| Risk Factors Factors Affecting Future Operating Results Our market is in the early stages of development, and our system may not be widely accepted |
| Our ability to achieve profitability depends in part on the widespread adoption of networked video communications systems and the adoption of our video operating system in particular |
| 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 achieve profitability |
| The market for our system is relatively new and evolving |
| We 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 broad market acceptance |
| In addition, businesses that have invested or may invest substantial resources in other video products may be reluctant or slow to adopt our system |
| 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 traditional methods of communication to the extensive use of networked video may not occur as rapidly as we wish |
| We incurred net losses of dlra5dtta2 million for 2005, dlra8dtta7 million for 2004 and dlra8dtta6 million for 2003 |
| As of December 31, 2005, our accumulated deficit was dlra94dtta6 million |
| Our revenue and income from settlement and patent licensing may not increase, or even remain at its current level |
| In addition, our operating expenses may increase as we continue to develop our business in the future |
| As a result, to become profitable, we will need to increase our revenue by increasing sales to existing customers and by attracting additional customers through both direct and indirect sales channels |
| If our expenses increase more rapidly than our revenue, or if revenue and expense levels remain the same, we may never 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 be adversely impacted |
| General economic conditions have and may continue to reduce our revenues and harm our business |
| The international economic environment has negatively affected our business in the past, and may continue to do so in the future |
| During the most recent economic slowdown, which began in 2000, the investment banking industry suffered a sharp decline, which caused many of our existing and potential customers to cancel or delay orders for our products |
| Although the US economy has improved, our customers and potential customers may continue to delay ordering our products, and we could fall short of our revenue expectations for 2006 and beyond |
| Slower growth among our customers, constraints on our customers’ operating budgets, retrenchment in the capital markets and other general economic factors all have had and could in the future have a materially adverse effect on our revenue, capital resources, financial condition and results of operations |
| Our lengthy sales cycle to acquire new customers or large follow-on orders may cause our operating results to vary significantly and make it more difficult to forecast our revenue |
| We have generally experienced a product sales cycle of approximately five months for new customers or large follow-on orders from existing customers due to the time needed to educate 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, or for personnel specifically dedicated to the 21 ______________________________________________________________________ procurement, installation or support of these systems |
| As a result, our customers spend a substantial amount of time before purchasing our system in performing internal reviews and obtaining capital expenditure approvals |
| Economic conditions over the last several years have contributed to additional deliberation and an associated delay in the sales cycle |
| 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 and year to year |
| 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 or year |
| Our customers typically place limited initial orders for our networked video communications system, as they seek to evaluate its usefulness and value |
| Our strategy is to pursue additional and larger follow-on orders after these initial orders |
| Economic conditions have contributed to decreases in our clients’ capital spending in the past, and we have experienced a decrease in the size and number of follow-on orders |
| Our future financial performance depends on successful initial installations of our system, and successful generation of follow-on orders as the Avistar network expands within a customer organization |
| If our system does not meet the needs and expectations of customers, we may not be able to generate follow-on orders |
| Because we depend on a few customers for a majority of our revenue, 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 limited number of customers, particularly Deutsche Bank AG and their affiliates and UBS Warburg LLC and their affiliates |
| In 2005, these customers accounted for 84prca our total revenue |
| Deutsche Bank AG and their affiliates and UBS Warburg LLC and their affiliates accounted for 71prca of our revenue for 2004 |
| No other customers individually contributed greater than 10prca of our total revenue for 2005 or 2004 |
| In 2003, Deutsche Bank AG and their affiliates accounted for 62prca of our revenue |
| No other customers individually accounted for greater than 10prca of our total revenue for 2003 |
| We expect that we will continue to depend upon a limited number of customers for a substantial portion of our revenue |
| As of December 31, 2005, three customers represented 48prca, 32prca and 17prca of accounts receivable |
| As of December 31, 2004, approximately 81prca of our accounts receivable were concentrated with one customer |
| As of December 31, 2003, approximately 89prca of our accounts receivable were concentrated with one customer |
| 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 to decline and 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 or year to year 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 and improve our products in a timely and cost effective manner to respond to technological change and customer demands |
| Future hardware and software platforms embodying new technologies and the emergence of new industry standards and customer requirements could render our system non-competitive or even obsolete |
| The market for our system is characterized by: · rapid technological change; · the emergence of new competitors and partnerships; 22 ______________________________________________________________________ · significant development costs; · changes in the requirements of our customers and their communities of users; · evolving industry standards; and · transition to Internet protocol connectivity for video at the desktop, with the increasing availability of bandwidth |
| Our system is designed to work with a variety of hardware and software configurations and data networking infrastructures used by our customers |
| The majority of these customer networks rely on Microsoft Windows servers |
| However, our software may not operate correctly on other hardware and software platforms or with other 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 in turn may cause confusion in the market, with a potentially harmful effect on our business |
| If we fail to promptly modify or improve our system in response to evolving industry standards or customers’ demands, our system could become less competitive, which would harm our financial condition and reputation |
| Difficulties or delays 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 and computing and communications systems |
| If we experience difficulties with installation or do not meet deadlines 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 we encounter delays in installing our products for new or existing customers or installation requires significant amounts of our professional services support, our revenue recognition could be delayed, our costs could increase, and our margins could suffer |
| Competition could reduce our market share and decrease our revenue |
| Currently, our competition comes from many other kinds of companies, including communication equipment, integrated solution, broadcast video and stand-alone point solution providers |
| Within the video-enabled network communications market, we compete primarily against Polycom, Inc, Tandberg Inc |
| We believe we face increasing competition from alternative video communications solutions that employ new technologies or new combinations of technologies from companies such as Cisco Systems, Inc, Avaya, Inc, Microsoft Corporation, Nortel Networks Corporation and WebEx Communications, Inc, that enable web-based or network-based video communications with low-cost digital camera systems |
| The market in which we operate is highly competitive |
| In addition, because our industry is relatively new and one which is characterized by rapid technological change, evolving user needs, developing industry standards and protocols and the 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 market |
| We expect competition to increase in the future from existing competitors, partnerships of competitors, and from new market entrants with products that may be less expensive than ours or that may provide better performance or additional features not currently provided by our products |
| Many of our current and potential competitors have substantially greater financial, technical, manufacturing, marketing, distribution and other resources, greater name recognition and market presence, longer operating histories, lower cost structures and larger customer bases than we do |
| As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements |
| 23 ______________________________________________________________________ We may be required to reduce prices or increase spending in response to competition in order to retain or attract customers, pursue new market opportunities or invest in additional research and development efforts |
| We cannot assure you that we will be able to compete successfully against current and future competitors, and partnerships of our competitors, or that competitive pressures faced by us will not harm our business, financial condition and results of operations |
| 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 produce may not provide us with adequate protection in all circumstances |
| Although CPI holds patents and has 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 |
| In the event that we believe a third party is infringing our intellectual property rights, an infringement claim brought by us could, regardless of the outcome, result in substantial cost to us, divert our management’s attention and resources, be time consuming to prosecute and result in unpredictable damage awards |
| A third party may also develop similar technology independently, without infringing upon 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 or other countries where we hold patents |
| Unauthorized copying, use or reverse engineering of our system could harm our business, financial condition or results of operations |
| Others may bring infringement claims against us, which could be time-consuming and expensive to defend |
| In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights and we have been a party to such litigation |
| On January 30, 2006, Tandberg Telecom AS, a wholly-owned manufacturing and patent holding subsidiary of Tandberg ASA, filed a patent infringement lawsuit against Avistar in the United States District Court for the Eastern District of Texas |
| The suit alleges that Avistar videoconferencing products infringe one patent purchased by Tandberg Telecom AS The patent involved is US Patent Nodtta 6cmam621cmam515, which covers a method and system for routing video calls |
| In this action, Tandberg Telecom AS has requested injunctive relief, money damages to compensate for its actual damages, costs associated with the litigation and such further relief as the Court deems just and proper |
| We responded to the complaint on March 23, 2006, at which time we asserted that we did not infringe the patent and that the patent was invalid |
| The prosecution of this lawsuit and defense of the Tandberg claims may require us and CPI to expend significant financial and managerial resources, and therefore may have a material negative impact on our financial position and results of operations |
| The duration and ultimate outcome of these proceedings are uncertain |
| We may be a party to additional litigation in the future, to protect our intellectual property or as a result of an alleged infringement of the intellectual property of others |
| These claims and any resulting lawsuit, could subject us to significant liability for damages and invalidation of proprietary rights |
| These lawsuits, regardless of their success, would likely be time-consuming and expensive to resolve and would divert management’s time and attention |
| Any potential intellectual property litigation also could force us to do one or more of the following: · stop selling, incorporating or using products or services that use the challenged intellectual property; 24 ______________________________________________________________________ · obtain from the owner of the infringed intellectual property a license to the relevant intellectual property, which may require us to license our intellectual property to such owner, or may not be available on reasonable terms or at all; and · redesign those products or services that use technology that is the subject of an infringement claim |
| If we are forced to take any of the foregoing actions, we may be unable to manufacture, use, sell, import and export our products, which would reduce our revenues |
| Our inability to protect the intellectual property created by us would cause our business to suffer |
| We rely on a combination of license, development and nondisclosure agreements, trademark, trade secret and copyright law, and contractual provisions to protect our other, non-patentable intellectual property rights |
| If we fail to protect these intellectual property rights, our licensees, potential licensees and others may seek to use our technology without the payment of license fees and royalties, which could weaken our competitive position, reduce our operating results and increase the likelihood of costly litigation |
| The growth of our business depends in part on the applicability of our intellectual property to the products of third parties, and our ability to enforce intellectual property rights against them |
| In addition, effective trade secret protection may be unavailable or limited in certain foreign countries |
| Although we intend to protect our rights vigorously, if we fail to do so, our business will suffer |
| Future revenues and income are difficult to predict for several reasons, including our lengthy and costly licensing cycle, and our failure to predict revenues and income accurately may cause us to miss analysts’ estimates and result in our stock price declining |
| Because our licensing cycle is a lengthy process, the accurate prediction of future revenues and settlement and patent licensing income from new licenses is difficult |
| By way of example, the process of persuading companies to adopt our technologies or convincing them that their products infringe our intellectual property rights can be lengthy |
| These factors make it difficult to predict future licensing revenue and settlement and patent licensing income, and may result in us missing analysts’ estimates which would likely cause our stock price to decline |
| Our system could have defects for which we could be held liable for, and which could result in lost revenue, increased costs, and loss of our credibility or delay in the further 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 |
| 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 potentially harm our reputation |
| Our license agreements with our customers typically contain provisions designed to limit our exposure to potential product liability and certain 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 effective under the laws of some jurisdictions |
| Although we maintain product liability (“errors and omissions”) insurance coverage, we cannot assure you that such coverage will be adequate |
| A product liability, warranty or other claim could 25 ______________________________________________________________________ harm our business, financial condition and/or results of operations |
| Performance interruptions at a customer’s site could negatively affect the 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 operations |
| 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 and new product development process |
| We depend on outside contract manufacturers to produce components of our systems, such as cameras, microphones, gateway, speakers and monitors that we install at desktops and in conference rooms |
| One supplier, Pacific Corporation, is a single source supplier for a key component of our product |
| Another supplier, Equator Technologies Inc, is our only current source of a component used in our IP gateway product |
| 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 due to environmental legislation such as Restriction of Hazardous Substances (RoHS) in the United Kingdom or other reasons, the need to qualify new or alternative components for our use or reconfigure our system and manufacturing process could be lengthy and expensive; · the likelihood that, if particular components were 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 conversely, price changes from suppliers if committed volumes are not met; and · the possible unavailability of, or interruption in, access to some technologies due to infringement claims, production/supply issues or other hindrances |
| 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 likely result in operational problems and increased expenses and could cause delays in the shipment of or otherwise limit our ability to provide our products |
| 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 disruption in product flow may limit our revenue, delay our product development, seriously harm our competitive position and/or result in additional costs or cancellation of orders by our customers |
| If we are unable to expand our direct sales force and/or add 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, product partners and/or value-added resellers, and/or effect sales through our customers |
| If we are unable to maintain or increase our direct sales force or add indirect distribution channels due to our own cost constraints, limited availability of qualified personnel or other reasons, our future revenue growth may be limited, and our future operating results may suffer |
| We 26 ______________________________________________________________________ cannot assure you that we will be successful in attracting, integrating, motivating and retaining sales personnel |
| Furthermore, it can take several months before a new hire becomes a productive member of our sales force |
| The loss of existing salespeople, or the failure of new salespeople and/or indirect sales partners 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 |
| Our products and technologies are complex, and to successfully implement our business strategy and manage our business, an in-depth understanding of video communication and collaboration technologies and their potential uses is required |
| We depend on the continued services of our executive officers and other key personnel |
| We do not have long-term employment agreements with our executive officers or other key personnel, and 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 |
| We need to attract and retain highly skilled technical and managerial personnel for whom there is intense competition |
| If we are unable to attract and retain qualified technical and managerial personnel due to our own cost constraints, limited availability of qualified personnel or other reasons, our results of operations could suffer and we may never achieve profitability |
| The failure of new personnel to develop the necessary skills in a timely manner could harm our business |
| Our plans call for growth in our business, and our inability to achieve or manage growth could harm our business |
| Failure to achieve or manage 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 in the future 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 |
| International revenue, which consists of sales to customers with operations principally in Western Europe and Asia, comprised 63prca of total revenue for 2005, 52prca for 2004 and 58prca for 2003 |
| Some of the risks we may encounter in conducting international business activities 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; · protection of our intellectual property; · restrictions on the repatriation of funds; · potentially adverse tax consequences; 27 ______________________________________________________________________ · timing, cost and potential difficulty of adapting our system to the local language standards in those foreign countries that do not use the English language or adapting our system to be compliant with local environmental legislation; · fluctuations in foreign currencies; and · limitations in communications infrastructures in some foreign countries |
| International political instability may increase our cost of doing business and disrupt our business |
| Increased international political instability, evidenced by the threat or occurrence of terrorist attacks, enhanced national security measures and/or sustained military action may halt or hinder our ability to do business, may increase our costs and may adversely affect our stock price |
| This increased instability has had and may continue to have negative effects on financial markets in the future, including significant price and volume fluctuations in securities markets |
| If this international political instability continues or escalates, our business and results of operations could be harmed and the market price of our common stock could decline |
| 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 |
| We may not meet the continued listing criteria for the NASDAQ Capital Market, which could materially and adversely affect the price and liquidity of our stock, our business and our financial condition |
| For continued listing of our common stock on The NASDAQ Capital Market, we are required to, among other things (i) maintain stockholders’ equity of at least dlra2dtta5 million, or a market value of listed securities of at least dlra35 million or annual net income from continuing operations of at least dlra500cmam000, and (ii) maintain a minimum closing bid price of our common stock of at least dlra1dtta00 |
| If we do not meet the continued listing requirements, our common stock could be subject to delisting from trading on The NASDAQ Capital Market |
| There can be no assurance that we will continue to meet all requirements for continued listing on The NASDAQ Capital Market |
| If we are unable to continue to list our common stock for trading on The NASDAQ Capital Market, there may be adverse impact on the market price and liquidity of our common stock, and our stock may be subject to the “penny stock rules” contained in Section 15(g) of the Securities Exchange Act of 1934, as amended, and the rules promulgated there under |
| Delisting of our common stock from The NASDAQ Capital Market could also materially adversely affect our business, including, among other things: our ability to raise additional financing to fund our operations; our ability to attract and retain customers; and our ability to attract and retain personnel, including management personnel |
| In addition, if we were unable to list our common stock for trading on NASDAQ, many institutional investors would no longer be able to retain their interests in and/or make further investments in our common stock because of their internal rules and protocols |
| 28 ______________________________________________________________________ Our common stock has been and will likely continue to be subject to substantial price and volume fluctuations due to a number of factors, many of which will be beyond our control, which may prevent our stockholders from reselling our common stock at a profit |
| The trading price of our common stock has in the past been and could in the future be subject to significant fluctuations in response to: · general trends in the equities market, and/or trends in the technology sector; · quarterly variations in our results of operations; · announcements regarding our product developments; · announcements of technological innovations or new products by us, our customers or competitors; · announcements of competitive product introductions by our competitors or our customers; · sales or the perception in the market of possible sales of a large number of shares of our common stock by our directors, officers, employees or principal stockholders; and · developments or disputes concerning patents or proprietary rights, or other events |
| If our revenue and results of operations are below the expectations of public market securities analysts or investors, then significant fluctuations in the market price of our common stock could occur |
| In addition, the securities markets have, from time to time, experienced significant price and volume fluctuations, which have particularly affected the market prices for high technology companies, and which often are unrelated and disproportionate to the operating performance of particular companies |
| These broad market fluctuations, as well as general economic, political and market conditions, may negatively affect the market price of our common stock |
| 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 |
| Our share price has, in the past, experienced price volatility, and may continue to do so in the future |
| If the market value of our common stock experiences adverse fluctuations and we become involved in this type of litigation, regardless of the merits or 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 |
| Our expected future working capital needs may require that we seek additional debt or equity funding which, if not available, could cause our business to suffer |
| We may need to arrange for the availability of additional funding in order to meet our future business requirements |
| If we are unable to obtain additional funding when needed on acceptable terms, we may not be able to develop or enhance our products, take advantage of future opportunities, respond to competitive pressures or unanticipated requirements, or finance our efforts to protect and enforce our intellectual property rights, which could seriously harm our business, financial condition, results of operations and ability to continue operations |
| 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 29 ______________________________________________________________________ Directors has the authority to issue up to 10cmam000cmam000 shares of preferred stock and to determine the terms of this 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 the control of Avistar 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 |
| Our principal stockholders can exercise a controlling influence over our business affairs and they may make business decisions with which you disagree that will affect the value of your investment |
| Our executive officers, directors and entities affiliated with them, in the aggregate, beneficially owned approximately 67prca of our common stock as of December 31, 2005 |
| If they were to act together, these stockholders would be able to exercise control over most matters requiring approval by our stockholders, including the election of directors and approval of significant corporate transactions |
| These actions may be taken even if they are opposed by other investors |
| This concentration of ownership may also have the effect of delaying or preventing a change in control of Avistar, which could cause the market price of our common stock to decline |
| Changes in stock option accounting rules enacted as scheduled will adversely impact our reported operating results prepared in accordance with generally accepted accounting principles, which may in turn adversely impact our stock price and our ability to attract and retain employees |
| In December 2004, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) Nodtta 123R (revised 2004), “Share-Based Payment (SFAS Nodtta 123R) |
| ” SFAS Nodtta 123R requires employee stock options and rights to purchase shares under stock participation plans to be accounted for under the fair value method, and eliminates the ability to account for these instruments under the intrinsic value method prescribed by Accounting Principles Board (APB) Opinion Nodtta 25, and allowed under the original provisions of SFAS Nodtta 123 |
| SFAS Nodtta 123R requires the use of an option pricing model for estimating fair value, which is amortized to expense over the service periods |
| The requirements of SFAS Nodtta 123R are effective for fiscal years beginning after June 15, 2005 |
| SFAS Nodtta 123R allows for either a modified prospective recognition of compensation expense or retrospective recognition back to the original issuance of SFAS Nodtta 123 |
| Avistar will adopt SFAS 123R in the first quarter of 2006 using the modified prospective method |
| SFAS 123R requires companies that chose under SFAS 123 to recognize actual forfeitures when they occur rather than estimate them at the grant date make a one-time cumulative adjustment at the adoption date for estimated forfeitures, regardless of the transition method |
| We are currently analyzing the estimated forfeiture adjustment amount for outstanding awards at adoption |
| Avistar will apply the Black-Scholes-Merton model to estimate the fair value of share-based payments to employees, which will then be amortized on a ratable basis over the requisite service period |
| The pro forma impact of the adoption of SFAS 123 on our historical financial statements is included in the notes to the consolidated financial statements presented elsewhere in this Form 10-K We expect to continue to grant stock options to employees |
| The impact of the new standard is expected to have a material impact on our future results of operations |