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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-K (Mark One)þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Period fromto. Commission File No. 000-31045 Raindance Communications, Inc.
 (a Delaware Corporation)
 I.R.S. Employer Identification Number 84-1407805
1157 Century Drive
Louisville, Colorado 80027
(800) 878-7326 Securities registered pursuant to Section 12(b) of the Act:
Not Applicable Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0015 Par Value Per Share Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirement for the past 90 days. Yes þ No  ̈ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.  ̈ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes þ No £ As of March 1, 2005, there were 55,880,946 shares of the registrants common stock outstanding
and the aggregate market value of such shares held by nonaffiliates of the registrant (based upon
the closing sale price of such shares on the Nasdaq National Market on June 30, 2004) was
approximately $96,633,726. Shares of the registrants common stock held by each current
executive officer and director and by each person who is known by the registrant to own 10% or more
of the outstanding common stock have been excluded from this computation in that such persons may
be deemed to be affiliates of the registrant. Share ownership information of certain persons known
by the registrant to own greater than 10% of the outstanding common stock for purposes of the
preceding calculation is based solely on information on Schedule 13G filed with the Commission and
is as of December 31, 2004. This determination of affiliate status is not necessarily a conclusive
determination for other purposes. DOCUMENTS INCORPORATED BY REFERENCE: Information required by Part III (Items 10, 11, 12, 13 and 14) is incorporated by reference to
portions of the registrants definitive proxy statement for the 2005 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after
the close of the 2004 year. Certain exhibits filed with the registrants Registration Statement on Form S-1 (File No.
333-30708), Annual Report on Form 10-K (File No. 000-31045, for fiscal year ended December 31,
2000) and Annual Report on Form 10-K (File No. 000-31045, for fiscal year ended December 31, 2003)
are incorporated by reference into Part IV of this report on Form 10-K.




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RAINDANCE COMMUNICATIONS, INC. Form 10-K For the Fiscal Year Ended December 31, 2004 TABLE OF CONTENTS  
 PagePART IItem      1       Business.
    
    
    3Item      2       Properties.
    
    
    10Item      3       Legal Proceedings.
    
    
    10Item      4       Submission of Matters to a Vote of Security Holders.
    
    
    10PART IIItem      5       Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
    
    
    11Item      6       Selected Consolidated Financial Data.
    
    
    12Item      7       Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item      7A    Quantitative and Qualitative Disclosures About Market Risk.
    
    
    43Item      8       Consolidated Financial Statements and Supplementary Data.
    
    
    43Item      9       Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
    
    
    43Item      9A    Controls and Procedures.
    
    
    43Item      9B     Other Information.
    
    
    44PART IIIItem      10       Directors and Executive Officers of the Registrant.
    
    
    45Item      11       Executive Compensation.
    
    
    45Item      12       Security Ownership of Certain Beneficial Owners and Management.
    
    
    45Item      13       Certain Relationships and Related Transactions.
    
    
    45Item      14       Principal Accounting Fees and Services.
    
    
    45PART IVItem      15       Exhibits and Consolidated Financial Statement Schedules.
    
    
    46Consent of KPMG LLPCertification of the Chief Executive Officer Pursuant to Section 302Certification of the Chief Financial Officer Pursuant to Section 302Certifications of the CEO and CFO Pursuant to Section 906
  SIGNATURES AND CERTIFICATIONS.
    
    
    48
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PART I Unless the context requires otherwise, references in this report to Raindance, the
Company, we, us, and our refer to Raindance Communications, Inc. This Report onForm 10-Kcontains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, including without limitation, statements regarding our strategies, future financial
performance, and future operations that involve risks and uncertainties. These forward-looking
statements include, but are not limited to, statements regarding the extent and timing of future
revenues and expenses and customer demand, statements regarding the deployment of our products, and
statements regarding reliance on third parties. In some cases, these statements may be identified
by terminology such as may, will, should, believes, anticipates, expects, plans,
intends, estimates, predicts, potential and words of similar import. Our actual results
may differ significantly from the results discussed in the forward-looking statements. Factors that
might cause such a difference include, but are not limited to; those discussed in this section and
in the sections entitled Managements Discussion and Analysis of Financial Condition and Results
of Operations and Risk Factors that May Affect Our Operating Results and The Market Price of Our
Common Stock. All forward-looking statements included in this Report are based on information
available to us as of the date hereof and we undertake no obligation to revise any forward-looking
statements in order to reflect any subsequent events or circumstances. Readers are urged to
carefully review and consider the various disclosures made in this report and in our other reports
filed with the Securities and Exchange Commission (SEC) that attempt to advise interested parties
of certain risks and factors that may affect our business. 
 ITEM 1.      BUSINESS Overview We provide remote communication services for everyday business meetings and events. Virtually
all of our communication services are based on proprietary architecture that integrates traditional
telephony technology with real-time interactive web tools. Our continuum of interactive services
includes Raindance Meeting Edition, Reservationless Conferencing, Web Conferencing Pro,
Operator-Assisted Conferencing and Unlimited Conferencing. Raindance Meeting Edition, which was
released in March 2004, is our next-generation communication service that integrates audio, web and
multi-point desktop video technology into one multi-media conferencing solution to support small
ad-hoc workgroup meetings. Reservationless Conferencing provides for automated reservationless
audio conferencing with simple web controls and presentation tools. Web Conferencing Pro allows
users to integrate reservationless automated audio conferencing with advanced web interactive tools
over the web such as application sharing, web touring and online whiteboarding to support large
seminar events. Operator-Assisted Conferencing provides customers with operator assistance during
high profile conferencing events and additional services such as call taping, digital replay and
transcription, which we often bundle with our Web Conferencing Pro service. Unlimited Conferencing
offers unlimited local toll access to our reservationless conferencing service for a fixed monthly
rate. We sell these services to businesses in various markets as well as to resellers of
conferencing and communications services, through our direct and indirect sales channels. Our
business model is largely usage-based, which generally means that our customers only pay for the
services that they use. We also offer our customers monthly subscription rates based on a fixed
number of concurrent users. In addition, through our distribution partners, we may also offer our
services on a software license basis. We operate as a single business segment. We were incorporated in Delaware in April 1997. We first recorded revenue in 1998 and,
excluding the fiscal year 2003, have incurred net losses every year since inception. Our principal
executive offices are located at 1157 Century Drive, Louisville, Colorado 80027. Remote Meeting Solutions Our integrated audio, web and video conferencing services support various types of meetings
from a simple, on-the-fly audio conference to company-wide online training initiatives. These
flexible service offerings enable businesses to choose the right solution to meet their specific
needs. 3




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Our remote communication services offer the following benefits:  
    Integrated Audio, Web and Video Functions.For everyday conference calls, meeting
moderators can use their personal ID to begin a phone conference at anytime without a
reservation or an operator. To add another layer of interaction and group collaboration,
moderators use the same ID to begin a web conference with interactive features to share
rich visual content and encourage higher levels of participation. We provide customers
simple and convenient remote communications solutions and with the release of Raindance
Meeting Edition, we provide our customers access to audio, web and video conferencing with
one telephone access number, one user ID, one technical support team and one billing
solution.
    Reliability and Security. We designed our facilities and infrastructure to provide the
scalability and reliability required to meet the critical communication needs of our
customers. We incorporate telecommunications-grade reliability standards into our
communication technologies and design our infrastructure to accommodate more participants
and usage than we expect. We monitor servers in our data center with redundant network
connections. In addition to offering our services in a secure socket layer, or SSL,
environment with 128-bit encryption, we provide a robust firewall configuration that
offers layered protection for customer data. Meeting moderators have the ability to
further ensure and monitor the security of their meetings using several layers of
security, including PIN codes, audio tones that signal when a participant enters or exits,
conference lock to prevent additional participants from joining a conference, a
participant count feature and unique security codes created by the meeting moderator.
    Flexible Pricing. Depending on the customers communication needs and selected remote
meeting solution, we offer a variety of pricing models to accommodate estimated service
usage as well as the customers preferred method of payment. A large portion of our
services are usage-based, which generally means that our customers pay on a per-minute,
per-participant basis. In addition, we also offer our customers monthly subscription rates
based on a fixed number of concurrent users. For our distribution partners, we may provide
our services through software licenses. We offer several levels of service depending on the customers needs. All of our services can
be used together or separately to create the ideal remote meeting solution for each customer. Our services include the following: Raindance Meeting Edition. In the first quarter of 2004, our next-generation service, which we
call Raindance Meeting Edition, became generally available to the public. Built on multimedia
architecture, that we call the SwitchTower network, Raindance Meeting Edition intuitively
integrates audio, web and video technologies into one seamless solution. Raindance Meeting Edition
includes innovative features that drive the complexity out of planning, accessing and managing
everyday remote meetings. In addition to easy-to-use multi-point video, browser and application
sharing features, Raindance Meeting Edition unites directly with users desktops and provides
seamless Outlook integration. Meeting moderators can use our unique call-me feature to dial
themselves into the conference with no access numbers to remember and invite participants using a
one-click link. To engage participants in a fully collaborative experience as if everyone were in
the same room, meeting moderators can allow participants to easily share documents and information
in a virtual public workspace, control participants interactivity with customized settings and
manage a roster of participants engaged in the audio, web and video portions of the meeting. Reservationless Conferencing.Our Reservationless Conferencing combines the reliability and
universal availability of traditional audio conferencing services with basic web presentations and
controls. Using their dedicated toll-free number and unique conference ID and PIN, meeting
moderators can begin a conference at any time with up to 125 participants from the phone or the
web, without prior reservations or operator assistance. By leveraging our basic web presentation
tools and controls, moderators also have the ability to share a visual presentation, extend the
reach of their conference by streaming audio and synchronized slide presentations over the web and
leverage a suite of conference controls. Web Conferencing Pro.Our Web Conferencing Pro service, available in either Meeting or Seminar
version, is a feature-rich web conferencing tool that allows sales, marketing and training
professionals to conduct meetings and events online with both internal and external participants.
Web Conferencing Pro requires no downloads or 4




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plug-ins for meeting participants, allows customers to customize the interface with their
companys colors and logo and offers a single, integrated interface enabling meeting moderators to
control both the phone and web functions. Web Meeting.Using the Meeting version of our Web Conferencing Pro service, Meeting
moderators can choose to share a variety of visuals online including collectively viewing
and editing desktop applications, displaying slide presentations, conceptualizing on a
shared whiteboard and leading a web tour. In addition, moderators can take advantage of
features that keep participants engaged and encourage interactivity, such as annotation
tools, text chat and polling. Web Seminar.Our Web Conferencing Pro Seminar version builds upon the features of the
Meeting version with added automated management tools to manage large or recurring online
events. Web Seminar allows event organizers, such as training or HR managers, to post
meeting schedules, manage participant registration and set automatic email reminders prior
to the event. In addition, Web Seminar includes additional features to manage interaction
with large groups, such as our online Q&A feature. Operator-Assisted Conferencing.Our Operator-Assisted Conferencing service provides a higher
level of personalized operator support as well as unique features for high-profile conferences and
events that need special attention. This service allows meeting moderators to contact an operator
to schedule a conference call, select the appropriate features for their event and provide event
management support. Operator-Assisted Conferencing provides features such as an operator-led
question and answer session with meeting participants, call taping for later replay and fax
services enabling moderators to distribute additional printed materials before or after the
conference. Operator-Assisted Conferencing can be used in conjunction with Web Conferencing Pro
Meeting or Seminar to support events with up to 2,500 participants. Unlimited Conferencing.Raindances Unlimited Conferencing service provides small and
medium-sized businesses a convenient way to conduct audio and web conferences with a predictable,
low price. Our fully automated, flat-rate conferencing service allows meeting moderators to use
their unique conference ID and PIN to conference as often as they choose, all billed at one fixed
cost. With Unlimited Conferencing, moderators and participants dial into the conference using their
dedicated local exchange toll call number. Similar to Raindance Reservationless Conferencing,
Unlimited Conferencing requires no reservations to initiate a conference with as many participants
as the moderators account allows. Unlimited Conferencing also includes phone and web commands to
control the conference and integrated web functions to share a presentation, conduct Q&A and view
online reports. Future Service Offerings We intend to leverage the infrastructure, technologies, and proprietary systems of our
next-generation network and services to facilitate the deployment of service enhancements and
additional business communication solutions. For example, in mid-2005 we expect to release
Raindance Seminar Edition, our next-generation seminar service designed to support large
multi-media events. Customers We have a diverse base of customers across numerous vertical markets, such as computer
software, business services, manufacturing and financial services. As of December 31, 2004, we had
4,087 revenue generating customers. In 2004, direct customers accounted for 81% of our revenue. In
addition, we partner with resellers, such as conferencing and communications providers, to leverage
their large and established customer bases. Some of our distribution partners also use our services
internally. In 2004, we generated 19% of our revenue from these relationships. No single customer
accounted for greater than 10% of total 2004 revenue. Our five largest customers represented $17.5
million or 23.3% of our total 2004 revenue and $17.7 million or 25.2% of our total 2003 revenue.
Our ten largest customers represented $22.1 million or 29.3% of our total 2004 revenue and $22.5
million or 31.9% of our total 2003 revenue. This indicates a diminishing financial concentration in
our five and ten largest customers; however, a loss of any one of these customers would still
negatively impact our financial results. Our results typically fluctuate based on seasonal sales patterns. Our operating results have
shown decreases in our usage-based services around certain holiday periods, such as during the
spring, summer, Thanksgiving, December and New Year holidays. We expect that our revenue during
these seasons will not grow at the same rates as compared to other periods of the year because of
decreased use of our services by business customers. 5




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Technology We have invested substantial human and capital resources to develop proprietary systems and
applications that integrate disparate telephony and Internet communication technologies. Our
layered approach to building applications allows us to effectively leverage our existing
infrastructure, technologies and proprietary systems to accommodate changes in the marketplace. We
believe this gives us a competitive advantage by allowing us to quickly and reliably develop new
services and enhance our existing services based on evolving market needs. We believe that our
technological resources give us the following benefits:  
    the ability to identify new, and enhance existing, web conferencing services;
    the ability to build integrated applications by combining traditional telephony, voice over Internet protocol (VoIP)
and Internet communication technologies; and
    the ability to build a reliable and scalable communication infrastructure. The technologies that support our business fall into four areas described below: Data Infrastructure.Our data infrastructure provides Internet connectivity between our end
customers and our automated services. We run a multi-home network infrastructure and operate our
own private networks between our on-premises data center and leased data centers. Our entire data
infrastructure is redundant with network cores consisting of some of the industrys most advanced
gigabit technology. All data circuits are delivered over multiple local loop providers and travel
to our data facilities over disparate paths. Critical choke-points in our data architecture are
load balanced. With the architecture design we currently have in place, we have maintained
constant service availability at the data layer for our customers connectivity. Currently we
provide over 450 Mbits of data layer connectivity to our customers over three separate Internet
backbones. Voice Infrastructure. Our voice infrastructure provides the telephony connectivity to our
customers that is required for the audio conferencing aspects of our services. Our voice
infrastructure consists mainly of dynamically routed SS7 call processing systems that integrate
closely with our network providers. These logical layer connections are made over diverse local
loop fiber routes and connect to geographically disparate switching fabrics. Currently we have
over 500 T1 voice circuits in production from two service providers. We have developed proprietary
schemes and methodologies to provide higher uptime statistics than systems utilizing single network
architectures. Application Infrastructure.Our application infrastructure is developed in-house and
represents a substantial portion of our intellectual property and a considerable competitive
advantage. Our ability to offer our customers integrated audio and web functionality is a hallmark
of our proprietary layering methodology. This functionality provides us an advantage over
competitors with less integrated offerings. Our application infrastructure is largely Java based
and is highly redundant and scalable. Business Infrastructure.We operate a largely custom and proprietary business infrastructure
layer that consists of custom real-time billing and rating engines. These functions enable us to
provide our customers with critical business information and tools. Our architecture is designed
to allow us to use information from each of the other infrastructure layers described above, and as
a result, we can provide current billing information for virtually any type of communication action
that is enabled by our platform. The business infrastructure layer uses Oracle 9i for all storage
and runs on multiple redundant and host standby servers. Our business layer also allows us to
adapt to changing requirements as next generation services mature. Research and Development Our research and development efforts are currently focused on leveraging the infrastructure,
technologies, and proprietary systems of our next-generation network and services to facilitate the
rapid deployment of service enhancements and additional business communication solutions to meet
the changing needs of our diverse customer base. We believe our success will depend, in part, on
our ability to develop and introduce new services and enhancements. We expensed, exclusive of
stock-based compensation, approximately $10.5 million, $8.3 million and $7.6 million related to
research and development activities in the years ended December 31, 2004, 2003 and 2002, 6




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respectively. As of March 1, 2005, we had a total of 68 full-time engineers and developers
engaged in research and development activities. We intend to devote substantial resources to
research and development for the next several years. Sales and Marketing Sales. We currently sell our services through a direct sales force and indirect sales
channels. As of March 1, 2005, we had 123 full-time employees engaged in sales and marketing. Our
direct sales force targets our services primarily to large and medium-sized corporations with a
proven need for business communication services in diverse vertical markets, such as computer
software, business services, manufacturing and financial services. We also have an account
management team that is responsible for developing our relationships and expanding opportunities
within our existing customers. Our indirect sales initiatives allow us to extend our reach to
businesses of all sizes by developing alternative distribution channels. The efforts of our
indirect sales group focus on partnering with resellers, such as conferencing and communications
providers, to leverage their customer bases and distribution channels. We private label or
co-brand our services for these partners depending on their requirements. We also partner with
agents to expand the size and reach of our direct sales efforts. A significant percentage of our
sales force compensation is commission based. Marketing. We primarily focus our marketing efforts on direct marketing programs aimed at our
target customers. We seek to generate qualified leads for our sales team, educate and retain
existing customers, generate brand awareness through proactive public relations and drive service
enhancements using research and customer feedback. Customer Service We offer customer support and operator assistance 24 hours a day, seven days a week, free of
charge, to our customers. Technical and customer support is available through a toll-free telephone
number and email request system. In addition, our users can request operator help during a
conference directly from their computer or on their telephone. We also offer substantial self-serve
information databases in the form of frequently asked questions, and user and quick reference
guides hosted on our web site. As of March 1, 2005, we employed 27 full-time technical and customer
support representatives to respond to customer requests for support. The vast majority of our requests for customer support are based on general product
functionality and basic technical assistance, such as browser setting adjustments. The majority of
our customer inquiries can be addressed during an operations technicians initial contact with the
customer. If the issue cannot be resolved immediately, it is escalated to our Level II support
team. If further help is required the issue is transferred to our Level III support team. Once the
issue is identified and a timeline for a resolution is determined, the associated operations
account manager will contact the customer with the resolution plan. Additionally, all customer
incidents are tracked within our database for future reference and technical pattern analysis. Competition The market for web conferencing services is relatively new, rapidly evolving and intensely
competitive. Competition in our market will continue to intensify and competitors are investing
significant resources to develop, market and sell competitive services. As a result, we have
experienced in the past and may continue to experience further price reductions, reduced sales,
revenue and margins, and reduced acceptance of our services. We believe that the primary competitive factors in the web conferencing services market include:  
    pricing;
    ease of use of services and breadth of features;
    brand identity;
    quality and reliability of communication services;
    compatibility with new and existing communication formats; 7




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
    access to and penetration of distribution channels necessary to achieve broad distribution;
    ability to protect intellectual property;
    quality of customer service;
    ability to develop and support secure formats for communication delivery;
    scalability of communication services; and
    challenges caused by bandwidth constraints and other limitations of the Internet infrastructure. Our failure to adequately address any of the above factors could harm our competitive
position. As an integrated provider of web and audio conferencing services, we compete with stand-alone
providers of web conferencing and traditional teleconferencing services. In the web conferencing
services market our principle competitors include Centra Software, Cisco Systems, Genesys, IBM,
Macromedia, Microsoft and WebEx. Our principal competitors in the teleconferencing market include
AT&T, Global Crossing, MCI, Premiere Global Services (formerly PTEK), Sprint and West Corporation.
Some of our competitors have entered or expanded their positions in the conferencing services
market by acquiring competitors of ours. For example, Microsoft acquired Placeware, Cisco Systems
acquired Latitude Communications, and West Corporation acquired Intercall. In addition, some large
software companies, such as Oracle, IBM, Citrix and Macromedia, are also providing web conferencing
products in addition to their software offerings. These large companies have expended
significantly greater resources developing, enhancing, marketing and selling conferencing services
and/or software that directly compete with our offerings, and because these companies can leverage
widespread use of their products and services by existing customers to capture market share in the
conferencing market, our market share as well as our revenue may significantly decline. In
addition, Oracle, which was a large customer of ours, significantly reduced its use of our services
as it completed the transition to an internal conferencing system in the third quarter of 2004. Other competitors or potential competitors may enter or expand their positions in the web
conferencing services market by acquiring one of our competitors, by forming strategic alliances
with these competitors or by developing an integrated offering of services. We also compete with
resellers of web and audio conferencing services. Additionally, there are a number of private
companies that have entered or may enter the web conferencing services market. Many of our current and potential competitors have larger and more established customer bases,
longer operating histories, greater name recognition, broader service offerings, more employees and
significantly greater financial, technical, marketing, public relations and distribution resources
than we do. As a result, these competitors may be able to spread costs across diversified lines of
business, and therefore, adopt aggressive strategies, such as reduced pricing structures and
large-scale marketing campaigns, that reduce our ability to compete effectively. Telecommunication
providers, for example, enjoy lower telephony costs as a result of their ownership of the
underlying telecommunication network. Many more companies have entered and will continue to enter
this market and invest significant resources to develop conferencing services that compete with
ours. These current and future competitors may also offer or develop products or services that
perform better than ours and as a result capture market share that may reduce our share as well as
our revenue. Intellectual Property The success of our business is substantially dependent on the proprietary systems that we have
developed. Currently, we have five issued patents in the United States. These patents cover
functionality related to our Web Conferencing Pro service. We also have thirteen pending patent
applications in the United States covering aspects of our existing and next-generation services and
infrastructure. We may file more patent applications in the future. There is no assurance that our
current and future patent applications will result in any patents being issued. If they are issued,
any patent claims allowed may not be sufficient to protect our technology. In addition, any current
or future patents may be challenged, invalidated or circumvented and any right granted thereunder
may not provide meaningful protection to us. The failure of any patent to provide protection for
our technology would make it easier 8




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for other companies or individuals to develop and market similar systems and services without
infringing upon any of our intellectual property rights. In addition, we have been sued for patent infringement in the past and may be subject to
additional claims alleging patent and intellectual property infringement in the future. As the
number of competitors in our market grows, there is an increased risk that the proprietary systems
and software upon which our services rely may be increasingly subject to third-party infringement
claims. From time to time, we have received notices alleging that we infringe issued third-party
patents or other intellectual property rights. When this happens, we evaluate the allegations
based on an investigation of the intellectual property asserted against our services. In addition,
we evaluate our ability to allege counterclaims. We may also evaluate settlement opportunities,
including licensing or cross-licensing arrangements that may include royalty provisions or
distribution restrictions, neither of which may be advantageous for our business. In some cases,
these matters result in litigation, which is expensive, time-consuming and could divert
managements attention and resources. Claims of this nature could require us to spend significant
amounts of time and money to defend ourselves, regardless of their merit. If any of these claims
were to prevail, we could be forced to pay damages, comply with injunctions, or halt or delay
distribution of our services while we reengineer them or seek licenses for necessary intellectual
property, which might not be available on commercially reasonable terms or at all. We also rely on a combination of trademarks, service marks, trade secrets, copyrights,
confidentiality agreements with our employees and third parties, and protective contractual
provisions. Our protection efforts may prove to be unsuccessful and unauthorized parties may copy
or infringe upon aspects of our technology, services or other intellectual property rights. In
addition, these parties may develop similar technology independently. Existing trade secret,
copyright and trademark laws offer only limited protection and may not be available in every
country in which we intend to offer our services. Policing unauthorized use of our proprietary
information is difficult. Each trademark, trade name or service mark appearing in this report belongs to its holder.
Raindance, Raindance Communications, SwitchTower, OpenGo and our logo are trademarks or registered
trademarks owned by us; all other company and product names herein may be trademarks of their
respective owners. Employees As of March 1, 2005, we employed 248 full-time people. The employees included 30 in general
and administrative functions, 27 in customer service, 123 in sales and marketing and 68 in research
and development. Our future success depends in part on our ability to attract, retain and motivate
highly qualified technical and management personnel. Our employees are not represented by a labor
union or covered by any collective bargaining agreements. We consider our employee relations to be
good. Available Information You may read and copy materials that we file with the SEC at the SECs Public Reference Room
at 450 Fifth Street NW, Washington, DC 20549. You may also obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site
that contains reports, proxy and information statements, and other information regarding issuers
that, like us, file electronically with the SEC. The SECs Internet site can be found at
http://www.sec.gov. Our reports are available free of charge through our website as soon as
reasonably practicable after we file them with, or furnish them to, the SEC. Our website address
is www.raindance.com. Once at www.raindance.com, go to Investor Center/SEC Filings and Financials.
Our internet website and the information contained therein or connected thereto are not intended to
be incorporated into this Annual Report on Form 10-K. 9




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ITEM 2.     PROPERTIES Our principal executive office is located in Louisville, Colorado where we lease two
facilities, which combined, approximate 43,500 square feet. One of the buildings, representing
approximately 36,500 square feet, is partially owned by Paul Berberian, our chairman of the board
and former chief executive officer and president. This lease commenced in October 1999 and has a
term of ten years. Pursuant to this lease, we pay rent of $60,848 per month subject to an annual
adjustment for inflation based on the consumer price index. We also pay the operating expenses
related to this building, which are currently $17,326 per month and vary on an annual basis. In
connection with the acquisition of Interact Conferencing, LLC, we also assumed a facility lease
obligation associated with a building that is partially owned by the former president and chief
executive officer of InterAct Conferencing who became an officer of the Company upon the completion
of the acquisition in 2002 and whose employment with us terminated in June 2004. This facility is
located in Roswell, Georgia and approximates 12,000 square feet. The lease obligation commenced in
May 2002 and has a term of five years. Pursuant to this lease we pay rent of $12,250 per month and
also pay operating expenses of approximately $2,570 per month, which vary on an annual basis. Based
on an independent review of both of these properties and the related lease terms, we believe our
lease obligations are fair and reasonable. Additionally, the Company leases office space for
current or former satellite sales offices that are typically less than 3,000 square feet in six
other states. We currently utilize one of these satellite facilities in California for a sales
office and sublease the others to third parties. At December 31, 2004, the Company occupied three
offices in Colorado, one in California and one in Georgia. We believe that these existing
facilities are adequate to meet current foreseeable requirements or that suitable additional or
substitute space will be available on commercially reasonable terms. 
 ITEM 3.      LEGAL PROCEEDINGS On May 17, 2004, a complaint was filed against us by iTalk, LLC in the District Court of
Boulder County, Colorado alleging breach of contract and unjust enrichment, seeking damages and
injunctive relief regarding an expired covenant not to compete in a license agreement entered into
in March 1999. On June 30, 2004, we filed a motion to dismiss the claims for failure to state a
claim upon which relief can be granted. On July 29, 2004, iTalk filed a response, opposing such
motion. On August 24, 2004, Raindance filed a reply in support of our motion to dismiss. On
September 24, 2004, the court denied the motion to dismiss. On October 4, 2004, Raindance answered
iTalks complaint. On December 10, 2004 the Court set a five day jury trial commencing August 29,
2005. Raindance disputes plaintiffs claims and intends to defend against them vigorously. 
 ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 2004. 10




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PART II 
  ITEM 5.
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES Market Information and Holders Our common stock commenced trading under the trading symbol RNDC on The Nasdaq National Market
on May 17, 2001. Prior to that, our common stock traded on The Nasdaq National Market under the
trading symbol EVOK, which commenced with our listing on July 25, 2000. The price for our common
stock as of the close of business on March 1, 2005 was $2.36 per share. As of March 1, 2005, we had
approximately 236 stockholders of record. The following table sets forth the high and low sales prices per share of our common stock as
of the market close for the periods indicated: High
    
    
    Low2004:First Quarter
    
    $
    3.51
    
    
    $
    2.51Second Quarter
    
    $
    2.84
    
    
    $
    1.92Third Quarter
    
    $
    2.01
    
    
    $
    1.27Fourth Quarter
    
    $
    2.40
    
    
    $
    1.492003:First Quarter
    
    $
    3.55
    
    
    $
    1.30Second Quarter
    
    $
    3.01
    
    
    $
    1.80Third Quarter
    
    $
    3.19
    
    
    $
    2.18Fourth Quarter
    
    $
    3.24
    
    
    $
    2.18
 Dividends We have never paid any cash dividends on our common stock. We intend to retain earnings, if
any, for use in our business and do not anticipate paying any cash dividends on our common stock in
the foreseeable future. On October 9, 2001, we entered into a loan and security agreement with a
bank, pursuant to which we were prohibited from paying any dividends without the banks prior
written consent. In April 2004, this agreement was terminated and a new loan and security
agreement with a different bank was entered into, which continues to prohibit us from paying any
dividends without prior written consent from the bank. Securities Authorized for Issuance Under Equity Compensation Plans The information required by this Item 201(d) of Regulation S-K regarding securities authorized
for issuance under equity compensation plans is incorporated by reference in our definitive Proxy
Statement to be filed in connection with the Annual Meeting of Stockholders to be held on May 5,
2005. Recent Sales of Unregistered Securities We did not sell any equity securities during the year ended December 31, 2004 that were not
registered under the Securities Act of 1933, as amended. Stock Repurchase Program On August 31, 2004 our board of directors approved the repurchase of up to $5,000,000 of our
common stock over twelve months, unless modified by our board, which we announced in a press
release on September 8, 2004. These repurchases may be made from time to time in open market
purchases at prevailing market prices, in negotiated transactions off the market, or pursuant to a
10b5-1 plan. We did not repurchase any shares of our common stock during the quarter ended December
31, 2004. 11




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ITEM 6.      SELECTED CONSOLIDATED FINANCIAL DATA The following selected historical consolidated financial data should be read in conjunction
with our consolidated financial statements and the notes to such statements and Managements
Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in
this Annual Report on Form 10-K. The consolidated statement of operations data for each of the
years in the three year period ended December 31, 2004, and the balance sheet data at December 31,
2004 and 2003 are derived from our financial statements, which have been audited by KPMG LLP, an
independent registered public accounting firm, and are included elsewhere in this filing. The
statement of operations data for the years ended December 31, 2001 and 2000 and the balance sheet
data at December 31, 2002, 2001 and 2000 are derived from our audited financial statements, which
have been audited by KPMG LLP, and are not included in this filing. We acquired Contigo Software,
Inc. in June 2000 in a transaction accounted for as a purchase. The consolidated statement of
operations data for each of the five years ended December 31, 2004 and the consolidated balance
sheet data as of December 31, 2004, 2003, 2002, 2001 and 2000 include the results of operations of
Contigo subsequent to June 16, 2000 and the financial position of Contigo as of such date,
respectively. We acquired substantially all of the assets of InterAct Conferencing, LLC in April
2002 in a transaction accounted for as a purchase. The consolidated statement of operations data
for each of the three years ended December 31, 2004 and the consolidated balance sheet data as of
December 31, 2004, 2003 and 2002 include the results of operations of InterAct subsequent to April
30, 2002 and the financial position of InterAct as of such date, respectively. Historical results
are not indicative of the results to be expected in the future. In 2002, Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other
Intangible Assets became effective and as a result, amortization of goodwill ceased upon adoption
of the Statement on January 1, 2002. Amortization expense related to goodwill would have been $12.2
million in 2003 and $26.5 million in 2002 at the prior amortization rate. In lieu of amortization,
we were required to perform an initial impairment review of our goodwill in 2002 and are required
to perform at least an annual impairment review thereafter. Years Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(in thousands, except per share data)Statement of Operations Data:Revenue:Service
    
    $
    75,269
    
    
    $
    66,611
    
    
    $
    60,651
    
    
    $
    39,410
    
    
    $
    18,022Software
    
    
    
    
    
    
    4,000
    
    
    
    
    
    
    
    
    
    
    
    Total Revenue
    
    
    75,269
    
    
    
    70,611
    
    
    
    60,651
    
    
    
    39,410
    
    
    
    18,022Cost of Revenue:Service
    
    
    34,029
    
    
    
    28,506
    
    
    
    26,635
    
    
    
    22,457
    
    
    
    16,144Software
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Cost of Revenue
    
    
    34,029
    
    
    
    28,506
    
    
    
    26,635
    
    
    
    22,457
    
    
    
    16,144Gross profit
    
    
    41,240
    
    
    
    42,105
    
    
    
    34,016
    
    
    
    16,953
    
    
    
    1,878Operating expenses:Sales and marketing
    
    
    24,044
    
    
    
    19,687
    
    
    
    18,508
    
    
    
    20,362
    
    
    
    53,169Research and development
    
    
    10,466
    
    
    
    8,289
    
    
    
    7,599
    
    
    
    5,704
    
    
    
    8,011General and administrative
    
    
    8,038
    
    
    
    7,202
    
    
    
    7,515
    
    
    
    7,397
    
    
    
    8,441Amortization of goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,506
    
    
    
    14,534Stock-based compensation expense
    
    
    2,211
    
    
    
    2,814
    
    
    
    3,028
    
    
    
    2,834
    
    
    
    8,383Asset impairment charges
    
    
    
    
    
    
    
    
    
    
    138
    
    
    
    4,576
    
    
    
    Restructuring charges, contract termination
expenses, severance and litigation expenses
    
    
    
    
    
    
    596
    
    
    
    584
    
    
    
    1,696
    
    
    
    11,133Total operating expenses
    
    
    44,759
    
    
    
    38,588
    
    
    
    37,372
    
    
    
    69,075
    
    
    
    103,671Income (loss) from operations
    
    
    (3,519
    )
    
    
    3,517
    
    
    
    (3,356
    )
    
    
    (52,122
    )
    
    
    (101,793
    )Interest income, net
    
    
    330
    
    
    
    101
    
    
    
    128
    
    
    
    887
    
    
    
    3,247Other income (expense), net
    
    
    (136
    )
    
    
    (71
    )
    
    
    (126
    )
    
    
    (1,488
    )
    
    
    (207
    )Net income (loss)
    
    
    (3,325
    )
    
    
    3,547
    
    
    
    (3,354
    )
    
    
    (52,723
    )
    
    
    (98,753
    )Preferred stock dividends and accretion of preferred
stock
to redemption value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,725Net income (loss) attributable to common stockholders
    
    $
    (3,325
    )
    
    $
    3,547
    
    
    $
    (3,354
    )
    
    $
    (52,723
    )
    
    $
    (100,478
    )
 12




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Years Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(in thousands, except per share data)Statement of Operations Data:Net income (loss) per share:Basic
    
    $
    (0.06
    )
    
    $
    0.07
    
    
    $
    (0.07
    )
    
    $
    (1.12
    )
    
    $
    (4.69
    )Diluted
    
    $
    (0.06
    )
    
    $
    0.06
    
    
    $
    (0.07
    )
    
    $
    (1.12
    )
    
    $
    (4.69
    )Weighted average number of common shares outstanding:Basic
    
    
    53,937
    
    
    
    52,672
    
    
    
    50,502
    
    
    
    47,280
    
    
    
    21,443Diluted
    
    
    53,937
    
    
    
    54,774
    
    
    
    50,502
    
    
    
    47,280
    
    
    
    21,443Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 As of December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(in thousands)Balance Sheet Data:Cash and cash equivalents
    
    $
    10,458
    
    
    $
    39,607
    
    
    $
    31,699
    
    
    $
    34,222
    
    
    $
    43,311Short-term investments
    
    
    32,935
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Working capital
    
    
    44,246
    
    
    
    37,179
    
    
    
    31,622
    
    
    
    31,567
    
    
    
    38,871Total assets
    
    
    118,725
    
    
    
    122,557
    
    
    
    113,005
    
    
    
    110,252
    
    
    
    158,824Long-term debt, less current portion
    
    
    
    
    
    
    1,227
    
    
    
    2,026
    
    
    
    3,064
    
    
    
    810Restructuring reserve, less current portion
    
    
    
    
    
    
    187
    
    
    
    518
    
    
    
    914
    
    
    
    2,952Total stockholders equity
    
    
    108,006
    
    
    
    107,922
    
    
    
    100,323
    
    
    
    94,768
    
    
    
    141,710
 13




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ITEM 7.      MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Annual Report onForm 10-Kcontains forward-looking statements, including without
limitation, statements containing the words believes, anticipates, expects, and words of
similar import and statements regarding our strategy, financial performance, and our operations
that involve risks and uncertainties. Our actual results may differ significantly from the results
discussed in the forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the subsection entitled Risk Factors that May Affect
Our Operating Results and The Market Price of Our Common Stock. Readers are urged to carefully
review and consider the various disclosures made in this report and in our other reports filed with
the SEC that attempt to advise interested parties of certain risks and factors that may affect our
business. You should read this analysis in conjunction with our consolidated financial statements
and related notes that begin on page F-1. Overview Throughout Managements Discussion and Analysis of Financial Condition and Results of
Operations and in our consolidated financial statements and related notes that begin on page F-1,
you will read about significant events and trends that materially impact earnings, revenue and
other metrics of financial performance. Significant events and trends discussed in this
Managements Discussion and Analysis include significant pricing pressure that has negatively
impacted, and is expected to continue to negatively impact, revenue, gross margins and our ability
to achieve or maintain profitability, changes to accounting rules related to stock compensation
expense that are anticipated to significantly affect our financial results in the second half of
2005, a one-time software license we entered into in 2003, severance charges we incurred in 2003, a
change in accounting treatment for costs associated with the development of our next-generation
service, which commenced in the third quarter of 2003, and restructuring charges and asset
impairment charges we incurred in 2002. These significant events and trends have materially
impacted, or are expected to materially impact, our business, operations and financial results.
Some of these events result from unique facts and circumstances or one-time events that may not
recur. While these items are important to understand and evaluate financial results, other
transactions, events or trends discussed later in this Managements Discussion and Analysis and in
the section entitled Risk Factors That May Affect Our Operating Results and The Market Price Of
Our Common Stock may also materially impact our business operations and financial results. A
complete understanding of these transactions, as well as the other events and trends explained
throughout this report, is necessary to evaluate our financial condition, changes in financial
condition and results of operations. As of December 31, 2004, we had an accumulated deficit of $171.7 million. Our quarterly and
yearly operating results have varied significantly from period to period in the past and are likely
to continue to vary significantly in future periods. For example, our net loss was $0.4 million
and our net income was $1.4 million for the quarters ended December 31, 2004 and 2003,
respectively, and our net loss was $3.3 million and our net income was $3.5 million for the years
ended December 31, 2004 and 2003, respectively. Although we reported net income throughout the
year ended December 31, 2003, we incurred net losses in each quarter of 2004. Additionally, we
expect to report net income in the first quarter of 2005; however there can be no assurance that we
will achieve or maintain net income in the future. Our stock-based compensation expense will
increase significantly beginning in the third quarter of 2005 due to a change in accounting rules
that will require us to record compensation expense for employee stock options and our employee
stock purchase plan in the financial statements. No single customer accounted for greater than 10% of total 2004 revenue. Our five largest
customers represented $17.5 million or 23.3% of our total 2004 revenue and $17.7 million or 25.2%
of our total 2003 revenue. Our ten largest customers represented $22.1 million or 29.3% of our
total 2004 revenue and $22.5 million or 31.9% of our total 2003 revenue. This indicates a
diminishing financial concentration in our five and ten largest customers; however, a loss of any
one of these customers would still negatively impact our financial results. In December 2004 we
settled a billing dispute with a significant customer and vendor related to the provision and
procurement of prior services which resulted in recognition of $0.4 million in revenue and $0.1
million in cost of revenue. While our business model is largely usage-based, which generally means that our customers only
pay for the services they use, our non-usage revenue, such as from subscriptions and software
licenses, may fluctuate based on the timing of new subscription agreements, the expiration and
renewal of existing agreements and the timing of and revenue recognition associated with software
licenses. This fluctuation can significantly impact our financial results, particularly revenue,
gross margins and net income or loss because these subscriptions and software licenses have 14




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virtually no variable cost of revenue expense. Such opportunities to license our software
have arisen infrequently and are difficult to predict, and currently we do not anticipate any
software license revenue in the near term. For example, we recognized $1.1 million and $2.9
million in software revenue in the third and fourth quarters of 2003, respectively, associated with
the sale of a Web Conferencing Pro license. As a result, the impact this revenue has had on our
business and financial results in the past is not consistent and should not be relied upon as
indicative of our future performance. In the quarter ended December 31, 2004, 9.7% of our revenue
was non-usage based as compared to 22.3% in the quarter ended December 31, 2003. In the year ended
December 31, 2004, 8.9% of our revenue was non-usage based as compared to 14.1% in the year ended
December 31, 2003. We expect our non-usage based revenue to approximate 7% to 12% of our total
revenue in the first quarter of 2005. Our next-generation service, Raindance Meeting Edition, was released in March 2004. Raindance
Meeting Edition revenue growth has been slower than anticipated and we believe this is due in large
part to the small workgroup collaboration services sector being in the early adoption phase.
However, we continue to add new customers and revenue from this product is increasing quarter over
quarter. We expect to release Raindance Seminar Edition in mid-2005. Raindance Seminar Edition
complements Raindance Meeting Edition and is designed for large, planned seminar events where there
is one main presenter and hundreds or thousands of participants. Currently, it is difficult to
predict with any certainty the impact Raindance Seminar Edition will have on our business,
operations and financial results, the market in general, or our existing customer base including
those that currently utilize Web Conferencing Pro. Our gross profit is higher on our web-based services, namely Web Conferencing Pro and
Raindance Meeting Edition and to the extent we are successful in selling more web-based services,
we would expect our overall gross profit to increase. We define multi-media revenue as revenue
generated from a collaboration event where more than one media type is used, such as an event that
combines audio and web conferencing or an event that combines audio, web and video conferencing
using Raindance Meeting Edition. Multi-media revenue excludes all service revenue attributable to
audio-only conferencing. Multi-media revenue was $12.7 million in 2004 compared to $11.1 million
in 2003. Our gross profit margins are typically higher on multi-media events, due to the web
integration, as compared to audio-only events and we expect our multi-media revenue to grow as a
percentage of revenue in the upcoming year. Statement of Operations Overview The following describes how we recognize revenue for the services and software we offered as
of December 31, 2004:  
    Raindance Meeting Edition.Revenue for our Raindance
Meeting Edition service is derived from subscription
and usage fees. Revenue from subscriptions is
recognized monthly regardless of usage, while usage
fees are based upon either connections or minutes
used. We recognize usage revenue from our Raindance
Meeting Edition services in the period the meeting is
completed. We recognize revenue associated with any
initial set-up fees ratably over the term of the
contract.
    Reservationless Conferencing Revenue. Revenue for our
Reservationless Conferencing service is generally
based upon the actual time that each participant is
on the phone or logged onto the web. For example, a
customer is charged a per-minute, per-user fee for
each participant listening and viewing a live or
recorded simulcast. In addition, we charge customers
a one-time fee to upload visuals for a phone
conference or a recorded simulcast. We recognize
usage revenue from our Reservationless Conferencing
services in the period the call or simulcast of the
call is completed. We recognize revenue associated
with any initial set-up fees ratably over the term of
the contract.
    Web Conferencing Pro Revenue. Revenue for our Web
Conferencing Pro service is derived from subscription
and usage fees in addition to event fees or, in more
limited cases, a software license fee. Revenue from
subscriptions is recognized monthly regardless of
usage, while usage fees are based upon either
connections or minutes used. Event fees are generally
hourly charges that are recognized as the events take
place. We recognize revenue associated with any
initial set-up fees ratably over the term of the
contract. Revenue from software license agreements is
either recognized upon shipment of the software when
all the following criteria have been met: persuasive
evidence of an arrangement exists, delivery has
occurred, the fee is fixed or determinable,
collectibility is probable, and vendor-specific
objective evidence is available for the fair value of
all undelivered elements, or 15




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recognized ratably over the software support period if we do not have
vendor-specific objective evidence for all undelivered elements.
    Operator-Assisted Revenue. Revenue for our
Operator-Assisted Conferencing service is generally
based upon the actual time that each participant is
on the phone. In addition, we charge customers a fee
for additional services such as call taping, digital
replay, participant lists and transcription services.
We recognize usage revenue and related fees from our
Operator-Assisted Conferencing service in the period
the call is completed.
    Unlimited Conferencing. Revenue from Unlimited
Conferencing is derived from a flat, fixed charge per
month depending on the conference size limit selected
by the customer. The fixed monthly charge is
recognized as revenue each month. Our cost of revenue consists primarily of telecommunication expenses, depreciation of network
and data center equipment, amortization of certain software including internally developed
software, Internet access fees and fees paid to network providers for bandwidth, equipment
maintenance contract expenses, compensation and benefits for operations personnel and allocated
overhead. Our telecommunication expenses are variable and directly correlate to the use of our
services and primarily are incurred when our customers use our Reservationless Conferencing
service. A change in our mix of Reservationless Conferencing and Web Conferencing Pro or Raindance
Meeting Edition revenue will affect our gross profit, as our cost of revenue is typically higher on
our Reservationless Conferencing service as a result of price compression for this service. Our
depreciation, Internet access and bandwidth expenses, equipment maintenance expenses and
compensation expenses generally increase as we increase our capacity and build our infrastructure.
We plan to continue to make investments in our infrastructure; however, we currently expect capital
expenditures in 2005 to be comparable with 2004. We expect that our cost of revenue will increase
in 2005 due to a corresponding increase in revenue, but do not expect cost of revenue as a
percentage of revenue to change materially. We expect that our current capacity and infrastructure,
coupled with the capital expenditures we have made and we expect to make, will accommodate our
needs through the end of 2005. We have a limited number of sources for our telephony services. If
one of our suppliers were to terminate or interrupt its services, we may experience difficulties or
delays in obtaining alternative sources on commercially reasonable terms and may experience an
increase in our variable telephony cost. We are also involved in a dispute with our primary
conferencing bridge provider that may require us to seek alternative sources for conferencing
bridges, which may be difficult and expensive to integrate into our existing infrastructure. We incur sales and marketing expenses that consist primarily of the salaries, commissions and
benefits for our sales and marketing personnel, remote sales offices expenses, product and market
research, sales lead generation and telemarketing expenses and allocated overhead. We currently
expect sales and marketing expenses to remain relatively flat in absolute dollars and decrease as a
percentage of revenue as we expand our sales force and continue our marketing initiatives in 2005
to support Raindance Meeting Edition and the anticipated mid-2005 release of Raindance Seminar
Edition. We incur research and development expenses that consist primarily of salaries and benefits for
research and development personnel, equipment maintenance contract expenses and allocated overhead.
We expense research and development costs as they are incurred, except for certain capitalized
costs associated with internally developed software. We capitalized $0.3 million of internally
developed software in 2004 and expect to continue to capitalize costs associated with internally
developed software in 2005. Based on plans developed in the third quarter of 2003 regarding the
external distribution of software, we changed the accounting treatment of costs associated with the
development of our next-generation service from SOP 98-1 to SFAS 86. Since the second quarter of
2001 we had capitalized, pursuant to SOP 98-1, $2.8 million in costs associated with our
next-generation service, $1.3 million of which was related to internal development and $1.5 million
of which was related to contract development. We currently expect to continue to make investments
in research and development and anticipate that these expenditures will remain relatively flat in
absolute dollars and decrease as a percentage of revenue in 2005. We incur general and administrative expenses that consist primarily of expenses related to
finance, human resources, administrative and general management activities, including legal,
accounting and other professional fees, in addition to other general corporate expenses. We
currently expect general and administrative expenses to remain relatively flat in terms of absolute
dollars and decrease as a percentage of revenue in 2005. Since our inception, we have used stock-based compensation for employees, consultants and
members of our board of directors to attract and retain business and technical personnel.
Stock-based compensation expense is 16




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based on the excess of the fair value of our common stock on the date of grant or sale over
the option exercise price or stock purchase price. Compensation expense related to stock options is
amortized over the vesting period of the options, which generally is four years. As of May 2004,
all of these options with fair values deemed in excess of the exercise price were fully vested and
therefore all associated stock-based compensation expense has been recognized. During the three
months ended December 31, 2004 we did not record any deferred stock-based compensation; however,
during the year ended December 31, 2004, we recorded $0.9 million of deferred stock-based
compensation. We also expensed $0.1 million and $2.2 million of stock-based compensation in the
three months and year ended December 31, 2004, respectively. The $0.9 million of deferred
stock-based compensation for the year ended December 31, 2004 relates to the issuance of 275,000
shares of restricted stock to our new president and chief executive officer in January 2004, of
which 50,000 shares were immediately vested; 100,000 shares vest after the completion of 24 months
of continuous service and 125,000 shares vest after the completion of 37 months of continuous
service. This agreement was amended in August 2004 to include acceleration of all unvested shares
of restricted stock in the event of a change in control of the Company, as defined in the
agreement. In the year ended December 31, 2003 we recorded $1.2 million of deferred stock-based
compensation related to 750,000 shares of restricted stock issued in February 2003 to certain
executives and key employees under our Executive Performance-Based Compensation Arrangement, as
approved by the board of directors in February 2003. The restricted stock will vest in full on the
sixth anniversary of its issuance, subject to accelerated vesting upon the achievement of certain
financial or product-based performance milestones, or, generally at the boards discretion, upon a
change in control of the Company. Accordingly, the $1.2 million deferred stock-based compensation
charge is being expensed ratably over six years, which charges will be accelerated when it becomes
apparent that the financial or product-based milestones are deemed probable of being achieved. In
addition, pursuant to this arrangement, $4.7 million of cash compensation was approved and will
become payable upon the achievement of such financial or product-based milestones, or, generally in
the boards discretion, upon a change in control of the Company. However, the termination of the
Companys former president and chief executive officer effective December 31, 2003 and the
resulting cancellation of 200,000 shares of restricted stock granted to him under the plan
triggered the reversal of the unamortized portion of his restricted stock grant compensation
expense in the amount of $0.3 million and terminated the Companys $1.5 million cash compensation
commitment to this former officer. In the first quarter of 2003 we determined that a product-based
milestone would likely be achieved in 2004 and, accordingly, we accelerated the stock compensation
charge associated with 100,000 shares of restricted common stock and began accruing a $0.2 million
cash bonus. In the first quarter of 2004 this milestone was achieved and the cash bonus of $0.2
million was paid and the restricted stock was released and issued. In the third quarter of 2004 we
determined that a second product-based milestone will likely be achieved in 2005 and, accordingly,
we began accruing a $0.3 million cash bonus payable upon the achievement of the milestone and
accelerated the stock compensation charge associated with 150,000 shares of restricted common
stock. In connection with the acquisition of InterAct, we recorded $3.4 million of deferred
stock-based compensation related to the issuance of 997,599 shares of common stock simultaneously
with the closing of the InterAct acquisition. The deferred stock-based compensation related to
these shares was being expensed over three years, beginning in May 2002. In June 2004, our former
Senior Vice President of Sales, Carolyn Bradfield, left the Company, and, as a result, we recorded
a $0.9 million stock compensation charge related to the unrecognized deferred stock-based
compensation associated with the release of certain escrowed shares of restricted stock. The value
of these escrowed shares was determined based on the average market price of our common stock over
the three-day period before and after the terms of the acquisition were agreed upon and announced. Assuming that no additional shares of restricted stock will be forfeited or granted, assuming
there is no change in control of the Company, and excluding stock-based compensation expense we
expect to record as a result of adopting Financial Accounting
Standards Board (FASB) 123R -Share-Based Payment: an amendment of FASB No. 123 and 95,we estimate incurring stock-based
compensation expense of approximately $0.5 million in 2005 for common stock issued or awarded to
our employees and members of our board of directors under our equity plans through December 31,
2004. Other Data  Non-GAAP Financial Measure We evaluate operating performance based on several factors, including our primary internal
financial measure of earnings before interest, taxes, depreciation, amortization and stock-based
compensation expense (adjusted EBITDA). This analysis eliminates the effects of considerable
amounts of depreciation and stock-based compensation. Since our initial public offering, we have
reported adjusted EBITDA, a financial measure that is not 17




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defined by Generally Accepted Accounting Principles (GAAP). Certain restructuring charges and
asset impairment charges historically presented in this non-GAAP financial performance measure have
been removed from adjusted EBITDA for 2002 to conform to the presentation of adjusted EBITDA for
the year ended December 31, 2004 and 2003. The calculation of adjusted EBITDA is as follows (in thousands): Years Ended December 31,2004
    
    
    2003
    
    
    2002Net income (loss)
    
    $
    (3,325
    )
    
    $
    3,547
    
    
    $
    (3,354
    )Add: depreciation, amortization and other
income (expense), net
    
    
    11,001
    
    
    
    10,265
    
    
    
    10,360Add: stock-based compensation expense
    
    
    2,211
    
    
    
    2,814
    
    
    
    3,028Adjusted EBITDA
    
    $
    9,887
    
    
    $
    16,626
    
    
    $
    10,034
 Although we had achieved quarterly net income for five consecutive quarters ending December
31, 2003, we recorded net losses in each quarter of 2004 partially due to the increase in sales and
marketing expenditures to support the release of Raindance Meeting Edition. Our research and
development costs also increased in 2004 over 2003 due to a change in accounting treatment of our
software development costs. Additionally, our cost of revenue increased in 2004 primarily due to an
increase in variable costs as a result of an increase in revenue. For the year ended December 31,
2004, as compared with the year ended December 31, 2003, our net income decreased by $6.9 million,
resulting in a $3.3 million net loss for the current year. For the year ended December 31, 2004,
as compared with the year ended December 31, 2003, adjusted EBITDA decreased by $6.7 million. The
trend from 2003 to 2004 depicted by this calculation indicates that we increased operating costs
primarily in sales and marketing and research and development expenses for a new product launch and
ongoing product development with the majority of these expenditures contributing to the net loss
for 2004 and the corresponding decrease in adjusted EBITDA. For the year ended December 31, 2003,
as compared with the year ended December 31, 2002, our net loss decreased by $6.9 million,
resulting in $3.5 million in net income for 2003. For the year ended December 31, 2003, as
compared with the year ended December 31, 2002, adjusted EBITDA increased by $6.6 million. The
trend from 2002 to 2003 depicted by this calculation indicates that we were successful in reducing
our net loss and generating net income as well as increasing adjusted EBITDA, primarily as a result
of our efforts to control operating costs while simultaneously increasing revenue. Adjusted EBITDA should be considered in addition to, not as a substitute for, net income
(loss) and other measures of financial performance reported in accordance with GAAP. We believe
that adjusted EBITDA is a useful performance metric for our investors and is a measure of operating
performance and liquidity that is commonly reported and widely used by financial and industry
analysts, investors and other interested parties because it eliminates significant non-cash charges
to earnings. In addition, many sophisticated financial institutions and banks use adjusted EBITDA
as a performance metric in their lending practices. For example, adjusted EBITDA is used by our
bank to determine our compliance with a financial covenant articulated in our credit agreement.
However, adjusted EBITDA as used by us may not be comparable to similarly titled measures reported
by other companies. The funds depicted by adjusted EBITDA were not available for our discretionary use due to debt
service and debt maturities, all of which were satisfied in 2004, and other commitments that we
have made. Cash flow calculated in accordance with GAAP is as follows: net cash provided by
operations was $7.4 million, $18.2 million and $7.2 million for the years ended December 31, 2004,
2003 and 2002, respectively; net cash used by investing activities was $35.2 million, $10.3 million
and $9.6 million for the years ended December 31, 2004, 2003 and 2002, respectively; net cash used
by financing activities was $1.3 million for the year ended December 31, 2004, net cash provided by
financing activities was less than $0.1 million for the year ended December 31, 2003, and net cash
used by financing activities was $0.1 million for the year ended December 31, 2002. Results of Operations Year Ended December 31, 2004 Compared to Year Ended December 31, 2003 Revenue.Total revenue increased by $4.7 million to $75.3 million for the year ended December
31, 2004 from $70.6 million for the year ended December 31, 2003. The increase was due in part to
the addition of new customers and an increase in usage from our existing customer base, which was
partially offset by pricing pressure we 18




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are experiencing for some of our services, particularly our Reservationless Conferencing
Service and the loss of Oracle Corporation who accounted for a significant portion of our revenue
in 2003 and reduced its use of our conferencing services as it completed the transition of
substantially all of its conferencing to an internal conferencing system in the third quarter of
2004. We recognized $4.0 million in revenue in 2003 associated with the sale of a Web Conferencing
Pro license. Opportunities to license our software have traditionally arisen infrequently and are
difficult to predict. We did not record any software revenue in 2004 and do not currently project
software licensing revenue in 2005. Total minutes attributable to our usage-based services were
759.5 million and 636.1 million for the years ended December 31, 2004 and 2003, respectively, which
represents a 19.4% increase in minutes. Usage-based revenue increased by 13.0% in 2004 from 2003,
which indicates that our average price per usage based minute
declined by approximately 5.4% or .0051 cents per minute in 2004. We expect this trend to continue in the foreseeable future. Cost of Revenue.Cost of revenue increased $5.5 million to $34.0 million for the year ended
December 31, 2004 from $28.5 million for the year ended December 31, 2003. Telecommunications
costs increased $2.9 million for the year ended December 31, 2004 over the year ended December 31,
2003 due to an increase in minutes from our Reservationless Conferencing and Web Conferencing Pro
communication services, partially offset by an overall improvement in the utilization of our
infrastructure. Total depreciation expense increased $2.0 million for the year ended December 31,
2004 due to additional hardware and software being placed into service in 2004, including the
depreciation of capitalized costs in connection with the release of Raindance Meeting Edition in
March of 2004. Expense associated with our Operator-Assisted Conferencing service increased $0.8
million in the current year, which is consistent with growth in revenue from this service.
Conversely, maintenance and repairs expense decreased $0.2 million for the year ended December 31,
2004 from the year ended December 31, 2003. The primary drivers that affect our gross profit are
changes in our telephony and fixed internet costs and a general improvement in our infrastructure
utilization, all of which are or may be partially offset by pricing pressure we are experiencing on
the sale of our Reservationless Conferencing service. In addition, our gross profit is higher on
our web-based services, namely Web Conferencing Pro and Raindance Meeting Edition and to the extent
we are successful in selling more web-based services, we would expect our overall gross profit to
increase. We define multi-media revenue as revenue generated from a collaboration event where more
than one media type is used, such as an event that combines audio and web conferencing or an event
that combines audio, web and video conferencing using Raindance Meeting Edition. Multi-media
revenue excludes all service revenue attributable to audio-only conferencing. Multi-media revenue
was $12.7 million in 2004 compared to $11.1 million in 2003. Our gross profit margins are typically
higher on multi-media events, due to the web integration, as compared to audio-only events and we
expect our multi-media revenue to grow as a percentage of revenue in the upcoming year. Sales and Marketing. Sales and marketing expense increased $4.3 million to $24.0 million for
the year ended December 31, 2004 from $19.7 million for the year ended December 31, 2003. Bad debt
expense increased $0.6 million for the year ended December 31, 2004 as compared to the year ended
December 31, 2003 as a result of the on-going quarterly analysis of the bad debt reserve.
Commissions expense increased $0.4 million for the year ended December 31, 2004 as compared to the
year ended December 31, 2003 in connection with an increase in revenue in the current year.
Personnel and payroll related expenses increased $1.6 million for the year ended December 31, 2004
as compared to the year ended December 31, 2003 due to increased headcount in 2004 as compared to
2003. Expenses related to advertising and promotion, lead generation, market research and sales
tools increased $0.3 million, $0.8 million, $0.4 million, and $0.2 million, respectively, for the
year ended December 31, 2004 as compared to the year ended December 31, 2003 due to an overall
increase in marketing initiatives, some of which directly related to the release of Raindance
Meeting Edition which occurred in March 2004. Additionally, trade show expenses, travel expenses
and meetings and conferences expenses have each increased $0.2 million year over year due to an
overall increase in marketing and sales initiatives. Outside service expense increased $0.4
million in the current year over the previous year due to consulting services utilized in
connection with the sales organization restructuring. Offsetting these increases, depreciation
expense decreased $0.8 million for the year ended December 31, 2004 as compared with the year ended
December 31, 2003 primarily due to fixed assets not specifically allocated to cost of revenue
becoming fully depreciated. Research and Development.Research and development expense increased $2.2 million to $10.5
million for the year ended December 31, 2004 from $8.3 million for the year ended December 31,
2003. Personnel and payroll related expenses increased $1.3 million for the year ended December
31, 2004 over the year ended December 31, 2003 due to increased headcount in connection with the
development of Raindance Meeting Edition that was released in March 2004, as well as a decrease in
capitalized internally-developed software. Similarly, outside services increased $1.1 million for
the year ended December 31, 2004 as compared to the year ended December 31, 2003. The increase in
personnel and payroll related expenses and outside services is primarily related to a change in 19




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the accounting treatment of costs associated with the development of Raindance Meeting Edition
from SOP 98-1 to SFAS 86. There was a slight variance in other expenses, including a $0.2 million
decrease in depreciation expense for the year ended December 31, 2004 as compared to the year ended
December 31, 2003 due to fixed assets not specifically allocated to cost of revenue becoming fully
depreciated. General and Administrative.General and administrative expense increased $0.8 million to $8.0
million for the year ended December 31, 2004 as compared to $7.2 million for the year ended
December 31, 2003. Legal expenses decreased $0.2 million for the year ended December 31, 2004 as
compared to the year ended December 31, 2003 due to the accrual of a $0.3 million loss contingency
pertaining to a patent infringement suit in the third quarter of 2003, which was subsequently paid
in the fourth quarter of 2003 and the first quarter of 2004. Accounting expense increased $0.4
million for the year ended December 31, 2004 as compared to the year ended December 31, 2003 due to
an increase in audit fees associated with the audit of internal controls over financial reporting
required by Sarbanes-Oxley. Outside services expense increased $0.7 million for the year ended
December 31, 2004 as compared to the year ended December 31, 2003 as a result of consultants we
engaged to assist us with our Sarbanes-Oxley compliance effort and certain strategic initiatives.
There were slight fluctuations in other expenses, including amortization, bonuses, payroll,
recruiting expense and allocated depreciation expense for the year ended December 31, 2004 as
compared to the previous year. Stock-Based Compensation Expense.Stock-based compensation expense decreased $0.6 million to
$2.2 million for the year ended December 31, 2004 from $2.8 million for the year ended December 31,
2003. Prior to our initial public offering, options and stock purchase rights were granted at less
than the estimated initial public offering price resulting in deferred compensation charges, which
were being recognized over the applicable vesting periods, which generally were four years. As of
May 2004, all of these options were fully vested and therefore all associated stock-based
compensation expense has been recognized. During the year ended December 31, 2004 and 2003, we
recorded $0.9 million and $1.2 million, respectively, of deferred stock-based compensation. The
$0.9 million of deferred stock-based compensation recorded in the first quarter of 2004 relates to
the issuance of 275,000 shares of restricted stock to our new president and chief executive officer
in January 2004, of which 50,000 shares were immediately vested; 100,000 shares vest after the
completion of 24 months of continuous service and 125,000 shares vest after the completion of 37
months of continuous service. This agreement was amended in August 2004 to include acceleration of
all unvested shares of restricted stock in the event of a change in control of the Company, as
defined in the agreement. The $1.2 million of deferred stock-based compensation recorded in the
first quarter of 2003 relates to 750,000 shares of restricted stock issued in February 2003 to
certain executives and key employees under our Executive Performance-Based Compensation
Arrangement, as approved by the board of directors in February 2003. The restricted stock will
vest in full on the sixth anniversary of its issuance, subject to accelerated vesting upon the
achievement of certain financial or product-based performance milestones, or, generally at the
boards discretion, upon a change in control of the Company. Accordingly, the $1.2 million deferred
stock-based compensation charge is being expensed ratably over six years, which charges will be
accelerated when it becomes apparent that the financial or product-based milestones are deemed
probable of being achieved. However, the termination of the Companys former president and chief
executive officer effective December 31, 2003 and the resulting cancellation of 200,000 shares of
restricted stock granted to him under the plan triggered the reversal of the unamortized portion of
his restricted stock grant compensation expense in the amount of $0.3 million. In the first
quarter of 2003 we determined that a product-based milestone would likely be achieved in 2004 and,
accordingly, we accelerated the stock compensation charge associated with 100,000 shares of
restricted common stock. In the first quarter of 2004 this milestone was achieved and the
restricted stock was released and issued. In the third quarter of 2004 we determined that a second
product-based milestone will likely be achieved in 2005 and, accordingly, we have accelerated the
stock compensation charge associated with 150,000 shares of restricted common stock. In connection with the acquisition of InterAct, we recorded $3.4 million of deferred
stock-based compensation related to the issuance of 997,599 shares of common stock simultaneously
with the closing of the InterAct acquisition, which are being held in escrow and are released
annually in equal one-third increments beginning in May 2003. Accordingly, the deferred
stock-based compensation related to the 997,599 shares was being expensed over three years,
beginning in May 2002. In June 2004, our former Senior Vice President of Sales, Carolyn Bradfield,
left the Company, and, as a result, we recorded a $0.9 million stock compensation charge related to
the unrecognized deferred stock-based compensation associated with the release of certain escrowed
shares of restricted stock. The value of these escrowed shares was determined based on the average
market price of our common stock over the three-day period before and after the terms of the
acquisition were agreed upon and announced. 20




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Severance.In October 2003, we entered into a separation agreement with our former president
and chief executive officer to terminate his employment as of December 31, 2003. Pursuant to the
terms of the separation agreement, we recognized approximately $0.6 million in the fourth quarter
of 2003 related to severance costs. The unpaid severance commitment at December 31, 2004 was $0.3
million. In addition, 200,000 shares of common stock issued to him in February 2003 under the
Executive Performance-Based Compensation Arrangement were subject to forfeiture and were cancelled
as of December 31, 2003, which triggered the reversal of the deferred portion of his restricted
stock grant compensation expense in the amount of $0.3 million. In addition, a $1.5 million cash
compensation commitment allocated to our former president and chief executive officer under the
Executive Performance-Based Compensation Arrangement was cancelled as of the termination of his
employment. Other Income, net.Interest income increased $0.1 million to $0.4 million for the year ended
December 31, 2004 from $0.3 million for the year ended December 31, 2003, respectively, as interest
rates increased in the latter half of 2004 and we began purchasing short-term investments.
Interest expense remained flat at $0.1 million for the years ended December 31, 2004 and 2003,
respectively, decreasing slightly in the current year as we retired our debt obligations in 2004. Year Ended December 31, 2003 Compared to Year Ended December 31, 2002 Revenue.Total revenue increased by $10.0 million to $70.6 million for the year ended December
31, 2003 from $60.6 million for the year ended December 31, 2002. The increase was due in part to
the addition of new customers and an increase in usage from our existing customer base, which was
partially offset by pricing pressure we experienced for some of our services, particularly our
Reservationless Conferencing Service. In addition, we first recognized significant revenue from
our Operator-Assisted Conferencing service in the first quarter of 2003. We also recognized $1.1
million and $2.9 million in revenue in the third and fourth quarters of 2003, respectively,
associated with the sale of a Web Conferencing Pro license. This license was entered into
contemporaneously with our agreement to purchase $10.3 million in hardware from the licensee, who
is also our primary hardware vendor, through December 2005. Opportunities to license our software
have traditionally arisen infrequently and are difficult to predict. Total minutes attributable to
our usage-based services were 636.1 million and 453.0 million for the years ended December 31, 2003
and 2002, respectively, which represents a 40.4% increase in minutes. Usage-based revenue increased
by 18.5% in 2003 from 2002, which indicates that our average price per usage based minute declined
by approximately 15.4% or .0174 cents per minute in 2003. Although this trend continued into
2004, we saw pricing pressure at a reduced rate in the latter months of 2003 and in 2004 and
therefore lowered our per usage based minute prices at a reduced rate, as discussed above. Cost of Revenue.Cost of revenue increased $1.9 million to $28.5 million for the year ended
December 31, 2003 from $26.6 million for the year ended December 31, 2002. Telecommunications
costs increased $0.5 million for the year ended December 31, 2003 over the year ended December 31,
2002 due to an increase in minutes from our Reservationless Conferencing and Web Conferencing Pro
communication services, partially offset by volume discounts received from our long distance
telephony providers, as well as an overall improvement in the utilization of our infrastructure.
Total depreciation expense increased $0.5 million for the year ended December 31, 2003 due to
additional hardware and software being placed into service in 2003, partially offset by allocated
depreciation due to decreased headcount over the same period in the previous year. Salaries
expense decreased $0.4 million due to decreased headcount in the year ended December 31, 2003 from
the year ended December 31, 2002. Conversely, expense associated with our Operator-Assisted
Conferencing service increased $1.1 million in 2003, which is consistent with growth in revenue
from this service. Maintenance and repairs expense increased $0.2 million for the year ended
December 31, 2003 from the year ended December 31, 2002 primarily due to an increase in gross
property and equipment. The primary positive drivers that affect our gross profit are reductions
in our long distance rates, a general improvement in our infrastructure utilization, the sale of
subscriptions and software licenses with virtually no corresponding variable cost of revenue
expense, all of which are or may be partially offset by pricing pressure we are experiencing on the
sale of our Reservationless Conferencing service. Sales and Marketing.Sales and marketing expense increased $1.2 million to $19.7 million for
the year ended December 31, 2003 from $18.5 million for the year ended December 31, 2002.
Commissions and bonus expense increased $0.8 million for the year ended December 31, 2003 as
compared to the year ended December 31, 2002 in connection with an increase in revenues in the
current year. Recruiting expense increased $0.2 million for the year ended December 31, 2003 as
compared to the year ended December 31, 2002 due to increased headcount over the same period in the
previous year. Outside service expense increased $1.5 million for the year ended December 31, 2003
as compared to the year ended December 31, 2002 due to the beta launch of Raindance Meeting 21




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Edition in the fourth quarter of 2003. Offsetting these increases, bad debt expense decreased
$0.8 million for the year ended December 31, 2003 as compared with the year ended December 31, 2002
due to fewer bankruptcy filings within our customer base, as well as a general improvement in our
accounts receivable aging, which resulted in a reduction of our bad debt reserve. Expenses related
to telemarketing, lead generation and market research decreased $0.5 million for the year ended
December 31, 2003 from 2002. Research and Development.Research and development expense increased $0.7 million to $8.3
million for the year ended December 31, 2003 from $7.6 million for the year ended December 31,
2002. Personnel and payroll related expenses increased $0.1 million for the year ended December 31,
2003 over the year ended December 31, 2002 due to increased headcount in connection with the
development of Raindance Meeting Edition that took place in 2003, offset by an increase in
capitalized internally-developed software. Outside services increased $0.5 million for the year
ended December 31, 2003 as compared to the year ended December 31, 2002 also in connection with the
development of Raindance Meeting Edition that took place in 2003. There was a slight variance in
other expenses; primarily a $0.2 million increase in repairs and maintenance for the year ended
December 31, 2003 as compared to the year ended December 31, 2002. Based on plans developed in the
third quarter of 2003 regarding the external distribution of software, we changed the accounting
treatment of costs associated with the development of our next-generation service from SOP 98-1 to
SFAS 86. General and Administrative.General and administrative expense decreased $0.3 million to $7.2
million for the year ended December 31, 2003 as compared to $7.5 million for the year ended
December 31, 2002. Legal and litigation expenses increased $0.5 million for the year ended
December 31, 2003 as compared to the year ended December 31, 2002, partially due to a lawsuit that
was filed against us in the third quarter of 2003. Offsetting this increase was a reduction in
various expenses, including personnel and payroll related expenses and allocated depreciation
expense due to decreased headcount. Stock-Based Compensation Expense.Stock-based compensation expense decreased $0.2 million to
$2.8 million for the year ended December 31, 2003 as compared to $3.0 million for the year ended
December 31, 2002. Prior to our initial public offering, options and stock purchase rights were
granted at less than the estimated initial public offering price resulting in deferred compensation
charges, which are being recognized over the applicable vesting periods, which generally are four
years. During the first quarter of 2003 we recorded $1.2 million of deferred stock-based
compensation that relates to 750,000 shares of restricted stock issued to certain executives and
key employees in February 2003 under our Executive Performance-Based Compensation Arrangement. The
restricted stock grants vest in full on the sixth anniversary of their issuance, subject to
accelerated vesting upon the achievement of certain financial or product-based performance
milestones, or in the boards discretion, upon a change in control of the Company. Accordingly,
the $1.2 million deferred stock-based compensation charge is being expensed ratably over six years,
with such charges being accelerated when it becomes probable that the financial or product-based
milestones will be achieved. However, the resignation of our former president and chief executive
officer effective December 31, 2003 and the resulting cancellation of 200,000 shares of restricted
stock granted to him under the plan triggered the reversal of the unamortized portion of his
restricted stock grant compensation expense in the amount of $0.3 million, as none of the
acceleration milestones were achieved by this time. In connection with the acquisition of
InterAct, we recorded $3.4 million of deferred stock-based compensation related to the issuance of
997,599 shares of common stock simultaneously with the closing of the InterAct acquisition, which
are being held in escrow and will be released annually in equal one-third increments beginning in
May 2003. Accordingly, the deferred stock-based compensation related to the 997,599 shares is being
expensed over three years, beginning in May 2002. The value of these escrowed shares was determined
based on the average market price of our common stock over the three-day period before and after
the terms of the acquisition were agreed upon and announced. Asset Impairment Charges.In the fourth quarter of 2002, we identified and removed from
service equipment that was no longer required or had become obsolete. The asset write-offs were
determined under the long-lived assets to be disposed of by sale model. For a discussion of the
methodology used to determine the amount of the impairment charge under this model, see the section
entitled Critical Accounting Policies and Estimates below and the notes to our consolidated
financial statements beginning on page F-8. We completed the sale and disposal of the assets in
2003. In connection with the plan of disposal, the carrying amount of the assets exceeded the fair
value of the assets less cost to sell, and as a result, we recorded an impairment loss of $0.2
million in the fourth quarter of 2002. In the fourth quarter of 2002, we recorded a reversal of $0.1 million based upon revised
estimates of the cash 22




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to be received upon complete dissolution and liquidation of Evoke Communications Europe. Severance.In October 2003, we entered into a separation agreement with our former president
and chief executive officer to terminate his employment as of December 31, 2003. Pursuant to the
terms of the separation agreement, we recognized approximately $0.6 million in the fourth quarter
of 2003 related to severance costs. In addition, 200,000 shares of common stock issued to him in
February 2003 under the Executive Performance-Based Compensation Arrangement were subject to
forfeiture and were cancelled as of December 31, 2003, which triggered the reversal of the deferred
portion of his restricted stock grant compensation expense in the amount of $0.3 million. In
addition, a $1.5 million cash compensation commitment allocated to our former president and chief
executive officer under the Executive Performance-Based Compensation Arrangement was cancelled as
of the termination of his employment. Restructuring Charges.In the fourth quarter of 2000, we reassessed our cost structure and in
December 2000, our board of directors approved a plan of restructuring, which was announced in
January 2001. In connection with this restructuring, we streamlined our operations to focus on our
core web conferencing service offerings. Additionally, in connection with streamlining operations,
we refocused our marketing strategy, reduced our workforce and closed several leased office
facilities. In connection with this restructuring we recorded restructuring charges of $0.2 million
and $0.4 million in the first and second quarter of 2002, respectively. The actual cost savings we
anticipated as a result of this restructuring effort have been realized with the exception of the
restructuring costs associated with the closure of remote sales facilities. Due to the real estate
market that existed, it took us longer than expected to sublease or otherwise terminate our lease
obligations in certain cities. We will continue to monitor and adjust, as warranted, the
restructuring reserve associated with remote sales facilities based on current facts and
circumstances. Other Income, net.Interest income decreased $0.2 million to $0.3 million for the year ended
December 31, 2003 from $0.5 million for the year ended December 31, 2002. The decrease was related
to lower interest rates in 2003 compared to 2002. Interest expense decreased $0.2 million to $0.1
million for the year ended December 31, 2003 from $0.3 million for the year December 31, 2002. The
decrease was due to refinancing our outstanding term loan with a lower interest rate and a
decreasing principal balance on which interest is calculated. Income Taxes We use the asset and liability method of accounting for income taxes as prescribed by
Statement of Financial Accounting Standard 109, Accounting for Income Taxes. At December 31,
2004, we had net operating loss carryforwards for federal income tax purposes of approximately
$125.5 million, which are available to offset future federal taxable income, if any, through 2024.
We experienced an ownership change in 1999 as defined in Section 382 of the Internal Revenue Code
that limited approximately $21.5 million of net operating loss carryforwards to an annual usage of
approximately $2.9 million. The balance of the net operating loss carryforwards of approximately
$104.0 million are not limited by Section 382 as of December 31, 2004. The availability of our net
operating losses will be affected should we experience another ownership change in the future, as
defined in Internal Revenue Code Section 382. Currently, we have recorded a valuation allowance
equal to our net deferred tax asset. We review our deferred tax assets on an ongoing basis for
realizability. While we had generated net income for the five consecutive quarters ending December
31, 2003, we incurred a net loss in all four quarters of 2004 and believe there currently is not
enough positive evidence to support a conclusion that it is more likely than not that we will
utilize some or all of our deferred tax assets. When we determine there is enough evidence to
support a conclusion that it is more likely than not that we will realize some or all of our
deferred tax assets, we will reduce the valuation allowance on our deferred tax assets, which is
anticipated to increase net income in the period in which such determination is made. Evidence to
support a conclusion that our deferred tax asset is realizable includes, but is not limited to,
generating net income in several consecutive quarters and projections for taxable income sufficient
to utilize our deferred tax assets. Our net deferred tax assets at December 31, 2004 were $49.1
million and we have established a full valuation allowance for our net deferred tax assets. 23




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Quarterly Results of Operations The following table sets forth our historical unaudited quarterly information for our most
recent eight quarters. This quarterly information has been prepared on a basis consistent with our
audited financial statements and, we believe, includes all normal recurring adjustments necessary
for a fair presentation of the information shown. Three Months EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,
    
    
    March 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,2004
    
    
    2004
    
    
    2004
    
    
    2004
    
    
    2003
    
    
    2003
    
    
    2003
    
    
    2003(in thousands, except per share data)Revenue:Service
    
    $
    19,582
    
    
    $
    19,328
    
    
    $
    18,408
    
    
    $
    17,951
    
    
    $
    15,438
    
    
    $
    16,835
    
    
    $
    16,959
    
    
    $
    17,377Software
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,056
    
    
    
    2,944Total Revenue
    
    
    19,582
    
    
    
    19,328
    
    
    
    18,408
    
    
    
    17,951
    
    
    
    15,438
    
    
    
    16,835
    
    
    
    18,015
    
    
    
    20,321Cost of Revenue:Service
    
    
    8,556
    
    
    
    9,045
    
    
    
    8,431
    
    
    
    7,998
    
    
    
    6,476
    
    
    
    6,874
    
    
    
    7,394
    
    
    
    7,760Software
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Cost of Revenue
    
    
    8,556
    
    
    
    9,045
    
    
    
    8,431
    
    
    
    7,998
    
    
    
    6,476
    
    
    
    6,874
    
    
    
    7,394
    
    
    
    7,760Gross profit
    
    
    11,026
    
    
    
    10,283
    
    
    
    9,977
    
    
    
    9,953
    
    
    
    8,962
    
    
    
    9,961
    
    
    
    10,621
    
    
    
    12,561Operating expenses:Sales and marketing
    
    
    6,500
    
    
    
    6,290
    
    
    
    6,005
    
    
    
    5,249
    
    
    
    4,463
    
    
    
    4,842
    
    
    
    4,644
    
    
    
    5,738Research and development
    
    
    2,726
    
    
    
    2,427
    
    
    
    2,618
    
    
    
    2,695
    
    
    
    1,697
    
    
    
    2,020
    
    
    
    2,159
    
    
    
    2,412General and administrative
    
    
    1,909
    
    
    
    2,128
    
    
    
    1,699
    
    
    
    2,302
    
    
    
    1,676
    
    
    
    1,741
    
    
    
    1,993
    
    
    
    1,791Stock-based compensation
expense
    
    
    613
    
    
    
    1,325
    
    
    
    134
    
    
    
    139
    
    
    
    781
    
    
    
    778
    
    
    
    679
    
    
    
    576Severance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    596Total operating expenses
    
    
    11,748
    
    
    
    12,170
    
    
    
    10,456
    
    
    
    10,385
    
    
    
    8,617
    
    
    
    9,381
    
    
    
    9,475
    
    
    
    11,113Income (loss) from operations
    
    
    (722
    )
    
    
    (1,887
    )
    
    
    (479
    )
    
    
    (432
    )
    
    
    345
    
    
    
    580
    
    
    
    1,146
    
    
    
    1,448Other income (expense), net
    
    
    17
    
    
    
    13
    
    
    
    87
    
    
    
    78
    
    
    
    (5
    )
    
    
    33
    
    
    
    6
    
    
    
    (5
    )Net income (loss)
    
    $
    (705
    )
    
    $
    (1,874
    )
    
    $
    (392
    )
    
    $
    (354
    )
    
    $
    340
    
    
    $
    613
    
    
    $
    1,152
    
    
    $
    1,443Net income (loss) per shareBasic
    
    $
    (0.01
    )
    
    $
    (0.03
    )
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.02
    
    
    $
    0.03Diluted
    
    $
    (0.01
    )
    
    $
    (0.03
    )
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.02
    
    
    $
    0.03Weighted average number of common
shares outstandingBasic
    
    
    53,548
    
    
    
    53,859
    
    
    
    54,079
    
    
    
    54,255
    
    
    
    52,557
    
    
    
    53,273
    
    
    
    53,565
    
    
    
    53,124Diluted
    
    
    53,548
    
    
    
    53,859
    
    
    
    54,079
    
    
    
    54,255
    
    
    
    53,930
    
    
    
    55,001
    
    
    
    55,320
    
    
    
    55,455
 As a result of our limited operating history and the rapidly changing nature of the
markets in which we compete, our operating results have varied significantly from period to period
in the past and are likely to continue to vary significantly in future periods. For example, we
expect our results will fluctuate based on seasonal sales patterns, particularly around holidays
and the spring and summer months. Accordingly, our operating results are difficult to predict. For
these reasons, you should not rely on period-to-period comparisons of our financial results as
indications of future performance. Our prospects must be considered in light of the risks, costs
and difficulties frequently encountered by growing companies in new and rapidly evolving markets,
such as the market for web conferencing services. Liquidity and Capital Resources As of December 31, 2004, cash, cash equivalents and short-term investments were $43.4 million,
an increase of $3.8 million compared with cash and cash equivalents of $39.6 million held as of
December 31, 2003. Net cash provided by operations was $7.4 million; $18.2 million and $7.2 million for each of
the years ended December 31, 2004, 2003 and 2002, respectively. Cash provided by operations
decreased in 2004 from cash provided by operations in 2003 primarily due to a net loss of $3.3
million for the year ended December 31, 2004 as compared to net income of $3.5 million for the year
ended December 31, 2003. The decrease is also explained by an increase in accounts receivable and
decreases in accounts payable, accrued compensation, accrued severance obligation and the
restructuring reserve partially offset by a decrease in prepaid expenses and other assets and an
increase in deferred revenue. Cash provided by operations increased significantly in 2003 from
2002 as we achieved net income of $3.5 million in 2003 compared to a net loss of $3.4 million for
the year ended December 31, 2002. The improvement was also due to an increase in accounts payable,
partially offset by an increase in prepaid expenses and other current assets and a decrease in
deferred revenue. Net cash used by investing activities was $35.2 million, $10.3 million and $9.6 million for
each of the years 24




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ended December 31, 2004, 2003 and 2002, respectively. $42.2 million of the net cash used in
investing activities for the year ended December 31, 2004 related to the purchase of investments,
offset by $9.2 million in proceeds from the maturities of investments. Additionally, there was $0.2
million provided by investing activities for the year ended December 31, 2004 due to the release of
restricted cash in the current year. The remainder of the net cash used by investing activities
in the year ended December 31, 2004 related to capital expenditures for equipment purchases in
anticipation of the release of Raindance Meeting Edition and additional conferencing capacity,
offset slightly by proceeds from the disposition of fixed assets and a payment from an affiliated
entity. Net cash used by investing activities in 2003 primarily related to capital expenditures for
equipment purchases in anticipation of the release of Raindance Meeting Edition and additional
conferencing capacity, offset slightly by proceeds from the disposition of fixed assets and the
release of restricted cash. Net cash used by investing activities in 2002 primarily related to
capital expenditures for equipment purchases, as we purchased additional equipment to increase our
capacity in conjunction with increases in revenue. Additionally, we paid, net of cash received,
$3.5 million to acquire substantially all of the assets of InterAct on April 30, 2002. Net cash used by financing activities was $1.3 million for the year ended December 31, 2004,
net cash provided by financing activities was less than $0.1 million for the year ended December
31, 2003, and net cash used by financing activities was $0.1 million for the year ended December
31, 2002. Cash used by financing activities in the year ended December 31, 2004 was due to debt
service payments, including the early retirement of our outstanding term loan in April 2004 and the
early retirement of our loan agreement with a vendor in December 2004, offset by cash proceeds from
the exercise of common stock options and employee stock purchase plan purchases. Cash provided by
financing activities in 2003 was primarily related to cash proceeds from the exercise of common
stock options and employee stock purchase plan purchases offset by debt payments. Cash used by
financing activities in 2002 was primarily due to debt service payments partially offset by cash
proceeds from the exercise of common stock options and employee stock purchase plan purchases. As of December 31, 2004, we had no debt obligations outstanding. Effective December 31, 2002, we amended the terms of a loan and security agreement that we
originally entered into on October 9, 2001. We renewed and increased the revolving line of credit
and refinanced the term loan. In connection with refinancing the term loan, the then outstanding
balance was scheduled to be repaid with monthly principal payments of approximately $0.1 million
plus interest at 5.25% over 36 months, with the final payment due in January 2006. Advances under
the revolving line of credit were limited to $12.5 million or 90% of eligible accounts receivable
as defined and adjusted in the agreement. The revolving line of credit was available through
January 26, 2004. Advances under the revolving line of credit may have been repaid and re-borrowed
at any time prior to the maturity date. The loan and security agreement was collateralized by
substantially all of our tangible and intangible assets and was subject to compliance with
covenants, including minimum liquidity coverage, minimum quick ratio and maximum quarterly
operating losses adjusted for interest, taxes, depreciation, amortization and other non-cash
charges. We were also prohibited from paying any dividends without the banks prior written
consent. In April 2004, the balance due under this agreement (exclusively related to the term loan)
of $1.8 million was paid in full. In addition, in May 2003, we entered into a loan agreement with
a vendor, in the amount of $0.7 million, to finance certain fixed assets. The loan was being repaid
with quarterly principal payments of approximately $0.1 million plus interest at 2.5% with the
final payment due in April 2005. In December 2004, the balance due under this agreement of $0.2
million was paid in full. In April 2004 we entered into a credit agreement with another bank for a
revolving line of credit, which expires in April 2006. Outstanding advances under the revolving
line of credit are limited to $15.0 million. Advances under the revolving line of credit bear
interest at 0.5% below the banks prime rate and may be repaid and re-borrowed at any time prior to
the maturity date. At December 31, 2004, the Company did not have an outstanding balance under the
revolving line of credit, however $0.2 million of the line of credit was securing letters of
credit. The credit agreement is collateralized by substantially all of our tangible and intangible
assets and is subject to compliance with covenants, including minimum liquidity coverage, minimum
tangible net worth and positive adjusted EBITDA defined as quarterly net income (loss) adjusted for
interest, taxes, depreciation, amortization and other non-cash charges. We are also prohibited from
paying any dividends without the banks prior written consent. At December 31, 2004, we were in
compliance with all financial loan covenants. We also receive funds from time to time from the exercise of options or similar rights to
purchase shares of our common stock. We have no other material external sources of liquidity. We have generated positive cash flows from operations for thirteen consecutive quarters and we
expect to 25




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continue to generate positive cash flows from operations in the near term. While we expect to
continue to generate positive cash flows from operations in the near term, such cash flows may be
less than the amounts recorded in prior quarters. Looking ahead, we do not anticipate any debt
service payments in 2005 as a result of the early retirement of our outstanding debt obligations,
unless we decide to incur new debt or borrow on our line of credit. We expect capital expenditures
in 2005 to be comparable with 2004. We also expect proceeds from the exercise of common stock
options; however, it is not possible to estimate the impact those proceeds will have on our cash
flow in 2005. We obtain a significant portion of our liquidity from operating cash flows. Our customer base
consists of a large number of geographically dispersed customers diversified across several
industries. No single customer accounted for greater than 10% of our total revenue in any one
quarter of 2004 or for the year. At December 31, 2004, the Company had a receivable, all of which
was current, due from Qwest Communications International, Inc. of $1.2 million or 11.6% of the
Companys total accounts receivable balance at such date. Our five largest customers represented
$17.5 million or 23.3% of our total 2004 revenue and also represented $2.3 million or 22.7% of our
total accounts receivable balance at December 31, 2004. The sixth through twenty-fifth largest
customers represented $11.1 million or 14.7% of our total 2004 revenue. A significant change in the
liquidity or financial position of one of our larger customers could have a material adverse impact
on our operating cash flows. In addition, a decrease in their use of our services may adversely
impact our future operating results. For example, Oracle Corporation, whose purchases accounted for
a significant portion of our revenue in the first and second quarters of 2004, significantly
reduced its use of our conferencing services as it completed the transition of substantially all of
its conferencing to an internal conferencing system in the third quarter of 2004. As of December 31, 2004, our purchase commitments for bandwidth usage and telephony services
and equipment were approximately $8.2 million and will be expended over the next two years. Some of
these agreements may be amended to either increase or decrease the minimum commitments during the
lives of the respective contracts. In September 2003 we entered into an agreement with our primary
conferencing bridge provider pursuant to which we made a commitment to purchase a certain amount of
equipment through December 2005. This commitment was contingent on certain functionality being
available in the equipment by May 12, 2004, which did not occur. As a result, we notified the
conferencing bridge provider that we terminated our remaining commitment, as well as the agreement
for material breach. The total remaining commitment that we terminated as of December 31, 2004 was
approximately $6.1 million. Our vendor disputes this position, has threatened litigation and may
seek to recover the alleged $6.1 million remaining contractual commitment. We lease office facilities under various operating leases that expire through 2009. Total
future minimum lease payments, under all operating leases, as of December 31, 2004, are
approximately $5.4 million. We have subleased six of these facilities and future minimum sublease
receivables for all subleased facilities, as of December 31, 2004, approximate $0.7 million that we
expect to receive through September 2005. Our contractual obligations and commitments to make future payments as of December 31, 2004
are as follows (in thousands): Payments Due by PeriodTotal
    
    
    Less than 1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    Over 5 yearsDebt
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating leases, exclusive of sublease
receivables
    
    
    5,420
    
    
    
    2,026
    
    
    
    1,946
    
    
    
    1,448
    
    
    
    Purchase obligations
    
    
    8,174
    
    
    
    7,545
    
    
    
    629
    
    
    
    
    
    
    
    Total contractual obligations and commitments
    
    $
    13,594
    
    
    $
    9,571
    
    
    $
    2,575
    
    
    $
    1,448
    
    
    $
    
 Not included in the contractual commitments schedule above are employment commitments we have
made to certain current and former officers of the Company. See note 8(c) and 8(d) to the financial
statements. Typically, the amount that may be paid and the timing of such a payment are not known
with certainty. At December 31, 2004 our total employment-related commitments were approximately
$4.0 million. Not included in the contractual commitments schedule above is the equipment purchase
commitment we terminated in the second quarter of 2004. See Note 8(b) to the financial statements.
Our vendor has disputed our position with respect to the termination. The total remaining
commitment that we terminated as of December 31, 2004 was approximately $6.1 million, which would
have been required to be expended in 2005. 26




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We currently anticipate that existing cash resources and our new revolving line of credit
facility will be sufficient to fund our anticipated working capital and capital expenditure needs
into the foreseeable future. We base our expenses and expenditures in part on our expectations of
future revenue levels. If our revenue for a particular period is lower than expected, we may take
steps to reduce our operating expenses accordingly. If cash generated from operations is
insufficient to satisfy our liquidity requirements, we may seek to sell additional public or
private equity securities, borrow on our revolving line of credit or obtain additional debt
financing. Additional financing may not be available at all or, if available, may not be obtainable
on terms favorable to us. If we are unable to obtain additional financing, we may be required to
reduce the scope of our planned operations, which could harm our business, financial condition and
operating results. Additional financing may also be dilutive to our existing stockholders. Critical Accounting Policies and Estimates We prepare our consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America. As such, we are required to make certain
estimates, judgments and assumptions that we believe are reasonable based upon the information
available. These estimates and assumptions affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the
periods presented. Actual results could differ from those estimates. Our significant accounting
policies are described in note 1 to the consolidated financial statements. Not all of these
significant accounting policies require us to make difficult subjective or complex judgments or
estimates. An accounting estimate is considered to be critical if it meets both of the following
criteria; the estimate requires assumptions about matters that are highly uncertain at the time the
accounting estimate is made, and different estimates reasonably could have been used or changes in
the estimate that are reasonably likely to occur from period to period may have a material impact
on our financial condition and results of operations. Our critical accounting estimates include the
accounts receivable allowance for doubtful accounts, useful lives of depreciable and intangible
assets and their recoverability, the assessment of goodwill and its recoverability and the
valuation allowance for net deferred tax assets. The significant accounting policies which we believe are the most critical to aid in fully
understanding and evaluating our reported financial results include the following: Accounts Receivable We perform periodic credit evaluations and continuously monitor collections and payments from
our customers. We maintain an allowance for doubtful accounts based upon our historical experience
and any specific customer collection issues that we have identified. While our doubtful accounts
have historically been within our expectations and the provisions established, we cannot guarantee
that we will continue to experience doubtful accounts at the same rate as we have in the past. Our
accounts receivable is currently diverse and is comprised of numerous geographically dispersed
customers who are dispersed across many different industries. However, our five largest customers
representing $17.5 million or 23.3% of total 2004 revenue also represented $2.3 million or 22.7 %
of our total December 31, 2004 accounts receivable balance. A significant change in the liquidity
or financial position of one of our larger customers could have a material adverse impact on the
collectability of our accounts receivables, the adequacy of our allowance for doubtful accounts and
our future operating results. We cannot predict with certainty future changes in the financial
stability of our customers and as such actual future losses from uncollectible accounts may differ
from our estimates. In the event we determine that a smaller or larger allowance for doubtful
accounts is appropriate, we will record a credit or charge to sales and marketing expense in the
period in which such determination is made. Long-Lived Assets and Their Recoverability Effective January 1, 2002, we adopted SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets.Under SFAS 144, long-lived assets, other than goodwill, are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of the
assets might not be recoverable. Conditions that would necessitate an impairment assessment include
a significant decline in the observable market value of an asset, a significant change in the
extent or manner in which an asset is used, or a significant adverse change that would indicate
that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets
to be held and used, we recognize an impairment loss only if its carrying amount is not recoverable
through its undiscounted estimated cash flows and we measure the impairment loss based on the
difference between the carrying amount and fair value. Long-lived assets held for sale are reported
at the lower of their carrying value or 27




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fair value less costs to sell. In 2002, we identified and removed from service equipment
that was no longer required or had become obsolete. The asset write-offs were determined under the
long-lived assets to be disposed of by sale model described above. We completed the sale and
disposal of the assets in 2003. In connection with the plan of disposal, the carrying amount of
the assets exceeded the fair value of the assets less costs to sell, and as a result, we recorded
an impairment loss of $0.2 million in the fourth quarter of 2002. We did not record any asset
impairment losses in 2003 or 2004. Goodwill Effective January 1, 2002, we adopted the provisions of SFAS 142 which requires that purchased
goodwill and certain indefinite-lived intangibles no longer be amortized, but instead be tested for
impairment at least annually. SFAS 142 requires a two-phase approach for impairment testing of
goodwill. The first phase screens for impairment, while the second phase (if necessary) measures
the impairment. In 2004, 2003 and 2002, we completed our first phase impairment analysis and did
not find indication of impairment of our recorded goodwill; accordingly, the second testing phase
was not necessary in each year. In assessing the recoverability of goodwill, we must make
assumptions regarding estimated future cash flows and profitability to determine fair value. The
valuation techniques that we consider include a weighted average multiple of revenue, a weighted
average multiple of cash flow, our stock market capitalization and the book value of our assets.
Our stock has been and continues to be volatile. We do not believe stock market capitalization
alone, particularly given the volatility in our stock price, is a good indicator of impairment. As
such, we will continue to monitor the volatility in our stock price and the resulting market
capitalization, as well as all of our other impairment indicators, and will continue to assess
their collective impact on our recorded goodwill. If our estimates or their related assumptions
change in the future, we may be required to record charges for impairment of goodwill in the future
and there can be no assurances that our goodwill will not be impaired in the future. At December 31, 2004, we had approximately $45.6 million in goodwill subject to the impairment
testing provisions of SFAS 142. Income Tax Valuation Allowances Currently, we have recorded a valuation allowance equal to our net deferred tax asset. We
review our deferred tax assets on an ongoing basis for realizability. While we generated net income
for five consecutive quarters ended December 31, 2003 we incurred net losses in each quarter of
2004 and believe there currently is not enough positive evidence to support a conclusion that it is
more likely than not that we will utilize some or all of our deferred tax assets. When we
determine there is enough positive evidence to support a conclusion that it is more likely than not
that we will realize some or all of our deferred tax assets, we will reduce the valuation allowance
on our deferred tax assets, which will increase net income in the period in which such
determination is made. Positive evidence to support a conclusion that our deferred tax assets are
realizable includes, but is not limited to, generating net income in consecutive quarters and
projections for taxable income sufficient to utilize our deferred tax assets. Stock-based compensation Our stock compensation expense is comprised of the following: (a) the amortization of deferred
compensation resulting from the grant of stock options or shares of restricted stock to employees
and board members at exercise or sale prices deemed to be less than fair value of the common stock
at grant date, net of forfeitures related to such employees who terminated service while possessing
unvested stock options, as these terminated employees have no further service obligations; (b) the
intrinsic value of modified stock options or restricted stock awards, measured at the modification
date, for the number of awards that, absent the modification, would have expired unexercisable;
(c) the intrinsic value of restricted stock awards to employees and directors, (d) deferred
stock-based compensation associated with the acquisition of InterAct Conferencing, LLC and (e)
compensation related to options granted to non-employees. We currently account for our stock option plans in accordance with the provisions of
Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees", and
related interpretations. As such, compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeds the exercise price, the intrinsic value
method. Under SFAS 123, Accounting for Stock-Based Compensation", entities are permitted to
recognize as expense, over the vesting period, the fair value of all stock-
based awards on the date of grant. Alternatively, SFAS 123 also allows entities to continue to
apply the provisions 28




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of APB Opinion 25 and provide pro forma net income (loss) disclosures for
employee stock option grants as if the fair-value-based method defined in SFAS 123 had been
applied. We have elected to continue to apply the provisions of APB Opinion 25 and provide the pro
forma disclosures required by SFAS 123. All stock-based awards to non-employees are accounted for
at their fair value in accordance with SFAS 123 and related interpretations. Recent Accounting Pronouncements In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised
2004), Share-Based Payment. SFAS 123R is a revision of FASB Statement No. 123 Accounting for
Stock-Based Compensationand supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees,and amends SFAS No. 95, Statement of Cash Flows.SFAS No. 123R requires all
share-based payments to employees, including grants of employee stock options to be recognized in
the income statement based on their fair values. The amount of compensation cost will be measured
based on the grant-date fair value of the equity or liability instruments issued. Compensation cost
will be recognized over the period that an employee provides service in exchange for the award. Pro
forma disclosure is no longer an alternative. The provisions of this statement will become
effective in our third quarter commencing on July 1, 2005. SFAS 123R permits public companies to adopt its requirements using one of two methods: 1.       A modified prospective method in which compensation cost is recognized beginning
with the effective date (a) based on the requirements of SFAS 123R for all share-based
payments granted after the effective date and (b) based on the requirements of SFAS 123 for
all awards granted to employees prior to the effective date of SFAS 123R that remain
unvested on the effective date. 2.      A modified retrospective method which includes the requirements of the modified
prospective method described above, but also permits entities to restate based on the
amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either
(a) all prior periods presented or (b) prior interim periods of the year of adoption. We have not determined the method we will use when we adopt SFAS 123R. As permitted by SFAS 123, we currently account for share-based payments to employees using
Opinion 25s intrinsic value method and, as such, generally recognize no compensation cost for
employee stock options. Accordingly, the adoption of SFAS 123Rs fair value method will have a
significant impact on our results of operations, although it will have no impact on our overall
financial position or cash flows. The impact of the adoption of SFAS 123R cannot be predicted
with certainty at this time because it will depend on levels of share-based payments granted in the
future. SFAS 123R also requires the benefits of tax deductions in excess of recognized
compensation cost be reported as a financing cash flow, rather than as an operating cash flow as
required under current literature. This requirement will reduce net operating cash flows and
increase net financing cash flows in periods after adoption and we have not assessed the impact of
this provision in the context of our net operating loss carryforwards. In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 153,
"Exchanges of Nonmonetary Assets - an amendment of APB opinion No. 29.SFAS No. 153 eliminates the
fair value exception in APB 29 for nonmonetary exchanges of similar productive assets and replaces
it with a general exception for exchanges of nonmonetary assets that do not have a commercial
substance. A nonmonetary exchange is deemed to have commercial substance if the future cash flows
of the entity are expected to change significantly as a result of the exchange. The provisions of
this statement will become effective in our third quarter commencing on July 1, 2005. Management
does not believe adoption of this statement will have a material impact on the Companys financial
position, results of operations or cash flows. 29




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Risk Factors That May Affect Our Operating Results and The Market Price Of Our Common Stock You should carefully consider the risks described below. The risks and uncertainties described
below are not the only ones we face. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially and adversely affected. In that
case, the trading price of our common stock could decline, and you may lose all or part of your
investment. You should not rely on forward-looking statements because they are inherently uncertain. This document contains certain forward-looking statements that involve risks and
uncertainties. We use words such as anticipate, believe, expect, future, intend, plan
and similar expressions to identify forward-looking statements. These statements are only
predictions. Although we believe that the expectations reflected in these forward-looking
statements are reasonable, we cannot guarantee future results, levels of activity, performance or
achievements. You should not place undue reliance on these forward-looking statements, which apply
only as of the date of this document. Our actual results could differ materially from those
anticipated in these forward-looking statements for many reasons, including the risks faced by us
and described on the following pages and elsewhere in this document. We assume no obligation to
update the forward-looking statements included in this document. We believe it is important to communicate our expectations to our investors. However, there
may be events in the future that we are not able to predict accurately or over which we have no
control. The risk factors listed below, as well as any cautionary language in this document,
provide examples of risks, uncertainties and events that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements. Before you invest
in our common stock, you should be aware that the occurrence of the events described in these risk
factors and elsewhere in this document could have a material adverse effect on our business,
operating results, financial condition and stock price. We have a history of losses and we may not achieve or maintain profitability. Our operating costs have exceeded our revenue in each year since our inception in April 1997,
except for the fiscal year 2003. We have incurred cumulative net losses of approximately $171.7
million from our inception through December 31, 2004. Although we have projected to report net
income in the first quarter of 2005, there can be no assurance that we will achieve or maintain
profitability in the future, particularly if existing or future competitors decrease our market
share, if price pressure increases, if our next-generation services do not achieve widespread
market acceptance, if such services reduce our revenue from our existing services, if our revenue
from web-related services does not substantially increase, or if we are unable to increase our
market share as the web conferencing market grows. If we are not able to significantly increase
revenue, we may not be able to maintain or increase our sales and marketing, research and
development, or other operating expenses, and as a result, we may be unable to continue our
operations as currently planned. Increasing our revenue may be difficult for us to do as a result
of increased competition, price pressure and other risk factors described in this section. We have a limited operating history, which makes it difficult to evaluate our business. We have a limited operating history and you should not rely on our recent results as an
indication of our future performance. We were incorporated in April 1997 and first recorded revenue
in January 1998. We began commercially offering our Reservationless Conferencing service in April
1999, our Web Conferencing Pro service in June 2000, our Operator-Assisted Conferencing service in
the first quarter of 2003 and Raindance Meeting Edition in March 2004. In January 2001, we
restructured our company to focus solely on our conferencing services. In connection with this
restructuring, we made significant changes to our services and growth strategies, our sales and
marketing plans, and other operational matters, including a significant reduction in our employee
base. As a result, we have a limited relevant operating history and it may be difficult to evaluate
an investment in our company, and we cannot be certain that our business model and future operating
performance will yield the results that we intend. As such, we may be required to restructure our
company and operations in the future. In addition, the rapidly changing nature of the web
conferencing market makes it difficult or impossible for us to predict future results, and you
should not expect our future revenue growth to equal or exceed historical growth rates. There are a
number of factors described in this section that could cause fluctuations in our operating results
in any particular period. If any of these risks are not within our control or we are otherwise
unable to address these risks in a cost-effective manner or at all, our operating results will be
harmed. 30




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We may fail to meet market expectations because of fluctuations or lack of growth in our quarterly
operating results, which would cause our stock price to decline. As a result of our limited operating history, increased competition, the rapidly changing
market for our services, price pressure and the other risks described in this section, our
quarterly operating results have varied significantly from period to period in the past and are
likely to continue to vary significantly in future periods. More recently, our quarterly operating
results have declined. For example, our quarterly net loss ranged between $0.4 million and $1.9
million in the four quarters ended December 31, 2004 and our 2004 quarterly revenue ranged between
$19.6 million in the first quarter and $18.0 million in the fourth quarter. Many of the factors
that affect our quarterly operating results are beyond our control, such as increased competition,
pricing pressure and market demand for our services. Our ability to license software may also
contribute to such fluctuations. For example, in the third and fourth quarters of 2003, we
recognized a significant portion of our revenue from a non-recurring software license. Licensing
opportunities have traditionally arisen infrequently, are difficult to predict, and currently, we
do not have any software licensing revenue projected. Additionally, we expect our results will
fluctuate based on seasonal sales patterns. Our operating results have shown decreases in our
usage-based services around certain times, such as spring, summer, Thanksgiving, December and New
Year holidays. We expect that our revenue during these seasons will not grow at the same rates as
compared to other periods of the year because of decreased use of our services by business
customers. As a result of these factors and other risks described in this section, our quarterly
operating results are difficult to predict and may not meet the expectations of securities analysts
or investors. If this occurs, the price of our common stock would decline. A high percentage of our revenue is attributable to repeat customers, none of whom are obligated to
continue to use our services. The failure of continued use of our services by existing customers
could harm our operating results and cause our stock price to decline. A high percentage of our revenue is attributable to repeat customer usage of our services. Our
customers are not obligated to continue to use our services as we provide our services largely on a
usage-based pricing model. In the year ended December 31, 2004, 91.1% of our revenue was
usage-based. In addition, customers have no obligation to renew subscription contracts with us. As
a result, our inability to retain existing customers and sustain or increase their usage of our
services could result in lower than expected revenue, and therefore, impact our ability to achieve
or maintain profitability, and cause our stock price to decline. In addition, because many of our
customers have no continuing obligations with us, we may face increased downward pricing pressure
that has caused, and will continue to cause, a decrease in our gross margins. The reasons we have
lost customers have included the failure of our software or systems to meet customers performance
expectations or requirements, customers decision to purchase competitive products or services for
reasons such as lower price, greater brand recognition and broader features and functionality, or
the lack of significant efforts required to educate our customers about the benefits of our
services. A significant portion of our revenue is attributable to large customers that have no obligation to
continue to use our services. We target our services to large companies and as a result, we may experience an increase in
customer concentration. For example, our top five customers accounted for 20.8% and 23.3% of our
revenue in the quarter and year ended December 31, 2004, respectively. The sixth through
twenty-fifth largest customers represented 14.7% of our revenue in both the quarter and year ended
December 31, 2004, respectively. These large customers have no obligation to continue to use our
services. For example, Oracle Corporation was a large customer of ours, representing 5.1% of our
revenue in the second quarter of 2004, and then significantly reduced the use of our services as it
completed its transition of substantially all of its conferencing to an internal conferencing
system in the third quarter of 2004. If any of our large customers stop using our services or are
unable to pay their debts as they become due, our operating results will be harmed, our revenue
will be negatively impacted, and our ability to achieve or maintain profitability would be
negatively impacted. For example, we have a significant receivable due from Qwest Communications
International, Inc. at December 31, 2004, which was approximately $1.2 million or 11.6% of the
Companys total accounts receivable balance. Our operating expenses may increase, and if our revenue does not increase, our operating results
will be negatively impacted. We may increase sales and marketing, research and development and other operating expenses,
particularly as we continue developing our next-generation services and architecture. We project
expenses in part on our 31




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estimates of future revenue. If our revenue for a particular period is lower than we expect,
we may be unable to reduce our operating expenses for that period or at all, in which case our
operating results and ability to achieve or maintain profitability would be negatively impacted. We have experienced significant pricing pressure, which is expected to continue and has negatively
impacted our financial results. The prices for our services are subject to rapid and frequent changes, particularly our
Reservationless Conferencing service. For example, our average price per usage based minute for
this service declined by 5.4% in the year ended December 31, 2004. In many cases, competitors
provide their services at significantly reduced rates, for free or on a trial basis in order to win
customers. In addition, telecommunications providers enjoy lower telephony costs as a result of
their ownership of the underlying telecommunications network. As a result, these carriers can offer
services similar to ours at substantially reduced prices. Due to competitive factors and the
rapidly changing marketplace, we have reduced our pricing in many circumstances and expect we will
be required to further reduce our pricing structure in the future. Audio conferencing-only revenue
constituted 82.5% of our revenue in the fourth quarter of 2004 and we expect that
audio-conferencing-only revenue will continue to constitute the vast majority of our revenue in the
near term. As such, significant pricing pressure has negatively impacted, and will continue to
negatively impact, our financial results. The growth of our business substantially depends on our ability to successfully develop and
introduce new services and features in a timely manner. Our growth depends on our ability to develop leading-edge web conferencing services and
features. For example, we recently released our Raindance Meeting Edition service and our
SwitchTower technology in March 2004; however, we will need to release additional features,
functionalities and services to remain competitive in the market. Many companies, including some
of our competitors, are utilizing less costly resources in China and India to develop and enhance
their products and services. As a result, our competitors are able to develop and introduce
additional products, services and features more quickly and more cost-effectively than we can. If
the services and features we develop fail to achieve widespread market acceptance or fail to
generate significant revenue to offset operational costs, our financial results may be harmed and
we may not be able to achieve or maintain profitability. In addition, we have experienced
development delays and cost overruns in our development efforts in the past and we may encounter
these problems in the future. Delays and cost overruns could affect our ability to respond to
technological changes, evolving industry standards, competitive developments or customer
requirements. In addition, our ability to introduce new services and features may depend on our ability to
license or otherwise acquire technologies from third parties. In such cases, we may be unable to
identify suitable candidates or come to terms acceptable to us, particularly if such need arises
from an intellectual property dispute. We also may not be able to successfully alter the design of
our systems to integrate new technologies. Our next-generation services may impact the revenue we receive from existing services. Our Raindance Meeting Edition and other next-generation services may negatively impact the
revenue we receive for our existing services, particularly our Web Conferencing Pro services. While
we intend to continue to sell our Web Conferencing Pro services, this service may lose market share
due to the vast majority of our resources being expended on our next-generation services and this
product becoming obsolete. In the event that we are unable to develop our next-generation services
in a timely manner, and if such next-generation services do not generate significant revenue to
offset any declining revenue from Web Conferencing Pro services, our financial performance could be
negatively affected, particularly revenue, gross margins and our ability to achieve or maintain
profitability. Competition in the web conferencing services and software market is intense and we may be unable to
compete successfully, particularly as a result of recent announcements from large software
companies. The market for web conferencing services and software is relatively new, rapidly evolving and
intensely competitive. Competition in our market will continue to intensify and competitors are
investing significant resources to develop, market and sell competitive services. As a result, we
have experienced in the past and may continue to experience further price reductions, reduced
sales, revenue and margins, and reduced acceptance of our services. As an integrated provider of
web and audio conferencing services, we compete with stand-alone providers of web conferencing and
traditional teleconferencing services. In the web conferencing services market our principle 32




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competitors include Centra Software, Cisco Systems, Genesys, IBM, Macromedia, Microsoft and
WebEx. Our principle competitors in the teleconferencing market include AT&T, Global Crossing,
MCI, Premiere Global Services (formerly PTEK), Sprint and West Corporation. Some of our competitors
have entered or expanded their positions in the conferencing market by acquiring competitors of
ours. For example, Microsoft acquired Placeware, Cisco Systems acquired Latitude Communications,
and West Corporation acquired Intercall. In addition, some large software companies, such as
Oracle, IBM, Citrix and Macromedia, are also providing web conferencing products in addition to
their software offerings. These large companies have expended significantly greater resources
developing, enhancing, marketing and selling conferencing services and/or software that directly
compete with our offerings, and because these companies can leverage widespread use of their
products and services by existing customers to capture market share in the conferencing market, our
market share as well as our revenue may significantly decline. In addition, Oracle, which was a
large customer of ours, significantly reduced its use of our services as it completed the
transition to an internal conferencing system in the third quarter of 2004. Other competitors or potential competitors may enter or expand their positions in the
conferencing market by acquiring one of our competitors, by forming strategic alliances with these
competitors or by developing an integrated offering of services. We also compete with resellers of
web and audio conferencing services. There are also a number of private companies that have entered
or may enter the web conferencing market. Many of our current and potential competitors have
larger and more established customer bases, longer operating histories, greater name recognition,
broader service offerings, more employees and significantly greater financial, technical,
marketing, public relations and distribution resources than we do. As a result, these competitors
may be able to spread costs across diversified lines of business, and therefore, adopt aggressive
strategies, such as reduced pricing structures and large-scale marketing campaigns, that reduce our
ability to compete effectively. Telecommunication providers, for example, enjoy lower telephony
costs as a result of their ownership of the underlying telecommunication network. Many more
companies have entered and will continue to enter this market and invest significant resources to
develop conferencing services that compete with ours. These current and future competitors may also
offer or develop products or services that perform better than ours and as a result capture market
share that may reduce our share as well as our revenue. In addition, acquisitions or strategic partnerships involving our current and potential
competitors could harm us in a number of ways. For example:  
    competitors could acquire or partner with companies with which we
have distribution relationships and discontinue our partnership,
resulting in the loss of distribution opportunities for our
services;
    competitors could be acquired by or enter into strategic
relationships with third parties that have greater resources and
experience than we do, such as the Cisco/Latitude,
Microsoft/Placeware, and West/Intercall acquisitions, thereby
reducing our ability to compete with such competitors; or
    competitors could acquire or partner with our key suppliers, such as the acquisition
of Voyant Technologies, our primary conferencing bridge supplier, by Polycom, Inc. Our sales cycle makes it difficult to predict our quarterly operating results. Our sales cycle varies from several weeks to several months depending on the type and size of
customer approached. Oftentimes, potential customers require approvals from multiple decision
makers within their organizations. In addition, since most of our services are provided on a
usage-based pricing model, it generally takes several weeks or months before our services are
ramped for use within an organization. We also have experienced long sales cycles because we need
to educate customers on the benefits of our web conferencing services, particularly Raindance
Meeting Edition. These variables make it difficult for us to predict if and when our services will
be adopted and used by our customers. As a result, our quarterly operating results are difficult
to predict. We have limited marketing, branding and lead-generation efforts, which may not be successful. We believe that significant marketing efforts are required to achieve brand recognition, to
educate customers and potential customers on the benefits of our services, and to increase adoption
of our services. We have limited resources, however, to support marketing, branding and lead
generation efforts. As such, our current and planned marketing efforts may not be sufficient or
successful to achieve the results we intend. As a result, our business may be impacted, which may
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In the third and fourth quarters of 2003, we recognized a significant portion of our revenue from a
non-recurring software license. We recognized $1.1 million and $2.9 million in revenue in the third and fourth quarters of
2003, respectively, associated with the sale of a Web Conferencing Pro license to Voyant
Technologies, which was subsequently acquired by Polycom. The software license fees associated
with this license will not recur. Licensing opportunities have traditionally arisen infrequently,
are difficult to predict and currently we do not have any software licensing revenue projected in
the near term. In addition, by licensing software we may have created an opportunity for
Voyant/Polycom to compete against us, which may reduce our market share, harm our competitive
position, and create further price pressure. As a result, our operating and financial performance
may be harmed. Our business and operating results may suffer if we fail to establish distribution relationships or
if our distribution partners do not successfully market and sell our services. For the quarter ended December 31, 2004, 20.6% of our revenue was attributable to our indirect
service customers. These customers may not be obligated to distribute our services through their
sales channels. In addition, these customers may not be obligated to continue to use our services
or renew any subscription agreements with us. As a result, we cannot anticipate the amount of
revenue we will derive from these relationships in the future. Our inability to retain these
customers and sustain or increase their distribution of our services could result in significant
reductions in our revenue or we may be required to reduce the price they pay for our services, and
therefore, reduce our margins and negatively affect our ability to achieve or maintain
profitability. If we fail to establish new distribution relationships in a timely manner or if our
distribution partners do not successfully distribute our services, our ability to achieve
widespread adoption for our services will suffer and our business and operating results will be
harmed. Establishing these distribution relationships can take several months or more. In some
cases, our service limitations, such as our inability to offer branding capabilities to our
resellers, has prevented us and will continue to prevent us from establishing distribution
relationships. Additionally, since the vast majority our contracts with our distribution partners
are usage-based, it typically takes several months or longer before our distribution arrangements
generate revenue. Our distribution partners are not prohibited from offering and reselling the
products and services of our competitors and may choose to devote greater resources to marketing
and supporting the products and services of our competitors. Our largest conferencing bridge supplier has threatened litigation against us regarding a
significant contract dispute. In September 2003, we entered into an agreement with Voyant Technologies, subsequently
acquired by Polycom, our largest conferencing bridge supplier, pursuant to which we made a
significant commitment to purchase conferencing bridges through December 2005. This commitment was
contingent on certain VoIP technology functionality being made available in the equipment by May
12, 2004, which did not occur. As a result, we notified Voyant Technologies that we have terminated
our remaining purchase commitment. Additionally, we terminated the agreement for material breach.
Voyant Technologies disputes our position, has threatened litigation and may seek to recover the
alleged $6.1 million remaining contractual commitment plus damages. Litigation could require us to
spend significant amounts of time and money to defend ourselves regardless of merit. If any of
these claims were to prevail, we could be forced to pay damages, comply with injunctions and divert
management attention and resources. Furthermore, this dispute may harm our relationship with this
vendor and require that we seek alternative sources for conferencing bridges, which may be
difficult and expensive to integrate into our infrastructure. We have been sued for breach of contract and unjust enrichment and may be subject to additional
litigation. On May 17, 2004, a complaint was filed against us by iTalk, LLC in the District Court of
Boulder County, Colorado alleging breach of contract and unjust enrichment, seeking damages and
injunctive relief regarding an expired covenant not to compete in a license agreement entered into
in March 1999. Raindance disputes plaintiffs claims and intends to defend against them vigorously.
In addition, we may be subject to other litigation, including from employees or former employees.
In addition, if we hire employees from our competitors, these competitors may claim that we have
violated agreements with their former employees or otherwise violated the law. Litigation could
require us to spend significant amounts of time and money to defend ourselves regardless of merit.
If any of these claims were to prevail, we could be forced to pay damages, comply with injunctions
and divert management attention and resources. 34




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We have been sued for patent infringement in the past and may be subject to additional claims
alleging patent and intellectual property infringement in the future. We have been sued for patent infringement in the past and may be subject to additional claims
alleging patent and intellectual property infringement in the future. As the number of competitors
in our market grows, there is an increased risk that the proprietary systems and software upon
which our services rely may be increasingly subject to third-party infringement claims. Our
services may infringe issued third-party patents or other intellectual property rights. There
may also be pending patent applications related to our services that we are unaware of since these
applications are not made public until issued. From time to time, we have received notices
alleging that we infringe issued third-party patents or other intellectual property rights. For
example, in February 2005, we received a letter on behalf of WebEx alleging that our Raindance
Meeting Edition service infringes one or more claims of certain WebEx patents. When this happens,
we evaluate the allegations based on an investigation of the intellectual property asserted against
our services. In addition, we evaluate our ability to allege counterclaims. We may also evaluate
settlement opportunities, including licensing or cross-licensing arrangements that may include
royalty provisions or distribution restrictions, neither of which may be advantageous for our
business. In some cases, these matters result in litigation, which is expensive, time-consuming
and could divert managements attention and resources. Claims of this nature could require us to
spend significant amounts of time and money to defend ourselves, regardless of their merit. If any
of these claims were to prevail, we could be forced to pay damages, comply with injunctions, or
halt or delay distribution of our services while we reengineer them or seek licenses to necessary
intellectual property, which might not be available on commercially reasonable terms or at all. Our competitors may be able to create systems with similar functionality to ours and third parties
may obtain unauthorized use of our intellectual property. The success of our business is substantially dependent on the proprietary systems that we have
developed. We own five patents issued in the United States relating to features of our Web
Conferencing Pro service. Other than these issued patents, our proprietary systems are not
currently protected by any patents and we may not be successful in our efforts to secure additional
patents for our proprietary systems. Our current patent claims may not be sufficient enough to
protect our technology. We also have thirteen pending patent applications in the United States
covering aspects of our existing and next-generation services and infrastructure. We may file more
patent applications in the future. There is no assurance that our current and future patent
applications will result in any patents being issued. If they are issued, any patent claims allowed
may not be sufficient to protect our technology. In addition, any current or future patents may be
challenged, invalidated or circumvented and any right granted thereunder may not provide meaningful
protection to us. The failure of any patent to provide protection for our technology would make it
easier for other companies or individuals to develop and market similar systems and services
without infringing upon any of our intellectual property rights. To protect our intellectual
property rights, we also rely on a combination of trademarks, service marks, trade secrets,
copyrights, and confidentiality agreements with our employees and third parties, and protective
contractual provisions. These measures may not be adequate to safeguard the technology underlying our web conferencing
services and other intellectual property. Unauthorized third parties may copy or infringe upon
aspects of our technology, services or other intellectual property. Regardless of our efforts to
protect our intellectual property, our competitors and others may be able to develop similar
systems and services without infringing on any of our intellectual property rights. In addition,
employees, consultants and others who participate in the development of our proprietary systems and
services may breach their agreements with us regarding our intellectual property and we may not
have any adequate remedies. Furthermore, the validity, enforceability and scope of protection for
intellectual property such as ours in Internet-related industries are uncertain and still evolving.
We also may not be able to effectively protect our intellectual property rights in certain
countries. In addition, our trade secrets may become known through other means not currently
foreseen by us. If we resort to legal proceedings to enforce our intellectual property rights, the
proceedings could be burdensome and expensive, and as a result, negatively affect our financial
results. Additionally, in any litigation the outcome is uncertain. 35




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We substantially depend on a single supplier for conferencing bridges and a limited number of
sources for telephony services, the loss of which could cause significant delays and increased
costs in providing services to our existing and prospective customers. We purchase substantially all of our conferencing bridges from a single supplier, Voyant
Technologies, which was acquired by Polycom. Any extended reduction, interruption or
discontinuation in the supply of these bridges would cause significant delays and increased costs
in providing services to our existing and prospective customers. These bridges form the basis of
our audio conferencing infrastructure, upon which the majority of our services rely. In order to
continue to expand our infrastructure capacity, we must purchase additional components from this
supplier. In the fourth quarter of 2004, we reached 61% of our capacity during peak usage, whereas,
we typically operate at 50% to 60% of capacity. In September 2003, we entered into an agreement
with Voyant Technologies pursuant to which we made a significant commitment to purchase a certain
amount of conferencing bridges through December 2005. This commitment was contingent on certain
VoIP technology functionality being made available in the equipment by May 12, 2004, which did not
occur. As a result, we notified Voyant Technologies that we have terminated our remaining purchase
commitment. Additionally, we terminated the agreement for material breach. If we are required to
find alternative sources for conferencing bridges, we may experience difficulty in integrating them
into our infrastructure and we could be required to expend significant money and resources, which
may harm our operating results. We also have a limited number of sources for our telephony services, particularly due to the
current routed architecture of our audio conferencing network upon which the majority of our
services rely. If these suppliers were to terminate or interrupt their services, we may experience
difficulties in obtaining alternative sources on commercially reasonable terms or in integrating
alternative sources into our technology platform. In addition, if we were required to obtain these
services from alternative sources, our cost of sales may substantially increase due to the limited
amount of suppliers. Due to increased price compression in the conferencing industry, we may be required to alter the
architecture of our audio conferencing network. We have architected our audio conferencing network with conferencing bridges and telephony
services to automatically route calls into conferences. While more reliable, the cost of this
routed architectural approach is more expensive than a non-routed architecture. For example, the
cost of purchasing routed telephony services is more expensive than it would be to purchase
non-routed telephony services. In addition, our costs of purchasing routed telephony services have
not decreased at the same rate as our prices have for Reservationless Conferencing. As a result of
this trend, our margins have declined and our net losses have increased, which could continue. In
order to reduce costs, we may be required to alter the architecture of our audio conferencing
network to a non-routed network in order to take advantage of lower priced telephony services.
This would be expensive, as well as time-consuming, as we would be required to purchase non-routed
conferencing bridges and we could experience technical difficulties and delays in doing so. Our transition to VoIP technology is subject to significant risks, delays and costs. We recently announced that we intend to transition some of our long distance telephony traffic
onto a VoIP platform. As a result of this change, we become subject to significant risks, delays
and costs. The costs associated with a transition to a new service provider are substantial. For
example, we have reengineered our systems and infrastructure to accommodate our new service
provider, and expect to continue to do so, which is both expensive and time-consuming. In addition,
we have experienced disruptions and delays in this transition. For example, our primary bridge
conferencing vendor did not have certain functionality available in conferencing bridges required
for this transition in the time periods we initially anticipated. As such, we expect our
transition to a widespread VoIP platform to be delayed. There also may be unforeseen circumstances
as a result of this transition that may cause delays in transitioning our long distance telephony
traffic. As a result of these delays, our ability to achieve or maintain profitability may be
negatively impacted. Any interruption in the delivery of our services may cause a loss of revenue
and a loss of customers. 36




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If any of the third party services that we use become unavailable to us, our services would be
subject to significant delays and increased costs. We rely on third party services, such as Internet access, transport and long distance
providers. These companies may not continue to provide services to us without disruptions, at the
current cost, or at all. The costs associated with a transition to a new service provider would be
substantial. We may be required to reengineer our systems and infrastructure to accommodate a new
service provider, which would be both expensive and time-consuming. In addition, we have
experienced disruptions and delays in our services in the past due to service disruptions from
these providers. Any interruption in the delivery of our services would likely cause a loss of
revenue and a loss of customers. Our business will suffer if our systems or services fail or become unavailable. A reduction in the performance, reliability or availability of our systems or services will
harm our ability to provide our services to our users, as well as harm our reputation. Some of our
customers have experienced interruptions in our services in the past due to service or network
outages, periodic system upgrades and internal system failures. Similar interruptions may occur
from time to time in the future. Because our revenue depends largely on the number of users and the
amount of minutes consumed by users, our business will suffer if we experience frequent or extended
system interruptions or if our systems or services become unavailable. Our customers depend on the
reliability of our services and we may lose customers if we fail to provide reliable services for
even a single communication event. We maintain our primary data facility and hosting servers at our headquarters in Louisville,
Colorado, and two secondary data facilities in the Denver, Colorado metropolitan area. Our
operations depend on our ability to protect these facilities and our systems against damage or
interruption from fire, power loss, water, telecommunications failure, vandalism, sabotage and
similar unexpected events. In addition, a sudden and significant increase in traffic on our systems
or infrastructure could strain the capacity of the software, hardware and systems that we use. This
could lead to slower response times or system failures. The occurrence of any of the foregoing
risks could cause service interruptions and, as a result, materially harm our reputation and
negatively affect our revenue and our ability to achieve or maintain profitability. Our services are often used to share confidential and sensitive information and, as a result, if
our security system is breached, our business and reputation could suffer. We must securely receive and transmit confidential information for our customers over public
networks and maintain that information on internal systems. Our failure to prevent security
breaches could damage our reputation, and expose us to risk of loss or liability. If we fail to
provide adequate security measures to protect the confidential information of our customers, our
customers may refrain from using our services or potential customers may not choose to use our
services, and as a result, our operating results would be harmed. Our servers are vulnerable to
computer viruses, physical or electronic break-ins and similar disruptions, which could lead to
interruptions, delays or loss of data. We may be required to expend significant capital and other
resources to protect against security breaches or to alleviate problems caused by any breach. In
addition, our internal systems are accessible to a number of our employees. Although each of these
employees is subject to a confidentiality agreement, we may be unable to prevent the
misappropriation of this information. Our business may be harmed if our services do not work with the various hardware and software
systems, including corporate security measures, used by our customers. We currently provide services to customers with various hardware and software systems, ranging
from legacy to next-generation applications and networking equipment. If our services are unable to
support these diverse platforms, and if we fail to modify our services to support new versions of
these applications and equipment, our services may fail to gain broad market acceptance, which
would cause our operating results to suffer. For example, usage of our Web Conferencing Pro
services depends on computers being enabled with certain Java technology. There are new computers
being shipped without Microsofts operating systems incorporating this Java technology. As such,
our Web Conferencing Pro services will not work on these computers unless the user downloads the
Java technology separately, which may be impracticable and expensive. Furthermore, because of
bandwidth constraints on corporate intranets and concerns about security, our customers and
potential customers may block reception of web services like ours within their corporate
environments. In order for customers to use our services, customers and users may 37




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need to reconfigure their corporate intranets, security measures and firewalls. Widespread
adoption of our technology and services depends on overcoming these obstacles. If we do not increase the capacity of our infrastructure in excess of customer demand, customers
may experience service problems and choose not to use our services. The amount of conferencing events we host has increased significantly. We must continually
increase our capacity consistent with our growth in usage. We generally utilize between 50% and
60% of our capacity based on average usage. In the fourth quarter 2004, we reached 61% of our
capacity during peak usage. To accommodate increased customer usage and rapidly expand our
operations requires a significant increase in the capacity of our infrastructure. To increase
capacity, we may need to order equipment with substantial development and manufacturing lead times,
which can sometimes be several months or longer. If we fail to increase our capacity in a timely
and efficient manner, customers may experience service problems, such as busy signals, improperly
routed conferences, and interruptions in service. Service problems such as these would harm our
reputation, cause us to lose customers and decrease our revenue, and therefore harm our ability to
achieve or maintain profitability. Conversely, if we overestimate our capacity needs, we will pay
for more capacity than we actually use, resulting in increased costs without a corresponding
increase in revenue, which would harm our operating results. We may pursue additional business relationships through acquisitions, joint ventures, or other
investment prospects, which may not be successful, and we may not realize the benefits of any
acquisition, joint venture, or other investment. We have limited experience in acquisition activities and may have to devote substantial time
and resources in order to complete acquisitions. There may also be risks of entering markets in
which we have no or limited prior experience. Further, these potential acquisitions, joint ventures
and investments entail risks, uncertainties and potential disruptions to our business. For example,
we may not be able to successfully integrate a companys operations, technologies, products and
services, information systems and personnel into our business. An acquisition may further strain
our existing financial and managerial controls, and divert managements attention away from our
other business concerns. There may also be unanticipated costs associated with an acquisition that
may harm our operating results and key personnel may decide not to work for us. These risks could
harm our operating results and cause our stock price to decline. In addition, if we were to make any acquisitions, we could, for example:  
    issue equity securities that would dilute our stockholders;
    expend cash;
    incur debt;
    assume unknown or contingent liabilities; and
    experience negative effects on our results of operations. Our failure to manage growth could cause increases in our operating costs, harm our ability to
achieve or maintain profitability, and therefore, decrease the value of our stock. Despite our restructuring in January 2001, which resulted in, among other things, a
significant reduction in the size of our workforce, we have rapidly expanded since inception, and
may continue to expand our operations and infrastructure organically or through acquisitions. This
expansion has placed in the past, and may place in the future, a significant strain on our
managerial, operational and financial resources and we may not effectively manage this growth.
Rapidly expanding our business would require us to invest significant amounts of capital in our
operations and resources, which would substantially increase our operating costs. As a result, our
failure to manage our growth effectively could cause substantial increases in our operating costs
without corresponding increases in our revenue, thereby harming our ability to achieve or maintain
profitability. Also, our management may have to divert a disproportionate amount of its attention
away from our day-to-day activities and devote a substantial amount of time to managing growth. In
order to rapidly expand our business we may need to raise additional funds. Any future financing we
require may not be available on a timely basis, in sufficient amounts or on terms acceptable to us.
If we cannot obtain adequate funds, we may not be able to grow, which could impact our ability to
compete effectively. 38




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If we do not attract and retain qualified management and personnel, our business may be harmed. Our success depends on our ability to attract and retain qualified management and personnel.
Recently, we hired a new Chief Executive Officer, Executive Vice President of Sales and Chief
Marketing Officer. In addition, we have hired a number of personnel in sales and marketing in
connection with the substantial reorganization of those groups in 2004. We may also continue to
hire new personnel. If we are not successful in attracting and retaining a substantial number of
these individuals, our business may be disrupted, management time and resources may be expended
and, as a result, our financial results may be harmed. In addition, we rely on stock options to
compensate existing employees and attract new employees. We are currently not required to record
stock-based compensation charges if the employees stock option exercise price equals or exceeds
the fair value of our common stock at the date of grant. However, the Financial Accounting
Standards Board has issued its final standard relating to share-based payments, including stock
options and other equity incentives granted to employees. This change in accounting policy will
require us to record expense for the fair value of stock options granted, modified or settled in
fiscal periods beginning after June 15, 2005 and recognize compensation cost with respect to any
unvested stock options outstanding on July 1, 2005. Because of this change in accounting policy,
we expect to reduce our reliance on stock options as a compensation tool which could make it more
difficult for us to attract and retain qualified employees. If we do not expand further internationally, our ability to attract and retain multi-national
customers will be harmed and as a result our business and operating results may be harmed. We have attempted to expand into international markets and spent significant financial and
managerial resources to do so. In particular, we formed a joint venture with @viso Limited, a
European-based venture capital firm, to expand our operations to continental Europe and the United
Kingdom. This joint venture failed and was recently liquidated and dissolved. In the fourth quarter of 2004, we expanded the capability of our Reservationless Conferencing
service to offer multi-national customers international 800 access to our service through a partner
in certain countries. We have limited experience in international operations and may not be able to
compete effectively in international markets. In addition, we face certain risks inherent in
conducting business internationally, such as:  
    difficulties in establishing and maintaining distribution channels and partners for our services;
    varying technology standards from country to country;
    uncertain protection of intellectual property rights;
    inconsistent regulations and unexpected changes in regulatory requirements;
    difficulties and costs of staffing and managing international operations;
    linguistic and cultural differences;
    fluctuations in currency exchange rates;
    difficulties in collecting accounts receivable and longer collection periods;
    imposition of currency exchange controls; and
    potentially adverse tax consequences. In addition, our expansion into international markets may require us to develop specific
technology that will allow our current systems to work with international telephony systems. We may
not develop this technology in a timely manner, in a way to prevent service disruptions or at all. 39




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Our Reservationless Conferencing service may become subject to traditional telecommunications
carrier regulation by federal and state authorities, which would increase the cost of providing our
services and may subject us to penalties. We believe our Reservationless Conferencing service is not subject to regulation by the
Federal Communications Commission (FCC) or any state public service commission because the services
integrate traditional voice teleconferencing and added value Internet services. The FCC and state
public service commissions, however, may require us to submit to traditional telecommunications
carrier regulations for our Reservationless Conferencing service under the Communications Act of
1934, as amended, and various state laws or regulations as a provider of telecommunications
services. For example, in March 2004, we received a letter from the FCC Investigations and Hearing
Division of the Enforcement Bureau regarding filing requirements of telecommunications carriers. If
the FCC or any state public service commission seeks to enforce any of these laws or regulations
against us, we could be prohibited from providing the voice aspect of our Reservationless
Conferencing service, which constitutes the vast majority of our revenue, until we have obtained
various federal and state licenses and filed tariffs. We believe we would be able to obtain those
licenses, although in some states, doing so could significantly delay our ability to provide
services. We also would be required to comply with other aspects of federal and state laws and
regulations. Subjecting our Reservationless Conferencing service to these laws and regulations
would increase our operating costs, could require restructuring of those services to charge
separately for the voice and Internet components, and would involve on-going reporting and other
compliance obligations. We also might be subject to fines or forfeitures and civil or criminal
penalties for non-compliance. We may be subject to assessment of state sales and other taxes for the sale of our services,
license of technology or provision of services, for which we have not accounted. We may have to pay past sales or other taxes that we have not collected from our customers.
For example, we recently were audited by the Commonwealth of Massachusetts, Department of Revenue
who claims that our Reservationless Conferencing service is subject to sales tax in the
Commonwealth of Massachusetts. We have formally protested this assessment. Because we do not
currently collect sales or other taxes on the sale of our services, our total liability in the
state of Massachusetts could be as much as $0.2 million based on the position taken by
Massachusetts. Additionally, more states may claim that we are subject to an assessment of sales
or other taxes, in which case our total liability may increase. Our business would be harmed if one
or more states were to require us to pay sales or other taxes on past sales of services,
particularly because we may be unable to go back to customers to collect sales or other taxes for
past sales and may have to pay such taxes out of our own funds. Our current stock compensation expense negatively impacts our earnings, and once we are required to
report the fair value of employee stock options and employee stock purchase plans as an expense in
conjunction with Financial Accounting Standards Board 123R - Share-based Payment, our earnings will
be adversely affected, which may cause our stock price to decline. Under our current accounting practice, stock compensation expense is recorded on the date of
grant only if the current market price of the underlying stock exceeds the exercise price. As of
December 31, 2004 we had approximately $1.0 million in deferred equity-based compensation expense.
We expect this expense to be amortized over five years and to negatively impact our ability to
achieve or maintain profitability during that time. We recorded approximately $0.9 million of this
deferred stock-based compensation in January 2004 associated with the issuance of 275,000 shares of
restricted stock to our new president and chief executive officer. In addition, we issued
restricted stock grants for 348,000 shares of common stock on January 24, 2005 to certain
executives and key employees. The total amount of deferred stock-based compensation recorded was
$0.8 million to be expensed ratably over 4 years. Under current accounting practices and including
the January 2005 restricted stock grants, $0.7 million of this deferred equity-based compensation
will be recognized as an expense over the next year as certain restricted stock grants vest.
Effective July 1, 2005, we will be required to record compensation expense in the financial
statements for stock issued to employees based on the grant-date fair value of the equity issued.
The adoption of SFAS 123Rs fair value method will have a significant impact on our results of
operations and as such, our ability to achieve or maintain profitability will be negatively
impacted, which may cause our stock price to decline. We disclose non-GAAP financial information. We prepare and release quarterly unaudited and annual audited financial statements prepared in
accordance with generally accepted accounting principles (GAAP). We also disclose and discuss
certain non-GAAP financial 40




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information in the related earnings release and investor conference call. This non-GAAP
financial information excludes certain non-cash expenses, consisting primarily of depreciation, the
amortization of intangible assets and stock-based compensation. We believe the disclosure of
non-GAAP financial information helps investors meaningfully evaluate the results of our operations.
However, we urge investors to carefully review the GAAP financial information included as part of
our Quarterly Reports on Form 10-Q, our Annual Reports on Form 10-K, and our quarterly earnings
releases and compare the GAAP financial information with the non-GAAP financial results disclosed
in our quarterly earnings releases and investor calls. Our corporate compliance program cannot guarantee that we are in compliance with all potentially
applicable regulations. As a publicly traded company we are subject to significant regulations, including the
Sarbanes-Oxley Act of 2002, some of which have either only recently been adopted or are currently
proposals subject to change. While we have developed and instituted a corporate compliance program
based on what we believe are the current best practices and continue to update the program in
response to newly implemented or changing regulatory requirements, we cannot assure that we are or
will be in compliance with all potentially applicable regulations. For example, we cannot assure
that in the future our management will not find a material weakness in connection with its annual
review of our internal control over financial reporting pursuant to Section 404 of the
Sarbanes-Oxley Act. We also cannot assure that we could correct any such weakness to allow our
management to assess the effectiveness of our internal control over financial reporting as of the
end of our fiscal year in time to enable our independent registered public accounting firm to
attest that such assessment will have been fairly stated in our Annual Report on Form 10-K to be
filed with the Securities and Exchange Commission or attest that we have maintained effective
internal control over financial reporting as of the end of our fiscal year. If we fail to comply
with any of these regulations we could be subject to a range of regulatory actions, fines, or other
sanctions or litigation. In addition, if we must disclose any material weakness in our internal
control over financial reporting, this may cause our stock price to decline. We are subject to risks associated with governmental regulation and legal uncertainties. It is likely that a number of laws and regulations may be adopted in the United States and
other countries with respect to the Internet that might affect us. These laws may relate to areas
such as:  
    changes in telecommunications regulations;
    copyright and other intellectual property rights;
    encryption;
    personal privacy concerns, including the use of cookies and individual user information;
    e-commerce liability; and
    email, network and information security. Changes in telecommunications regulations could substantially increase the costs of
communicating on the Internet or over VoIP networks. This, in turn, could slow the growth in
Internet use or VoIP networks and thereby decrease the demand for our services. Several
telecommunications carriers are advocating that the Federal Communications Commission regulate the
Internet and VoIP networks in the same manner as other telecommunications services by imposing
access fees. Recent events suggest that the FCC may begin regulating the Internet and VoIP networks
in such a way. In addition, we operate our services throughout the United States and state
regulatory authorities may seek to regulate aspects of our services as telecommunication
activities. Other countries and political organizations are likely to impose or favor more and different
regulations than those that have been proposed in the United States, thus furthering the complexity
of regulation. The adoption of such laws or regulations, and uncertainties associated with their
validity and enforcement, may affect the available distribution channels for and costs associated
with our services, and may affect the growth of the Internet or VoIP networks. Such laws or
regulations may therefore harm our business. 41




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Our stock price is volatile and this volatility may depress our stock price, result in litigation
or indicate that our goodwill is impaired, resulting in further declines to our stock price. The stock market in general, and the stock price of our company in particular, have
experienced extreme price and volume fluctuations. For example, between January 1, 2002 and
December 31, 2004 our stock has traded as high as $6.30 and as low as $1.20 on the Nasdaq National
Market. The volatility of our stock price can be due to factors such as, fluctuating operating
results, significant purchases and sales of our stock, announcements by us or our competitors,
changes in security analysts estimates of our performance, or our failure to meet analysts
expectations. Many of these factors are beyond our control. In addition, broad market and industry
factors may negatively impact our stock price, regardless of our operating performance. Many
companies that have experienced volatility in their stock prices have been targets for securities
class action litigation. If we were subject to any such litigation, we could be required to expend
substantial costs and resources, which could harm our business. Additionally, one of the factors
that we consider in determining a potential impairment of our goodwill is our stock market
capitalization. If our stock price declines and remains depressed for an extended period of time,
our reported goodwill could be materially adversely impaired which would require us to write down
our goodwill, and this charge may cause our stock price to decline further. 42




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ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK At December 31, 2004, we had no outstanding debt obligations. Future increases in interest
rates could increase the interest expense associated with future borrowings, including any advances
on our revolving line of credit. In April 2004 we entered into a credit agreement with a bank for a
$15.0 million revolving line of credit that bears interest at 0.5% below the banks prime rate and
matures in April 2006, under which we would be exposed to the risk that a material increase in
interest rates could increase our interest expense to the extent that we make any future draw downs
on the revolving line of credit. At December 31, 2004, we did not have an outstanding balance under
the revolving line of credit, however $0.2 million of the line of credit was securing letters of
credit. We are currently not exposed to foreign currency risks, however, we may decide to make
future investments that will subject us to this risk, as well as additional market risk. 
 ITEM 8.      CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and related notes thereto required by this item are listed and set
forth herein beginning on page F-1. 
 ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
                     FINANCIAL DISCLOSURE None. 
 ITEM 9A.     CONTROLS AND PROCEDURES Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the reports that we file under the Securities Exchange Act of 1934, as
amended (Exchange Act), is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure about our disclosure controls
and procedures, as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Donald F. Detampel, Jr., our Chief Executive Officer and President, and Nicholas J. Cuccaro,
our Chief Financial Officer, evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this Annual Report on
Form 10-K. Based on that evaluation, they have concluded that our disclosure controls and
procedures are effective as of the end of such period. Changes in Internal Controls There have been no significant changes in our internal controls over financial reporting
during the fiscal quarter ended December 31, 2004 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting. Managements Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision
and with the participation of our management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the effectiveness of our internal
control over financial reporting as of December 31, 2004. In making this assessment, we used the
framework in Internal Control - Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal
Control - Integrated Framework, our management concluded that our internal control over financial
reporting was effective as of December 31, 2004. Our managements assessment of the effectiveness of our internal control over financial
reporting as of December 31, 2004 has been audited by KPMG LLP, an independent registered public
accounting firm, as stated in their report which appears on page F-3 of this Annual Report on Form
10-K. 43




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ITEM 9B.      OTHER INFORMATION Not applicable. 44




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PART III 
 ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference to the section of the Companys 2005 Definitive Proxy Statement to
be filed with the Securities and Exchange Commission within 120 days of December 31, 2004 entitled
Proposal 1Election of Directors and the section entitled Management. We have adopted the Raindance Code of Business Conduct and Ethics and the Audit Committees
Whistleblower Policy, each of which applies to all of our employees and directors. The code of
business conduct and ethics and whistleblower policy are available on our website at
www.raindance.com. If we make any substantive amendments to the code of business conduct and ethics
or grant any waiver, including any implicit waiver, from a provision of our code of business
conduct and ethics to our Chief Executive Officer, Chief Financial Officer, Principal Accounting
Officer or a Director, we will disclose the nature of such amendment or waiver on that website or
in a report on Form 8-K. 
 ITEM 11.       EXECUTIVE COMPENSATION Incorporated by reference to the section of the Companys 2005 Definitive Proxy Statement to
be filed with the Securities and Exchange Commission within 120 days of December 31, 2004 entitled
Executive Compensation. 
 ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference to the section of the Companys 2005 Definitive Proxy Statement to
be filed with the Securities and Exchange Commission within 120 days of December 31, 2004 entitled
Security Ownership of Certain Beneficial Owners and Management and Stock Option Grants and
Exercises. 
 ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference to the section of the Companys 2005 Definitive Proxy Statement to
be filed with the Securities and Exchange Commission within 120 days of December 31, 2004 entitled
Certain Transactions. 
 ITEM 14.      PRINCIPAL ACCOUNTING FEES AND SERVICES Incorporated by reference to the section of the Companys 2005 Definitive Proxy Statement to
be filed with the Securities and Exchange Commission within 120 days of December 31, 2004 entitled
Independent Registered Public Accounting Firm Fees. 45




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PART IV 
 ITEM 15.     EXHIBITS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULES (a)    The following documents are filed as part of this Annual Report on Form 10-K. 1.      Reports of Independent Registered Public Accounting Firm. 2.      Consolidated Financial Statements: The consolidated financial statements of Raindance
Communications, Inc. are included as Appendix F of this report. See Index to Consolidated
Financial Statements on page F-1. 3.      Financial Statement Schedules: All financial statement schedules have been omitted
because they are not applicable or not required or because the information is included
elsewhere in the Consolidated Financial Statements or the notes thereto. 4.      Exhibits. Exhibit No.
    
    Description2.1(1)
    
    Agreement and Plan of Reorganization by and among Registrant, Contigo Software, Inc. and CSI
Acquisition Corporation dated as of March 24, 2000.2.2(1)
    
    Amendment to Agreement and Plan of Reorganization by and among Registrant, Contigo Software, Inc.
and CSI Acquisition Corporation dated as of April 7, 2000.2.3(4)
    
    Asset Purchase Agreement by and among Registrant, InterAct Conferencing, LLC and Carolyn
Bradfield dated as of April 17, 2002.3.1(1)
    
    Restated Certificate of Incorporation.3.2(1)
    
    Amended and Restated Bylaws.3.3(3)
    
    Certificate of Ownership, as filed May 15, 2001, merging EC Merger, Inc. into Evoke
Communications, Inc. under the name Raindance Communications, Inc.4.1
    
    Reference is made to Exhibits 3.1 and 3.2.4.2(3)
    
    Raindance Communications, Inc. specimen stock certificate representing shares of common stock.10.1(1)
    
    2000 Equity Incentive Plan.10.2(1)
    
    2000 Employee Stock Purchase Plan.10.3(1)
    
    Amended and Restated Stockholders Agreement, among the Registrant, certain of its stockholders
and certain of its management, dated March 29, 2000.10.6(1)
    
    Form of Indemnity Agreement entered into between Registrant and each of its directors and
executive officers.10.12(1)
    
    Lease, dated March 3, 1997, between BMC Properties, LLC and Registrant.10.13(1)
    
    Lease, dated June 6, 1999, between BLC Properties, LLC and Registrant.10.14(1)+
    
    Source Code and Object Code License Agreement, dated December 29, 1999, between Registrant and
AudioTalk Networks, Inc.10.16(1)
    
    Personal Services Agreement, dated November 17, 1999, between Registrant and Paul Berberian.10.16.1(5)
    
    Amendment to Personal Services Agreement, dated June 26, 2002, between the Company and Paul
Berberian.10.17(6)
    
    Separation and Release Agreement, dated October 14, 2003, between Registrant and Paul Berberian.10.18(8)
    
    Offer Letter, dated January 27, 2004, between Registrant and Donald F. Detampel, Jr.10.18.1(9)
    
    Amendment to Offer Letter, dated August 20, 2004, between Registrant and Donald F. Detampel, Jr.10.26(7)
    
    Executive Performance-Based Compensation Arrangement23.1
    
    Consent of KPMG LLP.24.1
    
    Powers of attorney (included on signature page).31.1
    
    Certification pursuant to 18 U.S.C. Section 1350 by the Chief Executive Officer, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed with the Securities and Exchange
Commission as Exhibit 31.1 to the companys Annual Report on Form 10-K for the year ended
December 31, 2004.31.2
    
    Certification pursuant to 18 U.S.C. Section 1350 by the Chief Financial Officer, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed with the Securities and Exchange
Commission as Exhibit 31.2 to the companys Annual Report on Form 10-K for the year ended
December 31, 2004.
 46




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Exhibit No.
    
    Description32.1
    
    Certifications pursuant to 18 U.S.C. Section 1350 by the Chief Executive Officer and Chief
Financial Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed
with the Securities and Exchange Commission as Exhibit 32.1 to the companys Annual Report on
Form 10-K for the year ended December 31, 2004.
   +
    
    Confidential treatment granted with respect to portions of these exhibits.(1)
    
    Incorporated by reference to the Registrants Registration Statement on Form S-1 No.
333-30708.(2)
    
    Incorporated by reference to the Registrants Annual Report on Form 10-K (File No. 000-31045)
as filed on March 29, 2001.(3)
    
    Incorporated by reference to the Registrants Quarterly Report on Form 10-Q (File No.
000-31045) as filed on August 14, 2001.(4)
    
    Incorporated by reference to the Registrants Quarterly Report on Form 10-Q (File No.
000-31045) as filed on May 15, 2002.(5)
    
    Incorporated by reference to the Registrants Quarterly Report on Form 10-Q (File No.
000-31045) as filed on August 14, 2002.(6)
    
    Incorporated by reference to the Registrants Quarterly Report on Form 10-Q (File No.
000-31045) as filed on November 14, 2003.(7)
    
    Incorporated by reference to the Registrants Annual Report on Form 10-K (File No. 000-31045)
as filed on March 26, 2003.(8)
    
    Incorporated by reference to the
Registrants Annual Report on Form 10-K (File No.
000-31045) as filed on March 12, 2004.(9)
    
    Incorporated by reference to the Registrants Quarterly Report on Form 10-Q (File No.
000-31045) as filed on November 9, 2004. 47




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, on the 15th day of March, 2005. Raindance Communications, Inc.By:
    /s/ Nicholas J. CuccaroNicholas J. CuccaroChief Financial Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Donald F. Detampel, Jr. and Nicholas J. Cuccaro, his attorney-in-fact,
with the power of substitution, for him in any and all capacities, to sign this Report, and to file
the same, with exhibits thereto and other documents in connection therewith, with the Securities
and Exchange Commission, hereby ratifying and confirming all that the said attorney-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated. Signature
    
    Title
    
    Date/s/ Donald F. Detampel, Jr.
    
    Chief Executive Officer and President
    
    March 15, 2005Donald F. Detampel, Jr.
    
    (Principal Executive Officer) and Director/s/
Nicholas J. Cuccaro
    
    Chief Financial Officer (Principal
Financial
    
    March 15, 2005Nicholas J. Cuccaro
    
    and Accounting Officer)/s/ Paul A. Berberian
    
    Chairman of the Board of Directors
    
    March 15, 2005Paul A. Berberian/s/ Kathleen j. Cunningham
    
    Director
    
    March 15, 2005Cary L. Deacon/s/ William J. Elsner
    
    Director
    
    March 15, 2005William J. Elsner/s/ Steven C. Halstedt
    
    Director
    
    March 15, 2005Steven C. HalstedtDirector
    
    March 15, 2005Patrick J. Lombardi
 48




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INDEX TO FINANCIAL STATEMENTS Raindance Communications, Inc. PageReports of Independent Registered Public Accounting Firm
    
    F-2Consolidated Balance Sheets as of December 31, 2004 and 2003
    
    F-4Consolidated Statements of Operations for the three years ended December 31, 2004, 2003
and 2002
    
    F-5Consolidated Statements of Stockholders Equity and Comprehensive Income (Loss) for
the three years ended December 31, 2004, 2003 and 2002
    
    F-6Consolidated Statements of Cash Flows for the three years ended December 31, 2004, 2003
and 2002
    
    F-7Notes to Consolidated Financial Statements
    
    F-8
 F-1




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders
Raindance Communications, Inc.: We have audited the accompanying consolidated balance sheets of Raindance Communications, Inc.
and subsidiary (the Company) at December 31, 2004 and 2003, and the related consolidated
statements of operations, stockholders equity and comprehensive income (loss), and cash flows for
each of the years in the three-year period ended December 31, 2004. These consolidated financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (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 consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Raindance Communications, Inc. and subsidiary as of
December 31, 2004 and 2003, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2004 in conformity with U.S. generally
accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Raindance Communications, Inc.s internal
control over financial reporting as of December 31, 2004, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 14, 2005, expressed an unqualified opinion on
managements assessment of, and the effective operation of, internal control over financial
reporting. KPMG LLP Boulder, Colorado
March 14, 2005 F-2




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders
Raindance Communications, Inc.: We have audited managements assessment, included in the accompanying Managements Report on
Internal Control Over Financial Reporting appearing under Item 9A, that Raindance Communications,
Inc. maintained effective internal control over financial reporting as of December 31, 2004, based
on criteria established in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Raindance Communications Inc.s
management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements assessment and an opinion on the
effectiveness of the Companys internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion. A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate. In our opinion, managements assessment that Raindance Communications, Inc. maintained
effective internal control over financial reporting as of December 31, 2004, is fairly stated, in
all material respects, based on criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our
opinion, Raindance Communications, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2004, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Raindance Communications, Inc.
and subsidiary as of December 31, 2004 and 2003, and the related consolidated statements of
operations, stockholders equity and comprehensive income (loss), and cash flows for each of the
years in the three-year period ended December 31, 2004, and our report dated March 14, 2005
expressed an unqualified opinion on those consolidated financial statements. KPMG LLP Boulder, Colorado
March 14, 2005 F-3




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##### Table of Contents



RAINDANCE COMMUNICATIONS, INC. 
 CONSOLIDATED BALANCE SHEETS
 (In thousands, except share and per share data)
 December 31,2004
    
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    10,458
    
    
    $
    39,607Short-term investments
    
    
    32,935
    
    
    
    Accounts receivable, net of allowance for doubtful accounts of $310 and $300 in 2004 and 2003,
respectively
    
    
    9,922
    
    
    
    8,958Due from affiliate
    
    
    
    
    
    
    86Prepaid expenses and other current assets
    
    
    1,593
    
    
    
    1,679Due from employees
    
    
    12
    
    
    
    14Total current assets
    
    
    54,920
    
    
    
    50,344Property and equipment, net
    
    
    17,807
    
    
    
    25,752Goodwill
    
    
    45,587
    
    
    
    45,587Due from employees
    
    
    
    
    
    
    2Other assets
    
    
    411
    
    
    
    872Total Assets
    
    $
    118,725
    
    
    $
    122,557Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    7,447
    
    
    $
    7,598Current portion of long-term debt
    
    
    
    
    
    
    1,314Accrued expenses
    
    
    510
    
    
    
    346Accrued compensation
    
    
    1,506
    
    
    
    2,694Accrued property tax
    
    
    258
    
    
    
    227Accrued severance obligation
    
    
    345
    
    
    
    596Current portion of restructuring reserve
    
    
    188
    
    
    
    278Current portion of deferred revenue
    
    
    420
    
    
    
    112Total current liabilities
    
    
    10,674
    
    
    
    13,165Long-term debt, less current portion
    
    
    
    
    
    
    1,227Restructuring reserve, less current portion
    
    
    
    
    
    
    187Deferred revenue, less current portion
    
    
    45
    
    
    
    Other
    
    
    
    
    
    
    56Total Liabilities
    
    
    10,719
    
    
    
    14,635Stockholders Equity:Common stock, par value $.0015, 130,000,000 shares authorized; issued and
outstanding 54,936,434 and 53,784,427 shares as of December 31, 2004 and 2003, respectively
    
    
    82
    
    
    
    81Additional paid-in capital
    
    
    280,561
    
    
    
    278,440Deferred stock-based compensation
    
    
    (960
    )
    
    
    (2,247
    )Accumulated deficit
    
    
    (171,677
    )
    
    
    (168,352
    )Total Stockholders Equity
    
    
    108,006
    
    
    
    107,922Commitments and contingenciesTotal Liabilities and Stockholders Equity
    
    $
    118,725
    
    
    $
    122,557
 See accompanying notes to consolidated financial statements. F-4




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##### Table of Contents



RAINDANCE COMMUNICATIONS, INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share data)
 Years ended December 31,2004
    
    
    2003
    
    
    2002Revenue:Service
    
    $
    75,269
    
    
    $
    66,611
    
    
    $
    60,651Software
    
    
    
    
    
    
    4,000
    
    
    
    Total revenue
    
    
    75,269
    
    
    
    70,611
    
    
    
    60,651Cost of revenue:Service
    
    
    34,029
    
    
    
    28,506
    
    
    
    26,635Software
    
    
    
    
    
    
    
    
    
    
    Total cost of revenue (exclusive of stock-based compensation expense of $2,
$102 and $197 for the years ended December 31, 2004, 2003 and 2002,
respectively, shown below)
    
    
    34,029
    
    
    
    28,506
    
    
    
    26,635Gross profit
    
    
    41,240
    
    
    
    42,105
    
    
    
    34,016Operating expenses:Sales and marketing (exclusive of stock-based compensation expense of
$32, $182 and $289 for the years ended December 31, 2004, 2003 and
2002, respectively, shown below)
    
    
    24,044
    
    
    
    19,687
    
    
    
    18,508Research and development (exclusive of stock-based compensation
expense of $151, $643 and $620 for the years ended December 31,
2004, 2003 and 2002, respectively, shown below)
    
    
    10,466
    
    
    
    8,289
    
    
    
    7,599General and administrative (exclusive of stock-based compensation
expense of $2,026, $1,887 and $1,922 for the years ended December 31,
2004, 2003 and 2002, respectively, shown below)
    
    
    8,038
    
    
    
    7,202
    
    
    
    7,515Stock-based compensation expense
    
    
    2,211
    
    
    
    2,814
    
    
    
    3,028Asset impairment charges
    
    
    
    
    
    
    
    
    
    
    138Restructuring and severance charges
    
    
    
    
    
    
    596
    
    
    
    584Total operating expenses
    
    
    44,759
    
    
    
    38,588
    
    
    
    37,372Income (loss) from operations
    
    
    (3,519
    )
    
    
    3,517
    
    
    
    (3,356
    )Other income (expense):Interest income
    
    
    394
    
    
    
    250
    
    
    
    474Interest expense
    
    
    (64
    )
    
    
    (149
    )
    
    
    (346
    )Other, net
    
    
    (136
    )
    
    
    (71
    )
    
    
    (126
    )Total other income, net
    
    
    194
    
    
    
    30
    
    
    
    2Net income (loss)
    
    $
    (3,325
    )
    
    $
    3,547
    
    
    $
    (3,354
    )Net income (loss) per share:Basic
    
    $
    (0.06
    )
    
    $
    0.07
    
    
    $
    (0.07
    )Diluted
    
    $
    (0.06
    )
    
    $
    0.06
    
    
    $
    (0.07
    )Weighted average number of common shares outstanding:Basic
    
    
    53,937
    
    
    
    52,672
    
    
    
    50,502Diluted
    
    
    53,937
    
    
    
    54,774
    
    
    
    50,502
 See accompanying notes to consolidated financial statements. F-5




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##### Table of Contents



RAINDANCE COMMUNICATIONS, INC. 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except share data)
 AccumulatedAdditional
    
    
    Deferred
    
    
    otherCommon Stock
    
    
    paid-in
    
    
    stock-based
    
    
    comprehensive
    
    
    Accumulated
    
    
    
    
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Capital
    
    
    compensation
    
    
    Income (loss)
    
    
    Deficit
    
    
    Total
    
    
    Income (loss)Balances at January 1, 2002
    
    
    48,130,324
    
    
    $
    72
    
    
    $
    267,064
    
    
    $
    (3,823
    )
    
    $
    
    
    
    $
    (168,545
    )
    
    $
    94,768Issuance of common stock under
compensation arrangements
    
    
    1,556,458
    
    
    
    2
    
    
    
    1,843
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,845Common stock options issued for services
    
    
    
    
    
    
    
    
    
    
    306
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    306Cancellation of common stock options
    
    
    
    
    
    
    
    
    
    
    (463
    )
    
    
    463
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued at less than fair
value to
directors for services rendered
    
    
    10,450
    
    
    
    1
    
    
    
    77
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78Issuance of common stock for the
acquisition of business
    
    
    2,198,581
    
    
    
    3
    
    
    
    7,384
    
    
    
    (3,352
    )
    
    
    
    
    
    
    
    
    
    
    4,035Amortization of deferred stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,645
    
    
    
    
    
    
    
    
    
    
    
    2,645Net loss and comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,354
    )
    
    
    (3,354
    )
    
    $
    (3,354
    )Balances at December 31, 2002
    
    
    51,895,813
    
    
    
    78
    
    
    
    276,211
    
    
    
    (4,067
    )
    
    
    
    
    
    
    (171,899
    )
    
    
    100,323Issuance of common stock under
compensation arrangements
    
    
    1,262,788
    
    
    
    2
    
    
    
    1,236
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,238Common stock options issued for services
    
    
    
    
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30Cancellation of common stock options
    
    
    
    
    
    
    
    
    
    
    (83
    )
    
    
    83
    
    
    
    
    
    
    
    
    
    
    
    Exercise of common stock warrant
    
    
    28,176
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued at less than fair
value to
officers, net of forfeiture
    
    
    550,000
    
    
    
    1
    
    
    
    896
    
    
    
    (897
    )
    
    
    
    
    
    
    
    
    
    
    Common stock issued at less than fair
value to
directors for services rendered
    
    
    47,650
    
    
    
    
    
    
    
    150
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150Amortization of deferred stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,634
    
    
    
    
    
    
    
    
    
    
    
    2,634Net income and comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,547
    
    
    
    3,547
    
    
    $
    3,547Balances at December 31, 2003
    
    
    53,784,427
    
    
    
    81
    
    
    
    278,440
    
    
    
    (2,247
    )
    
    
    
    
    
    
    (168,352
    )
    
    
    107,922Issuance of common stock under
compensation arrangements
    
    
    876,007
    
    
    
    1
    
    
    
    1,197
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,198Common stock options issued for services
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14Common stock issued at less than fair
value to
directors for services rendered
    
    

    1,000
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Common stock issued at greater than fair
value
to officers for services
    
    
    275,000
    
    
    
    
    
    
    
    907
    
    
    
    (907
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,194
    
    
    
    
    
    
    
    
    
    
    
    2,194Net loss and comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,325
    )
    
    
    (3,325
    )
    
    $
    (3,325
    )Balances at December 31, 2004
    
    
    54,936,434
    
    
    $
    82
    
    
    $
    280,561
    
    
    $
    (960
    )
    
    $
    
    
    
    $
    (171,677
    )
    
    $
    108,006
 See accompanying notes to consolidated financial statements. F-6




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##### Table of Contents



RAINDANCE COMMUNICATIONS, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 Years Ended December 31,2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Net income (loss)
    
    $
    (3,325
    )
    
    $
    3,547
    
    
    $
    (3,354
    )Adjustments to reconcile net income (loss) to net cash provided by operating
activities:Depreciation and amortization
    
    
    11,195
    
    
    
    10,330
    
    
    
    10,362Asset impairment charges and restructuring charges
    
    
    
    
    
    
    
    
    
    
    722Stock-based compensation
    
    
    2,211
    
    
    
    2,814
    
    
    
    3,028Other
    
    
    139
    
    
    
    74
    
    
    
    150Changes in operating assets and liabilities, excluding effects of
business acquisition:Accounts receivable
    
    
    (964
    )
    
    
    24
    
    
    
    (2,811
    )Prepaid expenses and other current assets
    
    
    (914
    )
    
    
    (1,025
    )
    
    
    523Other assets
    
    
    57
    
    
    
    (94
    )
    
    
    732Accounts payable and accrued expenses
    
    
    (1,340
    )
    
    
    2,791
    
    
    
    (1,121
    )Deferred revenue
    
    
    353
    
    
    
    (311
    )
    
    
    (1,055
    )Net cash provided by operating activities
    
    
    7,412
    
    
    
    18,150
    
    
    
    7,176Cash flows from investing activities:Purchase of property and equipment
    
    
    (2,614
    )
    
    
    (10,514
    )
    
    
    (6,131
    )Proceeds from the disposition of property and equipment
    
    
    18
    
    
    
    41
    
    
    
    11Purchase of investments
    
    
    (42,172
    )
    
    
    
    
    
    
    Proceeds from the maturities of investments
    
    
    9,237
    
    
    
    
    
    
    
    Cash received from affiliate
    
    
    77
    
    
    
    
    
    
    
    Cash paid for acquisition of InterAct Conferencing, LLC, net of cash
acquired
    
    
    
    
    
    
    
    
    
    
    (3,522
    )Change in restricted cash
    
    
    236
    
    
    
    194
    
    
    
    Net cash used by investing activities
    
    
    (35,218
    )
    
    
    (10,279
    )
    
    
    (9,642
    )Cash flows from financing activities:Net proceeds from issuance of common stock
    
    
    1,198
    
    
    
    1,237
    
    
    
    1,845Payments on debt
    
    
    (2,541
    )
    
    
    (1,200
    )
    
    
    (1,902
    )Net cash provided (used) by financing activities
    
    
    (1,343
    )
    
    
    37
    
    
    
    (57
    )Increase (decrease) in cash and cash equivalents
    
    
    (29,149
    )
    
    
    7,908
    
    
    
    (2,523
    )Cash and cash equivalents at beginning of year
    
    
    39,607
    
    
    
    31,699
    
    
    
    34,222Cash and cash equivalents at end of year
    
    $
    10,458
    
    
    $
    39,607
    
    
    $
    31,699Supplemental cash flow information -Interest paid in cash
    
    $
    71
    
    
    $
    158
    
    
    $
    609Supplemental non-cash investing and financing activities:Accounts payable incurred for purchases of property and equipment
    
    $
    60
    
    
    $
    323
    
    
    $
    548Debt incurred for purchases of property and equipment
    
    $
    
    
    
    $
    686
    
    
    $
    Common stock issued for acquisition of InterAct Conferencing, LLC
    
    $
    
    
    
    $
    
    
    
    $
    4,035
 See accompanying notes to consolidated financial statements. F-7




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##### Table of Contents



RAINDANCE COMMUNICATIONS, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31, 2004
 (1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a)     Business and Basis of Financial Statement Presentation Raindance Communications, Inc., (the Company), was incorporated under the laws of the State
of Delaware on April 17, 1997. The Company provides communication services for everyday business
meetings and events. The Companys continuum of interactive services includes Reservationless
Conferencing for reservationless automated audio conferencing with simple web controls and
presentation tools, Web Conferencing Pro, which allows users to integrate reservationless automated
audio conferencing with advanced web interactive tools such as application sharing, web touring and
online whiteboarding, Raindance Meeting Edition, released in March 2004, which allows users to
integrate reservationless automated audio conferencing with advanced web interactive tools and
video technology into one multi-media conferencing solution, Operator-Assisted Conferencing, and
Unlimited Conferencing. The Company operates in a single segment. The accompanying consolidated financial statements include the accounts of Raindance
Communications and its wholly-owned subsidiary. All significant intercompany transactions and
balances have been eliminated in consolidation. The preparation of the financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the

financial statements and the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates. Significant estimates are used in these financial
statements to determine the allowance for doubtful accounts, useful lives of depreciable and
intangible assets, the valuation allowance for deferred tax assets and restructuring charges and
reserves. Certain prior year amounts have been reclassified to conform to the current year presentation. (b)     Cash, Cash Equivalents and Investments in Debt Securities Cash and cash equivalents consist of cash held in bank deposit accounts and short-term, highly
liquid investments purchased with original maturities of three months or less at the date of
purchase. Cash equivalents at December 31, 2004 consist of money market accounts at three financial
institutions and commercial paper. Short-term investments consist of a United States government
note, federal agency notes, commercial paper and certificates of deposit. The Companys investments consist of available-for-sale debt securities whose costs
approximate fair value and, accordingly, there are no unrealized gains or losses. December 31,2004
    
    
    2003Cost and approximate fair value of
available-for-sale debt securities (in
thousands):United States Treasury note
    
    $
    5,020
    
    
    $
    Federal agency notes
    
    
    16,911
    
    
    
    Commercial paper
    
    
    9,977
    
    
    
    Certificate of deposit
    
    
    1,027
    
    
    
    Total available-for-sale debt securities
    
    $
    32,935
    
    
    $
    
 All of the Companys available-for-sale debt securities have contractual maturities of
one year or less. F-8




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##### Table of Contents



(c)     Restricted Cash Included in other current assets and other assets is restricted cash, which is less than $0.1
million and $0.3 million at December 31, 2004 and 2003, respectively. Restricted cash consists of
amounts supporting irrevocable letters of credit issued by the Companys bank and is primarily used
for security deposits associated with some of the Companys long term operating leases. Funds are
held in certificates of deposit at the Companys bank, and have been established in favor of a
third party beneficiary. The funds would be released to the beneficiary in the event that the
Company fails to comply with specified contractual obligations. Provided the Company meets these
contractual obligations, the letter of credit will be discharged and the Company would no longer be
restricted from the use of the cash. (d)     Property and Equipment Property and equipment are stated at cost, net of accumulated depreciation and amortization.
Depreciation of equipment is computed using the straight-line method over the estimated useful
lives of the assets, which range from three to seven years. Leasehold improvements are amortized
over the shorter of the related lease terms or their estimated useful lives. Upon retirement or
sale, the cost of the assets disposed and the related accumulated depreciation is removed from the
accounts and any resulting gain or loss is included in operations in the period realized. (e)     Goodwill and Intangible Assets The Company first recorded goodwill and goodwill amortization in 2000 in connection with its
acquisition of Contigo Software, Inc. in June 2000. Goodwill was amortized on a straight-line
method over the estimated useful life of three years. In July 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards 142 (SFAS 142), Goodwill
and Other Intangible Assets. SFAS 142 requires that goodwill no longer be amortized, but instead
is reviewed for impairment on an on-going basis. Accordingly, the amortization of goodwill ceased
upon adoption of the Statement, which was January 1, 2002. In addition, the Company recorded $6.9
million in goodwill in April 2002 when it acquired InterAct Conferencing LLC. For the purposes of
the application of SFAS 142, the Company has one reporting unit. The Companys initial assessment
of goodwill performed as of March 31, 2002 and the annual reassessment performed thereafter at
March 31, 2004 and 2003, have indicated that the fair value of the reporting unit exceeded the
goodwill carrying value, and therefore, goodwill was not deemed to be impaired. The Company has
not noted subsequent indicators of impairment, however, there can be no assurances that the
Companys goodwill will not be impaired in the future. Intangible assets consisting primarily of issued and pending patents and trademarks were $0.3
million and $0.4 million, net of accumulated amortization, at December 31, 2004 and 2003,
respectively. This amount is included in other assets in the accompanying consolidated balance
sheets. Intangible assets are amortized using the straight-line method over three years.
Amortization expense for intangible assets was $0.2 million, $0.1 million and less than $0.1
million for the years ended December 31, 2004, 2003 and 2002, respectively. (f)     Income Taxes The Company uses the asset and liability method of accounting for income taxes as prescribed
by SFAS 109, Accounting for Income Taxes. Under the asset and liability method, deferred tax
assets and liabilities are recognized for the estimated 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 in effect for the year in which those temporary differences are expected to be recovered or
settled. The resulting deferred tax assets and liabilities are adjusted to reflect changes in tax
laws or rates in the period of enactment. (g)     Fair Value of Financial Instruments and Concentrations of Credit Risk The carrying amounts of certain of the Companys financial instruments, including cash and
cash equivalents, accounts receivable and accounts payable, approximate fair value because of the
short-term nature of these instruments. Because the interest rates on the Companys note payable
obligations reflected market rates and F-9




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terms, the fair values of these instruments approximated carrying amounts. Financial
instruments that potentially subject the Company to concentration of credit risk consist of cash
and cash equivalents, short-term investments and accounts receivable. The Companys cash and cash
equivalents are held with financial institutions that the Company believes to be of high credit
standing. Investment policies have been implemented that limit the purchases of investments to
investment grade securities. No single customer accounted for greater than 10% of total 2004
revenue. At December 31, 2004, the Company had a receivable due from Qwest Communications
International, Inc. of $1.2 million or 11.6% of the Companys total accounts receivable balance at
such date. (h)     Revenue Recognition Revenue for the Raindance Meeting Edition service is derived from subscription and usage fees.
Revenue from subscriptions is recognized monthly regardless of usage, while usage fees are based
upon either connections or minutes used. The Company recognizes usage revenue from our Raindance
Meeting Edition services in the period the meeting is completed. The Company recognizes revenue
associated with any initial set-up fees ratably over the term of the contract. Revenue for the Companys Reservationless Conferencing service is generally based upon the
actual time that each participant is on the phone or logged onto the web. For example, a customer
is charged a per-minute, per-user fee for each participant listening and viewing a live or recorded
simulcast. In addition, the Company charges customers a one-time fee to upload visuals for a phone
conference or a recorded simulcast. The Company recognizes usage revenue from Reservationless
Conferencing service in the period the call or simulcast of the call is completed. The Company
recognizes revenue associated with any initial set-up fees ratably over the term of the contract. Revenue for the Companys Web Conferencing Pro service is derived from subscription and usage
fees in addition to event fees or, in more limited cases, a software license fee. Revenue from
subscriptions is recognized monthly regardless of usage, while usage fees are based upon either
connections or minutes used. Event fees are generally hourly charges that are recognized as the
events take place. The Company recognizes revenue associated with any initial set-up fees ratably
over the term of the contract. Revenue from software license agreements is either recognized upon
shipment of the software when all the following criteria have been met: persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable, collectibility is
probable, and vendor specific objective evidence is available for the fair value of all undelivered
elements, or recognized ratably over the software support period if the Company does not have
vendor specific objective evidence for an undelivered element. Revenue for the Companys Operator-Assisted Conferencing service is generally based upon the
actual time that each participant is on the phone. In addition, the Company charges customers a fee
for additional services such as call taping, digital replay, participant lists and transcription
services. The Company recognizes usage revenue and related fees from the Operator-Assisted
Conferencing service in the period the call is completed. Revenue from the Companys Unlimited Conferencing service is derived from a flat, fixed charge
per month depending on the conference size limit selected by the customer. The fixed monthly charge
is recognized as revenue in full each month. This service provides small and medium-sized
businesses with a convenient way to conduct audio and web conferences with a predictable price.
Conference moderators and participants dial into the conference using their dedicated local
exchange toll call number as opposed to a toll-free number ordinarily used with the Reservationless
Conferencing service. (i)     Software Development Costs Costs incurred in the engineering and development of the Companys services is expensed as
incurred, except certain software development costs. Costs associated with the development of
software to be marketed externally are expensed prior to the establishment of technological
feasibility as defined in Statement of Financial Accounting Standard No. 86 (SFAS 86), Accounting
for the Cost of Computer Software to Be Sold, Leased, or Otherwise Marketed, and capitalized
thereafter. To date, the Companys software development has been completed concurrent with
attaining technological feasibility and, accordingly, all software development costs incurred to
which SFAS 86 is applicable have been charged to operations as incurred in the accompanying
financial statements. The Company capitalizes certain qualifying computer software costs incurred
during the application development stage in accordance with Statement of Position 98-1 Accounting
for the Costs of Computer Software Developed or F-10




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Obtained for Internal Use (SOP 98-1) issued by the American Institute of Certified
Public Accountants, which was adopted by the Company as of January 1, 1999. These costs are
amortized using the straight-line method over the softwares estimated useful life. Based on plans
regarding the external distribution of software developed in the third quarter of 2003 and because
the software was in the development stage, the Company changed its accounting treatment of costs
associated with the development of Raindance Meeting Edition from SOP 98-1 to SFAS 86. Since the
second quarter of 2001, the Company had capitalized $2.8 million in costs associated with Raindance
Meeting Edition, $1.3 million of which was related to internal development and $1.5 million of
which was related to contract development. The Company began amortization when Raindance Meeting
Edition was released in March 2004. (j)     Long-Lived Assets Effective January 1, 2002, the Company adopted SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets.Under SFAS 144, long-lived assets, other than goodwill, are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of the assets might not be recoverable. Conditions that would necessitate an impairment
assessment include a significant decline in the observable market value of an asset, a significant
change in the extent or manner in which an asset is used, or a significant adverse change that
would indicate that the carrying amount of an asset or group of assets is not recoverable. For
long-lived assets to be held and used, the Company recognizes an impairment loss only if its
carrying amount is not recoverable through its undiscounted cash flows and measures the impairment
loss based on the difference between the carrying amount and fair value. Long-lived assets held for
sale are reported at the lower of their carrying value or fair value less costs to sell. In 2002,
the Company recorded an asset impairment charge of $0.2 million (see note 11). (k)     Advertising Costs The Company expenses advertising costs as they are incurred. Advertising expense was $0.2
million, less than $0.1 million and $0.1 million for the years ended December 31, 2004, 2003 and
2002, respectively. (l)     Stock-Based Compensation The Company currently accounts for its stock option plans and employee stock purchase plans in
accordance with the provisions of Accounting Principles Board (APB) Opinion 25, Accounting for
Stock Issued to Employees, and related interpretations. As such, compensation expense is recorded
for common stock options on the date of grant to the extent the current market price of the
underlying stock exceeds the exercise price, which is the intrinsic value method. Under SFAS 123,
Accounting for Stock-Based Compensation,entities are permitted to recognize as expense, over the
vesting period, the fair value of all stock-based awards on the date of grant. Alternatively, SFAS
123 also allows entities to continue to apply the provisions of APB Opinion 25 and provide pro
forma net income (loss) disclosures for employee stock option grants as if the fair-value-based
method defined in SFAS 123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion 25 and provide the pro forma
disclosures required by SFAS 123. All stock-based awards to non-employees are accounted for at
their fair value in accordance with SFAS 123 and related interpretations. Stock compensation expense is comprised of the following: (a) the amortization of deferred
compensation resulting from the grant of stock options or shares of restricted stock to employees
at exercise or sale prices deemed to be less than fair value of the common stock at grant date, net
of forfeitures related to such employees who terminated service while possessing unvested stock
options, as these terminated employees have no further service obligations; (b) the intrinsic
value of modified stock options or restricted stock awards, measured at the modification date, for
the number of awards that, absent the modification, would have expired un-exercisable; (c) the
intrinsic value of restricted stock awards to employees and directors, (d) deferred stock-based
compensation associated with the acquisition of InterAct Conferencing, LLC and (e) compensation
related to options granted to non-employees. The following table summarizes information as to reported results under the Companys
intrinsic value method of accounting for stock awards, with supplemental information as if the fair
value recognition provisions of SFAS 123 had been applied for the three years ended December 31,
2004, 2003 and 2002, respectively (in thousands, except per share amounts): F-11




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Years ended December 31,2004
    
    
    2003
    
    
    2002Net income (loss), as reported
    
    $
    (3,325
    )
    
    $
    3,547
    
    
    $
    (3,354
    )Add: Stock-based employee compensation expense
attributable to common stock options
included in net income (loss)
    
    
    70
    
    
    
    1,304
    
    
    
    2,207Deduct: Stock-based employee compensation
expense attributable
to common stock options determined under
fair value based method
    
    
    (5,798
    )
    
    
    (7,388
    )
    
    
    (12,971
    )Deduct: Stock-based employee compensation
expense attributable
to employee stock purchase plan
determined under fair value
based method
    
    
    (580
    )
    
    
    (498
    )
    
    
    (685
    )Net income (loss), as adjusted
    
    $
    (9,633
    )
    
    $
    (3,035
    )
    
    $
    (14,803
    )Income (loss) per share  basic, as reported
    
    $
    (0.06
    )
    
    $
    0.07
    
    
    $
    (0.07
    )Income (loss) per share  diluted, as reported
    
    $
    (0.06
    )
    
    $
    0.06
    
    
    $
    (0.07
    )Income (loss) per share  basic, as adjusted
    
    $
    (0.18
    )
    
    $
    (0.06
    )
    
    $
    (0.29
    )Income (loss) per share  diluted, as adjusted
    
    $
    (0.18
    )
    
    $
    (0.06
    )
    
    $
    (0.29
    )
 The per share weighted-average fair value of stock options granted during the years ended
December 31, 2004, 2003 and 2002 was $2.40, $1.96 and $2.94, respectively, using the Black-Scholes
option pricing model. The Company used the following weighted average assumptions in determining
the fair value of options granted during the years ended December 31, 2004, 2003 and 2002: Years ended December 31,2004
    
    
    2003
    
    
    2002Expected life (years)
    
    
    5
    
    
    
    5
    
    
    
    6Risk-free interest rate
    
    
    3.63
    %
    
    
    3.25
    %
    
    
    5
    %Expected volatility
    
    
    191
    %
    
    
    123
    %
    
    
    106
    %Expected dividend yield
    
    None
    
    None
    
    None
 In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R,
Share-Based Payment(SFAS 123R), which supersedes APB Opinion 25 and related interpretations.
SFAS 123R requires companies to measure and recognize compensation expense for all stock-based
payments at fair value. SFAS 123R is effective for all interim periods beginning after June 15,
2005 and, thus, will be effective for the Company beginning with the third quarter of fiscal 2005.
For outstanding awards accounted for under APB No. 25 or SFAS No. 123, stock compensation expense
must be recognized in earnings after June 15, 2005 for the portion of those awards for which the
requisite service has not yet been rendered, based upon the grant date fair value of such awards
calculated under SFAS 123. (m)     Comprehensive Income (Loss) The Company has adopted SFAS 130 Reporting Comprehensive Income, which established standards
for reporting and displaying comprehensive income. Comprehensive loss equals net loss for the years
ended December 31, 2004 and 2002. Comprehensive income equals net income for the year ended
December 31, 2003. (n)     Net Income (Loss) Per Share Net income (loss) per share is presented in accordance with SFAS No. 128, Earnings Per Share
(SFAS 128). Under SFAS 128, basic earnings (loss) per share (EPS) excludes dilution for potential
common stock and is computed by dividing net income or loss by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or converted into
common stock. Potential common shares are comprised of shares of common stock issuable upon the
exercise of stock options and warrants and restricted stock subject to vesting restrictions and are
computed using the treasury stock method. F-12




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The following table sets forth the calculation of net income (loss) per share for the three
years ended December 31, 2004, 2003 and 2002 (in thousands, except per share amounts): Years ended December 31,2004
    
    
    2003
    
    
    2002Net income (loss)
    
    $
    (3,325
    )
    
    $
    3,547
    
    
    $
    (3,354
    )Common shares outstanding:Historical common shares outstanding at beginning of
year
    
    
    53,234
    
    
    
    51,896
    
    
    
    48,130Weighted average common shares issued during year
    
    
    703
    
    
    
    776
    
    
    
    2,372Weighted average common shares at end of year - basic
    
    
    53,937
    
    
    
    52,672
    
    
    
    50,502Effect of potential common shares
    
    
    
    
    
    
    2,102
    
    
    
    Weighted average common shares at end of year - diluted
    
    
    53,937
    
    
    
    54,774
    
    
    
    50,502Net income (loss) per share  basic
    
    $
    (0.06
    )
    
    $
    0.07
    
    
    $
    (0.07
    )Net income (loss) per share  diluted
    
    $
    (0.06
    )
    
    $
    0.06
    
    
    $
    (0.07
    )
 For the year ended December 31, 2004 and 2003, 675,000 and 550,000 shares, respectively,
of issued and outstanding restricted stock have been excluded from the calculation of basic
earnings per share due to vesting restrictions (see Note 7) and, if applicable, have been included
in diluted earnings per share. The following common stock options and warrants have been excluded from the computation of
diluted net income (loss) per share for the years ended December 31, 2004, 2003 and 2002 because
their effect would have been antidilutive: As of December 31,2004
    
    
    2003
    
    
    2002Shares issuable under stock options.
    
    
    8,096,391
    
    
    
    5,328,351
    
    
    
    8,409,064Shares issuable pursuant to warrants
    
    
    10,000
    
    
    
    20,017
    
    
    
    652,790
 (2)     JOINT VENTURES AND ACQUISITIONS In June 2000, the Company entered into an agreement with @viso Limited, a European-based
venture capital firm, to form Evoke Communications, B.V., a Netherlands corporation (Evoke
Communications Europe). Pursuant to this agreement, the Company loaned Evoke Communications Europe
approximately $4.6 million that was to be repaid under the terms of a promissory note. In the third
quarter of 2001 the board of directors of Evoke Communications Europe unanimously approved a plan
of liquidation and dissolution and, as a result, Evoke Communications Europe has been liquidated
and its operations have ceased. The Company recorded an impairment charge of $1.8 million in 2001,
which represented the excess of the note receivable over the cash and equipment the Company
expected to receive from the liquidation. In
the fourth quarter of 2001, the Company received equipment valued at $1.8 million and
anticipated receiving, prior to December 31, 2002, cash of approximately $1.0 million. The
equipment was transferred to the Company at net book value. The Company received cash payments from
Evoke Communications Europe of $1.0 million throughout 2002. In the fourth quarter of 2002, the
Company recorded a reversal of $48,000 based upon revised estimates of the cash to be received upon
complete dissolution and liquidation of Evoke Communications Europe. The liquidation and
dissolution was completed in 2004 and the Company received a final cash payment in the third
quarter of 2004. On April 17, 2002, the Company entered into a definitive agreement to acquire substantially
all of the assets of InterAct Conferencing, LLC (InterAct), a reseller of audio and web
conferencing services. On April 30, 2002, the Company completed the acquisition. In connection with
the acquisition, the Company also assumed certain liabilities of InterAct as of April 30, 2002,
consisting primarily of accounts payable and a $0.1 million line of credit. The Company also
assumed a facility lease obligation of approximately $0.7 million associated with a building that
is partially owned by the former president and chief executive officer of InterAct who became an F-13




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officer of the Company upon the completion of the acquisition. Effective May 1, 2002, the results
of InterActs operations are included in the Companys consolidated financial statements. The aggregate purchase consideration paid to InterAct was $7.8 million, which was comprised of
$3.8 million in cash and 1,200,982 shares of the Companys common stock valued at $4.0 million. In
addition, the Company incurred $0.1 million of acquisition related expenses. An additional 997,599
shares of the Companys common stock were issued and deemed to be compensation for future services.
Accordingly, the Company recorded $3.4 million in deferred stock-based compensation, which was
being expensed over three years, beginning in May 2002. In June 2004, the Companys former Senior
Vice President of Sales, Carolyn Bradfield, left the Company, and as a result, the Company recorded
$0.9 million stock compensation charge related to the unrecognized deferred sock-based compensation
associated with the release of certain escrowed shares of restricted stock. The value of the common
stock issued was determined based on the average market price of the Companys common stock over
the three-day period before and after the terms of the acquisition were agreed upon and announced.
The acquisition has been accounted for using the purchase method. The purchase consideration
allocation is as follows: Tangible net assets
    
    $
    1.0Goodwill
    
    
    6.9Total purchase consideration allocation
    
    $
    7.9
 The summary table below, prepared on an unaudited pro forma basis, combines the Companys
consolidated results of operations with InterActs results of operations for 2002 as if the
InterAct acquisition took place as of the beginning of the year (in thousands, except per share
data). Year endedDecember 31,2002Revenue
    
    $
    62,161Net loss
    
    
    (3,185
    )Basic loss per share
    
    
    (0.06
    )Diluted loss per share
    
    
    (0.06
    )
 The pro forma results for the year ended December 31, 2002 combine the Companys results for
the year ended December 31, 2002 with the results of InterAct for the period from January 1, 2002
through April 30, 2002. The pro forma results are not necessarily indicative of the results of
operations that would have occurred if the acquisition had been consummated at the beginning of
that year. In addition, they are not intended to be a projection of future results and do not
reflect any synergies that may have been achieved from the combined operations. (3)     OFFICER LOANS The Company had an unsecured note receivable dated September 7, 2000 due from its Chief
Technology Officer in the face amount of $50,000. The note was originally due September 7, 2005 and
bore interest at 6.22%. This obligation, including accrued interest, was paid in full during the
fourth quarter of 2002. The Company had an unsecured note receivable dated January 24, 2001 due from its former
president and chief executive officer in the face amount of $100,000. The note was originally due
January 24, 2003 and bore interest at 8.00%. This obligation, including accrued interest, was paid
in full during the fourth quarter of 2002. F-14




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(4)     PROPERTY AND EQUIPMENT Property and equipment consists of the following (in thousands): December 31,2004
    
    
    2003Computers and office equipment
    
    $
    40,571
    
    
    $
    40,936Software purchased or developed for internal use
    
    
    15,119
    
    
    
    13,785Furniture and fixtures
    
    
    2,074
    
    
    
    2,064Leasehold improvements
    
    
    2,349
    
    
    
    2,31660,113
    
    
    
    59,101Less accumulated depreciation and amortization
    
    
    (42,306
    )
    
    
    (33,349
    )$
    17,807
    
    
    $
    25,752
 In the years ended December 31, 2004 and 2003, the Company capitalized $0.3 million and
$0.9 million, respectively, of internal software application development costs in accordance with
SOP 98-1. These costs are generally amortized over 18 months from the time the software is ready
for its intended use with the exception of the capitalized costs of Raindance Meeting Edition,
which is being amortized over 36 months effective with its release to general availability in March
2004. Amortization expense of all costs capitalized pursuant to SOP 98-1 was $0.7 million, $0.4
million and $0.4 million for the years ended December 31, 2004, 2003 and 2002, respectively.
Depreciation expense was $10.3 million; $9.8 million and $10.0 million for the years ended December
31, 2004, 2003 and 2002, respectively. (5)     DEBT AND LINE OF CREDIT On January 7, 1999, the Company entered into a loan and security agreement with a total
commitment of $3,000,000 with a bank. In connection with obtaining this commitment, the Company
issued warrants to purchase 86,538 shares of Series C Preferred stock to the lender. The exercise
price of the warrants was $1.04 per share. Upon completion of the Companys initial public offering
on July 28, 2000, the warrants, which expire on July 24, 2005, were converted into warrants to
purchase 57,692 shares of common stock at $1.56 per share. Draws under this agreement were to be
repaid over 37 months, with interest at the 36 month Treasury note rate, plus 275 basis points. An
additional payment of 9% of the amount financed was payable at the end of the term of the loan.
This additional amount and the fair value of warrants of $75,000 were included in interest expense
over the term of the agreement. During 1999, the Company borrowed, in four separate draws, the
entire commitment of $3,000,000. The interest rate ranged from 7.41% to 8.40%. The loan and
security agreement was secured by substantially all business assets except those that were secured
by the debt facility described below. All balances due under this loan and security agreement were
paid by December 31, 2002. On October 9, 2001, the Company entered into a loan and security agreement with a bank
that was subsequently amended effective December 31, 2002. On October 12, 2001, the Company
received $5.0 million pursuant to the term loan component of the loan and security agreement. The
term loan was scheduled to be repaid with monthly principal payments of approximately $0.1 million
plus interest at 5.25% with the final payment due in January 2006. Advances under the revolving
line of credit component of the loan and security agreement were limited to $12.5 million or 90% of
eligible accounts receivable as defined in the agreement. The revolving line of credit was
available through January 26, 2004. Advances under the revolving line of credit may have been
repaid and re-borrowed at any time prior to the maturity date. The loan and security agreement were
collateralized by substantially all tangible and intangible assets of the Company and were subject
to compliance with covenants, including minimum liquidity coverage, minimum quick ratio and maximum
quarterly operating losses adjusted for interest, taxes, depreciation, amortization and other
non-cash charges. The Company was also prohibited from paying any dividends without the banks
prior written consent. In April 2004, the balance due under this agreement (exclusively related to
the term loan) of $1.8 million was paid in full. On May 29, 2003, the Company entered into a loan agreement with a vendor, in the amount of
$0.7 million, to finance certain fixed assets. The loan was scheduled to be repaid with quarterly
principal payments of F-15




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approximately $0.1 million plus interest at 2.5% with the final payment due
in April 2005. In December 2004, the balance due under this agreement of $0.1 million was paid in
full. In April 2004, the Company entered into a credit agreement with a bank for a revolving line of
credit, which expires in April 2006. Outstanding advances under the revolving line of credit are
limited to $15.0 million. Advances under the revolving line of credit bear interest at 0.5% below
the banks prime rate and may be repaid and re-borrowed at any time prior to the maturity date. At
December 31, 2004, the Company did not have an outstanding balance under the revolving line of
credit, however $0.2 million of the available balance of the line of credit was securing various
letters of credit. The credit agreement is collateralized by substantially all tangible and
intangible assets of the Company and is subject to compliance with covenants, including minimum
liquidity coverage, minimum tangible net worth and positive adjusted EBITDA defined as quarterly
net income (loss) adjusted for interest, taxes, depreciation, amortization and other non-cash
charges. The Company is also prohibited from paying any dividends without the banks prior written
consent. At December 31, 2004, the Company was in compliance with all of the financial loan
covenants. (6)     INCOME TAXES Income tax expense (benefit) relating to losses incurred differs from the amounts that would
result from applying the applicable federal statutory rate as follows (in thousands): Years ended December 31,2004
    
    
    2003
    
    
    2002Expected tax expense (benefit)
    
    $
    (1,131
    )
    
    $
    1,206
    
    
    $
    (1,140
    )State income taxes, net of federal impact
    
    
    (195
    )
    
    
    112
    
    
    
    (118
    )Change in valuation allowance for deferred tax assets
    
    
    2,143
    
    
    
    (1,235
    )
    
    
    1,301Stock compensation/exercise stock option benefit
    
    
    (214
    )
    
    
    199
    
    
    
    (141
    )Goodwill amortization
    
    
    
    
    
    
    (212
    )
    
    
    Other, net
    
    
    (603
    )
    
    
    (70
    )
    
    
    98Income tax expense (benefit)
    
    $
    
    
    
    $
    
    
    
    $
    
 Temporary differences that give rise to the components of net deferred tax assets are as
follows (in thousands): December 31,2004
    
    
    2003Net operating loss carryforwards
    
    $
    46,950
    
    
    $
    46,383Depreciation and amortization
    
    
    (2,840
    )
    
    
    (3,016
    )Stock-based compensation
    
    
    3,325
    
    
    
    2,576Accrued expenses
    
    
    1,701
    
    
    
    1,050Net deferred tax asset
    
    
    49,136
    
    
    
    46,993Valuation allowance
    
    
    (49,136
    )
    
    
    (46,993
    )Net deferred tax asset, less
valuation allowance
    
    $
    
    
    
    $
    
 At December 31, 2004, the Company had net operating loss carryforwards for federal income
tax purposes of approximately $125.5 million, which are available to offset future federal taxable
income, if any, through 2024. The federal net operating loss carryforwards include amounts related
to tax deductions totaling $3.4 million for exercised stock options which, when the related
valuation is reversed, would be recognized as additional paid in capital. The Company experienced
an ownership change in 1999 as defined in Section 382 of the Internal Revenue Code that limited
approximately $21.5 million of net operating loss carryforwards to an annual amount of
approximately $2.9 million. The balance of the net operating loss carryforwards of approximately
$104.0 million are not limited by Section 382 as of December 31, 2004. The Company reviews its deferred tax assets on an ongoing basis for realizability. While
the Company had generated net income for five consecutive quarters as of December 31, 2003, it
incurred quarterly losses in 2004 and management believes there currently is not enough positive
evidence to support a conclusion that it is more likely F-16




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##### Table of Contents



than not that the Company will utilize some
or all of the deferred tax assets. When management determines there is enough positive evidence to
support a conclusion that it is more likely than not that the Company will realize some or all of
the deferred tax assets, management will reduce the valuation allowance on
deferred tax assets, which will increase net income in the period in which such determination
is made. Positive evidence to support a conclusion that the deferred tax assets are realizable
includes, but is not limited to, generating net income in consecutive quarters and projections for
taxable income sufficient to utilize the deferred tax assets. (7)     COMMON STOCK PLANS AND WARRANTS (a)     Stock Options In February 2000, the Company adopted the 2000 Equity Incentive Plan that amended and
restated the 1997 stock option/stock issuance plan. Under the plan, up to an aggregate of
17,274,814 shares are reserved for issuance, including shares reserved pursuant to the plans
evergreen provisions. At December 31, 2004, there were 2,528,191 shares available for future
issuance under the plan. Pursuant to the plan, the Companys board of directors may issue common
stock and grant incentive and non-statutory stock options to employees, directors and consultants.
Incentive and non-statutory stock options generally have ten-year terms and vest over four years. The Company utilizes APB Opinion 25 in accounting for its plans. In the year ended
December 31, 2004, a total of 1,000 shares of restricted stock were granted at less than fair value
to members of the Companys board of directors as compensation for board services rendered to the
Company, resulting in aggregate compensation expense of $2,720. In February 2003, the Companys
board of directors approved an Executive Performance-Based Compensation Arrangement, pursuant to
which the Company granted 750,000 shares of restricted stock to certain executives and key
employees under the plan. The restricted stock grants cliff vest in six years and include
accelerated vesting if certain financial or product-based performance milestones are achieved. The
stock-based compensation charge associated with these grants was $1.2 million and is being recorded
as an expense ratably over six years, with such charges being accelerated if it becomes apparent
that the financial or product-based performance milestones are deemed probable of being achieved.
In addition, pursuant to this arrangement, $4.7 million of cash compensation was approved and will
become payable upon the achievement of such financial or product-based milestones, or, generally in
the boards discretion, upon a change in control of the Company. However, the Companys former
president and chief executive officers employment terminated effective December 31, 2003, which
triggered the reversal of the deferred portion of the Companys restricted stock grant compensation
expense in the amount of $0.3 million related to the cancellation of 200,000 shares of restricted
common stock and terminated the Companys $1.5 million cash compensation commitment to this former
officer. In the first quarter of 2003 the Company determined that a product-based milestone would
likely be achieved in 2004 and, accordingly, the Company began accruing a $0.2 million bonus
payable upon the achievement of the milestone and accelerated the stock compensation charge
associated with 100,000 shares of restricted common stock. In the first quarter of 2004 this
milestone was achieved and subsequently the cash bonus was paid and the restrictions on the stock
were released and issued. In the third quarter of 2004 the Company determined that a second
product-based milestone will likely be achieved in 2005 and, accordingly, the Company began
accruing a $0.3 million bonus payable upon the achievement of the milestone and accelerated the
stock compensation charge associated with 150,000 shares of restricted common stock. On January 28, 2004, the Company announced the hiring of Donald F. Detampel, Jr. as president
and chief executive officer. Simultaneously with the commencement of Mr. Detampels employment, the
Company issued a stock option grant to Mr. Detampel for 2,000,000 shares of common stock with an
exercise price of $3.28 per share. The Company also issued 275,000 shares of restricted stock to
Mr. Detampel which vest as follows: 50,000 shares were immediately vested, 100,000 shares vest
after the completion of 24 months of continuous service and 125,000 shares vest after the
completion of 37 months of continuous service. The value of the restricted stock was $3.30 per
share and the Company recorded $0.9 million in deferred stock-based compensation expense in January
2004, which is being amortized as an expense over the applicable vesting period. On August 20,
2004, this agreement was amended to include acceleration of all unvested shares of restricted stock
in the event of a change in control of the Company as defined in the agreement. If a change in
control was to occur, an additional stock-based compensation charge of $1.48 per share would be
incurred on all shares to which the vesting acceleration applies. F-17




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##### Table of Contents



Stock option activity in the Companys 2000 Equity Incentive Plan during 2002, 2003 and
2004 was as follows: Number of
    
    
    Weighted-averageShares
    
    
    exercise priceBalance at January 1, 2002
    
    
    7,593,578
    
    
    $
    3.33Granted at fair value
    
    
    2,359,086
    
    
    
    3.53Exercised
    
    
    (482,172
    )
    
    
    1.44Cancelled
    
    
    (1,241,225
    )
    
    
    4.06Balance at December 31, 2002
    
    
    8,229,267
    
    
    
    3.39Granted at fair value
    
    
    2,143,450
    
    
    
    2.33Exercised
    
    
    (292,929
    )
    
    
    1.47Cancelled
    
    
    (1,013,901
    )
    
    
    4.42Balance at December 31, 2003
    
    
    9,065,887
    
    
    
    3.09Granted at fair value
    
    
    1,376,545
    
    
    
    2.22Granted at greater than fair value
    
    
    2,000,000
    
    
    
    3.28Exercised
    
    
    (283,816
    )
    
    
    1.00Cancelled
    
    
    (774,862
    )
    
    
    3.25Balance at December 31, 2004
    
    
    11,383,754
    
    
    
    3.06
 The following table summarizes information about stock options outstanding under the
Companys 2000 Equity Incentive Plan at December 31, 2004: Options outstanding
    
    
    Options ExercisableWeightedaverageremaining
    
    Weighted
    
    
    
    
    
    
    WeightedRange of
    
    
    Number
    
    
    contractual
    
    average
    
    
    Number of
    
    
    averageexercise prices
    
    
    outstanding
    
    
    life
    
    exercise price
    
    
    Options
    
    
    exercise price$
    0.15  1.63
    
    
    
    1,942,540
    
    
    6.0
    
    $
    1.18
    
    
    
    1,755,188
    
    
    $
    1.151.64  2.56
    
    
    
    2,746,707
    
    
    7.7
    
    
    2.13
    
    
    
    1,558,635
    
    
    
    2.282.57  3.17
    
    
    
    2,016,304
    
    
    8.1
    
    
    2.73
    
    
    
    972,095
    
    
    
    2.753.28  3.35
    
    
    
    2,062,975
    
    
    9.0
    
    
    3.28
    
    
    
    56,915
    
    
    
    3.343.49  10.80
    
    
    
    2,615,228
    
    
    6.5
    
    
    5.52
    
    
    
    2,251,163
    
    
    
    5.8011,383,754
    
    
    7.5
    
    
    3.06
    
    
    
    6,593,996
    
    
    
    3.26
 In addition, the Company has sold or granted to employees, directors and consultants for
services rendered an aggregate of 1,453,399 shares of common stock through stock grants under the
plan at prices and values ranging from $0.15 to $10.80 per share. This amount includes the 550,000
shares granted pursuant to the Executive Performance-Based Compensation Arrangement and the 275,000
shares granted to Mr. Detampel. In 2002 the Company modified stock option grants for two departing members of its board of
directors. The Company accelerated the vesting on 97,225 options, which had a weighted average
exercise price of $3.19. The Company also extended the time period permitted to exercise these
options and certain options that were fully vested to one year. 140,000 options were affected by
the additional time period permitted to exercise and the weighted average exercise price of those
options was $2.73. The Company recorded compensation charges of $36,000 based on the intrinsic
value of the stock option grants at the date of modification. In 2003 the Company modified stock option grants for a departing member of its board of
directors. The Company accelerated the vesting on 42,223 options, which had a weighted average
exercise price of $3.22. The Company also extended the time period permitted to exercise these
options and certain options that were fully vested to one year. 86,666 options were affected by the
additional time period permitted to exercise and the weighted average exercise price of those
options was $2.54. The Company recorded compensation charges of $22,600 based on the intrinsic
value of the stock option grants at the date of modification. F-18




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##### Table of Contents



Pursuant to the Companys acquisition of Contigo Software, Inc. in June 2000, the Company
assumed certain stock option plans and the outstanding stock options of Contigo (assumed plans).
Stock options under the assumed plans have been converted into the Companys stock options and
adjusted to reflect the conversion ratio as specified by the applicable acquisition agreement, but
are otherwise administered in accordance with the terms of the assumed plans. Stock options under
the assumed plans generally vest over three years and expire ten years from date of grant. No
additional stock options are expected to be granted under the assumed plans. 7,814 shares were
exercised in the assumed plans during the year ended December 31, 2004 and 162,020 options remain
outstanding. Stock option activity in the assumed plans during 2002, 2003 and 2004 was as follows: Number of
    
    
    Weighted-averageShares
    
    
    exercise priceBalance at January 1, 2002.
    
    
    578,335
    
    
    $
    2.42Exercised
    
    
    (341,221
    )
    
    
    1.77Cancelled
    
    
    (57,317
    )
    
    
    3.79Balance at December 31, 2002
    
    
    179,797
    
    
    
    3.21Exercised
    
    
    (9,963
    )
    
    
    0.45Cancelled
    
    
    
    
    
    
    Balance at December 31, 2003
    
    
    169,834
    
    
    
    3.37Exercised
    
    
    (7,814
    )
    
    
    0.45Cancelled
    
    
    
    
    
    
    Balance at December 31, 2004
    
    
    162,020
    
    
    
    3.51
 The following table summarizes information about stock options outstanding under the
Companys assumed plans at December 31, 2004: Options outstanding
    
    
    Options ExercisableWeightedaverageremaining
    
    
    Weighted
    
    
    
    
    
    
    WeightedRange of
    
    Number
    
    
    contractual
    
    
    average
    
    
    Number of
    
    
    averageexercise prices
    
    outstanding
    
    
    life
    
    
    exercise price
    
    
    Options
    
    
    exercise price$0.72  2.72
    
    
    41,706
    
    
    
    4.1
    
    
    $
    1.31
    
    
    
    41,706
    
    
    $
    1.313.92
    
    
    100,563
    
    
    
    5.1
    
    
    
    3.92
    
    
    
    100,563
    
    
    
    3.926.08
    
    
    19,751
    
    
    
    5.2
    
    
    
    6.08
    
    
    
    19,751
    
    
    
    6.08162,020
    
    
    
    4.8
    
    
    
    3.51
    
    
    
    162,020
    
    
    
    3.51
 (b)     Employee Stock Purchase Plan In February 2000, the board of directors adopted the 2000 Employee Stock Purchase Plan
(ESPP). The ESPP allows participating employees to purchase shares of common stock at a 15%
discount from the market value of the stock as determined on specific dates at six-month intervals.
Under the Plan, up to an aggregate of 6,008,148 shares of common stock are available for issuance,
including shares reserved pursuant to the Plans evergreen provisions. During 2001 employees
purchased an aggregate of 291,704 shares at an average price of $1.01 per share. During 2002
employees purchased an aggregate of 745,140 shares at an average price of $0.765 per share. During
2003 employees purchased an aggregate of 960,146 shares at an average price of $0.84 per share. In
February and August 2004 employees purchased an aggregate of 281,752 shares and 302,625 shares,
respectively, at an average price of $1.99 per share and $1.16 per share, respectively. At December
31, 2004, 3,426,781 shares were reserved for future issuance. At December 31, 2004 approximately
$467,000 in payroll deductions were withheld from employees for future purchases under the plan. On
February 15, 2005 employees purchased 512,118 shares at an average price of $1.11 per share. The
ESPP is a qualified plan under the applicable section of the Internal Revenue Code and a
non-compensatory plan pursuant to Accounting Principles Board (APB) 25 accordingly; no compensation
expense has been recognized for purchases under the plan. The fair value of each purchase right is
estimated, for disclosure purposes, on the date of grant using the Black-Scholes option pricing
model with the following assumptions for 2004, 2003 and 2002, respectively: no dividends; an
expected life of six months; expected volatility of 165%, 145% and 154%, respectively; and a
risk-free interest rate of 3.41%, 4.15% and 4.56%, F-19




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##### Table of Contents



respectively. The weighted-average fair value of the right to purchase those shares in 2004,
2003 and 2002 was $1.07, $0.96 and $0.72, respectively. (c)     Stock Purchase Warrants In January 1999, in connection with obtaining a $3.0 million loan, the Company issued
warrants to purchase 86,538 shares of Series C preferred stock. The warrants were exercisable at
$1.04 per share. Upon completion of the Companys initial public offering on July 28, 2000, the
warrants, which expire on July 24, 2005, were converted into warrants to purchase 57,692 shares of
common stock at $1.56 per share. The fair value of the warrants was $75,000, as determined using
the Black-Scholes option pricing model with the following assumptions: no expected dividends, 75%
volatility, risk-free interest rate of 6% and a term of 10 years. The fair value of the warrants
was included in interest expense over the term of the agreement. In January 2003, one of the
warrant holders notified the Company of its intent to utilize the net exercise feature of this
warrant. Accordingly, the warrant holder utilized 50,769 shares of the warrant and the Company
issued 28,176 shares of common stock. In June 2000, the Company issued a warrant to purchase 10,000 shares of common stock. The
warrant is exercisable at $8.00 per share and expires on June 30, 2005. The warrant was in exchange
for certain marketing costs and was expensed as sales and marketing costs at the grant date. The
warrant became exercisable on July 24, 2000, and is not contingent on counterparty performance. The
fair value of the warrant was $89,000 as determined using the Black-Scholes option pricing model
with the following assumptions: no expected dividends, 75% volatility, risk-free interest rate of
6.5% and a term of five years. At December 31, 2004, the Company had total warrants outstanding to purchase 19,727 shares of
common stock at a weighted-average exercise price of $4.82 per share. At December 31, 2003 and
2002, the Company had total warrants outstanding to purchase 29,744 and 652,790 shares of common
stock at a weighted-average exercise price of $4.72 and $7.35, respectively. (d)     Stock Repurchase Program On August 31, 2004 the Companys board of directors approved the repurchase of up to
$5,000,000 of common stock over twelve months, unless modified by the Companys board, which the
Company announced in a press release on September 8, 2004. These repurchases may be made from time
to time in open market purchases at prevailing market prices, in negotiated transactions off the
market, or pursuant to a 10b5-1 plan. The Company did not repurchase any shares of common stock in
2004. (8)     COMMITMENTS AND CONTINGENCIES (a)     Operating Leases The Company leases office facilities under operating lease agreements that expire through
2009. Two of the office facilities are leased from entities that are controlled by a former
executive officer or current director of the Company. Rent expense related to related party leases
was $1,103,994, $1,053,324 and $1,033,953 for the years ended December 31, 2004, 2003 and 2002,
respectively. Future minimum lease payments are as follows (in thousands): F-20




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##### Table of Contents



Portionattributableto relatedTotal
    
    
    parties2005
    
    $
    2,026
    
    
    $
    9002006
    
    
    1,064
    
    
    
    9212007
    
    
    882
    
    
    
    8442008
    
    
    818
    
    
    
    8182009
    
    
    630
    
    
    
    630Total future minimum lease
payments
    
    $
    5,420
    
    
    $
    4,113
 Total rent expense for the years ended December 31, 2004, 2003, and 2002 was $1,356,819,
$1,439,561, and $1,377,057, respectively. As part of the restructuring described in note 10 the
Company has subleased all closed facilities, each of which has leases that expires at various
dates. Future minimum sublease receivables for the subleased facilities, as of December 31, 2004,
approximate $0.7 million that will be received through September 2005. The future minimum sublease
receivables have been factored into any adjustments the Company has made to the restructuring
reserve for each specific office. (b)     Purchase Commitments The Company has commitments for bandwidth usage and telephony services with various service
providers. The total commitment as of December 31, 2004 was approximately $8.2 million to be
expended through 2006. Commitments for bandwidth usage and telephony services for each of the years
subsequent to December 31, 2004 are as follows (in thousands): 2005$7,545; 2006$629. Some of
these agreements may be amended to either increase or decrease the minimum commitments during the
life of the contract. In September 2003, the Company entered into an agreement with its primary conferencing
bridge supplier, Voyant Technologies, subsequently acquired by Polycom, pursuant to which it made a
commitment to purchase a certain amount of conferencing bridges through December 2005. This
commitment was contingent on certain VoIP technology functionality being made available in the
equipment by May 12, 2004, which did not occur. As a result, management notified Voyant
Technologies that the Company has terminated the remaining purchase commitment, as well as the
agreement for material breach. Voyant Technologies has disputed this position, threatened
litigation and may seek to recover the alleged $6.1 million remaining contractual commitment plus
damages. (c)     Employment Contracts In February 2003 the Companys board of directors approved an Executive Performance-Based
Compensation Arrangement. Pursuant to this arrangement, at December 31, 2004, $3.1 million of cash
compensation, net of the cancellation below, will become payable in the future upon the achievement
of certain financial or product-based milestones or, in the boards discretion, upon a change in
control of the Company. $0.3 million relates to product-based milestones that must be achieved
before February 19, 2006. $2.8 million relates to financial milestones that must be achieved before
February 19, 2007. In March 2004, a product-based milestone was achieved and accordingly, the
Company paid $0.2 million pursuant to this commitment and accelerated the vesting on 100,000 shares
of common stock. In October 2003 the Company entered into a separation agreement with its former president and
chief executive officer to terminate his employment as of December 31, 2003. Pursuant to the terms
of the separation agreement, the Company recognized approximately $0.6 million in the fourth
quarter of 2003 related to severance costs. In addition, 200,000 shares of common stock associated
with the Executive Performance-Based Compensation Arrangement were subject to forfeiture and were
cancelled as of December 31, 2003, which triggered the reversal of the deferred portion of his
restricted stock grant compensation expense in the amount of $0.3 million. In addition, the cash
compensation commitment to this former officer was terminated as of December 31, 2003. In January 2004, the Company entered into an employment agreement with its new president and
chief executive officer. The agreement continues until terminated by either the executive or the
Company, and provides for a termination payment under certain circumstances. The maximum amount
payable upon termination pursuant to the agreement is $0.3 million. F-21




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In addition, the Company has a letter agreement with three of its executive officers, which
would require the Company to pay $0.3 million if the executive officers were terminated under
certain conditions set forth in the agreement. (d)     Severance Commitments In June 2004, the Company entered into a separation agreement with its former Senior Vice
President of Sales pursuant to which the Company recognized approximately $0.1 million in the
second quarter of 2004 related to severance costs. Such amount is included in sales and marketing
expenses in the accompanying consolidated statement of operations. In addition, the Company
recorded a stock compensation charge of $0.9 million related to the unrecognized deferred
stock-based compensation in connection with the release from escrow of certain shares of restricted
stock associated with the acquisition of InterAct Conferencing, LLC in April 2002. In October 2003, the Company entered into a separation agreement with its former president and
chief executive officer pursuant to which the Company recognized approximately $0.6 million in the
fourth quarter of 2003 related to severance costs. The unpaid severance commitment at December 31,
2004 is $0.3 million. (e)     Legal and Tax Contingenices On May 17, 2004, a complaint was filed against the Company by iTalk, LLC in the District Court
of Boulder County, Colorado alleging breach of contract and unjust enrichment, seeking damages and
injunctive relief. On June 30, 2004, the Company filed a motion to dismiss the claims for failure
to state a claim upon which relief can be granted. On July 29, 2004, iTalk filed a response,
opposing such motion. On August 24, 2004, the Company filed a reply in support of its motion to
dismiss. On September 24, 2004, the court denied the motion to dismiss. On October 4, 2004, the
Company answered iTalks complaint. On December 10, 2004 the Court set a 5-day jury trial starting
August 29, 2005. Raindance disputes plaintiffs claims and intends to defend against them
vigorously. No accrual has been made for this contingency in the accompanying financial statements
as of December 31, 2004. In addition, from time to time, the Company has been subject to legal proceedings and claims
in the ordinary course of business. Any claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources. The Company is not aware of any
legal proceedings or claims that it believes will have, individually or in the aggregate, a
material adverse effect on its business. The Company is involved in tax proceedings in the ordinary course of business. The
Company periodically assesses its liabilities and contingencies in connection with these matters
based upon the latest information available. For those matters where it is probable that the
Company has incurred a loss and the loss or range of loss can be reasonably estimated, it has
recorded reserves in the financial statements. In other instances, the Company is unable to make a
reasonable estimate of any liability because of the uncertainty related to both the probable
outcome and amount or range of loss. As additional information becomes available, the Company
adjusts its assessments. The Company is currently undergoing a sales tax audit by the Commonwealth of Massachusetts,
Department of Revenue. The Company currently does not collect sales or other taxes on the sale of
its services. The Company may be required to pay sales or other taxes on past sales of services and
may be unable to collect sales or other taxes for past sales of services to customers and,
therefore would have to pay such taxes out of its own funds. The Commonwealth of Massachusetts,
Department of Revenue has assessed the Company sales tax from April 1999 through May 2004. The
Company disagrees with the position of the Department of Revenue and has filed a formal protest to
the assessment. No provision has been made in the financial statements for the proposed tax,
interest and penalty because the ultimate liability, if any, cannot be reasonably estimated. The
assessment including tax, interest and penalties approximates $0.2 million. (9)     EMPLOYEE BENEFIT PLAN The Company sponsors a defined contribution 401(k) plan that allows eligible employees to
contribute up to 15% of their compensation up to the maximum allowable amount under the Internal
Revenue Code. The F-22




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##### Table of Contents



Company did not make a discretionary employer matching or profit sharing
contribution to the plan in 2004, 2003 or 2002. (10)     RESTRUCTURING RESERVES The Companys restructuring activities included workforce reductions, the sale or other
disposition of assets, contract cancellations and the closure of several remote sales offices. In
the first and second quarters of 2002, the Company recorded a restructuring charge of $0.2 and $0.4
million, respectively, to record additional charges associated with offices that remained vacant
while the Company continued its attempts to sublease these facilities. Restructuring reserves and activity for 2002, 2003 and 2004 are detailed below (in thousands): RestructuringReserve Balance
    
    
    Reserve
    
    
    
    
    
    
    Reserve BalanceJanuary 1, 2002
    
    
    Adjustments
    
    
    Payments
    
    
    December 31, 2002Lease
obligations, net of
estimated sublease
income
    
    $
    1,576
    
    
    $
    584
    
    
    $
    (1,135
    )
    
    $
    1,025
 RestructuringReserve Balance
    
    
    Reserve
    
    
    
    
    
    
    Reserve BalanceJanuary 1, 2003
    
    
    Adjustments
    
    
    Payments
    
    
    December 31, 2003Lease
obligations, net of
estimated sublease
income
    
    $
    1,025
    
    
    $
    
    
    
    $
    (560
    )
    
    $
    465
 RestructuringReserve Balance
    
    
    Reserve
    
    
    
    
    
    
    Reserve BalanceJanuary 1, 2004
    
    
    Adjustments
    
    
    Payments
    
    
    December 31, 2004Lease
obligations, net of
estimated sublease
income
    
    $
    465
    
    
    $
    
    
    
    $
    (277
    )
    
    $
    188
 At December 31, 2004, the Companys restructuring reserves totaled $0.2 million, all of
which is current and solely relates to lease costs, which will be relieved as payments are made.
The Company has adjusted its restructuring reserves in the past based on what it believed would be
the most probable outcome. The actual cost savings that the Company anticipated as a result of this
restructuring effort have been realized, with the exception of the restructuring costs associated
with the closure of remote sales facilities. Due to the real estate market that existed, it took
the Company longer than expected to sublease or otherwise terminate its lease obligations in
certain cities. The Company will continue to monitor and adjust, as warranted, its restructuring
reserve associated with remote sales facilities based on current facts and circumstances. At
December 31, 2004, all facilities subject to the restructuring and included in the restructuring
reserve have been subleased. However, the Company may be required to record additional
restructuring charges on certain subleased offices if subtenants default on these commitments.
Future minimum sublease receivables for all subleased facilities, as of December 31, 2004,
approximate $0.7 million, which are scheduled to be received through September 2005. (11)     ASSET IMPAIRMENT CHARGES In the fourth quarter of 2002, the Company identified, and removed from service, equipment
that was no longer required or had become obsolete. The asset write-offs were determined under the
long-lived assets to be disposed of by sale model. The Company completed the sale and disposal of
the assets in 2003. In connection with the plan of disposal, the carrying amount of the assets
exceeded the fair value of the assets less cost to sell, and as a result, the Company recorded an
impairment loss of $0.2 million in the fourth quarter of 2002. In the third quarter of 2001 the board of directors of Evoke Communications Europe unanimously
approved a plan of liquidation and dissolution and, as a result, Evoke Communications Europe has
been liquidated and its operations have ceased. In the fourth quarter of 2002, the Company
recorded a reversal of $0.1 million based upon revised estimates of the cash to be received upon
complete dissolution and liquidation of Evoke Communications Europe. The dissolution and
liquidation was completed in the third quarter of 2004. F-23




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(12)     RELATED PARTY TRANSACTIONS In the third quarter of 2003 the Company sold a software license to the Companys primary
hardware vendor (Voyant Technologies, Inc., subsequently acquired by Polycom) in the amount of $4.0
million, $1.1 million of which was recognized as revenue in the third quarter of 2003 and $2.9
million of which was recognized as revenue in the fourth quarter of 2003. The Company also entered
into an agreement with the same vendor to purchase approximately $10.3 million in equipment to be
expended through December 31, 2005. At the time of the transaction the vendor was a privately held
company and shared a common board member with the Company. On January 6, 2004, Polycom, Inc., a
publicly traded company, acquired Voyant Technologies, Inc. and the common board member
relationship ceased. The Company terminated the purchase commitment and the agreement for material
breach, which Polycom disputes. For the years ended December 31, 2004, 2003, and 2002, the Company paid consulting fees and
commissions in the amount of $0.3 million, $0.2 million, and $0.1 million respectively, to 2Com
Communications, LLC, an entity controlled by the brother-in-law of the Companys current chairman
of the board and former president and chief executive officer. (13)     SIGNIFICANT CUSTOMERS AND SUPPLIERS A significant concentration is represented by sales or accounts receivable equal to or greater
than 10% of the Companys total sales or accounts receivable for the year. For the year ended
December 31, 2004 the Company did not have any significant concentrations with respect to sales,
however, the Company had a receivable, all of which was current, due from Qwest Communications
International, Inc. of $1.2 million or 11.6% of the Companys total accounts receivable balance at
December 31, 2004. For the year ended December 31, 2003, the Company did not have significant
concentrations with respect to either sales or accounts receivable. In 2002, Qwest Communications
International, Inc. (Qwest) accounted for 14.3% of total revenue. The receivable due from Qwest at
December 31, 2002, all of which was current, was approximately $2.5 million or 25.2% of the
Companys total accounts receivable balance. The Company purchases audio conferencing bridges from a single supplier, Voyant/Polycom. See
note 12. In 2004, 2003, and 2002, the Company purchased $1.1 million, $5.7 million, and $3.6
million, respectively, in equipment and services from this supplier. (14)     VALUATION AND QUALIFYING ACCOUNTS Valuation and qualifying accounts for each of the years in the three-year period ended
December 31, 2004 is detailed below (in thousands): Balance at
    
    
    
    
    
    
    
    
    
    
    Balance atbeginning of
    
    
    
    
    
    
    
    
    
    
    end ofDescription
    
    year
    
    
    Additions
    
    
    Deductions
    
    
    yearYear ended December 31, 2004:Allowances deducted from asset accounts:Allowance for doubtful accounts
    
    $
    300
    
    
    
    181
    
    
    
    (171
    )
    
    
    310Deferred tax asset valuation allowance
    
    
    46,993
    
    
    
    2,143
    
    
    
    
    
    
    
    49,136Year ended December 31, 2003:Allowances deducted from asset accounts:Allowance for doubtful accounts
    
    $
    850
    
    
    
    371
    
    
    
    (921
    )
    
    
    300Deferred tax asset valuation allowance
    
    
    48,228
    
    
    
    
    
    
    
    (1,235
    )
    
    
    46,993Year ended December 31, 2002:Allowances deducted from asset accounts:Allowance for doubtful accounts
    
    
    775
    
    
    
    464
    
    
    
    (389
    )
    
    
    850Deferred tax asset valuation allowance
    
    
    46,927
    
    
    
    1,301
    
    
    
    
    
    
    
    48,228
 F-24




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(15)     SUBSEQUENT EVENTS On January 24, 2005 the Compensation Committee of the board of directors of Raindance
Communications, Inc. approved the grant of 348,000 shares of restricted common stock to certain
executive officers and key employees. The awards will generally vest in equal quarterly
installments over a four-year period with the first quarterly installment vesting on March 31,
2005. These grants resulted in a deferred stock-based compensation charge of $0.8 million to be
recognized as stock-based compensation expense ratably over a four-year period. F-25




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INDEX TO EXHIBIT Exhibit No.
    
    Description2.1(1)
    
    Agreement and Plan of Reorganization by and among Registrant, Contigo Software, Inc. and CSI
Acquisition Corporation dated as of March 24, 2000.2.2(1)
    
    Amendment to Agreement and Plan of Reorganization by and among Registrant, Contigo Software, Inc.
and CSI Acquisition Corporation dated as of April 7, 2000.2.3(4)
    
    Asset Purchase Agreement by and among Registrant, InterAct Conferencing, LLC and Carolyn Bradfield
dated as of April 17, 2002.3.1(1)
    
    Restated Certificate of Incorporation.3.2(1)
    
    Amended and Restated Bylaws.3.3(3)
    
    Certificate of Ownership, as filed May 15, 2001, merging EC Merger, Inc. into Evoke Communications,
Inc. under the name Raindance Communications, Inc.4.1
    
    Reference is made to Exhibits 3.1 and 3.2.4.2(3)
    
    Raindance Communications, Inc. specimen stock certificate representing shares of common stock.10.1(1)
    
    2000 Equity Incentive Plan.10.2(1)
    
    2000 Employee Stock Purchase Plan.10.3(1)
    
    Amended and Restated Stockholders Agreement, among the Registrant, certain of its stockholders and
certain of its management, dated March 29, 2000.10.6(1)
    
    Form of Indemnity Agreement entered into between Registrant and each of its directors and executive
officers.10.12(1)
    
    Lease, dated March 3, 1997, between BMC Properties, LLC and Registrant.10.13(1)
    
    Lease, dated June 6, 1999, between BLC Properties, LLC and Registrant.10.14(1)+
    
    Source Code and Object Code License Agreement, dated December 29, 1999, between Registrant and
AudioTalk Networks, Inc.10.16(1)
    
    Personal Services Agreement, dated November 17, 1999, between Registrant and Paul Berberian.10.16.1(5)
    
    Amendment to Personal Services Agreement, dated June 26, 2002, between the Company and Paul
Berberian.10.17(6)
    
    Separation and Release Agreement, dated October 14, 2003, between Registrant and Paul Berberian.10.18(8)
    
    Offer Letter, dated January 27, 2004, between Registrant and Donald F. Detampel, Jr.10.18.1(9)
    
    Amendment to Offer Letter, dated August 20, 2004, between Registrant and Donald F. Detampel, Jr.10.26(7)
    
    Executive Performance-Based Compensation Arrangement23.1
    
    Consent of KPMG LLP.24.1
    
    Powers of attorney (included on signature page).31.1
    
    Certification pursuant to 18 U.S.C. Section 1350 by the Chief Executive Officer, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed with the Securities and Exchange
Commission as Exhibit 31.1 to the companys Annual Report on Form 10-K for the year ended December
31, 2004.31.2
    
    Certification pursuant to 18 U.S.C. Section 1350 by the Chief Financial Officer, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed with the Securities and Exchange
Commission as Exhibit 31.2 to the companys Annual Report on Form 10-K for the year ended December
31, 2004.




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Exhibit No.
    
    Description32.1
    
    Certifications pursuant to 18 U.S.C. Section 1350 by the Chief Executive Officer and Chief
Financial Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed with
the Securities and Exchange Commission as Exhibit 32.1 to the companys Annual Report on Form 10-K
for the year ended December 31, 2004.
   +     Confidential treatment granted with respect to portions of these exhibits.(1)     Incorporated by reference to the Registrants Registration Statement on Form S-1 No. 333-30708.(2)     Incorporated by reference to the Registrants Annual Report on Form 10-K (File No. 000-31045) as filed on March 29, 2001.(3)     Incorporated by reference to the Registrants Quarterly Report on Form 10-Q (File No. 000-31045) as filed on August 14, 2001.(4)     Incorporated by reference to the Registrants Quarterly Report on Form 10-Q (File No. 000-31045) as filed on May 15, 2002.(5)     Incorporated by reference to the Registrants Quarterly Report on Form 10-Q (File No. 000-31045) as filed on August 14, 2002.(6)     Incorporated by reference to the Registrants Quarterly Report on Form 10-Q (File No. 000-31045) as filed on November 14, 2003.(7)     Incorporated by reference to the Registrants Annual Report on Form 10-K (File No. 000-31045) as filed on March 26, 2003.(8)     Incorporated by reference to the
Registrants Annual Report on Form 10-K (File No.
000-31045) as filed on March 12, 2004.(9)     Incorporated by reference to the Registrants Quarterly Report on Form 10-Q (File No. 000-31045) as filed on November 9, 2004.