competitors are companies that provide products
and services in specific areas where we offer our integrated system, such as:
- room-based point-to-point video communication products;
- desktop video communications products;
- broadcast video products;
- video retrieval and viewing products; and
- desktop content creation products.
While a number of companies have marketed individual applications that
enable users to use individual features of our system, we do not believe that
any single competitor currently offers a fully integrated system which competes
with the features of our system. Although we compete with companies to satisfy a
given application at a potential customer, we believe these companies in many
cases can also represent complementary opportunities to extend the reach of an
Avistar system by potentially expanding the market for video networking.
We expect competition to increase significantly in the future from existing
providers of specialized video communications products and from companies that
may enter our existing or future markets, possibly including major telephone
companies or communications equipment providers. These companies may develop
similar or substitute solutions that may be less costly or provide better
performance or functionality than our systems. Many of our existing and
potential competitors have longer operating histories, significantly greater
financial, marketing, service, support, technical and other resources,
significantly greater name recognition and a larger installed base of customers
than we do. In addition, many of our competitors have well-established
relationships with our current and potential customers and have extensive
knowledge of our industry. It is possible that new competitors or alliances
among competitors may emerge and
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rapidly acquire significant market share. To be successful, we must continue to
respond promptly and effectively to the challenges of changing customer
requirements, technological change and competitors' innovations. Accordingly, we
cannot predict what our relative competition position will be as the market
evolves for video communications products and services. For more information
regarding some of the risks of competition, see "Risk Factors -- Competition
could reduce our market share and decrease our revenue" on page 8.
EMPLOYEES
As of June 30, 2000, we had 86 employees, including 21 employees in
research and development, 28 employees in customer services, including
installation and support services, 21 employees in sales and marketing and 16
employees in finance, administration and contracts. Three employees are employed
by our Collaboration Properties, Inc. subsidiary, all in research and
development. Our future performance depends in significant part upon the
continued service of our key technical, sales and marketing, and senior
management personnel, none of whom is bound by an employment agreement. The loss
of the services of one or more of our key employees could harm our business.
FACILITIES
Our corporate headquarters are located in Redwood Shores, California, where
we lease approximately 17,000 square feet under a sublease that expires
September 2003 at a current annual rate of $626,904 plus a portion of the
facility operating costs and expenses. This rent increases approximately 4%
annually through 2003. We believe that this facility will be sufficient to meet
our needs through the next 12 months. In addition, we lease a total of
approximately 13,000 square feet of office space in Palo Alto, California;
Incline Village, Nevada; New York, New York; Dallas, Texas; Eton Berkshire,
England; and London, England. The Palo Alto facility is a distribution warehouse
for inventory, with final assembly and test capabilities.
LEGAL PROCEEDINGS
We are not currently involved in any material litigation.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Our directors, executive officers and key employees, and their ages as of
June 30, 2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Gerald J. Burnett........... 57 Chairman of the Board, President and Chief Executive Officer
R. Stephen Heinrichs........ 53 Vice Chairman of the Board, Chief Financial Officer and
Secretary
William L. Campbell......... 52 Executive Vice President and Director
Craig F. Heimark............ 45 Vice President of Strategic Markets
James P. Hughes............. 40 President of Avistar Systems Corporation
R. Jan Afridi............... 41 Vice President of Financial Industry Sales of Avistar
Systems Corporation
Stephen F. Arisco........... 41 Vice President of Operations and Customer Support of Avistar
Systems Corporation
Michael G. Barsotti......... 51 Chief Financial Officer of Avistar Systems Corporation
Lauren F. Calaby............ 38 Vice President of Product Marketing and Business Development
of Avistar Systems Corporation
J. Chris Lauwers............ 40 Vice President of Engineering of Avistar Systems Corporation
Lester F. Ludwig............ 44 Vice President of Collaboration Properties, Inc.
William R. Brody............ 56 Director
David M. Solo............... 35 Director
</TABLE>
Gerald J. Burnett is one of our founders and has been Chairman, President
and Chief Executive Officer since March 2000. He has been Chief Executive
Officer of Avistar Systems Corporation and a director of Collaboration
Properties, Inc. since 1998. From 1993 to 1997, he was a director of Avistar
Systems Corporation or a principal of its predecessor limited partnership, and
also served as an advisor to Vicor, Inc., a systems engineering company. From
1976 through 1989, he was President of Teknekron, a group of technology
companies. He is also one of the founders and has been a director of Vicor, Inc.
since its inception in 1989. Since 1990, he has also been a director of Western
Data Systems of Nevada, Inc., a supplier of software to the aerospace and
defense industries. He is also a member of the Corporation (Board of Trustees)
of the Massachusetts Institute of Technology. Dr. Burnett holds a B.S. and an
M.S. from the Massachusetts Institute of Technology in electrical engineering
and computer science and a Ph.D. from Princeton University in computer science
and communications.
R. Stephen Heinrichs is one of our founders and has been Vice Chairman,
Chief Financial Officer and Secretary since March 2000. He has been Chairman of
Avistar Systems Corporation since 1993 and also served as Chief Executive
Officer from 1993 to 1997 and Chief Financial Officer from 1993 to 1995. From
1976 through 1989 he was Chief Financial Officer of Teknekron and Chairman and
Chief Executive Officer of several Teknekron companies. He is also one of the
founders and has been a director of Vicor, Inc. since its inception in 1989. He
has been Chairman of Western Data Systems of Nevada, Inc. since 1990. From 1969
through 1974 he was an accountant with Arthur Andersen LLP. Mr. Heinrichs holds
a B.S. from California State University in Fresno in Accounting. He is a
certified public accountant.
William L. Campbell is one of our founders and has been a director and
Executive Vice President since March 2000. He has been Chairman, President and
Chief Executive Officer of Collaboration Properties, Inc. since 1998. He is one
of the founders of Vicor, Inc. and has been Chairman since 1994 and a director
since 1989. Mr. Campbell holds a B.S. in general engineering from the U.S.
Military Academy and an M.S. in management from the Sloan School of the
Massachusetts Institute of Technology.
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Craig F. Heimark has been Vice President of Strategic Markets since March
2000. From 1997 to 2000, he was Managing Partner of the Hawthorne Group, a
strategic advisory firm specializing in consulting to high growth information
technology companies. Prior to founding the Hawthorne Group, he served in
various roles at SBC Warburg, including Member of the Executive Board, Head of
Strategic Planning and Chief Information Officer from 1990 to 1997. He holds a
B.A. in Economics and B.S. in Biology from Brown University.
James P. Hughes has been President of Avistar Systems Corporation since
January 2000. Previously, he had been Vice President of Sales of Avistar Systems
Corporation since 1994. From 1991 through 1993, he was Director of Business
Development at Aurum Software, Inc. Mr. Hughes holds a B.S. and an M.B.A. in
Marketing from the University of Santa Clara.
R. Jan Afridi has been Vice President of Financial Industry Sales of
Avistar Systems Corporation since April 2000. Previously, he served as Director
of Domestic Financial Services Sales from 1998 to March 2000 of Avistar Systems
Corporation and as Director of Support Services from 1997 to 1998 of Avistar
Systems Corporation. Prior to joining Avistar he was Director of Sales at
Cornerstone, a document imaging company, from 1994 to 1997. Mr. Afridi holds a
B.S. in engineering from U.S. Military Academy University and an M.B.A. from
Golden Gate University.
Stephen F. Arisco has been Vice President of Operations and Customer
Service of Avistar Systems Corporation since February 2000. He previously served
as Director of Operations and Customer Service from December 1997 to January
2000 of Avistar Systems Corporation. From 1987 through 1997, he was Director of
Customer Service and Operations at TRW Financial Services, a systems integration
company. He holds a certificate of study from H.C. Wilcox Vocational Technical
School.
Michael G. Barsotti has been Chief Financial Officer of Avistar Systems
Corporation since 1995. During 1994 he was Chief Financial Officer of Redwood
Microsystems. Prior to that, he was Corporate Controller at ASK Computer
Systems. Mr. Barsotti has a B.S. in mechanical engineering and an M.B.A. in
finance from the University of California at Berkeley. He is a certified public
accountant.
Lauren F. Calaby has been Vice President of Product Marketing and Business
Development of Avistar Systems Corporation since February 2000. She previously
served as Director of Product Marketing and Business Development and in other
business development positions of Avistar Systems Corporation from October 1997
to January 2000. From 1996 through 1997, she was Director of Product and
Strategy at Pacific Bell. From 1993 through 1996, she was at AirTouch Teletrac,
last serving as Director of Corporate Development. Ms. Calaby holds a B.S. in
metallurgical engineering and material science from Carnegie Mellon University
and an M.B.A. from the University of California at Los Angeles.
J. Chris Lauwers has been Vice President of Engineering of Avistar Systems
Corporation since 1994. He was Principal Software Architect at Vicor, Inc. from
1990 through 1993. From 1987 to 1990 he was a Research Associate of Olivetti
Research Center. Dr. Lauwers holds a B.S. in electrical engineering from the
Katholieke Universiteit Leuven of Belgium. He also holds an M.S. and a Ph.D. in
electrical engineering and computer science from Stanford University.
Lester F. Ludwig has been Vice President of Collaboration Properties, Inc.
since 1998. Previously, he had been Principal Scientist at Vicor, Inc. since
1990. He was Director of Technology of Avistar Systems Corporation from 1995 to
1998. From 1986 to 1990 Dr. Ludwig conducted foundational multimedia
communications research at Bellcore. Dr. Ludwig holds a B.S. and an M.S. in
electrical engineering from Cornell University and a Ph.D. in electrical
engineering and computer science from the University of California at Berkeley.
57
<PAGE> 62
William R. Brody has been a director since April 2000. Dr. Brody has been
President of The Johns Hopkins University since September 1996. Prior to
assuming that position, he served as Provost of the University of Minnesota
Academic Health Center from 1994 to 1996. From 1987 to 1994, Dr. Brody was the
Martin Donner Professor and Director of the Department of Radiology, professor
of electrical and computer engineering and professor of biomedical engineering
at Johns Hopkins University and radiologist-in-chief of The Johns Hopkins
Hospital. He has been a co-founder of three medical device companies, and served
as the President and Chief Executive Officer of Resonex Inc., a medical device
company, from 1984 to 1987. He currently serves on the board of directors of
Alza Corporation, Medtronic Inc. and Mercantile Bankshares Corporation. Dr.
Brody holds a B.S. and an M.S. in electrical engineering from the Massachusetts
Institute of Technology and an M.D. and a Ph.D. in electrical engineering from
Stanford University.
David M. Solo has been a director since April 2000. He is currently a
strategic advisor to several companies, including UBS AG on e-commerce and
technology issues. From 1998 to 1999 he was a member of the UBS AG Executive
committee and prior to that served as SBC Warburg Deputy Chief Executive Officer
and Chief Operating Officer with responsibilities including Logistics and
Technology from 1996 to 1998. From 1992 to 1996 he was the Head of Fixed Income
& Rate Derivatives Division of SBC Warburg and its predecessor SBC. Mr. Solo
holds a B.S. and an M.S. in electrical engineering and computer science from the
Massachusetts Institute of Technology.
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
Our bylaws provide that the number of members of our board of directors
will be not less than four and not more than six. The number of directors is
currently five. We expect to add an additional director in the future who will
serve on our audit committee.
The audit committee consists of Dr. Brody and Mr. Solo. The audit committee
reviews our records and affairs to determine our financial condition, oversees
the adequacy of our system of internal accounting controls and reviews our
accounting methods.
The compensation committee consists of Dr. Brody and Mr. Solo. The
compensation committee determines compensation for our officers, administers our
stock option plans and makes recommendations to the board of directors
concerning awards granted under the plan to directors and employees who are
subject to Section 16 of the Securities Exchange Act of 1934. No officer serving
on the board of directors has or will participate in decisions awarding
compensation or granting stock options to himself.
DIRECTOR COMPENSATION
Our employees and representatives of our institutional investors do not
receive any compensation for serving on the board of directors. Non-employee
directors receive an annual fee of $10,000. In April 2000, we awarded options to
purchase 12,000 shares, exercisable at $17.25 per share, to each of Dr. Brody
and Mr. Solo under our 1997 stock option plan described on page 61.
All of our directors may be reimbursed for reasonable travel expenses
incurred in attending board meetings. In addition, all of our non-employee
directors are eligible to receive initial and automatic grants of stock options
or other rewards pursuant to our director stock option plan of 12,000 shares
when joining our board, and 3,000 shares per year thereafter, as described below
under "Incentive Plans -- 2000 Director Option Plan" beginning on page 63.
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<PAGE> 63
EXECUTIVE COMPENSATION
The following table provides information concerning the compensation paid
to our Chief Executive Officer and each of our most highly compensated executive
officers whose total salary and bonus exceeded $100,000 during the year ended
December 31, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
-------------------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS
--------------------------- ---- -------- -------- -------------------
<S> <C> <C> <C> <C>
Gerald J. Burnett.............................. 1999 $199,866 -- --
Chief Executive Officer
R. Stephen Heinrichs........................... 1999 $204,527 -- --
Chief Financial Officer
William L. Campbell............................ 1999 $204,846 -- --
Chief Executive Officer of Collaboration
Properties, Inc.(1)
James P. Hughes................................ 1999 $142,938 $ 59,610(2) 215,942
President of Avistar Systems Corporation
R. Jan Afridi.................................. 1999 $ 99,389 $153,536(2) 50,000
Vice President of Financial Industry Sales of
Avistar Systems Corporation(3)
</TABLE>
-------------------------
(1) Served as President and Chief Executive Officer of Collaboration Properties,
Inc. during 1999. As described in "Related Party Transactions" beginning on
page 67, our founders contributed the stock of Collaboration Properties to
us, and Mr. Campbell became our Executive Vice President, in March 2000.
(2) Represents commissions earned during 1999.
(3) Served as Director of Domestic Financial Industry Sales of Avistar Systems
Corporation during 1999.
59
<PAGE> 64
The following table provides information regarding stock options granted to
the named executive officers during the year ended December 31, 1999.
OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------
PERCENT OF
TOTAL POTENTIAL REALIZATION
OPTIONS VALUE AT ASSUMED
NUMBER OF GRANTED ANNUAL RATES OF STOCK
SECURITIES TO EXERCISE PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES PRICE OPTION TERM(1)
OPTIONS IN FISCAL PER EXPIRATION -----------------------
NAME GRANTED YEAR SHARE(2) DATE 5% 10%
---- ---------- ---------- -------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Gerald J. Burnett................ -- -- -- -- -- --
R. Stephen Heinrichs............. -- -- -- -- -- --
William L. Campbell.............. -- -- -- -- -- --
James P. Hughes.................. 100,000(3) 13.6% $ .95 6/21/09 $772,000 $1,901,000
115,942(3) 15.8% $3.45 12/20/09 $958,000 $2,395,362
R. Jan Afridi.................... 50,000(3) 6.8% $ .95 6/21/09 $386,000 $ 951,000
</TABLE>
-------------------------
(1) Assumes a per share fair market value equal to the assumed initial public
offering price of $14.00. The dollar amounts under these columns represent
the potential realizable value of each grant assuming that the market value
of our stock appreciates from the date of grant to the expiration of the
option at annualized rates of 5% and 10%. These assumed rates of
appreciation have been specified by the SEC for illustrative purposes only
and are not intended to forecast future financial performance or possible
future appreciation in the price of our stock. The actual amount the
executive officer may realize will depend on the extent to which the stock
price exceeds the exercise price of the options on the date the option is
exercised.
(2) The exercise price on the date of grant was equal to 100% of the fair market
value on the date of grant, as determined by the board of directors.
(3) 25% of this option grant vests twelve months after the grant date with 6.25%
of the remaining options vesting on a quarterly basis for three years,
thereafter.
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<PAGE> 65
1999 OPTION VALUES
The following table provides information with respect to options exercised
by named executive officers during the year ended December 31, 1999 and the
value of unexercised options held by named executive officers as of December 31,
1999. None of the named executive officers exercised any stock options during
1999.
OPTION/SAR VALUES AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT YEAR-END AT YEAR-END(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gerald J. Burnett.............................. -- -- -- --
R. Stephen Heinrichs........................... -- -- -- --
William L. Campbell............................ -- -- -- --
James P. Hughes................................ 37,500 278,442 $525,000 $3,898,050
R. Jan Afridi.................................. -- 50,000 -- $ 700,000
</TABLE>
-------------------------
(1) Assumes a per share fair market value equal to the assumed initial public
offering price of $14.00.
INCENTIVE PLANS
1997 Stock Option Plan
Our 1997 stock option plan was adopted by the board of directors and
stockholders of our predecessor in December 1997, and assumed by Avistar
Communications Corporation as part of our March 2000 reorganization. The stock
option plan was amended most recently in May 2000. A total of 2,994,227 shares
of common stock have been reserved for issuance under the plan and we do not
intend to grant any additional options from the plan after the effective date of
our initial public offering.
The plan provides for grants of incentive and nonstatutory stock options to
our employees including officers and employee directors and nonstatutory stock
options to our consultants including nonemployee directors. At the request of
the board of directors, the compensation committee administers the plan and
determines the optionees and the terms of options granted, including the
exercise price, number of shares subject to the option and the exercisability of
the shares.
The term of the options granted under the plan is set forth in the option
agreement. However, the term of an option may not exceed ten years and, in the
case of an incentive stock option granted to an optionee who owns more than 10%
of our outstanding stock at the time of grant, the term of an option may not
exceed five years. Options granted under the plan vest and become exercisable as
set forth in each option agreement. On December 31, 1997, we awarded options to
purchase 1,091,800 shares of common stock, including 631,800 that were fully
vested at the grant date. The common stock issued under these fully vested
options is subject to our repurchase right upon the occurrence of specified
events, including the termination of an employee. This repurchase right is our
option that expires 60 days from the triggering event or upon the occurrence of
specified transactions, including an initial public offering. If we exercise our
repurchase right, the purchase price is the net book value of the stock as of
the end of the calendar quarter immediately preceding the triggering event, as
determined by management. All other options vest over a four year period, with
25% vesting after one year and the remaining vesting 6.25% per quarter.
61
<PAGE> 66
With respect to any optionee who owns more than 10% of our outstanding
stock, the exercise price of any stock option granted must be at least 110% of
the fair market value on the grant date.
No incentive stock options may be granted to an optionee, which, when
combined with all other incentive stock options becoming exercisable in any
calendar year that are held by that person, would have an aggregate fair market
value in excess of $100,000. The plan will terminate in December 2007, unless
our board of directors terminates it sooner.
In 2000, we awarded options to purchase 1,204,608 shares of common stock at
a weighted average exercise price of $13.61 per share, including options to
purchase an aggregate of 637,750 shares at an exercise price of $17.25 and
284,058 shares at an exercise price of $3.95 to three of our five named
executive officers.
As of June 30, 2000, we had issued 823,050 shares of common stock upon the
exercise of options granted under our 1997 stock option plan, we had outstanding
options to purchase 2,190,050 shares of common stock at a weighted average
exercise price of $6.90 per share and 55,925 shares remain available for future
option grants under our 1997 stock option plan.
2000 Stock Option Plan
Our 2000 stock option plan was adopted by our board of directors in April
2000 and approved by our stockholders in April 2000. It became effective on the
date of this prospectus. A total of 3,000,000 shares of common stock have been
reserved for issuance under the plan, together with an annual increase in the
number of shares of common stock reserved under the plan beginning on the first
day of our fiscal year, commencing January 1, 2001, in an amount equal to the
lesser of:
- 1,200,000 shares of common stock;
- four percent of our outstanding shares of common stock on the last day of
the prior fiscal year; or
- an amount determined by our board of directors.
As a result of these annual increases, a maximum of 15,000,000 shares of
common stock could be issued over the ten year life of the 2000 stock option
plan.
The plan provides for grants of incentive and nonstatutory stock options to
our employees including officers and employee directors and nonstatutory stock
options to our consultants including nonemployee directors. At the request of
the board of directors, the compensation committee administers the plan and
determines the optionees and the terms of options granted, including the
exercise price, number of shares subject to the option and the exercisability of
the shares.
The term of the options granted under the plan is set forth in the option
agreement. However, the term of an option may not exceed ten years and, in the
case of an incentive stock option granted to an optionee who owns more than 10%
of our outstanding stock at the time of grant, the term of an option may not
exceed five years. Options granted under the plan vest and become exercisable as
set forth in each option agreement.
With respect to any optionee who owns more than 10% of our outstanding
stock, the exercise price of any stock option granted must be at least 110% of
the fair market value on the grant date.
No incentive stock options may be granted to an optionee, which, when
combined with all other incentive stock options becoming exercisable in any
calendar year that are held by that person, would have an aggregate fair market
value in excess of $100,000. In any fiscal year, we may not grant any employee
options to purchase more than 600,000 shares or 900,000 additional shares in the
case of an employee's initial employment.
62
<PAGE> 67
The 2000 stock option plan will terminate in 2010, unless our board of
directors terminates it sooner. As of June 30, 2000, we had granted no options
or issued any shares of common stock upon the exercise of options granted under
the plan.
2000 Employee Stock Purchase Plan
Our 2000 employee stock purchase plan was adopted by our board of directors
in April 2000, our stockholders in April 2000 and became effective upon the date
of this prospectus. We have reserved a total of 1,500,000 shares of common stock
for issuance under the plan, together with an annual increase in the number of
shares of common stock reserved under the plan beginning on the first day of our
fiscal year commencing January 1, 2001 in an amount equal to the lesser of:
- 900,000 shares of common stock;
- three percent of our outstanding common stock on the last day of the
prior fiscal year; or
- an amount determined by our board of directors.
As a result of these annual increases, a maximum of 10,500,000 shares of
common stock could be sold over the ten year life of the plan.
The plan is administered by the board of directors and is intended to
qualify under Section 423 of the Internal Revenue Code. Our employees, including
our officers and employee directors but excluding our five percent or greater
stockholders, are eligible to participate if they are customarily employed for
at least 20 hours per week and for more than five months in any calendar year.
The plan permits eligible employees to purchase common stock through payroll
deductions, which may not exceed the lesser of 15% of an employee's
compensation, defined as Form W-2 compensation plus contributions to our 401(k)
plan, or $25,000 per annum.
The plan will be implemented in a series of overlapping 24 month offering
periods, and each offering period consists of four six month purchase periods.
The initial offering period under the plan will begin on the date of this
prospectus, and the subsequent offering periods will begin on the first trading
day on or after February 1 and August 1 of each year. Each participant will be
granted an option on the first day of the offering period and the option will be
automatically exercised on the date six months later, the end of a purchase
period, throughout the offering period. If the fair market value of our common
stock on any purchase date is lower than such fair market value on the start
date of that offering period at the time the option was granted, then all
participants in that offering period will be automatically withdrawn from such
offering period and re-enrolled in the immediately following offering period.
The purchase price of our common stock under the plan will be 85% of the lesser
of the fair market value per share on the start date of the offering period or
at the end of the purchase period. Employees may end their participation in an
offering period at any time, and their participation ends automatically on
termination of employment with our company.
The plan will terminate in 2010, unless our board of directors terminates
it sooner.
2000 Director Option Plan
Our 2000 director option plan was adopted by our board of directors in
April 2000 and our stockholders in April 2000 and will become effective upon the
date of this prospectus. We have reserved a total of 90,000 shares of common
stock for issuance under the plan, together with an annual increase in the
number of shares of common stock reserved under the plan beginning on the first
day of our fiscal year commencing January 1, 2001 equal to the lesser of:
- 12,000 shares of common stock;
- 0.2% of the outstanding shares of our common stock on the last day of the
prior fiscal year; or
- an amount determined by the board of directors.
63
<PAGE> 68
As a result of these annual increases, a maximum of 210,000 shares of
common stock could be issued over the ten year life of the plan.
The option grants under the plan are automatic and non-discretionary, and
the exercise price of the options is 100% of the fair market value of our common
stock on the grant date. The initial awards will be exercisable at the initial
public offering price.
The plan provides for an initial grant to a nonemployee director of an
option to purchase 12,000 shares of common stock. Subsequent to the initial
grants, each nonemployee director will be granted an option to purchase 3,000
shares of common stock at the next meeting of the board of directors following
the annual meeting of stockholders, if on the date of the annual meeting, the
director has served on the board of directors for at least six months.
The term of the options granted under the 2000 director option plan is ten
years, but the options expire three months following the termination of the
optionee's status as a director or twelve months if the termination is due to
death or disability. The grants will become exercisable at a rate of one-fourth
of the shares on each anniversary of the grant date.
The plan will terminate in 2010, unless our board of directors terminates
it sooner.
LIMITATION, LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation limits the liability of our directors to
the fullest extent permitted by Delaware law. Delaware law provides that the
directors of a corporation will not be personally liable to the corporation or
its stockholders for monetary damages for breach of the fiduciary duties as
directors, except liability for any of the following:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation provides that we may indemnify our
directors, officers and employees to the fullest extent permitted by law. Our
bylaws provide that we will indemnify our directors and officers, and that we
may indemnify our employees and other agents, to the maximum extent and in the
manner permitted by law. Our bylaws also permit us to secure insurance on behalf
of any officer, director, employee or other agent for any liability arising out
of his or her status in such capacity, regardless of whether Delaware law would
permit indemnification.
We have entered into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our bylaws. These
agreements, among other things, provide for indemnification of our directors and
officers for expenses, judgments, fines, and settlement amounts incurred by any
such person in any action or proceedings arising out of such person's services
as our director or executive officer or at our request. We also maintain
directors' and officers' liability insurance.
64
<PAGE> 69
PRINCIPAL STOCKHOLDERS
The following table shows information regarding beneficial ownership of our
common stock as of June 30, 2000 and as adjusted to reflect the sale of the
common stock in this offering for:
- each of our directors and named executive officers;
- all directors and executive officers as a group; and
- each person known by us to be the beneficial owner of more than five
percent of our common stock.
The following table reflects or gives effect to the following:
- 1,850,825 shares of common stock outstanding as of June 30, 2000;
- a one-for-five reverse stock split of our shares of common and preferred
stock effective in July 2000;
- the conversion upon completion of this offering, of:
- all 16,000,000 outstanding shares of series A convertible preferred
stock into an estimated 18,667,286 shares of common stock, which
represents the sum of (1) 16,000,000 shares of common stock plus (2) an
estimated additional 2,667,286 shares of common stock representing a
beneficial conversion feature equal to the quotient of (A) the
conversion amount, which was $37.3 million at June 30, 2000 and which
includes an amount equal to $0.2167 per share per annum, pro rated based
on the number of days elapsed in the year, divided by (B) an assumed
initial public offering price of $14.00 per share, and
- all 1,067,369 outstanding shares of series B convertible preferred stock
into 1,067,369 shares of common stock; and
- the termination of our right to repurchase some of the shares held by
employees upon completion of this offering.
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<PAGE> 70
Each person has the sole power to vote or dispose of shares of our common
stock, except as described in the footnotes to the table. In computing the
number of shares beneficially owned by an individual and the percentage
ownership of that individual, shares of common stock subject to options owned by
that individual that can be exercised within 60 days of June 30, 2000 are deemed
outstanding for that individual, but not for any other persons.
<TABLE>
<CAPTION>
BEFORE OFFERING AFTER OFFERING
---------------------------- ----------------------------
NUMBER OF NUMBER OF
SHARES OF PERCENT OF SHARES OF PERCENT OF
COMMON COMMON COMMON COMMON
STOCK STOCK STOCK STOCK
BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED OWNED OWNED OWNED
------------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
UBS (USA) Inc.(1).......................... 1,053,369 5.6% 1,053,369 4.2%
Stamford Branch
677 Washington Boulevard
Stamford, Connecticut 06901
Gerald J. Burnett(2)....................... 9,136,466 48.3 10,948,787 43.5
555 Twin Dolphin Drive, Suite 360
Redwood Shores, California 94065
R. Stephen Heinrichs(3).................... 4,203,025 22.2 4,904,821 19.5
P.O. Box 7097
Incline Village, Nevada 89452
William L. Campbell(4)..................... 794,153 4.2 924,567 3.7
James P. Hughes(5)......................... 300,000 1.6 300,000 1.2
R. Jan Afridi(6)........................... 20,500 .1 20,500 .1
William R. Brody........................... -- -- --
David M. Solo.............................. -- -- --
Executive officers and directors as a group
(13 persons)(7).......................... 15,373,268 80.3 18,017,799 71.5
</TABLE>
-------------------------
(1) UBS (USA) is a wholly owned subsidiary of UBS AG.
(2) Includes 9,113,748 shares of common stock issuable upon conversion of
9,113,748 shares of series A preferred stock as to which Dr. Burnett will
have sole voting and investment power as of the effective date of this
offering. The number of shares beneficially owned after the offering
includes 1,812,321 additional shares of common stock that will become
issuable upon conversion of the series A preferred stock in connection with
the completion of this offering, at an assumed initial public offering price
of $14.00 per share.
(3) Includes 4,192,550 shares of common stock issuable upon conversion of
4,192,550 shares of series A preferred stock as to which Mr. Heinrichs will
have sole voting and investment power as of the effective date of this
offering. The number of shares beneficially owned after the offering
includes 701,796 additional shares of common stock that will become issuable
upon conversion of the series A preferred stock in connection with the
completion of this offering, at an assumed initial public offering price of
$14.00 per share.
(4) Includes 792,175 shares of common stock issuable upon conversion of 792,175
shares of series A preferred stock as to which Mr. Campbell will have sole
voting and investment power as of the effective date of this offering. The
number of shares beneficially owned after the offering includes 130,414
additional shares of common stock that will become issuable upon conversion
of the series A preferred stock in connection with the completion of this
offering, at an assumed initial public offering price of $14.00 per share.
(5) Includes options to purchase 60,000 shares of common stock exercisable
within 60 days of June 30, 2000.
(6) Includes options to purchase 12,500 shares of common stock exercisable
within 60 days of June 30, 2000.
(7) Includes shares of Dr. Burnett, Mr. Heinrichs and Mr. Campbell described in
footnotes (2), (3) and (4) above. Also includes options to purchase an
aggregate of 110,125 shares of common stock exercisable within 60 days of
June 30, 2000.
66
<PAGE> 71
RELATED PARTY TRANSACTIONS
THE REORGANIZATION
We were founded in Nevada in 1993 as Avistar Systems, Limited Partnership.
On December 31, 1997, we converted from a limited partnership into a corporation
by transferring all of our assets and liabilities to a Nevada corporation that
had been specially formed for that purpose. In exchange, this Nevada corporation
issued 16,000,000 shares of series A convertible preferred stock as well as
shares of common stock to Avistar Systems Limited Partnership. We reincorporated
in Delaware in March 2000. At that time, our founders, Gerald J. Burnett, R.
Stephen Heinrichs and William L. Campbell, contributed to us all of the stock of
Collaboration Properties, Inc. and VCT, Inc., which they owned approximately in
proportion to their relative stockholdings in us, as described in "Principal
Stockholders" on page 66. As a result, these two companies became our wholly
owned subsidiaries. VCT then merged into Collaboration Properties and we
contributed our assets to our operating subsidiary, Avistar Systems Corporation.
Prior to the reorganization, Collaboration Properties licensed its intellectual
property portfolio to us. The amounts we have paid to Collaboration Properties
since 1997 are reflected in our combined and consolidated financial statements
as a result of the accounting for the reorganization. In April 2000, we changed
our name to Avistar Communications Corporation. Unless otherwise noted below,
when we refer to "Avistar," "we," "our" and "us," we mean Avistar Communications
Corporation, a Delaware corporation, and our two corporate and limited
partnership predecessors.
In connection with the contribution of Collaboration Properties and VCT we
assumed demand notes issued by them to Dr. Burnett, Mr. Campbell and Mr.
Heinrichs bearing interest at the rate of 10% per annum. The $2.8 million of
principal plus accrued interest under these notes as of June 30, 2000 was $1.9
million in the case of Dr. Burnett, $757,000 in the case of Mr. Heinrichs and
$115,000 in the case of Mr. Campbell. We intend to pay off these notes out of
the proceeds of this offering.
In June 2000, all of the series A preferred stock held by Avistar Systems,
Limited Partnership, was distributed to our three founders and one other
individual, and all of the common stock held by the limited partnership was
distributed to our employees, former advisors, and affiliates. These shares
represent an amount equal to those shares of class B units in Avistar Systems,
Limited Partnership that were owned by the respective individuals before the
transfer of assets to the corporation. Prior to this offering, the limited
partnership will dissolve.
On the closing date of this offering, the shares of series A preferred
stock automatically convert into an estimated 18,667,286 shares of common stock,
which represents the sum of (1) 16,000,000 shares of common stock plus (2) an
estimated additional 2,667,286 shares of common stock representing a beneficial
conversion feature equal to the quotient of (A) the conversion amount, which was
$37.3 million at June 30, 2000 and which includes an amount equal to $0.2167 per
share per annum, pro rated based on the number of days elapsed in the year,
divided by (B) an assumed initial public offering price of $14.00 per share. See
"Principal Stockholders" on page 65 for more information regarding the
stockholdings of our founders and "Description of Capital Stock -- Preferred
Stock" on page 70 for a description of the series A preferred stock.
TRANSACTIONS WITH UBS WARBURG LLC
UBS Warburg LLC is an underwriter in this offering. On December 9, 1999, we
completed the sale of 1,067,369 shares of series B preferred stock of which
1,053,369 shares were sold to UBS (USA) Inc., an affiliate of UBS Warburg LLC,
for $5.3 million. At the request of UBS (USA), we issued the series B preferred
to them in two separate series, 918,196 shares of series B-1 preferred and
135,173 shares of series B-2 preferred. See "Description of Capital
Stock -- Preferred Stock" for a description of the terms of our series B
preferred stock on page 70. Also in December 1999, Collaboration Properties sold
to UBS (USA) a number of shares of preferred stock for $1.1 million
67
<PAGE> 72
that was proportionate to the number of shares UBS (USA) purchased from us. UBS
(USA) contributed the Collaboration Properties stock to us as part of the March
2000 reorganization discussed above. As a result of the reorganization, UBS
(USA) now holds 1,053,369 shares of our series B preferred stock. Upon
completion of this offering, these shares will automatically convert into
1,053,369 shares of our common stock.
Additionally, we granted UBS (USA) the following rights:
- two demands, submitted by the holders of at least 30% of the series B
preferred stock, for registration of the series B preferred stock or the
common stock issuable in the event of conversion at any time six months
after the effective date of the registration statement that includes this
prospectus, unless our board of directors in good faith determines that
registration would be seriously detrimental to us or our shareholders;
and
- piggyback registration rights if we propose to register any securities
under the Securities Act other than on a Form S-8 or S-4, subject to
quantitative limitations imposed by the underwriter if the offering is
underwritten.
Additionally, we agreed to pay expenses in connection with the demand
registrations.
UBS Warburg LLC and its affiliates have purchased systems and services from
us in the past and may continue to do so in the future. In 1999, such purchases
constituted 23% of our revenue. David M. Solo, one of our directors, was an
executive officer of UBS AG, an affiliate of UBS Warburg LLC, during 1999, and
is a strategic advisor to UBS AG. Barry McQuain, an employee of UBS Warburg, is
a director of our intellectual property subsidiary, Collaboration Properties,
Inc. UBS (USA) and its affiliates do not have the right to elect a
representative to our board of directors.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
Dr. Burnett, Mr. Heinrichs and Mr. Campbell are also general partners or
controlling shareholders of a number of other entities, including Vicor, Inc.,
Western Data Systems of Nevada, Inc. and Visionary Corporate Technologies, Inc.
Their relative ownership of those entities is generally in proportion to their
stockholdings of us, as described in "Principal Stockholders" on page 66. We
have entered into various arrangements with some of these entities as described
below:
Notes Payable and Line of Credit. A partnership controlled by Dr. Burnett,
and of which Mr. Heinrichs and Mr. Campbell are general partners, has provided
debt financing to us and our predecessors. Before Avistar Systems, Limited
Partnership contributed its assets to our Nevada corporate predecessor, the
limited partnership financed its activities primarily from borrowings from the
partnership controlled by Dr. Burnett and from its corporate general partner. As
of December 31, 1997, outstanding principal and accrued interest under the notes
was $28.7 million, which was capitalized and converted into shares of series A
preferred stock as part of the conversion.
Since December 31, 1997, we have had a line of credit from the partnership
controlled by Dr. Burnett and in which Mr. Heinrichs and Mr. Campbell are also
general partners, under which we borrowed $9.1 million. As of June 30, 2000, the
principal balance plus accrued interest was $9.7 million. Borrowings under the
line of credit accrue interest at 10% per annum. The line of credit was
originally due on demand, but was extended in connection with the UBS (USA)
transaction to the earlier of (1) November 18, 2002 or (2) a liquidating event,
including a merger, with any outstanding principal and accrued interest due in
full at that time or (3) 180 days after an initial public offering with proceeds
of at least $20 million at an offering price of at least $7.50 per share. The
line of credit is secured by all of our assets and is subordinate to our line of
credit with
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a commercial lender. Outstanding principal under the notes was $4.9 million at
December 31, 1998 and $9.1 million at December 31, 1999, and accrued interest
was approximately $260,000 and $106,000, respectively. We now intend to repay
the line of credit promptly after completion of this offering. This
indebtedness, plus the $2.8 million of demand notes owed to Dr. Burnett, Mr.
Heinrichs, and Mr. Campbell, is the total debt due to related parties.
Transactions with Vicor. We originally acquired our intellectual property
from Vicor in August 1997. Vicor is a systems engineering company and was the
initial patent applicant for our underlying technology. Prior to that
acquisition, Vicor had granted us a nonexclusive worldwide license to use the
patents under which we paid royalties of $38,000 in 1997. As a result of that
acquisition, we were obligated to make potential residual payments to Vicor.
Under the formula, we made no payments in 1997, 1998 or 1999 and we paid Vicor
$5,000 to cancel the potential residual royalty obligation in March 2000.
Effective December 31, 1996, we acquired from Vicor all of the assets
relating to Vicor's internet-based e-mail and fax messaging systems. The
purchase price for the assets was approximately $601,000 and was paid by the
issuance of a promissory note due December 31, 1998, which bore interest at 10%
per annum. In February 1999 we paid Vicor an amount of approximately $269,000
representing the then entire outstanding principal and accrued interest.
Since 1998, we have provided some engineering and consulting services to
Vicor. We recognized fees of approximately $214,000 in 1998 and $262,000 in 1999
for those services.
We sublease space at our Redwood Shores, California headquarters to Vicor.
Vicor pays a monthly rent of approximately $11,000 under the sublease. As a
result, Vicor paid us approximately $45,000 during 1999. This sublease, which
commenced on September 1, 1999, expires on August 31, 2000. Prior to that, we
subleased space from Vicor which assumed the lease from Visionary Corporate
Technologies at our previous Palo Alto, California headquarters at a cost of
approximately $400,000 in 1997, $504,000 in 1998 and $465,000 in 1999.
Pursuant to an agreement dated January 1, 1996, we granted to Vicor the
right to resell to end users certain of our systems purchased from us at a
discount. In addition, in the event of a successful sale by us as a result of
Vicor's involvement, we agreed to pay to Vicor a referral fee. The agreement had
an initial term of one year subject to automatic annual renewals. We paid Vicor
approximately $104,000 in 1997. We made no payments in 1998 or 1999, and
terminated this agreement, effective in April 1999.
Western Data Systems Support Services. We operate our own customer support
call center. Pursuant to an agreement dated July 1, 1998, with Western Data
Systems of Nevada, Inc., which we refer to as WDS, we handle support calls on
behalf of WDS in connection with its systems and services. WDS is a supplier of
software to the aerospace and defense industries. This call center operates 24
hours a day, seven days a week. Under the terms of this agreement, which had an
initial term of one year but which is automatically renewable on an annual
basis, we charge WDS for its share of support center costs on a cost plus basis.
Additionally, we provide some contract support services to WDS. We received fees
of approximately $757,000 in 1997, $618,000 in 1998, $578,000 in 1999 and
$274,000 in the six months ended June 30, 2000 for these services, which were
recorded as reductions in our operating expenses in our financial statements.
Management Services With Visionary. Under the terms of a management
agreement, Visionary Corporate Technologies provided business management
consulting services to us. Based on a revenue-based formula, we paid
approximately $173,000 in 1997. The agreement was terminated in connection with
our conversion into a corporation at the end of 1997.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 250,000,000 shares of common stock
and, upon closing of the offering, 10,000,000 shares of preferred stock. No
other class of capital stock will be authorized.
COMMON STOCK
Our authorized common stock consists of 250,000,000 shares of common stock,
of which 135,173 were designated as non-voting common stock. As of June 30,
2000, there were outstanding 1,850,825 shares of common stock held of record by
34 holders and no shares of non-voting common stock. Upon the closing of this
offering, all shares of our existing convertible preferred stock will convert
into common stock. At that time, we expect to have 25,185,480 shares of common
stock issued and outstanding, based on an assumed initial public offering price
of $14.00 per share, and will no longer have any authorized non-voting common
stock.
The holders of common stock are entitled to one vote per share on all
matters submitted to a vote of stockholders, including the election of
directors. At any elections of directors, holders of our common stock will have
cumulative voting rights, which means that they would be entitled to a number of
votes equal to the number of their shares multiplied by the number of directors
to be elected. A stockholder would thus be entitled to cast all of his or her
votes for any director or for any two or more as the stockholder would choose.
The holders of common stock are entitled to receive dividends when, as, and if
declared by the board of directors out of legally available funds. Upon
liquidation or dissolution, the holders of common stock will be entitled to
share ratably in the assets legally available for the distribution to
stockholders after payment of liabilities and subject to the prior rights of any
holders of preferred stock then outstanding. The holders of common stock have no
conversion, sinking fund, redemption, preemptive or subscription rights. The
rights, preferences and privileges of holders of common stock are subject to the
rights of the holders of shares of any series of preferred stock that is issued
or may be issued in the future.
PREFERRED STOCK
Upon the closing of this offering, our certificate of incorporation will
provide that we may issue up to 10,000,000 shares of preferred stock in one or
more series as may be determined by our board of directors who may establish the
number of shares to be included in each such series, fix the designation,
powers, preferences and relative rights of the shares of each such series and
any qualifications, limitations or restrictions thereof, and increase or
decrease the number of shares of any such series without any further vote or
action by the stockholders. The board of directors may authorize, without
stockholder approval, the issuance of preferred stock with voting and conversion
rights that could harm the voting power and other rights of holders of common
stock. Preferred stock could be issued quickly with terms designated to delay or
prevent a change in our control or to make the removal of management more
difficult. This could have the effect of decreasing the market price of the
common stock.
We have outstanding 16,000,000 shares of series A preferred stock. The
series A preferred stock has the same voting rights as our common stock. The
series A preferred stock is entitled to annual non-cumulative dividends of
$0.2167 per share. In addition, it has a liquidation preference of $2.009 per
share plus an amount equal to all accrued and declared but unpaid annual
dividends of $0.2167 per share. On December 31 of each year starting in 1999,
the liquidation preference is increased annually by $0.2167 less the amount of
all per share dividends paid during that year. In addition, the series A
preferred stock is entitled to conversion rights, including the automatic
conversion into common stock in the event of an initial public offering of our
securities in which we raise at least $20 million at a price of at least $7.50
per share. On the closing date of this offering, the shares of series A
preferred stock automatically convert into an estimated 18,667,286
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shares of common stock, which represents the sum of (1) 16,000,000 shares of
common stock plus (2) an estimated additional 2,667,286 shares of common stock
representing a beneficial conversion feature equal to the quotient of (A) the
conversion amount, which was $37.3 million at June 30, 2000 and which includes
an amount equal to $0.2167 per share per annum, pro rated based on the number of
days elapsed in the year, divided by (B) an assumed initial public offering
price of $14.00 per share.
We have outstanding 932,196 shares of series B-1 preferred stock and
135,173 shares of B-2 preferred stock. The two series are identical in all
respects, except that the series B-1 preferred stock has the same voting rights
as our common stock while the B-2 has no voting rights and is convertible into
our common stock or our non-voting common stock. When we refer to the series B
preferred stock, we mean both the series B-1 and the series B-2 preferred stock.
The series B preferred stock is entitled to annual non-cumulative dividends,
prior and in preference to the series A preferred stock, of $0.40 per share. In
addition, it has a liquidation preference of $5.00 per share prior to the series
A preferred stock. The series B preferred stock is entitled to conversion
rights, including the conversion at any time into a number of shares of common
stock determined by dividing the series B preferred stock issuance price of
$5.00 by the series B preferred stock conversion price of $5.00, subject to
adjustments. The series B preferred stock converts automatically into common
stock in the event of an initial public offering of our securities in which we
raise no less than $20 million at a price of at least $7.50 per share.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF DELAWARE LAW AND OUR CERTIFICATE OF
INCORPORATION AND BYLAWS
Some of the provisions of our certificate of incorporation and bylaws,
summarized in the following paragraphs, may be considered to have an
anti-takeover effect and may delay, deter or prevent a tender offer, proxy
contest or other takeover attempt that a stockholder might consider to be in
such stockholder's best interest, including such an attempt that might result in
payment of a premium over the market price for shares held by stockholders.
Size of Board. Our bylaws provide that the number of members of our board
of directors will be not less than four and not more than six. The number of
directors is currently five. As a result, the size of the board of directors
cannot be changed outside of that range except by amending the certificate of
incorporation or the bylaws with the approval of a majority of the voting power.
Preferred Stock. Our certificate of incorporation authorizes our board of
directors to establish one or more series of preferred stock, and to determine
the terms of that series at the time of issuance. See "-- Preferred Stock"
above.
Special Meetings of Stockholders. Our bylaws provide that a special meeting
of stockholders may only be called by any of the following, subject to
compliance with specified procedures:
- the board of directors;
- our president;
- our chairman of the board;
- our chief executive officer; and
- by one or more stockholders holding 10% or more of our voting power.
Advance Notice Requirements. Our bylaws require that stockholders give
advance notice to one of our specified officers of any nominations for director
or other business to be brought by stockholders at any meeting of stockholders
and comply with procedural requirements specified in our bylaws.
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Business Combinations. Section 203 of the Delaware General Corporation Law
provides that, subject to certain exceptions specified therein, an "interested
stockholder" of a Delaware corporation may not engage in any business
combinations, including mergers or consolidations or acquisitions of additional
shares of the corporation, with the corporation for a three-year period
following the date that such stockholder becomes an interested stockholder
unless:
- before such date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction that resulted in the stockholder
becoming an "interested stockholder," the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding certain shares; or
- on or after such date, the business combination is approved by the board
of directors of the corporation and authorized at an annual or special
meeting of stockholders by the affirmative vote of at least 66.67% of the
outstanding voting stock that is not owned by the interested stockholder.
Except as otherwise specified in Section 203 of the Delaware General
Corporation Law, an interested stockholder is generally defined to include:
- any person that owns or did own, 15% or more of the outstanding voting
stock of the corporation, or is an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within three years immediately
before the date of determination; and
- the affiliates and associates of any such person.
Under certain circumstances, Section 203 of the Delaware General
Corporation Law makes it more difficult for a person who would be an interested
stockholder to effect various business combinations with a corporation for a
three-year period. We have not elected to be exempt from the restrictions
imposed under Section 203 of the Delaware General Corporation Law. However, Dr.
Burnett, Mr. Heinrichs and their associates are excluded from the definition of
"interested stockholder" pursuant to the terms of Section 203 of the Delaware
General Corporation Law. The provisions of Section 203 of the Delaware General
Corporation Law may encourage persons interested in acquiring us to negotiate in
advance with the board, since the stockholder approval requirement would be
avoided if a majority of the directors then in office approves either the
business combination or the transaction which results in any such person
becoming an interested stockholder. Such provisions also may have the effect of
preventing changes in our management. It is possible that such provisions could
make it more difficult to accomplish transactions that our stockholders may
otherwise deem to be in their best interests.
CALIFORNIA FOREIGN CORPORATION LAW
Section 2115 of the California Corporations Code provides that under some
circumstances several provisions of the California Corporations Code may be
applied to foreign corporations qualified to do business in California,
notwithstanding the law of the jurisdiction where the corporation is
incorporated. These corporations are referred to in this prospectus as "quasi-
California" corporations. Section 2115 applies to foreign corporations that have
more than half of their voting stock held by stockholders residing in California
and more than half of their business deriving from California, measured on or
after the 135th day of the corporation's fiscal year. We believe that we would
currently be deemed a quasi-California corporation and therefore, we have to
comply with California law with respect to, among other things, elections of
directors and
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distributions to stockholders. Under the California Corporations Code, a
corporation is prohibited from paying dividends unless:
- the retained earnings of the corporation immediately prior to the
distribution equal or exceed the amount of the proposed distribution; or
- (a) the assets of the corporation, exclusive of specific non-tangible
assets, equal or exceed 1 1/4 times its liabilities, exclusive of
specific liabilities; and
- (b) the current assets of the corporation at least equal its current
liabilities. If the average pre-tax net earnings of the corporation
before interest expense for the two years preceding the distribution were
less than the average interest expense of the corporation for those
years, however, the current assets of the corporation must exceed 1 1/4
times its current liabilities.
Following this offering, we would be exempt from the application of Section
2115 if more than half of our voting stock is held by stockholders with
residences outside of California or our voting stock is held by more than 800
stockholders of record.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar of our common stock is EquiServe Trust
Company, 150 Royall Street, Canton, Massachusetts 02021. Its telephone number is
(781) 575-3400.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the offering, we will have outstanding 25,185,480
shares of common stock, or 25,725,480 shares if the underwriters over-allotment
option is exercised in full, based on an assumed initial public offering price
of $14.00 per share. Of these shares, all 3,600,000 shares sold in this
offering, or 4,140,000 shares if the underwriters' over-allotment option is
exercised in full, will be freely tradable without restriction or further
registration under the Securities Act except for any shares purchased by an
"affiliate," which will be subject to the limitations of Rule 144 of the
Securities Act. As defined in Rule 144, an "affiliate" of an issuer is a person
that directly, or indirectly through one or more intermediaries, controls, is
controlled by or is under common control with the issuer. The remaining
outstanding shares of common stock will be "restricted securities" as defined in
Rule 144 and may not be resold in the absence of registration under the
Securities Act or pursuant to an exemption from such registration, including
exemptions provided by Rule 144. In addition, we and our officers and directors,
and other holders of all or substantially all of our existing outstanding shares
have agreed not to offer, sell, contract to sell or otherwise dispose of any
common stock or any securities convertible into or exchangeable for common stock
for a period of 180 days after the effective date of the registration statement
that includes this prospectus without the prior written consent of Chase
Securities Inc. Immediately following this offering, the existing stockholders
will own 21,585,000 restricted shares, based on an assumed initial public
offering price of $14.00 per share, representing approximately 85.7% of the then
outstanding shares of common stock (83.9% if the underwriters' over-allotment
option is exercised in full). Our executive officers and directors will own
18,017,799 shares, based on an assumed initial public offering price of $14.00
per share.
RULE 144
In general, under Rule 144, beginning 90 days after the effective date of
the registration statement that includes this prospectus, a person who has
beneficially owned restricted shares for at least one year, including persons
who are affiliates, would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of:
- 1% of the then outstanding shares of our common stock, which would be
approximately 251,854 shares immediately after this offering, based on an
assumed initial public offering price of $14.00 per share; or
- the reported average weekly trading volume of our common stock during the
four calendar weeks preceding a sale by such person.
Sales under Rule 144 are also subject to manner-of-sale provisions, notice
requirements and the availability of current public information.
RULE 144(k)
Under Rule 144(k), a person who has not been one of our affiliates during
the 90 days preceding a sale, and who has beneficially owned the shares proposed
to be sold for at least two years, is free to sell such shares without regard to
the volume, manner-of-sale or other limitations contained in Rule 144. Except as
restricted by the lock-up described above, upon completion of this offering,
holders of 996,958 shares of our common stock will be eligible to freely sell
those shares under Rule 144(k).
Prior to this offering, there has been no public market for our common
stock and we can make no predictions about the effect, if any, that market sales
of shares or the availability of shares for sale will have on the market price
of our common stock prevailing from time to time. Future sales
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of substantial amounts of our common stock in the public market, or the
perception that such sales may occur, may cause the market price of our common
stock to decline.
REGISTRATION RIGHTS
Under the terms of an agreement with the holders of the series B
convertible preferred stock, 180 days after the effective date of the
registration statement of which this prospectus forms a part, the holders will
be entitled to demand the registration of their 1,067,369 shares of common
stock. We are required to effect up to two registrations for the holders
pursuant to this demand right. In addition, after the closing of this offering,
the holders will be entitled to piggyback registration rights with respect to
the registration of their shares. If we propose to register any securities under
the Securities Act other than on a Form S-8 or S-4, the holders are entitled to
include their shares in the registration subject to quantitative limitations
imposed by any underwriters. We have agreed to pay the holders' expenses, except
underwriting discounts and selling commissions, in connection with the demand
registrations. Registration of any of the shares of our common stock held by the
holders would result in such shares becoming freely tradeable without
restriction under the Securities Act immediately upon effectiveness of such
registration.
OPTIONS
As of June 30, 2000, options to purchase 2,190,050 shares of our common
stock were outstanding. We intend to file a registration statement on Form S-8
under the Securities Act to register all of the shares of our common stock
reserved for issuance under our stock option and stock purchase plans. The
filing of this registration statement will allow these shares, other than those
held by members of management who are deemed to be affiliates, to be eligible
for resale without restriction, subject to the lock-up period related to this
offering, or further registration upon issuance to participants. After the
effective date of the registration statement on Form S-8 and, if applicable, the
expiration of the lock-up period related to this offering, shares purchased upon
exercise of options granted pursuant to the stock option plan, generally will be
available for resale in the public market by non-affiliates without restriction.
Sales by our affiliates of shares registered on this registration statement are
subject to all of the Rule 144 restrictions except for the one-year minimum
holding period requirement.
In addition to possibly being able to sell option shares without
restriction under a Form S-8 registration statement when effective, persons
other than our affiliates are allowed under Rule 701 under the Securities Act to
sell shares of our common stock issued upon exercise of stock options beginning
90 days after the date of this prospectus, subject only to the manner of sale
provisions of Rule 144 and to the lock-up period related to this offering. Our
affiliates may also begin selling option shares beginning 90 days after the date
of this prospectus but are subject to all of the Rule 144 restrictions except
for the one-year holding period requirement and for the 180 day lock-up period
related to this offering.
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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a discussion of the material United States federal income
tax and estate tax consequences relating to the purchase, ownership and
disposition of the common stock applicable to non-U.S. holders. For purposes of
this discussion, we refer to the Internal Revenue Code of 1986, as amended, as
the Code and the Internal Revenue Service as the IRS.
This summary:
- is based on the provisions of the Code, the existing or proposed Treasury
regulations, administrative pronouncements, and judicial authority, all
of which are subject to change, possibly on a retroactive basis;
- deals only with non-U.S. holders that will hold the common stock as
capital assets within the meaning of Section 1221 of the Code;
- does not purport to be a complete analysis of all the potential tax
consequences that may be material to a non-U.S. holder based on his or
her particular tax situation; and
- does not address tax consequences applicable to non-U.S. holders that may
be subject to special tax rules, such as banks, tax-exempt organizations,
pension funds, insurance companies, dealers in securities or foreign
currencies or persons that will hold the notes as a position in a hedging
transaction, straddle or conversion transaction for tax purposes, or
persons that have a functional currency other than the U.S. dollar.
We have not sought any ruling from the IRS with respect to the statements
made and the conclusions reached in the following discussion, and the IRS may
not agree with those statements and conclusions. In addition, the IRS is not
precluded from successfully adopting a contrary position. This discussion does
not consider the effect of any applicable state, local, foreign or other tax
laws.
The following summary does not discuss all aspects of United States federal
income taxation that may be relevant to a holder of shares of common stock in
light of a holder's particular circumstances and income tax situation.
Prospective holders should consult their own tax advisors as to the specific tax
consequences to them of the purchase, ownership and disposition of common stock,
including the application and effect of state, local, foreign and other tax
laws.
When we refer to non-U.S. holder, we mean a beneficial owner of common
stock that for United States federal income tax purposes, is other than:
- a citizen or resident of the United States;
- a corporation, partnership or other entity created or organized in or
under the laws of the United States or any political subdivision thereof;
- an estate the income of which is subject to United States federal income
taxation regardless of its source; or
- a trust that is subject to the primary supervision of a United States
court and to the control of one or more United States persons, or that
has a valid election in effect under applicable U.S. Treasury regulations
to be treated as a United States person.
TAXATION OF DIVIDENDS AND DISPOSITIONS
Dividends on Common Stock. Subject to the discussion below, dividends, if
any, paid to a non-U.S. holder generally will be subject to United States
withholding tax at a 30% rate, or a lower rate as may be prescribed by an
applicable tax treaty, unless the dividends are effectively connected
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with a trade or business of the non-U.S. holder within the United States.
Dividends effectively connected with such trade or business generally will not
be subject to withholding if the non-U.S. holder complies with applicable IRS
reporting requirements and generally will be subject to U.S. federal income tax
on a net income basis at regular graduated rates. In the case of a non-U.S.
holder that is a corporation, such effectively connected income also may be
subject to the branch profits tax, which generally is imposed on a foreign
corporation on the deemed repatriation from the United States of effectively
connected earnings and profits, at a 30% rate or a lower rate as may be
prescribed by an applicable tax treaty. Even though such effectively connected
dividends are subject to income tax, and may be subject to branch profits tax,
they will not be subject to United States withholding tax if the non-U.S. holder
delivers a properly executed IRS Form 4224 to the payor.
Under currently effective Treasury regulations, dividends paid on or before
December 31, 2000 to an address outside the United States are presumed to be
paid to a resident of such country for purposes of the withholding tax, absent
knowledge that such presumption is not warranted. Under interpretations of
currently effective Treasury regulations, the same presumption applies to
determine the applicability of a reduced rate of withholding under a tax treaty.
Thus, non-U.S. holders receiving dividends at addresses outside the United
States currently are not required to file tax forms to obtain the benefit of
reduced withholding at an applicable treaty rate.
Treasury regulations that became effective for dividends paid after
December 31, 2000, however, generally provide that the status of a payee as a
non-U.S. holder will be made based upon a withholding certificate. In addition,
these Treasury regulations establish certain presumptions, which differ from
those discussed above, upon which we generally may rely to determine whether, in
the absence of certain documentation, a holder should be treated as a non-U.S.
holder for purposes of the 30% withholding tax described above. The presumptions
would not apply for purposes of granting a reduced rate of withholding under a
tax treaty. Under the Treasury regulations, to obtain a reduced rate of
withholding under a tax treaty, a non-U.S. holder generally will be required to
satisfy applicable certification and other requirements. In addition, under
these Treasury regulations, in the case of common stock held by a foreign
partnership, the certification requirement generally would be applied to the
partners of the partnership, unless the partnership agrees to become a
"withholding foreign partnership", and the partnership would be required to
provide certain information, including a United States taxpayer identification
number. These Treasury regulations also provide look-through rules for tiered
partnerships.
Dispositions of Common Stock. Generally, a non-U.S. holder will not be
subject to United States federal income tax with respect to gain realized upon
the disposition of such holder's shares of common stock unless:
- the non-U.S. holder is an individual who is present in the United States
for 183 days or more in the taxable year of disposition and certain other
conditions are met;
- such gain is effectively connected with the conduct by a non-U.S. holder
of a trade or business within the United States and, if certain tax
treaties apply, is attributable to a United States permanent
establishment maintained by the non-U.S. holder;
- the non-U.S. holder is subject to Code provisions applicable to certain
U.S. expatriates; or
- we are or have been a "United States real property holding corporation"
for federal income tax purposes and, assuming that the common stock is
deemed to be "regularly traded on an established securities market," the
non-U.S. holder held, directly or indirectly at any time during the
five-year period ending on the date of disposition or such shorter period
that such shares were held, more than five percent of the common stock.
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We believe we are not currently, and do not anticipate becoming, a "United
States real property holding corporation" for United States federal income tax
purposes.
Special rules may apply to certain non-U.S. holders, such as "controlled
foreign corporations", "passive foreign investment companies", "foreign personal
holding companies" and corporations that accumulate earnings to avoid U.S.
federal income tax, that are subject to special treatment under the Code. Such
entities should consult their own tax advisors to determine the U.S. federal,
state, local and other tax consequences that may be relevant to them.
FEDERAL ESTATE TAX
Common stock owned or treated as owned by an individual non-U.S. holder at
the time of death will be included in such holder's gross estate for United
States federal estate tax purposes, unless an applicable estate tax treaty
provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
We must report annually to the IRS and to each non-U.S. holder the amount
of dividends paid to such holder and the tax withheld with respect to such
dividends. This information may also be made available to the tax authorities in
the country in which the non-U.S. holder resides under the provisions of an
applicable income tax treaty.
Information reporting requirements and backup withholding requirements will
not apply to any payment of the proceeds received on the sale of the common
stock that is effected outside the United States by a foreign office of a
broker, unless such broker is:
- a United States person;
- a foreign person that derives 50% or more of its gross income for certain
periods from activities that are effectively connected with the conduct
of a trade or business in the United States;
- a controlled foreign corporation for United States federal income tax
purposes; or
- after December 31, 2000, a foreign partnership more than 50% of the
capital or profits of which is owned by one or more United States persons
or which engages in a United States trade or business.
Payment of the proceeds of any such sale effected outside the United States
by a foreign office of any broker that is described above in the preceding
sentence will not be subject to backup withholding tax but will be subject to
information reporting requirements, unless such broker has documentary evidence
in its records that the beneficial owner is a non-U.S. holder and certain other
conditions are met, or the beneficial owner otherwise establishes as exemption.
Payment of the proceeds of any such sale to or through a United States office of
a broker is subject to both information reporting and backup withholding
requirements, unless the beneficial owner of the common stock certifies its
non-United States status under penalties of perjury or otherwise establishes an
exemption.
If paid to an address outside the United States, dividends on common stock
held by a non-U.S. holder generally will not be subject to the information
reporting and backup withholding requirements described in this section,
provided that the payor does not have actual knowledge that the holder is a
United States person. Under Treasury regulations effective with respect to
payments made after December 31, 2000, however, dividend payments will be
subject to information reporting and backup withholding at a rate of 31% unless
applicable certification requirements are satisfied.
Backup withholding is not an additional tax. Any amount withheld from a
payment to a non-U.S. holder under these rules will be allowed as a credit
against such holder's United States federal income tax liability and may entitle
such holder to a refund, provided that the required information is furnished
timely to the IRS.
78
<PAGE> 83
UNDERWRITING
Chase Securities Inc., UBS Warburg LLC and Wit SoundView Corporation are
the representatives of the underwriters. Subject to the terms and conditions of
the underwriting agreement, the underwriters named below, through their
representatives, have severally agreed to purchase from us the following
respective numbers of shares of common stock.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Chase Securities Inc. ......................................
UBS Warburg LLC.............................................
Wit SoundView Corporation...................................
---------
Total....................................................... 3,600,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are subject to conditions precedent, including the absence of any
material adverse change in our business and the receipt of various certificates,
opinions and letters from us, our counsel and the independent auditors. The
underwriters are committed to purchase all of the shares offered by us if they
purchase any shares.
The following table shows the per share and total underwriting discounts
and commissions we will pay to the underwriters. Such amounts are shown assuming
both no exercise and full exercise of the underwriters' over-allotment option to
purchase additional shares.
UNDERWRITING DISCOUNTS AND COMMISSIONS
<TABLE>
<CAPTION>
WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT
EXERCISE EXERCISE
-------------- --------------
<S> <C> <C>
Per Share................................ $ $
Total.................................... $ $
</TABLE>
We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $1.4 million.
The underwriters propose to offer the shares directly to the public at the
initial public offering price set forth on the cover page of this prospectus and
to various dealers at that price less a concession not in excess of $ per
share. The underwriters may allow and such dealers may re-allow a concession not
in excess of $ per share to various other dealers. If all of the shares are
not sold at the initial public offering price, the representatives may change
the offering price and other selling terms.
We have granted to the underwriters an option, exercisable no later than 30
days after the date of this prospectus, to purchase up to 540,000 additional
shares of common stock at the initial public offering price, less the
underwriting discount set forth on the cover page of the prospectus. To the
extent that the underwriters exercise this option, each of the underwriters will
have a firm commitment to purchase approximately the same percentage of these
option shares which the number of shares of common stock to be purchased by it
shown in the above table bears to the total number of shares of common stock
offered by this prospectus. We will be obligated, pursuant to this option, to
sell shares to the underwriters to the extent the option is exercised. The
79
<PAGE> 84
underwriters may exercise this option only to cover over-allotments made in
connection with the sale of shares of common stock in this offering.
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
We have agreed to indemnify the underwriters against liabilities specified
in the underwriting agreement, including liabilities under the Securities Act,
and to contribute to payments the underwriters may be required to make in
respect of these liabilities.
Our officers and directors and all or substantially all of our stockholders
have agreed that they will not, without the prior written consent of Chase
Securities Inc., which will not be unreasonably withheld, directly or
indirectly, sell, offer, contract to sell, transfer the economic risk of
ownership in, make any short sale, pledge or otherwise dispose of any shares of
our common stock, options or warrants to acquire shares of our common stock or
securities exchangeable for or convertible into shares of our common stock owned
by them or any other rights to purchase or acquire our common stock for a period
of 180 days following the effective date of the registration statement that
includes this prospectus. We have agreed that we will not, without the prior
written consent of Chase Securities Inc., directly or indirectly, offer, sell,
contract to sell, make any short sale, pledge, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of any shares of our
capital stock, or any securities exchangeable or exercisable for or convertible
into or any rights to purchase or acquire shares of our capital stock for a
period of 180 days following the date of this prospectus, except that we may
issue shares in connection with acquisitions, may issue shares upon the exercise
of options granted prior to the date of this prospectus and may grant additional
options or sell additional shares under our stock option or stock purchase
plans. Without the prior written consent of Chase Securities Inc., any
additional options granted shall not be exercisable during this 180-day period
unless the holders shall have executed an agreement substantially to the effect
of the agreement described in the first sentence of this paragraph.
Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol AVSR.
In connection with this offering, the underwriters may effect transactions
that could have the effect of raising or maintaining, or preventing or retarding
a decline in, the market price of our shares. As a result, the price of our
shares may be higher than the price that might otherwise exist in the open
market. These transactions may be effected on the Nasdaq National Market, in the
over-the-counter market or otherwise.
In particular, the underwriters may make short sales of our shares and may
purchase our shares on the open market to cover positions created by short
sales. Short sales involve the sale by the underwriters of a greater number of
shares than they are required to purchase in the offering. Covered short sales
are sales made in an amount not greater than the over-allotment option. The
underwriters may close out any covered short position by either exercising their
over-allotment option or purchasing shares in the open market. In determining
the source of shares to close out the covered short position, the underwriters
will consider, among other things, the price of shares available for purchase in
the open market as compared to the price at which they may purchase shares
through the over-allotment option. Naked short sales are sales in excess of the
over-allotment option. The underwriters must close out any naked short position
by purchasing shares in the open market. A naked short position is more likely
to be created if the underwriters are concerned that there may be downward
pressure on the price of the shares in the open market after pricing that could
adversely affect investors who purchase in this offering.
80
<PAGE> 85
In addition, an underwriter may enter a stabilizing bid in connection with
the offering, which is the placing of any bid or effecting of any purchase, for
the purposes of pegging, fixing or maintaining the price of the shares. The
underwriters may also impose penalty bids, which permit them to reclaim the
selling concession from a syndicate member when shares sold by the syndicate
member are purchased in syndicate covering transactions. Any stabilizing, if
commenced, may be discontinued at any time.
The underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority that exceed 5% of the total number of shares of
common stock offered by them.
Prior to this offering, there has been no public market for our shares. The
initial public offering price for the shares will be determined by negotiations
among us and the representatives. Among the factors considered in determining
the initial public offering will be prevailing market and economic conditions,
our revenue, the prospects for our future earnings, market valuations of other
companies engaged in activities similar to our business operations and our
management. The estimated initial public offering price range set forth on the
cover of this preliminary prospectus is subject to change as a result of market
conditions or other factors.
Each underwriter has represented that it has complied and will comply with
all applicable laws and regulations in connection with the offer, sale or
delivery of the shares and related offering materials in the United Kingdom,
including:
- the Public Offers of Securities Regulations 1995 (as amended),
- the Financial Services Act 1986, and
- the Financial Services Act 1986 (Investment Advertisements)(Exemptions)
Order 1996 (as amended).
Neither we nor any underwriter has taken or will take any action in any
jurisdiction other than the United States that would permit a public offering of
the shares or possession or distribution of a prospectus in any jurisdiction
where such action is required to make a public offering. Persons who come into
possession of this prospectus in jurisdictions outside the United States are
required to inform themselves about and to observe any restrictions as to this
offering and the distribution of this prospectus applicable to that
jurisdiction.
At our request, the underwriters have reserved up to 180,000 shares of
common stock for sale at the initial public offering price to our directors,
officers, employees, business associates and related persons. The number of
shares of common stock available for sale to the general public will be reduced
if such persons purchase the reserved shares. Any reserved shares which are not
so purchased may be offered by the underwriters to the general public on the
same basis as the other shares offered by this prospectus.
A prospectus in electronic format will be made available on the Websites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to the underwriters
for sale to their online brokerage account holders. Internet distributions will
be allocated by the underwriters that will make internet distributions on the
same basis as other allocations. Wit Capital Corporation is an online
broker/dealer that may receive an allocation of shares of common stock through
its affiliate Wit SoundView Corporation.
In the ordinary course of business, Chase Securities Inc., UBS Warburg LLC
and their affiliates have purchased, and may in the future purchase, products
and services from us. UBS (USA) Inc., an affiliate of UBS Warburg LLC owns
approximately 5.6% of our existing share capital as of June 30, 2000. David M.
Solo, one of our directors, was an executive officer during 1998 and 1999 of UBS
AG, the parent of UBS Warburg LLC, and is an advisor to UBS AG. In addition,
Barry McQuain, an
81
<PAGE> 86
employee of UBS Warburg, is a director of our intellectual property subsidiary,
Collaboration Properties, Inc.
LEGAL MATTERS
The validity of the issuance of the common stock offered in the offering
will be passed upon for us by Bryan Cave LLP, Santa Monica, California, and for
the underwriters by Simpson Thacher & Bartlett, Los Angeles, California.
EXPERTS
The combined financial statements and schedule as of December 31, 1998 and
1999, and for each of the three years in the period ended December 31, 1999,
included in this prospectus and elsewhere in the registration statement, have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1, of which this
prospectus is a part, with the Securities and Exchange Commission under the
Securities Act with respect to the common stock offered in this offering. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information set forth in the registration statement, parts of
which are omitted as permitted by the rules and regulations of the Commission.
Statements contained in this prospectus as to the contents of any contract or
other document are not necessarily complete. For further information pertaining
to us and our common stock, we refer you to our registration statement and the
exhibits thereto, copies of which may be inspected without charge at the
principal office of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the regional offices of the Commission located at Seven World
Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part
of the registration statement may be obtained at prescribed rates from the
Commission. The Commission maintains a Website on the internet at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Exchange Act and, in accordance
therewith, will file periodic reports, proxy and information statements and
other information with the Commission. Such periodic reports, proxy and
information statements and other information will be available for inspection
and copying at the regional offices, public reference facilities and Website of
the Commission referred to above.
We intend to furnish our stockholders with annual reports containing
audited financial statements and an opinion thereon expressed by independent
certified public accountants. We also intend to furnish other reports as we may
determine or as required by law.
82
<PAGE> 87
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Combined Balance Sheets as of December 31, 1998 and 1999 and
Consolidated Balance Sheet as of June 30, 2000
(unaudited)............................................... F-3
Combined Statements of Operations for each of the three
years in the period ended December 31, 1999, and the six
months ended June 30, 1999 (unaudited) and the
Consolidated Statement of Operations for the six months
ended June 30, 2000 (unaudited)........................... F-4
Combined Statements of Stockholders' Deficit for each of the
three years in the period ended December 31, 1999, and for
the six months ended June 30, 1999 (unaudited), and the
Consolidated Statement of Stockholders' Deficit for the
six months ended June 30, 2000 (unaudited)................ F-5
Combined Statements of Cash Flows for each of the three
years in the period ended December 31, 1999, and for the
six months ended June 30, 1999 (unaudited), and the
Consolidated Statement of Cash Flows for the six months
ended June 30, 2000 (unaudited)........................... F-6
Notes to the Combined Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 88
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Avistar Communications Corporation and affiliates:
We have audited the accompanying combined balance sheets of Avistar
Communications Corporation (a Delaware corporation, formerly known as Avistar
Systems Corporation) and affiliates identified in Note 1 as of December 31, 1999
and 1998, and the accompanying combined statements of operations, stockholders'
deficit and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Avistar
Communications Corporation and affiliates as of December 31, 1999 and 1998, and
the combined results of their operations and their cash flows for each of the
three years in the period ending December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
San Jose, California
June 9, 2000
F-2
<PAGE> 89
AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
COMBINED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1999 AND CONSOLIDATED BALANCE SHEET AS OF JUNE 30,
2000 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, 2000
PRO FORMA
DECEMBER 31, LIABILITIES AND
------------------ JUNE 30, STOCKHOLDERS'
1998 1999 2000 DEFICIT (NOTE 7)
------- -------- -------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS:
Current assets
Cash and cash equivalents.............................. $ 139 $ 6,232 $ 7,285
Accounts receivable, net of allowance for doubtful
accounts of $272, $240 and $240, respectively........ 1,291 2,041 2,627
Inventories, including inventory shipped to customer
sites, not yet installed of $169, $818, and $738,
respectively......................................... 896 1,589 2,387
Prepaid expenses and other current assets.............. 18 124 950
------- -------- --------
Total current assets.............................. 2,344 9,986 13,249
Property and equipment, net.............................. 385 219 136
Other assets............................................. 39 318 310
------- -------- --------
Total assets...................................... $ 2,768 $ 10,523 $ 13,695
======= ======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities
Line of credit......................................... $ -- $ 1,998 $ 2,573 $ 2,573
Notes payable and accrued interest due to related
parties.............................................. 1,300 2,533 2,829 12,473
Accounts payable....................................... 1,030 1,157 2,083 2,083
Deferred revenue....................................... 1,510 1,313 3,407 3,427
Accrued liabilities and other.......................... 1,385 1,329 1,704 1,704
------- -------- -------- --------
Total current liabilities......................... 5,225 8,330 12,616 22,260
Notes payable and accrued interest due to related
parties, net........................................... 5,152 9,190 9,644 --
------- -------- -------- --------
Total liabilities................................. 10,517 17,520 22,260 22,260
------- -------- -------- --------
Stockholders' deficit:
Convertible preferred stock, $0.001 per share par
value; aggregate liquidation preference of $41,812
(unaudited) at June 30, 2000:
Authorized at June 30, 2000 -- 86,000,000 (unaudited)
Issued and outstanding -- 16,000,000 shares,
17,067,369 shares, 17,067,369 shares (unaudited) at
December 31, 1998, 1999 and June 30, 2000,
respectively; no shares issued and outstanding pro
forma................................................ 16 17 17 --
Common stock, $0.001 par value; 25,000,000, 25,000,000
and 250,000,000 (unaudited) shares authorized at
December 31, 1998 and 1999, and June 30, 2000,
respectively, 2,802,200, 2,818,950 and 2,994,450
(unaudited) shares issued at December 31, 1998 and
1999, and June 30, 2000, respectively; and 22,729,105
shares outstanding pro forma......................... 3 3 3 23
Treasury common stock, 985,250, 1,139,625 and 1,143,625
(unaudited) shares, at cost, at December 31, 1998 and
1999, and June 30, 2000, respectively................ (1) (1) (1) (1)
Additional paid-in-capital............................. 220 9,265 11,137 48,476
Deferred stock compensation............................ -- (2,084) (2,746) (2,746)
Accumulated deficit.................................... (7,847) (14,197) (16,975) (54,317)
------- -------- -------- --------
Total stockholders' deficit....................... (7,609) (6,997) (8,565) (8,565)
------- -------- -------- --------
Total liabilities and stockholders' deficit....... $ 2,768 $ 10,523 $ 13,695 $ 13,695
======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 90
AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999, AND THE
SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) AND THE
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------- -------------------
1997 1998 1999 1999 2000
----------- ------- -------- ------- --------
PREDECESSOR (UNAUDITED)
ENTITY
<S> <C> <C> <C> <C> <C>
Revenue:
Products................................ $ 3,196 $ 3,342 $ 6,146 $ 2,761 $ 7,081
Services, maintenance and support....... 1,861 1,786 3,227 1,382 2,170
------- ------- -------- ------- --------
Total revenue................... 5,057 5,128 9,373 4,143 9,251
------- ------- -------- ------- --------
Cost of revenue:
Products................................ 2,661 1,959 3,190 1,640 3,272
Services, maintenance and support....... 2,354 1,443 1,697 844 1,054
------- ------- -------- ------- --------
Total cost of revenue........... 5,015 3,402 4,887 2,484 4,326
------- ------- -------- ------- --------
Gross margin.................... 42 1,726 4,486 1,659 4,925
------- ------- -------- ------- --------
Operating expenses:
Research and development................ 3,347 3,348 2,718 1,259 1,791
Sales and marketing..................... 2,513 3,152 3,649 1,743 2,349
General and administrative.............. 1,182 2,289 2,872 1,294 1,779
Amortization of deferred stock
compensation*........................ -- -- 618 -- 1,168
------- ------- -------- ------- --------
Total operating expenses........ 7,042 8,789 9,857 4,296 7,087
------- ------- -------- ------- --------
Loss from operations............ (7,000) (7,063) (5,371) (2,637) (2,162)
------- ------- -------- ------- --------
Other income (expenses)
Interest expense........................ (2,394) (276) (972) (331) (725)
Interest income......................... 1 1 54 3 114
Other, net.............................. (288) (286) (40) (2) --
------- ------- -------- ------- --------
Total other expense, net........ (2,681) (561) (958) (330) (611)
------- ------- -------- ------- --------
Loss before provision for income
taxes......................... (9,681) (7,624) (6,329) (2,967) (2,773)
Provision for income taxes................ 22 17 21 -- 5
------- ------- -------- ------- --------
Net loss........................ $(9,703) $(7,641) $ (6,350) $(2,967) $ (2,778)
======= ======= ======== ======= ========
Net loss per share -- basic and diluted... $(86.83) $ (54.27) $(26.49) $ (12.40)
======= ======== ======= ========
Shares used in computing basic and diluted
net loss per share...................... 88 117 112 224
======= ======== ======= ========
Pro forma net loss attributable to
common stockholders (see Note 10).... $(41,958) $(40,120)
Pro forma net loss per share -- basic
and diluted.......................... $ (2.24) $ (2.01)
======== ========
Shares used in computing pro forma net
loss per share -- basic and diluted..... 18,728 19,958
======== ========
</TABLE>
---------------
<TABLE>
<S> <C> <C> <C> <C> <C>
*Amortization of deferred stock compensation
excluded from the following expenses:
Cost of revenue........................ $ 146 -- $ 165
Research and development............... 143 -- 146
Sales and marketing.................... 303 -- 827
General and administrative............. 26 -- 30
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 91
AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
COMBINED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 1997, 1998 AND 1999, AND THE CONSOLIDATED STATEMENT
OF STOCKHOLDER'S DEFICIT
FOR THE SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK TREASURY STOCK ADDITIONAL
------------------- ------------------- ------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ------ ---------- ------ --------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997...................... 16,000,000 $16 2,171,400 $ 2 -- $-- $ 223
Issuance of common stock pursuant to exercise
of stock options............................ -- -- 630,800 1 -- -- 1
Repurchase of common stock upon employee
terminations................................ -- -- -- -- 24,000 -- --
Repurchase of common stock from Avistar
Systems, Limited Partnership................ -- -- -- -- 961,250 (1) (4)
Net loss...................................... -- -- -- -- -- -- --
---------- --- ---------- --- --------- --- -------
Balance, December 31, 1998...................... 16,000,000 16 2,802,200 3 985,250 (1) 220
Issuance of Series B Convertible Preferred
Stock for cash.............................. 1,067,369 1 -- -- -- -- 6,380
Costs associated with issuance of Series B
Convertible Preferred Stock................. -- -- -- -- -- -- (41)
Issuance of common stock pursuant to exercise
of stock options............................ -- -- 16,750 -- -- -- 5
Repurchase of common stock upon employee
terminations................................ -- -- -- -- 50,000 -- --
Deferred stock compensation................... -- -- -- -- -- -- 2,702
Amortization of deferred stock compensation... -- -- -- -- -- -- --
Repurchase of common stock from Avistar
Systems, Limited Partnership................ -- -- -- -- 104,375 -- (1)
Net loss...................................... -- -- -- -- -- -- --
---------- --- ---------- --- --------- --- -------
Balance, December 31, 1999...................... 17,067,369 17 2,818,950 3 1,139,625 (1) 9,265
Issuance of common stock pursuant to exercise
of stock options (unaudited)................ -- -- 175,500 -- -- -- 42
Repurchase of common stock upon employee
termination (unaudited)..................... -- -- -- -- 4,000 -- --
Deferred stock compensation (unaudited)....... -- -- -- -- -- -- 1,830
Amortization of deferred stock compensation
(unaudited)................................. -- -- -- -- -- -- --
Net loss (unaudited).......................... -- -- -- -- -- -- --
---------- --- ---------- --- --------- --- -------
Balance, June 30, 2000 (unaudited).............. 17,067,369 $17 2,994,450 $ 3 1,143,625 $(1) $11,137
========== === ========== === ========= === =======
<CAPTION>
DEFERRED TOTAL
STOCK ACCUMULATED STOCKHOLDERS'
COMPENSATION DEFICIT EQUITY
------------ ----------- -------------
<S> <C> <C> <C>
Balance, December 31, 1997...................... $ -- $ (206) $ 35
Issuance of common stock pursuant to exercise
of stock options............................ -- -- 2
Repurchase of common stock upon employee
terminations................................ -- -- --
Repurchase of common stock from Avistar
Systems, Limited Partnership................ -- -- (5)
Net loss...................................... -- (7,641) (7,641)
------- -------- -------
Balance, December 31, 1998...................... -- (7,847) (7,609)
Issuance of Series B Convertible Preferred
Stock for cash.............................. -- -- 6,381
Costs associated with issuance of Series B
Convertible Preferred Stock................. -- -- (41)
Issuance of common stock pursuant to exercise
of stock options............................ -- -- 5
Repurchase of common stock upon employee
terminations................................ -- --
Deferred stock compensation................... (2,702) -- --
Amortization of deferred stock compensation... 618 -- 618
Repurchase of common stock from Avistar
Systems, Limited Partnership................ -- -- (1)
Net loss...................................... -- (6,350) (6,350)
------- -------- -------
Balance, December 31, 1999...................... (2,084) (14,197) (6,997)
Issuance of common stock pursuant to exercise
of stock options (unaudited)................ -- -- 42
Repurchase of common stock upon employee
termination (unaudited)..................... -- -- --
Deferred stock compensation (unaudited)....... (1,830) -- --
Amortization of deferred stock compensation
(unaudited)................................. 1,168 -- 1,168
Net loss (unaudited).......................... -- (2,778) (2,778)
------- -------- -------
Balance, June 30, 2000 (unaudited).............. $(2,746) $(16,975) $(8,565)
======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 92
AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999, AND FOR THE SIX MONTHS
ENDED JUNE 30, 1999 (UNAUDITED), AND THE CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- -----------------
1997 1998 1999 1999 2000
----------- ------- ------- ------- -------
PREDECESSOR (UNAUDITED)
ENTITY
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss.................................................. $(9,703) $(7,641) $(6,350) $(2,967) $(2,778)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation............................................ 502 425 248 127 83
Loss on disposal of fixed assets........................ -- -- 24 -- --
Amortization of goodwill................................ 261 261 -- -- --
Amortization of stock compensation expense.............. 150 -- 618 -- 1,168
Allowance for doubtful accounts......................... 17 25 (32) (32) --
Changes in current assets and liabilities:
Accounts receivable.................................. (1,476) 695 (718) (265) (586)
Inventories.......................................... (320) 436 (693) 90 (798)
Prepaid expenses and other current assets............ 79 12 (106) (205) (826)
Other assets......................................... (25) 12 (279) (44) 8
Accounts payable..................................... 544 (124) 127 (381) 926
Accrued interest..................................... 2,393 9 105 363 775
Deferred revenue..................................... 581 303 (197) 158 2,114
Accrued liabilities and other........................ 417 (94) (56) (80) 375
------- ------- ------- ------- -------
Net cash (used in) provided by operating activities....... (6,580) (5,681) (7,309) (3,236) 461
------- ------- ------- ------- -------
Cash Flows from Investing Activities:
Purchase of property and equipment........................ (483) (175) (106) (34) --
------- ------- ------- ------- -------
Cash Flows from Financing Activities:
Net borrowings (payments) under line of credit............ -- -- 1,998 -- 550
Payments on notes payable to related parties.............. (42) (200) (269) (269) --
Borrowings from related parties........................... 7,063 6,183 5,435 3,445 --
Proceeds from issuance of partnership units............... 25 -- -- -- --
Proceeds from issuance of common stock.................... -- 2 5 -- 42
Proceeds from issuance of Series B preferred stock........ -- -- 6,381 -- --
Offering costs incurred in conjunction with issuance of
Series B preferred stock................................ -- -- (41) -- --
Repurchase of common stock from employees and the
Partnership............................................. -- (5) (1) -- --
------- ------- ------- ------- -------
Net cash provided by financing activities................. 7,046 5,980 13,508 3,176 592
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents...... (17) 124 6,093 (94) 1,053
Cash and cash equivalents, beginning of period............ 32 15 139 139 6,232
------- ------- ------- ------- -------
Cash and cash equivalents, end of period.................. $ 15 $ 139 $ 6,232 $ 45 $ 7,285
======= ======= ======= ======= =======
Supplemental Cash Flow Information:
Cash paid for income taxes................................ $ 6 $ 17 $ 21 $ -- $ --
======= ======= ======= ======= =======
Cash paid for interest.................................... $ -- $ -- $ 84 $ -- $ 16
======= ======= ======= ======= =======
Cancellation of notes payable and accrued interest........ $28,674 $ -- $ -- $ -- $ --
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 93
AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1999 AND 2000 IS UNAUDITED)
1. BUSINESS, ORGANIZATION, BASIS OF PRESENTATION AND RISKS AND UNCERTAINTIES
BUSINESS
Avistar Communications Corporation ("Avistar" or the "Company") provides
networked video communications software and hardware products and services.
Avistar's products include applications for interactive video calling, content
creation and publishing broadcast video and video-on-demand as well as data
sharing, directory services and network management. Avistar designs, markets,
sells, manufactures or assembles and installs and supports its products.
Avistar's real-time and non-real-time products are based upon its architecture
which facilitates distribution over local and wide area networks using telephony
or internet services as appropriate. Avistar's services include consulting,
implementation, training, maintenance and support.
ORGANIZATION
The business was founded in 1993 as a Nevada limited partnership, Avistar
Systems, Limited Partnership ("ASLP" or "Predecessor"). In December 1997, ASLP
entered into an acquisition agreement (the "Asset Acquisition") with a newly
formed corporation, Avistar Systems Corporation ("ASC"), to convey all of ASLP's
assets, and transfer all of ASLP's liabilities, in exchange for 16,000,000
shares of ASC's Series A convertible preferred stock (see Note 7) and 2,171,400
shares of common stock. Effective December 31, 1997, all operations previously
conducted by ASLP were thereafter undertaken by ASC. Accordingly, the statements
of operations and cash flows for the year ended December 31, 1997 reflect the
activities of the Predecessor.
Collaborative Properties, Inc. ("CPI") and VCT, Inc. ("VCT") were founded
in 1997 and 1998, respectively, to hold certain intellectual property, including
patents, that underlie certain technology used by ASLP and subsequently by ASC.
Three of the stockholders of CPI and VCT, owning approximately 95% of CPI and
100% of VCT are also the partners of Collaboration Holdings L.P. ("CHLP"), which
owns a controlling interest in ASLP. The owners of all three entities are
subject to voting agreements which gives one of the three owners 100% voting
control of all three entities. The remaining 5% ownership of CPI was held by UBS
(USA), Inc. ("UBS") which also holds a 5% ownership interest in ASC (see Note 6
and Note 7). Accordingly, the accounts of CPI and VCT have been combined at
historical cost with those of ASC for all periods presented since their
inception.
REORGANIZATION
Effective March 31, 2000, ASC merged with and into a newly formed Delaware
corporation, Avistar Communications Corporation. The operating assets and
liabilities of Avistar were then contributed to a wholly owned subsidiary,
Avistar Systems Corporation ("Systems"), a Delaware corporation. At the same
time, the owners of CPI and VCT transferred all of their stock in those entities
to Avistar as a capital contribution. As a result, CPI and VCT are recorded at
their historical cost basis and became wholly owned subsidiaries of Avistar as
of March 31, 2000. In April 2000, the operations of VCT were merged with and
into CPI.
In June 2000, all of the Series A preferred stock held by ASLP was
distributed to the Company's three founders and several other individuals based
on their respective ownership interests in ASLP. In addition, all of the shares
of Avistar's common stock, held by ASLP was distributed to the Company's
employees, former advisors and officers. These common shares
F-7
<PAGE> 94
AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND 2000 IS UNAUDITED)
represent an amount equal to those shares of Class B units in ASLP that were
owned by the respective individuals before the acquisition.
BASIS OF PRESENTATION
The reorganization in March 2000 of these affiliated entities described
above was treated as a combination of entities under common control for
financial reporting purposes. Accordingly, the accompanying financial statements
as of December 31, 1998, and 1999, and for the three years in the period ended
December 31, 1999 have been presented on a combined basis to reflect the
operations of ASC (or ASLP for 1997) and its wholly-owned consolidated
subsidiary, Avistar Systems (UK) Limited ("ASUK"), together with the results of
CPI and VCT, after elimination of all accounts and transactions between the
affiliated entities. The unaudited balance sheet as of June 30, 2000 presents
the consolidated financial position of Avistar and its two wholly-owned
subsidiaries, Systems and CPI. The combined and consolidated results are
referred to, collectively, as those of Avistar or the Company in these
footnotes.
The functional currency of ASUK is the U.S. dollar. Accordingly, all gains
and losses resulting from those transactions denominated in currencies other
than the U.S. dollar are included in the combined statements of operations.
RISKS AND UNCERTAINTIES
The markets for the Company's products and services have only recently
begun to develop. Some of the Company's products utilize changing and emerging
technologies. As is typical in industries of this nature, demand and market
acceptance are subject to a high level of uncertainty. Acceptance of the
Company's products, over time, is critical to the Company's success. The
Company's prospects must be evaluated in light of difficulties encountered by it
and its competitors in further developing the evolving marketplace. The Company
has generated losses since inception and had an accumulated deficit of $17
million as of June 30, 2000. The Company's operating results may fluctuate
significantly in the future as a result of a variety of factors, including, but
not limited to, the use of differing distribution channels, the timing of the
new product announcements by the Company or its competitors, and general
economic conditions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED INTERIM FINANCIAL INFORMATION
The unaudited interim financial statements for the six months ended June
30, 1999 and 2000 have been prepared on the same basis as the audited financial
statements and, in the opinion of management, reflect all normal recurring
adjustments necessary to present fairly the financial information set forth in
accordance with accounting principles generally accepted in the United States.
The financial information presented for such periods are not necessarily
indicative of the results expected for the full fiscal year or for any other
interim period.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported
F-8
<PAGE> 95
AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND 2000 IS UNAUDITED)
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
The Company considers all investment instruments purchased with an original
maturity of three months or less to be cash equivalents. The Company's cash
equivalents at December 31, 1998 and 1999, and June 30, 2000 consist of only
money market funds.
SIGNIFICANT CONCENTRATIONS
A relatively small number of customers have accounted for a significant
percentage of the Company's net sales. Sales to major customers as a percentage
of sales are as follows for the years ended December 31, 1997, 1998 and 1999,
and the six months ended June 30, 2000:
<TABLE>
<CAPTION>
PREDECESSOR SIX MONTHS
ENTITY ENDED
1997 1998 1999 JUNE 30, 2000
----------- ---- ---- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Customer A.................................. 38% 12% * *
Customer B.................................. 13% * * *
Customer C.................................. * 11% 43% 15%
Customer D.................................. * 14% * *
Customer E.................................. * 12% 23% 20%
Customer F.................................. * * * 13%
Customer G.................................. * * * 24%
Customer H.................................. * * 11% *
</TABLE>
-------------------------
* Less than 10%
Any change in the relationship with these customers could have a
potentially adverse effect on the Company's financial position. No such change
is currently anticipated by management.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables from U.S.
and foreign entities. As of December 31, 1998, approximately 46 percent of
accounts receivable was concentrated with two customers. As of December 31,
1999, approximately 80 percent of accounts receivable was concentrated with
three customers. As of June 30, 2000, approximately 82 percent of accounts
receivable was concentrated with 5 customers.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial assets and liabilities,
including cash and cash equivalents, accounts receivable, accounts payable,
short-term borrowings and promissory notes at December 31, 1998 and 1999, and
June 30, 2000, approximate fair value because of the short maturity of these
instruments.
F-9
<PAGE> 96
AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND 2000 IS UNAUDITED)
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market and comprise the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- JUNE 30,
1998 1999 2000
---- ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials.......................................... $210 $ 302 $ 223
Work-in-progress....................................... 302 382 990
Finished goods......................................... 215 87 436
Inventory shipped to customer sites, not yet
installed............................................ 169 818 738
---- ------ ------
$896 $1,589 $2,387
==== ====== ======
</TABLE>
Inventory shipped to customer sites, not yet installed represents product
shipped to customer sites pending completion of the installation process by the
Company. As of December 31, 1998 and 1999, and June 30, 2000, the Company has
billed approximately $0, $1,454 and $2,037 to their customers related to these
shipments, but has not recorded the receivable or the revenue, as the
installations have not been completed.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
double declining balance method over the estimated useful lives (three to five
years) of the assets. Property and equipment consists of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1998 1999 2000
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment.................................. $ 1,406 $ 1,345 $ 1,345
Computer software................................... 106 106 106
Furniture, fixtures and equipment................... 537 295 295
------- ------- -------
2,049 1,746 1,746
Less: Accumulated depreciation...................... (1,664) (1,527) (1,610)
------- ------- -------
$ 385 $ 219 $ 136
======= ======= =======
</TABLE>
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to operations as
incurred. Statement of Financial Accounting Standards ("SFAS") No. 86 ("SFAS
86"), "Accounting for Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed," requires the capitalization of certain software development
costs subsequent to the establishment of technological feasibility. Based on the
Company's product development process, technological feasibility is established
upon completion of a working model. Costs incurred by the Company between
completion of a working model and the point at which the product is ready for
general release have been insignificant. Through June 30, 2000, all research and
development costs have been expensed.
F-10
<PAGE> 97
AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND 2000 IS UNAUDITED)
REVENUE RECOGNITION AND DEFERRED REVENUE
The Company's revenue recognition policy is in compliance with Statement of
Position ("SOP") SOP 97-2, "Software Revenue Recognition" (SOP 97-2), and SOP
98-9, "Modification of SOP 97-2, Software Revenue Recognition, with Respect to
Certain Transactions" (SOP 98-9). Although the Company may enter into separate
contracts for various elements, arrangements with customers to provide products
and related services (such as installation, maintenance and training) are
accounted for as a single arrangement. The Company recognizes revenues from
product sales when all of the following conditions are met: the product has been
shipped, an arrangement exists with the customer at a fixed price and the
Company has the right to invoice the customer, collection of the receivable is
probable and the Company has fulfilled all of its material contractual
obligations to the customer.
The price charged for maintenance is stipulated in the contract and is
based on a percentage of product revenue. Customers have the option to renew the
maintenance in subsequent periods at the rate established in the original
agreement. The Company has historically charged all customers the same
percentage of product revenue for maintenance. Training services can be offered
independent of the purchase of product. The value of these training courses is
determined in a multiple element arrangement based on the price charged when
such services are sold separately. Although not required, historically customers
have always purchased maintenance when ordering products. Because the fair value
of all undelivered elements in an arrangement is known, the Company recognizes
revenue related to delivered elements using the residual value method in
accordance with SOP 98-9.
When the Company provides installation services, the product and
installation revenues are recognized upon completion of installation and
customer acceptance is received. When the customer or a third party provides
installation services, the product revenue is recognized upon shipment. Payment
for product is due upon shipment based on specific payment terms. Installation
and training services are due upon providing the services. If payments for
systems are made in advance of the completion of installation, such amounts are
deferred and recorded as deferred revenue in the accompanying balance sheets
until installation has occurred and the customer has accepted the product.
Revenue from the provision of services, including training, is recognized as the
work is performed. Revenue from maintenance is offered based on a percentage of
product sales as stipulated in the agreement and is recognized pro-rata over the
maintenance term, which is typically one year in length. Payments for services
and maintenance made in advance of the provision of services and maintenance are
recorded as deferred revenue.
WARRANTY RESERVE
The Company accrues the estimated costs of fulfilling the warranty
provisions of its contracts over the warranty period, which is typically 90
days. The warranty reserve was approximately $0.1 million as of December 31,
1998 and 1999, and June 30, 2000, respectively, and is included in accrued
liabilities in the accompanying balance sheets.
STOCK-BASED COMPENSATION
The Company has adopted SFAS No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation." As permitted under this standard, the Company applies
Accounting Principles
F-11
<PAGE> 98
AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND 2000 IS UNAUDITED)
Board Opinion No. 25, "Accounting For Stock Issued to Employees" and related
interpretations in accounting for its stock options (see Note 8).
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging
Activities" which requires companies to record derivative financial instruments
on the balance sheet as assets or liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. The Company will be required to adopt SFAS 133 in 2001 in
accordance with SFAS 137, which delays the required implementation of SFAS 133
for one year. To date, the Company has not entered into any derivative financial
instrument contracts. Thus, the Company believes that adoption of this Statement
will not have a material impact on the financial condition or results of
operations of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. Adoption of
SAB 101 is required in the second quarter of 2000. The Company has historically
recognized and currently recognizes revenue under the guidelines as currently
provided by SAB 101.
In March 2000, the FASB issued Financial Accounting Standards Board
Interpretation No. 44 ("Interpretation No. 44"), "Accounting for Certain
Transactions involving Stock Compensation -- an interpretation of APB Opinion
25". Interpretation No. 44 is effective July 1, 2000. Interpretation No. 44
clarifies the application of APB Opinion 25 for certain matters, specifically
(a) the definition of an employee for purposes of applying APB Opinion 25, (b)
the criteria for determining whether a plan qualifies as a noncompensatory plan,
(c) the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. Management does not
anticipate that the adoption of Interpretation No. 44 will have a material
impact on the financial position or results of operations of the Company.
COMPREHENSIVE NET LOSS
In June 1997, the FASB issued SFAS No. 130 ("SFAS 130"), "Reporting
Comprehensive Income." SFAS 130 was adopted by the Company beginning on January
1, 1998. This standard defines comprehensive income as the changes in equity of
an enterprise, except those resulting from stockholder transactions.
Accordingly, comprehensive loss includes certain changes in equity that are
excluded from the net loss. The comprehensive loss for each of the periods
presented equaled the net loss.
3. LINE OF CREDIT
Effective June 2, 1999, the Company entered into a Loan and Security
Agreement (the "Agreement") with a financial institution to borrow up to the
lesser of $2 million or 80 percent of
F-12
<PAGE> 99
AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND 2000 IS UNAUDITED)
the Company's eligible accounts receivable. As of December 31, 1999, the Company
had $2 million outstanding and no available borrowings. Interest on the loan is
at prime plus two percent (8.5 percent at December 31, 1999), provided that the
rate of interest may not fall below eight percent and the interest charge for
any quarter may not fall below $36,000. The agreement maturity date is June 2,
2000, however, subsequent to year end, the Company and the lender mutually
agreed to extend the maturity date to August 2, 2000, at which time the
Agreement will not be renewed. As part of this termination agreement, the
parties agreed to waive the $36,000 minimum interest payment. The Agreement may
be terminated earlier by the Company at its discretion; however a fee of $12,000
per month to the maturity date must be paid to the lender. The same termination
fee must be paid to the lender if there is an event of default by the Company,
as defined in the Agreement. The borrowings under the Agreement are secured by
the available cash, accounts receivable, inventory, investment, and general
intangibles of the Company.
4. NOTES PAYABLE AND LINE OF CREDIT FROM RELATED PARTIES
As of December 31, 1998, the Company had a line of credit agreement (the
"Credit Agreement") from CHLP. On November 18, 1999, the Company amended the
Credit Agreement to increase the principal amount to $9.1 million. Borrowings
under the Credit Agreement accrue interest at ten percent per annum and expire
on the earlier of (1) November 18, 2002, (2) upon a liquidating event, as
defined in the Credit Agreement, with any outstanding principal and accrued
interest due in full at that time or (3) 180 days after an initial public
offering (an "IPO"). The Credit Agreement is subordinate to the line of credit
(see Note 3) and is secured by all of the Company's assets. As of December 31,
1998, and 1999, and June 30, 2000, respectively, the outstanding principal under
the Credit Agreement was $4.9 million, $9.1 million and $9.1 million, and
accrued interest was approximately $0.3 million, $0.1 million, and $0.6 million.
As of December 31, 1998 and 1999 and June 30, 2000, respectively, the
Company had unsecured net notes payable and related accrued interest totaling
$1.0 million, $2.5 million, and $2.8 million outstanding due to its founders.
These notes bear interest at 10 percent per annum, and are payable upon demand.
5. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities under operating leases which expire
through April 2004. As of December 31, 1999, the future minimum lease
commitments under all leases were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------ ------
<S> <C>
2000........................................................ $1,032
2001........................................................ 798
2002........................................................ 787
2003........................................................ 570
2004........................................................ 36
------
Total minimum lease payments................................ $3,223
======
</TABLE>
Rent expense under operating leases for each of the years ended December
31, 1997, 1998 and 1999, was approximately $0.9 million, $0.8 million and $0.9
million, respectively.
F-13
<PAGE> 100
AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND 2000 IS UNAUDITED)
The Company sub-leased certain office space, at cost, from an affiliated
entity through common ownership. For the years ended December 31, 1997, 1998 and
1999, rental expense includes $0.4 million, $0.5 million, and $0.5 million,
respectively, relating to this lease. This lease expired in August 1999 when the
Company moved to its new facilities. Beginning in September 1999, the Company
began subleasing office space to Vicor, Inc. ("Vicor"). The Company received
approximately $45,000 during the year ended December 31, 1999 and $66,000 for
the six months ended June 30, 2000, from Vicor related to this sublease
agreement.
6. OTHER RELATED PARTY TRANSACTIONS
Certain partners with controlling interests in ASLP are also the majority
owners of several entities that conduct business with the Company, including
Vicor, Western Data Systems of Nevada, Inc.("WDS"), and CHLP. In addition to the
transactions described with these entities elsewhere herein, descriptions of
certain transactions between the Company and these entities follow.
SUPPORT SERVICES
The Company maintains a seven day a week, 24 hour a day support center to
receive first level support calls. The support center handles support calls for
WDS in addition to those for the Company. Pursuant to an agreement between the
Company and WDS, the Company charges WDS for its share of support center costs.
Additionally, the Company provides some contract services to WDS. For the years
ended December 31, 1997, 1998 and 1999 and for the six months ended June 30,
2000, the Company charged WDS $0.8 million, $0.6 million, $0.6 million and $0.3
million, respectively, under the agreement. As of December 31, 1998, accounts
receivable outstanding from WDS were $40,225, related to the support center
agreement. There were no outstanding receivables related to WDS as of December
31, 1999 and June 30, 2000. Such reimbursement from WDS is recorded as a
reduction in the costs incurred for the support center.
SERVICES TO AND FROM AFFILIATES
For each of the years ended December 31, 1998 and 1999, respectively, the
Company recognized approximately $0.2 million and $0.3 million for consulting
and engineering services to affiliates. For the year ended December 31, 1997,
the Company recognized expenses of $0.3 million related to the utilization of
employee services from affiliates. We made no payments in 1998 and 1999 or the
six months ended June 30, 2000.
ACQUISITION OF PRODUCT LINE FROM AFFILIATE
Effective December 31, 1996, ASLP acquired the assets relating to a product
line from Vicor. The product line consists of internet-based e-mail and fax
messaging products. The purchase price of $0.6 million, including costs
associated with the transaction, was settled by the issuance of a note bearing
interest at ten percent per annum. The purchase price reflected Vicor's carrying
value of the product line assets at the acquisition date, including a goodwill
amount of $0.5 million. The Company made principal payments of $200,000 during
1998, and in February 1999, the Company repaid all principal and accrued
interest outstanding on the note. The goodwill was fully amortized at December
31, 1998.
F-14
<PAGE> 101
AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND 2000 IS UNAUDITED)
REVENUE FROM A RELATED PARTY
UBS Warburg LLC, which is an affiliate of UBS (an approximate 5 percent
stockholder as of December 31, 1999 and June 30, 2000), is also a customer of
the Company. Revenue from UBS Warburg LLC and its affiliates represented
approximately 12 percent, 23 percent and 20 percent of total revenue for the
years ended December 31, 1998 and 1999, and six months ended June 30, 2000,
respectively. The Partnership did not have any revenue from this entity in
fiscal 1997. Management believes the transactions with UBS Warburg LLC and its
affiliates are at terms comparable to those provided to unrelated third parties.
As of December 31, 1998 and 1999, and June 30, 2000, the Company had accounts
receivable outstanding from UBS Warburg LLC and its affiliates of approximately
$0.2 million, $1.1 million and $0.9 million, respectively.
7. STOCKHOLDERS' EQUITY
PREFERRED STOCK
On December 31, 1997, under the terms of the Asset Acquisition, ASLP
conveyed all of its assets, and transferred all of its liabilities to Avistar in
exchange for 2,171,400 shares of common stock and 16,000,000 shares of Avistar's
Series A convertible preferred stock ("Series A preferred stock"). Holders of
the Series A preferred stock are entitled to receive annual, noncumulative cash
dividends at a rate of $0.2167 per share, when and if declared by the Board of
Directors. As of June 30, 2000, no dividends had been declared by the Board of
Directors.
Shares of Series A preferred stock are not convertible at the option of the
stockholder. The shares of Series A preferred stock are only convertible upon
the closing of an IPO of at least $20 million and at an offering price of at
least $7.50 per share. At that point, each share of Series A preferred stock
will be automatically converted into (i) one-fifth of a share of common stock
plus (ii) a beneficial conversion feature equal to the number of shares of
common stock that result from dividing $2.009 (the "Conversion Amount") by the
per share offering price to the public. Beginning December 31, 1999 and for each
year thereafter, the Conversion Amount will be increased by $0.2167 per share of
Series A preferred stock less the amount of all dividends paid during the year.
In addition, upon the occurrence of an IPO the conversion amount is increased by
$0.2167, calculated pro rata on a daily basis. The shares of Series A preferred
stock have the same voting rights as the shares of common stock into which they
are convertible.
The Series A preferred stock have a liquidation preference of $2.009 per
share plus all declared and unpaid dividends on each share of Series A preferred
stock. On December 31 of each year, beginning December 31, 1999, the liquidation
preference will be increased by $0.2167 per share of Series A preferred stock
less the amount of all dividends paid to Series A preferred stock during such
year. As of December 31, 1999, and June 30, 2000, respectively, the liquidation
preference per share was $2.2255 and $2.333875.
In December 1999, ASC and CPI raised a combined $6.4 million from UBS in an
offering of 932,196 shares of ASC's Series B-1 convertible preferred stock and
135,173 shares of ASC's Series B-2 convertible preferred stock (collectively
with the Series B-1 convertible preferred stock, the "Series B preferred
stock"), and 526,316 shares of CPI's Series A preferred stock. As a result, UBS
owned approximately 5 percent of ASC and CPI, respectively. The shares of Series
A preferred stock in CPI were subsequently conveyed to the Company for a nominal
value and cancelled as part of the Reorganization. After the reorganization, UBS
held an approximate 5 percent ownership interest in Avistar. Holders of the
Series B preferred stock are entitled to receive noncumulative
F-15
<PAGE> 102
AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND 2000 IS UNAUDITED)
cash dividends at an annual rate $0.08 per share, when and if declared by the
Board of Directors. As of June 30, 2000, no dividends had been declared by the
Board of Directors.
Each share of Series B preferred stock is convertible, at the option of the
stockholder and at any time after the date of issuance of such share, into the
number of shares of common stock determined by dividing the original Series B
issue price ($1.00) by the Series B conversion price then in effect ($1.00 as of
December 31, 1999). In addition, each share of Series B preferred stock will be
automatically converted into the number of shares of common stock at the
effective Series B conversion price upon an IPO of at least $20 million and at
an offering price per share of at least $7.50. Holders of the Series B-1
convertible preferred stock have the same voting rights equal to the number of
shares of common stock into which their shares of Series B-1 preferred stock are
convertible. Holders of the Series B-2 preferred stock have no voting rights.
The Series B preferred stock has a liquidation preference of $1.00 per
share and ranks senior to the common stock and Series A preferred stock.
DEFERRED STOCK COMPENSATION
In connection with the grant of stock options to purchase shares of common
stock to employees during 1999, the Company recorded deferred compensation of
approximately $2.7 million, representing the difference between the estimated
fair value of the common stock and the aggregate option exercise price of such
options at the date of grant. This amount is presented as a reduction of
stockholders' equity and amortized ratably over the vesting period of the
applicable options (generally four years). Amortization expense related to
deferred stock compensation was approximately $0.6 million in 1999. Compensation
expense is decreased in the period of forfeiture for any accrued but unvested
compensation arising from the early termination of an option holder's services.
In addition, the Company recorded an additional $1.8 million of deferred stock
compensation for stock options granted during the six month period ended June
30, 2000. This amount will be expensed over the stock option vesting period of
four years. Amortization expense was approximately $1.2 million for the six
months ended June 30, 2000.
REPURCHASE OF PARTNERSHIP UNITS
In accordance with the Acquisition Agreement, if an employee of the Company
is terminated and the employee had Class B units in ASLP (the "Class B units"),
ASLP has a repurchase right related to those Class B units. If ASLP exercises
its right to buy back the Class B units held by the terminated employee, the
Company has the right, but not the obligation, to repurchase an equal number of
shares common stock in the Company held by ASLP. During fiscal 1998 and 1999,
respectively, the Company repurchased 961,250 and 104,375 shares of its common
stock from ASLP.
PRO FORMA LIABILITIES AND STOCKHOLDERS' DEFICIT (UNAUDITED)
In June 2000, the Company's Board of Directors (the "Board") authorized the
filing of a registration statement with the SEC to register shares of its common
stock in connection with a proposed IPO. If the IPO is consummated under the
terms presently anticipated, all of the currently outstanding preferred stock
will be converted upon the closing of the IPO into an estimated 19,734,655
shares of common stock, which represents the sum of (1) 17,067,369 shares of
common stock plus (2) an estimated additional 2,667,286 shares of common stock
representing a beneficial conversion feature equal to the quotient of (A) the
conversion amount, which was
F-16
<PAGE> 103
AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND 2000 IS UNAUDITED)
$37.3 million at June 30, 2000 and which includes an amount equal to $0.2167 per
share per annum, pro rated based on the number of days elapsed in the year,
divided by (B) an assumed initial offering price of $14.00 per share. In
addition, the notes payable and accrued interest to related parties will become
current liabilities of the Company upon closing of the IPO. The effect of the
conversion and the early repayment of related party notes and interest have been
reflected in the unaudited pro forma liabilities and stockholders' equity in the
accompanying balance sheet as of June 30, 2000.
8. STOCK OPTION PLAN
In December 1997, the Board established the 1997 Stock Option Plan (the
"Plan") and authorized the issuance of 1,828,602 shares of common stock
thereunder. In December 1999 and May 2000, respectively, the Board authorized an
additional 1,065,625 shares and 100,000 shares to be issued under the Plan.
Under the Plan, incentive stock options to purchase shares of common stock may
be granted only to employees at not less than 100 percent of the fair market
value at the grant date as determined by the Board. Additionally, nonqualified
stock options to purchase shares of common stock may be granted to employees and
consultants at not less than 85 percent of the fair market value at the grant
date. Options generally have a life of ten years.
On December 31, 1997, the Company issued options to purchase 1,091,800
shares of common stock, including 631,800 that were fully vested at the grant
date. The common stock issued under these fully vested options is subject to a
repurchase right of the Company upon the occurrence of certain events, including
the termination of an employee. This repurchase right is an option of the
Company that expires 60 days from the triggering event or upon the occurrence of
certain specific transactions, as defined in the agreement. If the Company
exercises its repurchase right, the purchase price shall be the net book value
of the stock as of the end of the calendar quarter immediately preceding the
triggering event, as determined by management. All other options vest over a
four year period, with 25 percent vesting after one year and the remaining
vesting 6.25 percent per quarter.
F-17
<PAGE> 104
AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND 2000 IS UNAUDITED)
A summary of the Plan activity and related information for the years ended
December 31, 1997, 1998 and 1999, and the six months ended June 30, 2000
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------
OPTIONS WEIGHTED AVERAGE
AVAILABLE SHARES EXERCISE PRICE
---------- --------- ----------------
<S> <C> <C> <C>
Balance, December 31, 1996......................... -- -- $--
Authorized....................................... 1,828,600 -- --
Granted.......................................... (1,091,800) 1,091,800 0.105
---------- --------- ----------------
Balance, December 31, 1997......................... 736,800 1,091,800 0.105
Authorized....................................... -- -- --
Granted.......................................... (86,100) 86,100 0.39
Exercised........................................ -- (630,800) 0.0005
Canceled/repurchased............................. 25,800 (1,000) 0.0005
---------- --------- ----------------
Balance, December 31, 1998......................... 676,500 546,100 0.27
Authorized....................................... 1,065,625 -- --
Granted.......................................... (734,242) 734,242 1.45
Exercised........................................ -- (16,750) 0.31
Canceled/repurchased............................. 137,450 (87,450) 0.445
---------- --------- ----------------
Balance, December 31, 1999......................... 1,145,333 1,176,142 1.00
Authorized (unaudited)........................... 100,000 --
Granted (unaudited).............................. (1,204,608) 1,204,608 13.61
Exercised (unaudited)............................ -- (175,500) 0.25
Canceled/repurchased (unaudited)................. 15,200 (15,200) 2.55
---------- --------- ----------------
Balance, June 30, 2000 (unaudited)................. 55,925 2,190,050 $ 6.90
========== ========= ================
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ --------------------------
NUMBER WEIGHTED- WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT AVERAGE
EXERCISE DECEMBER 31, REMAINING EXERCISE DECEMBER 31, EXERCISE
PRICES 1999 LIFE PRICE 1999 PRICE
------------ -------------- ---------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.25 440,000 8.00 $0.25 220,000 $0.25
$0.40 - 0.45 16,700 8.75 0.45 4,657 0.45
$ 0.95 542,300 9.48 0.95 -- --
$1.95 - 2.45 47,800 9.69 2.30 -- --
$2.95 - 3.45 129,342 9.96 3.40 -- --
--------- ---- ----- ------- -----
1,176,142 8.98 $1.00 224,657 $0.25
========= ==== ===== ======= =====
</TABLE>
The Company has adopted SFAS 123 for disclosure purposes. The weighted
average fair value of options granted during 1998 and 1999 estimated on the date
of grant using the Black-Scholes option pricing model was $0.05 and $0.30,
respectively. The fair value of 1998 and 1999 options granted is estimated on
the date of grant using the following assumptions: risk-free interest rate range
of 4.24 to 6.37 percent, depending on the grant date, volatility of 0.001
percent, expected term of 4 years, and no expected dividends.
F-18
<PAGE> 105
AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND 2000 IS UNAUDITED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period. The Company's pro forma
expense was $159,800, $8,000 and $63,000 for the years ended December 31, 1997,
1998 and 1999, respectively. The Company's pro forma information for the years
ended December 31, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Net loss attributable to common stockholders (in thousands)
As reported............................................... $(7,641) $(6,350)
Pro forma................................................. (7,649) (6,413)
Basic and diluted earnings per share
As reported............................................... $(17.41) $(10.82)
Pro forma................................................. (17.42) (10.92)
</TABLE>
COMMON STOCK RESERVED FOR FUTURE ISSUANCE
As of June 30, 2000, the Company had reserved the following shares of
common stock for issuance in connection with:
<TABLE>
<S> <C>
Conversion of Series A preferred stock...................... 16,000,000
Conversion of Series B preferred stock...................... 1,200,000
Stock options under stock option plan....................... 2,245,975
----------
Total............................................. 19,445,975
==========
</TABLE>
9. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes" ("SFAS 109"). SFAS 109 provides for an asset and
liability approach to account for income taxes under which deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities, and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some or all
of the deferred tax assets will not be recognized. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period of enactment.
No provision for federal or state income taxes is reflected in the
accompanying combined statement of operations for 1997 or for CPI and VCT (both
S corporations prior to January 1, 2000) as such taxes were levied on the
individual partners and shareholders of ASLP and of CPI and VCT. The tax
returns, the qualifications of ASLP as such for tax purposes, and the amount of
distributable income or loss are subject to examination by federal and state
taxing authorities.
F-19
<PAGE> 106
AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND 2000 IS UNAUDITED)
The provision for taxes of Avistar only consists of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1998 1999
------- -------
<S> <C> <C>
Current:
Federal................................................... $ -- $ --
State..................................................... 2 2
Foreign................................................... 15 19
------- -------
17 21
Deferred benefits:
Federal................................................... 2,622 1,791
State..................................................... 388 284
------- -------
3,010 2,075
Valuation allowance......................................... (3,010) (2,075)
------- -------
$ 17 $ 21
======= =======
</TABLE>
The provision for taxes for the six months ended June 30, 2000 of $5,000
represents foreign taxes. There was no tax provision for the six months ended
June 30, 1999.
Avistar's effective income tax provision differs from the Federal statutory
rate of 35 percent due to the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1998 1999
------- -------
<S> <C> <C>
Expected tax benefit at federal statutory rate.............. $(2,249) $(1,741)
State taxes (net of federal benefit)........................ (469) (284)
Change in valuation allowance............................... 3,010 2,075
Research credits not used................................... (255) --
Other....................................................... (20) (29)
------- -------
Provision for income taxes.................................. $ 17 $ 21
======= =======
</TABLE>
The net deferred income tax asset related to Avistar consists of the
following as of December 31, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Deferred income tax assets:
Federal net operating loss carryforwards.................. $ 1,876 $ 3,692
State net operating loss carryforwards.................... 308 596
Tax credit carry forward.................................. 255 255
Reserves.................................................. 571 542
------- -------
3,010 5,085
Valuation allowance......................................... (3,010) (5,085)
------- -------
Net deferred income tax asset............................... $ -- $ --
======= =======
</TABLE>
Net operating loss carryforwards at December 31, 1998 and 1999 were
approximately $5.4 million and $10.4 million for Federal and state income tax
purposes, respectively. The net
F-20
<PAGE> 107
AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND 2000 IS UNAUDITED)
operating loss carryforwards expire on various dates through the year 2019. The
Internal Revenue Service Code contains provisions which may limit the net
operating loss carryforwards to be used in any given year upon the occurrence of
certain events, including a significant change in ownership interest. The
Company believes sufficient uncertainty exists regarding the realizability of
the net operating loss carryforwards and other timing differences at December
31, 1998 and 1999. Accordingly, a valuation allowance has been provided for the
entire net deferred tax asset.
10. NET LOSS PER SHARE
Basic and diluted net loss per share of common stock are presented in
conformity with SFAS No. 128 ("SFAS 128"), "Earnings Per Share," for all periods
presented. Pursuant to SEC Staff Accounting Bulletin No. 98, common stock and
convertible preferred stock issued or granted for nominal consideration prior to
the anticipated effective date of an IPO must be included in the calculation of
basic and diluted net loss per share as if such stock had been outstanding the
years ended December 1998 and 1999. To date, the Company has had no issuances or
grants for nominal consideration. Prior to December 31, 1997, there was no
common stock outstanding as the Company was organized as a partnership.
Accordingly, no earnings per share have been presented for fiscal 1997.
In accordance with SFAS 128, basic net loss per share has been computed
using the weighted average number of shares of common stock outstanding during
the period, less shares subject to repurchase. Diluted net loss per share is
computed on the basis of the weighted average number of shares and common
equivalent shares outstanding during the period. Common equivalent shares result
from the assumed exercise of outstanding stock options that have a dilutive
effect when applying the treasury stock method. The Company has excluded all
convertible preferred stock, outstanding stock options and shares subject to
repurchase from the calculation of diluted net loss per share for the years
ended December 31, 1998 and 1999, and the six months ended June 30, 1999 and
2000, because all such securities are antidilutive. Accordingly, diluted net
loss per share approximates basic net loss per share for all years presented.
The total number of shares excluded from the calculations of diluted net
loss per share were 18,154,364 and 18,333,729 for the years ended December 31,
1998 and 1999, respectively and 18,070,631 and 19,809,520 for the six months
ended June 30, 1999 and 2000, respectively. Basic and diluted pro forma net loss
per share have been computed as described above and also give effect, under SEC
guidance, to the conversion of the convertible preferred stock (using the
if-converted method) from the original date of issuance and the effect of the
beneficial conversion related to the Series A convertible preferred stock.
F-21
<PAGE> 108
AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND 2000 IS UNAUDITED)
The following table presents the calculation of basic and diluted and pro
forma basic and diluted net loss per share (in thousands, except per share
data):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------- -------------------
1998 1999 1999 2000
------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net loss.......................................... $(7,641) $ (6,330) $(2,967) $ (2,778)
======= ======== ======= ========
Basic and diluted:
Weighted average shares of common stock
outstanding..................................... 1,997 1,707 1,731 1,773
Less: Weighted average shares of common stock
subject to repurchase........................... (1,909) (1,590) (1,619) (1,549)
------- -------- ------- --------
Weighted average shares of common stock used in
computing net loss per share.................... 88 117 224
Net loss per share................................ $(86.83) $ (54.27) $(26.49) $ (12.40)
Pro forma:
Net loss.......................................... $ (6,350) $ (2,778)
Beneficial conversion related to convertible
preferred stock................................. $(35,608) $(37,342)
-------- --------
Pro forma net loss attributable to common
stockholders.................................... $(41,958) $(40,120)
======== ========
Weighted average shares of common stock used in
computing basic and diluted net loss per
share........................................... 117 224
Pro forma adjustment to reflect weighted average
effect of assumed conversion of convertible
preferred stock and beneficial conversion
related to the Series A convertible preferred
stock........................................... 18,611 19,734
Weighted average shares of common stock used in
computing pro forma basic and diluted net loss
per share....................................... 18,728 19,958
Pro forma basic and diluted net loss per share.... $ (2.24) $ (2.01)
</TABLE>
11. SEGMENT REPORTING
In June 1997, the FASB issued SFAS No. 131 ("SFAS 131"), "Disclosures About
Segments of an Enterprise and Related Information." SFAS 131 was adopted by the
Company beginning on January 1998. SFAS 131 establishes standards for
disclosures about operating segments, products and services, geographic areas
and major customers. The Company is organized and operates as two operating
segments: (1) the design, development, manufacturing, sale and marketing of
networked video communications products (ASC) and (2) the development,
prosecution, maintenance and support of the intellectual property used in the
Company's products (CPI). Service revenue relates mainly to the maintenance,
training and installation of products and is included in ASC for
F-22
<PAGE> 109
AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND 2000 IS UNAUDITED)
purposes of reporting and decision making. The Company's chief decision maker
monitors the Company's operations based upon the information reflected in the
following table:
<TABLE>
<CAPTION>
ASC CPI TOTAL
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 2000
Revenue................................................... $ 9,251 $ -- $ 9,251
Gross margin.............................................. 4,925 -- 4,925
Depreciation expense...................................... (75) (8) (83)
Total operating expenses.................................. (6,401) (686) (7,087)
Interest income........................................... 90 24 114
Interest expense.......................................... (593) (132) (725)
Net loss.................................................. (1,985) (793) (2,778)
Assets.................................................... 12,095 2,348 14,443
SIX MONTHS ENDED JUNE 30, 1999
Revenue................................................... $ 4,143 $ -- $ 4,143
Gross margin.............................................. 1,659 -- 1,659
Depreciation expense...................................... (118) (9) (127)
Total operating expenses.................................. (3,416) (880) (4,296)
Interest income........................................... 1 2 3
Interest expense.......................................... (260) (71) (331)
Net loss.................................................. (2,018) (949) (2,967)
Assets.................................................... 3,069 195 3,264
YEAR ENDED DECEMBER 31, 1999
Revenue................................................... $ 9,373 $ -- $ 9,373
Gross margin.............................................. 4,486 -- 4,486
Depreciation expense...................................... (229) (19) (248)
Total operating expenses.................................. (7,956) (1,901) (9,857)
Interest income........................................... 14 40 54
Interest expense.......................................... (789) (183) (972)
Net loss.................................................. (4,280) (2,070) (6,350)
Assets.................................................... 9,771 1,157 10,928
YEAR ENDED DECEMBER 31, 1998
Revenue................................................... $ 5,128 $ -- $ 5,128
Gross margin.............................................. 1,726 -- 1,726
Depreciation expense...................................... (423) (2) (425)
Total operating expenses.................................. (7,332) (1,457) (8,789)
Interest income........................................... 1 -- 1
Interest expense.......................................... (259) (17) (276)
Net loss.................................................. (6,167) (1,474) (7,641)
Assets.................................................... 2,845 126 2,971
YEAR ENDED DECEMBER 31, 1997
Revenue................................................... $ 5,057 $ -- $ 5,057
Gross margin.............................................. 42 -- 42
Depreciation expense...................................... (502) -- (502)
Total operating expenses.................................. (7,042) -- (7,042)
Interest income........................................... 1 -- 1
Interest expense.......................................... (2,394) -- (2,394)
Net loss.................................................. (9,703) -- (9,703)
Assets.................................................... 4,333 -- 4,333
</TABLE>
F-23
<PAGE> 110
AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND 2000 IS UNAUDITED)
International revenue, which consists of domestic sales to customers with
operations principally in Western Europe, comprised 14.8 percent, 14.1 percent,
18.6 percent, 25.2 percent and 37.3 percent of total revenue for the years ended
December 31, 1997, 1998 and 1999, and the six months ended June 30, 1999 and
2000, respectively. No single foreign country represented greater than 10
percent of total revenues for the two years in the period ended December 31,
1998. For the year ended December 31, 1999 and the six months ended June 30,
1999 and 2000, respectively, international revenues to customers in the United
Kingdom accounted for 15.6 percent, 22.3 percent and 26.7 percent, of total
revenues. The Company had no significant long-lived assets in any country other
than in the United States for any period presented.
12. SUBSEQUENT EVENTS
In April 2000, the stockholders approved an amendment to the Company's
Certificate of Incorporation to increase the number of authorized shares of
common stock to 50,000,000, effective as of April 2000, and to authorize
10,000,000 shares of preferred stock, effective upon completion of the IPO, that
may be issued in one or more series as may be determined by the Board who may
establish the number of shares to be included in each such series, fix the
designations, powers, preferences and relative rights of the shares of each such
series and any qualifications, limitations, or restrictions thereof, and
increase or decrease the number of shares of any such series without any further
vote or action by the stockholders.
In April 2000, the Company adopted the 2000 Stock Option Plan, to be
effective upon the completion of an IPO. A total of 3,000,000 shares of common
stock have been reserved for issuance under the plan, together with an annual
increase in the number of shares of common stock reserved thereunder as provided
for in the plan.
In April 2000, the Company adopted the 2000 Employee Stock Purchase Plan. A
total of 1,500,000 shares of common stock has been reserved for issuance under
the plan, together with an annual increase in the number of shares of common
stock reserved thereunder as provided in the plan.
In April 2000, the Company adopted the 2000 Director Option Plan. A total
of 90,000 shares of common stock has been reserved for issuance under the plan,
together with an annual increase in the number of shares of common stock
reserved thereunder as provided in the plan.
In May 2000, the Company entered into a one year line of credit agreement
with a financial institution providing for borrowings up to $4.0 million, based
on 80 percent of eligible accounts receivable, to be used for working capital
purposes. This line requires certain financial covenants and bears interest at
prime plus 1.25 percent (subject to adjustment to prime plus 2.75 percent if a
minimum of $2.0 million of equity has not been raised by September 30, 2000)
with minimum monthly interest accruing at $20,000, and is secured by all of
Avistar Systems Corporation's assets.
In July 2000, the Company's Board of Directors approved a one-for-five
reverse split of its common and preferred stock. All common and preferred and
per share amounts in the accompanying combined and consolidated financial
statements have been adjusted retroactively to give effect to this reverse stock
split.
F-24
<PAGE> 111
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
3,600,000 SHARES
[AVISTAR LOGO]
COMMON STOCK
-----------------------
PROSPECTUS
-----------------------
CHASE H&Q
UBS WARBURG LLC
WIT SOUNDVIEW
-----------------------
, 2000
-----------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
WE HAVE NOT TAKEN ANY ACTION IN ANY JURISDICTION OUTSIDE THE UNITED STATES
TO PERMIT A PUBLIC OFFERING OF THE COMMON STOCK OR POSSESSION AND DISTRIBUTION
OF THIS PROSPECTUS IN THAT JURISDICTION. PERSONS WHO COME INTO POSSESSION OF
THIS PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED TO
INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND
THE DISTRIBUTION OF THIS PROSPECTUS APPLICABLE TO THAT JURISDICTION.
UNTIL , 2000, ALL DEALERS THAT BUY, SELL OR TRADE OUR
COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 112
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following sets forth the estimated expenses and costs (other than
underwriting discounts and commissions) expected to be incurred in connection
with the issuance and distribution of our common stock registered hereby.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 16,395
NASD filing fee............................................. $ 6,250
Blue Sky fees and expenses (including legal fees)........... 7,500
Nasdaq National Market application fee...................... 95,000
Printing and engraving expenses............................. 250,000
Registrar and transfer agent fees........................... 20,000
Other legal fees and expenses............................... 600,000
Accounting fees and expenses................................ 400,000
D & O Insurance(A).......................................... 0
Miscellaneous............................................... 4,855
----------
Total....................................................... $1,400,000
==========
</TABLE>
------------------
(A) The Company's D & O Insurance premium will be amortized to expense over the
policy period.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's certificate of incorporation limits the liability of the
Registrant's directors to the maximum extent permitted by Delaware law. Delaware
law provides that the directors of a corporation will not be personally liable
to the corporation and its stockholders for monetary damages for breach of the
fiduciary duties as directors, except liability for any of the following:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
The Registrant's certificate of incorporation provides that it may
indemnify any of its directors, officers or employees to the fullest extent
permitted by law. The Registrant's bylaws provide that it will indemnify its
directors and officers, and that it may indemnify its employees and other
agents, to the fullest extent permitted by law. The bylaws also permit the
Registrant to secure insurance on behalf of any officer, director, employee or
other agent for any liability arising out of his or her actions in such
capacity, regardless of whether the bylaws would permit indemnification.
The Registrant has entered into agreements to indemnify its directors and
executive officers, in addition to indemnification provided for in its Bylaws.
These agreements, among other things, provide for indemnification of the
Registrant's directors and executive officers for expenses, judgments, fines,
and settlement amounts incurred by any such person in any action or proceedings
II-1
<PAGE> 113
arising out of such person's services as a director or executive officer or at
the Registrant's request. The Registrant also maintain directors' and officers'
liability insurance.
The Underwriting Agreement, the form of which is filed as Exhibit 1.1 to
this Registration Statement, will provide for indemnification for specified
matters by the underwriters of the Registrant, its directors, its officers who
sign the registration statement, and the Registrant's controlling persons for
certain liabilities, including liabilities arising under the Securities Act.
ITEM 15. SALES OF UNREGISTERED SECURITIES
The following information gives effect to the one-for-five revenue stock
split effected in July 2000.
In March 2000, registrant was incorporated in the State of Delaware as the
successor to Avistar Systems Corporation, a Nevada corporation ("Predecessor"),
which merged with and into registrant in a migratory merger. In connection with
this transaction, registrant issued an aggregate of 1,850,825 shares of common
stock and 17,067,369 shares of preferred stock to the former stockholders of
Predecessor. The issuance of these shares was exempt from registration pursuant
to Rule 145(a)(2) of the Securities Act of 1933, as amended.
During the past three years, Predecessor has issued unregistered securities
to a limited number of persons, as described below. None of these transactions
involved any underwriters or any public offerings and registrant believes that
each of these transactions was exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) thereof, Regulation D promulgated
thereunder or Rule 701 pursuant to compensatory benefit plans and contracts
related to compensation as provided under Rule 701. The recipients of the shares
of Common Stock in these transactions represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof, and appropriate legends were affixed to the share
certificates and instruments issued in these transactions. All recipients had
adequate access to information about registrant through their relationship with
registrant.
On December 9, 1999, Predecessor issued 1,067,369 shares of its Series B
Preferred Stock to a limited number of accredited investors, including UBS
(USA), Inc., for an aggregate of $5,336,843.
On December 31, 1997, Avistar Systems, Limited Partnership, a Nevada
limited partnership ("ASLP"), entered into an acquisition agreement with
Predecessor to convey all of ASLP's assets, and transfer all of ASLP's
liabilities, to Predecessor. In exchange, Predecessor issued to ASLP 16,000,000
shares of series A convertible preferred stock and 2,171,400 shares of common
stock of Predecessor.
From December 31, 1997 to July 21, 2000, Registrant and Predecessor granted
stock options to purchase an aggregate of 3,116,750 shares of common stock at
exercise prices ranging from $0.0005 to $17.25 per share to employees,
consultants and affiliates, including the following executive officers and
directors: Mr. Campbell, Mr. Heimark, Mr. Hughes, Mr. Afridi, Mr. Arisco, Mr.
Barsotti, Ms. Calaby, Mr. Lauwers, Mr. Ludwig, Mr. Brody and Mr. Solo. During
that period, options to acquire 823,050 shares of common stock were exercised at
an exercise price of $0.25 per share by the following executive officers and
directors: Mr. Hughes, Mr. Afridi, Mr. Arisco, Mr. Barsotti, Ms. Calaby, Mr.
Lauwers and Mr. Ludwig.
II-2
<PAGE> 114
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The exhibits and financial statements schedules filed as part of this
registration statement are as follows:
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
2.1**( Acquisition Agreement by and among Avistar Systems
Corporation and Avistar Systems, Limited Partnership, dated
as of December 31, 1997
2.2( Agreement and Plan of Merger between Avistar Corporation,
f/k/a Avistar Systems Corporation, a Delaware corporation,
and Avistar Systems Corporation, a Nevada corporation, dated
March 28, 2000
2.3( Contribution Agreement between Avistar Systems Corporation,
Collaboration Properties, Inc. and the stockholders of
Collaboration Properties, Inc. dated March 31, 2000
2.4( Contribution Agreement between Avistar Systems Corporation,
VCT, Inc. and the stockholders of VCT, Inc. dated March 31,
2000
3.1( Second Amended and Restated Certificate of Incorporation
3.2( Form of Restated Certificate of Incorporation upon offering
3.3( Bylaws of Avistar Communications Corporation
4.1( Specimen Certificate evidencing shares of Common Stock
5.1 Form of Opinion of Bryan Cave LLP regarding legality of the
common stock
10.1( Avistar Communications Corporation 1997 Stock Option Plan,
as amended
10.1.1( Avistar Systems Corporation 1997 Stock Option Plan Stock
Option Agreement
10.2( Avistar Communications Corporation 2000 Stock Option Plan
10.3( Avistar Communications Corporation 2000 Director Option Plan
10.4( Avistar Communications Corporation Director Option Agreement
10.5( Avistar Communications Corporation Indemnification Agreement
10.6( Master lease for the premises located at 555 Twin Dolphin
Drive, Suite 360, Redwood City, California, between Spieker
Properties, L.P. and Entex Information Services, Inc., dated
August 10, 1998
10.7( Sublease by and between Entex Information Services, Inc. and
Avistar Systems Corporation, dated July 23, 1999
10.8(+ Preferred Supplier Agreement dated June 24, 1997 by and
between Avistar and Tandberg, Inc., including modifications
Nos. 1, 2, 3 and 4
10.8.1(+ Modification No. 5 to Preferred Supplier Agreement dated
June 24, 1997 by and between Avistar and Tandberg, Inc.
10.9( Amended and Restated Secured Non-recourse Revolving
Promissory Note in the principal amount of $9,084,074 by and
between Avistar Systems Corporation and Collaborative
Holdings, dated November 18, 1999
10.10( Accounts Receivable Financing Agreement between Silicon
Valley Bank and Avistar Systems Corporation dated May 26,
2000
10.11( Secured Nonrecourse Revolving Promissory Note of
Collaboration Properties, Inc. in the principal amount of
$1,783,989.73 issued in favor of the Burnett Revocable Trust
dated April 30, 2000
10.12( Secured Nonrecourse Revolving Promissory Note of
Collaboration Properties, Inc. in the principal amount of
$716,359.94 issued in favor of the Heinrichs Revocable Trust
dated April 30, 2000
10.13( Secured Nonrecourse Revolving Promissory Note of
Collaboration Properties, Inc. in the principal amount of
$109,915.08 in favor of William L. Campbell dated April 30,
2000
10.14**( Collaboration Properties, Inc. Series A Preferred Stock
Purchase Agreement dated December 9, 1999
10.15**( Avistar Systems Corporation Series B Preferred Stock
Purchase Agreement, dated December 9, 1999
10.16( Avistar Systems Corporation Registration and Information
Rights Agreement dated December 9, 1999
</TABLE>
II-3
<PAGE> 115
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<C> <S>
21.1( Subsidiaries of the Company
23.1* Consent of Bryan Cave LLP (included in Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
24.1( Power of Attorney
27.1( Financial Data Schedule
</TABLE>
-------------------------
* To be filed by amendment.
** The Registrant hereby agrees to furnish supplementally a copy of any omitted
schedules to the Commission upon request.
+ Portions of the exhibit have been omitted pursuant to a request for
confidential treatment and the omitted portions have been separately filed
with the Commission.
( Previously filed.
(b) Financial Statement Schedules.
Schedule II -- Valuation and qualifying accounts. See page II-7.
All other Financial Statement Schedules have been omitted because of the
absence of conditions under which they would be required or because the required
information has been included in the financial statements.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions of Item 14 of this registration
statement, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance on Rule 430A and contained in
the form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 116
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 3 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Redwood Shores, State of California on July 27, 2000.
AVISTAR COMMUNICATIONS CORPORATION
By: /s/ R. STEPHEN HEINRICHS
------------------------------------
R. Stephen Heinrichs
Vice-Chairman of the Board and Chief
Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to Registration Statement has been signed by the following
persons in the capacities indicated on the date set forth opposite their names.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ GERALD J. BURNETT* Chairman of the Board and July 27, 2000
----------------------------------------------------- Chief Executive Officer
Gerald J. Burnett
/s/ R. STEPHEN HEINRICHS Vice-Chairman of the Board July 27, 2000
----------------------------------------------------- and Chief Financial Officer
R. Stephen Heinrichs (Principal Accounting Officer)
/s/ WILLIAM L. CAMPBELL* Director July 27, 2000
-----------------------------------------------------
William L. Campbell
/s/ WILLIAM R. BRODY* Director July 27, 2000
-----------------------------------------------------
William R. Brody
/s/ DAVID M. SOLO* Director July 27, 2000
-----------------------------------------------------
David M. Solo
*By /s/ R. STEPHEN HEINRICHS
----------------------------------------------------
R. Stephen Heinrichs
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 117
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Avistar Communications Corporation and affiliates:
We have audited in accordance with auditing standards generally accepted in
the United States, the combined financial statements of Avistar Communications
Corporation and affiliates included in this registration statement and have
issued our report thereon dated June 9, 2000. Our audits were made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The accompanying schedule is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
San Jose, California
June 9, 2000
II-6
<PAGE> 118
AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING CHARGED TO END OF
DESCRIPTION OF PERIOD OPERATIONS WRITE-OFFS PERIOD
----------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts Period Ended:
December 31, 1997............................. $230 $17 $ -- $247
==== === ==== ====
December 31, 1998............................. $247 $25 $ -- $272
==== === ==== ====
December 31, 1999............................. $272 $-- $(32) $240
==== === ==== ====
</TABLE>
II-7
<PAGE> 119
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
2.1**( Acquisition Agreement by and among Avistar Systems
Corporation and Avistar Systems, Limited Partnership, dated
as of December 31, 1997
2.2( Agreement and Plan of Merger between Avistar Corporation,
f/k/a Avistar Systems Corporation, a Delaware corporation,
and Avistar Systems Corporation, a Nevada corporation, dated
March 28, 2000
2.3( Contribution Agreement between Avistar Systems Corporation
and the stockholders of Collaboration Properties, Inc. dated
March 31, 2000
2.4( Contribution Agreement between Avistar Systems Corporation
and the stockholders of VCT, Inc. dated March 31, 2000
3.1( Second Amended and Restated Certificate of Incorporation
3.2( Form of Restated Certificate of Incorporation upon offering
3.3( Bylaws of Avistar Communications Corporation
4.1( Specimen Certificate evidencing shares of Common Stock
5.1 Form of Opinion of Bryan Cave LLP regarding legality of the
common stock
10.1( Avistar Communications Corporation 1997 Stock Option Plan,
as amended
10.1.1( Avistar Systems Corporation 1997 Stock Option Plan Stock
Option Agreement
10.2( Avistar Communications Corporation 2000 Stock Option Plan
10.3( Avistar Communications Corporation 2000 Director Option Plan
10.4( Avistar Communications Corporation Director Option Agreement
10.5( Avistar Communications Corporation Indemnification Agreement
10.6( Master lease for the premises located at 555 Twin Dolphin
Drive, Suite 360, Redwood City, California, between Spieker
Properties, L.P. and Entex Information Services, Inc., dated
August 10, 1998
10.7( Sublease by and between Entex Information Services, Inc. and
Avistar Systems Corporation, dated July 23, 1999
10.8(+ Preferred Supplier Agreement dated June 24, 1997 by and
between Avistar and Tandberg, Inc., including modifications
Nos. 1, 2, 3, and 4
10.8.1(+ Modification No. 5 to Preferred Supplier Agreement dated
June 24, 1997 by and between Avistar and Tandberg, Inc.
10.9( Amended and Restated Secured Non-recourse Revolving
Promissory Note in the principal amount of $9,084,074 by and
between Avistar Systems Corporation and Collaborative
Holdings, dated November 18, 1999
10.10( Accounts Receivable Financing Agreement between Silicon
Valley Bank and Avistar Systems Corporation dated May 26,
2000
10.11( Secured Nonrecourse Revolving Promissory Note of
Collaboration Properties, Inc. in the principal amount of
$1,783,989.73 issued in favor of the Burnett Revocable Trust
dated April 30, 2000
10.12( Secured Nonrecourse Revolving Promissory Note of
Collaboration Properties, Inc. in the principal amount of
$716,359.94 issued in favor of the Heinrichs Revocable Trust
dated April 30, 2000
10.13( Secured Nonrecourse Revolving Promissory Note of
Collaboration Properties, Inc. in the principal amount of
$109,915.08 in favor of William L. Campbell dated April 30,
2000
10.14**( Collaboration Properties, Inc. Series A Preferred Stock
Purchase Agreement dated December 9, 1999
10.15**( Avistar Systems Corporation Series B Preferred Stock
Purchase Agreement, dated December 9, 1999
10.16( Avistar Systems Corporation Registration and Information
Rights Agreement dated December 9, 1999
</TABLE>
<PAGE> 120
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<C> <S>
21.1( Subsidiaries of the Company
23.1* Consent of Bryan Cave LLP (included in Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
24.1( Power of Attorney
27.1( Financial Data Schedule
</TABLE>
-------------------------
* To be filed by amendment.
** The Registrant hereby agrees to furnish supplementally a copy of any omitted
schedules to the Commission upon request.
+ Portions of the exhibit have been omitted pursuant to a request for
confidential treatment and the omitted portions have been separately filed
with the Commission.
( Previously filed.
