-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ae16bKbnc6hRC44wNRYq2eLYubrKIbKh2o2IOQMI+9COj468cneFgvaKuK+VHG35 KWieoAtbjM1/bqH7bfRKxQ== 0001012870-99-000639.txt : 19990226 0001012870-99-000639.hdr.sgml : 19990226 ACCESSION NUMBER: 0001012870-99-000639 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19990225 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LATITUDE COMMUNICATIONS INC CENTRAL INDEX KEY: 0001078425 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 943177392 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-72935 FILM NUMBER: 99550065 BUSINESS ADDRESS: STREET 1: 2121 TASMAN DRIVE CITY: SANTA CLARA STATE: CA ZIP: 95054 S-1 1 FORM S-1 As filed with the Securities and Exchange Commission on February 25, 1999 Registration No. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM S-1 REGISTRATION STATEMENT Under The Securities Act of 1933 ---------------- LATITUDE COMMUNICATIONS, INC. (Exact Name of Registrant as Specified in Its Charter) ---------------- Delaware 5045 94-3177392 (State or Other (Primary Standard Industrial (I.R.S. Employer Jurisdiction of Classification Code Number) Identification Number) Incorporation or Organization) 2121 Tasman Drive Santa Clara, CA 95054 (408) 988-7200 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) ---------------- Emil C.W. Wang President and Chief Executive Officer Latitude Communications, Inc. 2121 Tasman Drive Santa Clara, CA 95054 (408) 988-7200 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) Copies to: Mark A. Medearis Jeffrey D. Saper Edward Y. Kim Selim Day Anita Vasudevan Ava M. Hahn VENTURE LAW GROUP WILSON SONSINI GOODRICH & ROSATI A Professional Corporation Professional Corporation 2800 Sand Hill Road 650 Page Mill Road Menlo Park, CA 94025 Palo Alto, CA 94304 ---------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Proposed Maximum Aggregate Amount Of Title Of Each Class of Offering Registration Securities To Be Registered Price(1) Fee - -------------------------------------------------------------------------------- Common stock, par value $.001 per share............... $41,400,000 $11,510 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) and Rule 457(o) under the Securities Act. ---------------- The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this prospectus is not complete and may be changed. We may + +not sell these securities until the registration statement filed with the + +Securities and Exchange Commission is effective. This prospectus is not an + +offer to sell these securities and it is not soliciting an offer to buy these + +securities in any state where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED FEBRUARY 25, 1999 Shares [LOGO] Latitude Communications, Inc. Common Stock -------- Prior to this offering, there has been no public market for the common stock. The initial public offering price of the common stock is expected to be between $ and $ per share. We have made application to list the common stock on The Nasdaq Stock Market's National Market under the symbol "LATD." We have granted the underwriters an option to purchase a maximum of additional shares to cover over-allotments of shares. Investing in the common stock involves certain risks. See "Risk Factors" starting on page 5.
Underwriting Price to Discounts and Proceeds to Public Commissions Latitude ------------ ------------- ------------ Per Share.................................. $ $ $ Total...................................... $ $ $
Delivery of the shares of common stock will be made on or about , 1999, against payment in immediately available funds. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Credit Suisse First Boston Hambrecht & Quist Dain Rauscher Wessels a division of Dain Rauscher Incorporated Prospectus dated , 1999 ------------ TABLE OF CONTENTS
Page ---- Prospectus Summary....................................................... 3 Risk Factors............................................................. 5 Use of Proceeds.......................................................... 15 Dividend Policy.......................................................... 15 Certain Information...................................................... 15 Capitalization........................................................... 16 Dilution................................................................. 17 Selected Consolidated Financial Data..................................... 18 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 19
Page ---- Business................................................................... 29 Management................................................................. 42 Certain Transactions....................................................... 52 Principal Stockholders..................................................... 53 Description of Capital Stock............................................... 55 Shares Eligible for Future Sale............................................ 58 Additional Information..................................................... 59 Underwriting............................................................... 60 Notice to Canadian Residents............................................... 62 Legal Matters.............................................................. 63 Experts.................................................................... 63 Index to Financial Statements.............................................. F-1
------------ You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document. ------------ Dealer Prospectus Delivery Obligation Until , 1999 (25 days after the commencement of this offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions. "MeetingPlace" is a registered trademark of Latitude, and "Latitude," "Latitude Communications," the Latitude logo, "MeetingNotes" and "MeetingTime" are trademarks of Latitude. This prospectus also includes trademarks and service marks owned by other companies. 2 PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary is not complete and does not contain all the information you should consider before buying shares in this offering. You should read the entire prospectus carefully. Except as otherwise indicated, all information in this prospectus is based on the following assumptions: (a) a three-for-two split of the common stock prior to the effectiveness of this offering; (b) the conversion of each outstanding share of convertible preferred stock into one share of common stock immediately prior to the completion of this offering; (c) no exercise of the underwriters' over-allotment option; (d) our reincorporation in Delaware prior to the effectiveness of this offering; and (e) the filing of our amended and restated certificate of incorporation upon completion of this offering. Latitude Communications, Inc. ---------------- We are a leading provider of integrated voice and data conferencing solutions for geographically dispersed organizations. We develop, market and support our MeetingPlace system, which allows companies to conduct "virtual" meetings and thereby extend real-time decision making processes irrespective of the geographic location of participants. With MeetingPlace, participants can schedule and attend a meeting, share and edit documents, and capture and retrieve meeting content. MeetingPlace is designed to be an enterprise-wide resource and to leverage existing technologies such as telephones, cellular phones and personal computers. Moreover, we expect the dramatic growth in web browsers and collaborative software applications to drive data conferencing as an important business application of the Internet. MeetingPlace consists of three components: (a) the MeetingPlace conference server; (b) MeetingPlace software; and (c) system integration options. MeetingPlace incorporates many easy-to-use features that allow participants to emulate the voice and data collaboration that occurs in a face-to-face meeting, such as breakout sessions, roll calls and meeting handouts. MeetingPlace provides simultaneous voice and data conferencing and the ability to record and access meeting content while lowering the enterprise's overall conferencing costs. Our objective is to make MeetingPlace a standard communications tool within an enterprise. To achieve this objective, we intend to establish MeetingPlace as a ubiquitous desktop application by continuing to integrate it seamlessly with a wide array of enterprise software, including browsers and collaborative software applications. We also intend to aggressively leverage our installed customer base to increase market penetration, leverage our technological expertise to address significant market opportunities and develop partnerships to expand our distribution channels. Furthermore, we expect to continue to provide our customers with a range of value-added consulting services to promote broad deployment within their organizations. We began commercial shipment of MeetingPlace in December 1994 and, as of December 31, 1998, had over 200 customers. In addition to enterprise-wide general deployment, customers have purchased and used MeetingPlace for a variety of specific business applications, including morning brokerage calls, crisis management, training and education, customer and client services, supply chain management and merger integration. Furthermore, over 60% of our customers have purchased additional products or services after their initial system installations. MeetingPlace has been installed in some of the world's leading enterprises, including 3Com, Aetna, Cisco, Credit Suisse First Boston, Hewlett- Packard, Honeywell, Merrill Lynch, Microsoft, Oracle, State Farm Insurance, Union Pacific Railroad and the U.S. Federal Reserve Bank. We were originally incorporated in California under the name "Convene Communications, Inc." in April 1993 and changed our name to "Latitude Communications, Inc." in July 1993. Our address is 2121 Tasman Drive, Santa Clara, California 95054, and our telephone number is (408) 988-7200. 3 The Offering Common stock offered........................ shares Common stock to be outstanding after this offering................................... shares Use of proceeds............................. For general corporate purposes, including working capital, capital expenditures, geographic expansion and additional sales and marketing efforts. Proposed Nasdaq National Market symbol...... LATD
- -------- This table is based on shares outstanding as of December 31, 1998. This table excludes: . 1,352,496 shares subject to outstanding options at a weighted average exercise price of $2.24 as of December 31, 1998, and 233,868 shares of common stock available for future issuance under our 1993 Stock Plan; . 134,386 shares of common stock reserved for issuance on the exercise of outstanding warrants, at a weighted average price of $1.05 per share as of December 31, 1998; . 2,700,000 shares of common stock available for issuance under our 1999 Stock Plan; . 250,000 shares of common stock available for issuance under our 1999 Directors' Stock Option Plan; and . 500,000 shares of common stock available for issuance under our 1999 Employee Stock Purchase Plan. Summary Consolidated Financial Data (In thousands, except per share data)
Years ended April 7, 1993 (date December 31, of inception) to ------------------------- December 31, 1995 1996 1997 1998 ------------------- ------- ------- ------- Consolidated Statement of Opera- tions Data: Revenue: Product ...................... $1,477 $ 5,103 $10,620 $16,506 Service....................... 148 943 2,312 4,545 ------ ------- ------- ------- Total revenue............... 1,625 6,046 12,932 21,051 Gross profit.................... 683 3,877 8,969 15,094 Operating income (loss)......... (8,822) (4,390) (2,206) 778 Net income (loss)............... (8,547) (4,252) (2,229) 703 Net income (loss) per share-- basic.......................... $ (2.02) $ (0.78) $ 0.21 Shares used in per share calculation--basic............. 2,110 2,850 3,279 Net income (loss) per share-- diluted........................ $ (2.02) $ (0.78) $ 0.04 Shares used in per share calculation--diluted........... 2,110 2,850 16,635
December 31, 1998 ------------------- Actual As Adjusted ------- ----------- Consolidated Balance Sheet Data: Cash and cash equivalents.................................. $ 3,982 $ Working capital............................................ 4,470 Total assets............................................... 11,870 Long-term obligations...................................... 838 Total stockholders' equity................................. 4,785
- -------- See Note 2 of Notes to Consolidated Financial Statements for an explanation of the determination of the number of shares used in computing per share data. The as adjusted numbers in the table above are adjusted to give effect to receipt of the net proceeds from the sale of shares of common stock offered by us at an assumed offering price of $ per share after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. See also "Use of Proceeds," "Capitalization" and "Underwriting." 4 RISK FACTORS You should carefully consider the following risks in addition to the remainder of this prospectus before purchasing our common stock. The risks and uncertainties described below are not the only ones that we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. We have a limited operating history. We commenced operations in May 1993 and commercially released the first version of our MeetingPlace system in December 1994. Accordingly, we have a limited operating history on which you can base your evaluation of our business and prospects. Our prospects must be considered in light of the risks and uncertainties encountered by companies in the early stages of development, including: . our substantial dependence on our MeetingPlace products, which have limited market acceptance; . our need to expand our marketing, sales and support organizations; . our unproven ability to anticipate and respond to market competition; . our ability to retain existing customers; . the degree to which our customers perceive that our products are secure and reliable; . the market's acceptance of integrated real-time voice and data conferencing; and . our dependence on key personnel. To address these risks and uncertainties, we must, among other things, do the following: . successfully market our products and services to new and existing customers; . attract, integrate and retain qualified personnel; . adequately respond to competitive developments; and . successfully introduce enhancements to our existing products to incorporate new technologies or standards. We cannot assure you that we will successfully address any of these risks and uncertainties. Our future profitability is uncertain. As of December 31, 1998, we had an accumulated deficit of approximately $14.3 million. We first achieved profitability during the fourth quarter of 1997. Although our revenue has grown in recent quarters, we cannot be certain that our revenue will continue to grow or that we will maintain profitability in the future. We expect to continue to incur significant product development, sales and marketing, and administrative expenses. As a result, we will need to generate significant revenue to sustain profitability. Because our product market is new and evolving, we cannot accurately predict the future growth rate, if any, or the ultimate size of our market. Our ability to increase revenue and sustain profitability also depends on a number of factors outside our control, including the extent to which: . our products are able to gain market acceptance; . our competitors develop competing products; . we are able to maintain the average selling price of our products; and . our distributors and other marketing partners dedicate resources to selling our products. As a result, we may not be able to increase revenue or achieve profitability on a quarterly or annual basis. 5 Our operating results may fluctuate significantly. Our operating results are difficult to predict and are likely to fluctuate significantly on a quarterly and an annual basis due to a number of factors, many of which are outside of our control. These factors include, but are not limited to, the following: . the amount and timing of our revenue; . the lengthiness and unpredictability of our sales cycle; . potential delays we may encounter in introducing new products and services; . changes in our mix of revenues generated from product sales and services; . changes by existing customers in their levels of purchases of our products and services; . changes in our mix of sales channels through which our products and services are sold; and . changes in our mix of domestic and international sales. The amount and timing of our operating expenses will vary from quarter to quarter, depending on the level of actual and anticipated business activities. In addition, a significant portion of our expenses, such as employee base compensation and rent, are relatively fixed. As a result, any shortfall in revenue could cause significant changes in our quarterly operating results. Orders at the beginning of each quarter typically do not equal expected revenue for that quarter. In addition, a significant portion of our orders are received in the last month of each fiscal quarter. Accordingly, we are dependent upon obtaining orders in a quarter for shipment in the same quarter to achieve our revenue objectives. If we fail to ship products by the end of a quarter in which the order is received, or if our prospective customers delay their orders or delivery schedules until the following quarter, we may fail to meet our revenue objectives, which may adversely impact our operating results. Our quarterly revenue and operating results are difficult to forecast, and we believe that period-to-period comparisons of our operating results will not necessarily be meaningful. As a result, you should not rely upon them as an indication of future performance. It is likely that our future quarterly operating results from time to time will not meet the expectations of security analysts or investors. If this occurs, the price of the common stock would likely decline. Our market is highly competitive. We compete in a market that is highly competitive and rapidly changing. We expect competition to persist and intensify in the future. We face competition from a number of different sources. Currently, our principal competitors include: . major telecommunications carriers that operate service bureaus for voice conferencing, such as AT&T Corp., MCI Worldcom, Inc. and Sprint Corporation; . private branch exchange, or PBX, vendors that sell systems with voice conferencing capabilities, such as Lucent Technologies Inc. and Nortel Networks; . providers of video conferencing systems such as PictureTel Corporation, Pinnacle Data Systems Incorporated and 8x8, Inc.; and . smaller start-up companies that offer web-based voice and data conferencing products. In addition, we anticipate that, in the future, we may experience competition from potential competitors that include: . networking companies, such as Cisco Systems, Inc., 3Com Corporation, Lucent Technologies Inc. and Nortel Networks that are currently focusing on providing hardware to enable voice over IP applications and that may offer voice and data conferencing functionality at a cost lower than ours or at no cost; and . collaborative software providers, such as Microsoft Corporation and Lotus Development Corporation, that are currently focusing on data conferencing products and that may in the future incorporate voice conferencing functionality into their products at little or no incremental charge to their customers. 6 Many of these companies have longer operating histories, stronger brand names and significantly greater financial, technical, marketing and other resources than we do. These companies also may have existing relationships with many of our prospective customers. In addition, these companies may be able to respond more quickly than we can to new or emerging technologies and changes in customer requirements. New competitors may emerge and rapidly acquire significant market share. Competitive pressure, including any reduction in the cost of voice conferencing services provided by service bureaus, may make it difficult for us to acquire and retain customers and may require us to reduce the price of our products and services. We cannot assure you that we will be able to compete successfully with existing or new competitors. If we fail to compete successfully against current or future competitors, our business could suffer. See "Business--Competition." Our market is in an early stage of development. The market for integrated real-time voice and data conferencing is relatively new and rapidly evolving. In contrast, stand-alone voice conferencing is a well established and widely used communication tool. Our ability to remain profitable depends in large part on the widespread adoption by end users of real-time voice and data conferencing. We do not know whether the market we have targeted will accept our products. Accordingly, we will have to devote substantial resources to educate prospective customers about the uses and benefits of our products. In addition, businesses that have invested substantial resources in other conferencing products may be reluctant or slow to adopt our products, which might replace or compete with their existing systems. Our efforts to educate potential customers may not result in our products achieving market acceptance. If the market for our products fails to grow or grows more slowly than we anticipate, our business could suffer. Our market is subject to rapid technological change. The market in which we compete is characterized by rapid technological change, frequent new product introductions, changes in customer requirements and emerging industry standards. In particular, we expect that the growth of the Internet and Internet-based telephony applications, as well as general technology trends such as migrations to new operating systems, will require us to adapt our product to remain competitive. Our products could become obsolete and unmarketable if products using new technologies are introduced and new industry standards emerge. For example, the widespread acceptance of competing technologies such as video conferencing and voice over IP, the transmission of voice over the Internet, could diminish demand for our current products. As a result, the life cycle of our products is difficult to estimate. To be successful, we will need to develop and introduce new products and product enhancements that respond to technological changes or evolving industry standards, such as voice over IP, in a timely manner and on a cost effective basis. In addition, our current full care support agreements with our customers require us to deliver two product upgrades per year. We cannot assure you that we will successfully develop these types of products and product enhancements or that our products will achieve broad market acceptance. Our failure to respond in a timely and cost-effective manner to new and evolving technologies could adversely impact our business. Our sales cycle is lengthy and unpredictable. The typical sales cycle of our products is lengthy, generally between six to nine months, unpredictable, and involves significant capital investment decisions by prospective customers, as well as our education of potential customers regarding the use and benefits of our products. Furthermore, many of our prospective customers have neither budgeted expenses for voice and data conferencing systems nor have personnel specifically dedicated to procurement and implementation of such conferencing systems. As a result, our customers spend a substantial amount of time before purchasing our products in performing internal reviews and obtaining capital expenditure approvals. We cannot be certain that this cycle will not lengthen in the future. The emerging and evolving nature of the real-time voice and data conferencing market may lead to confusion 7 in the market, which may cause prospective customers to postpone their purchase decisions. In addition, general concerns regarding Year 2000 compliance may further delay purchase decisions by prospective customers. Any delay in sales of our products could cause our operating results to vary significantly from quarter to quarter. We rely on sales of one product family for substantially all of our revenue. Sales of our MeetingPlace products and related services have accounted for substantially all of our revenue to date, and we expect that this trend will continue for the foreseeable future. If sales of our MeetingPlace products and related services fail to increase, our business and operating results would suffer. We need to expand our sales and distribution channels. We will need to expand our direct and indirect sales operations in order to increase market awareness of our products and generate increased revenue. We have recently expanded our direct sales force and plan to recruit additional sales personnel. New sales personnel will require training and take time to achieve full productivity. There is strong competition for qualified sales personnel in our business, and we may not be able to attract and retain sufficient new sales personnel to expand our operations. In addition, we believe that our future success is dependent upon establishing successful relationships with a variety of distribution partners. To date, we have entered into agreements with only a small number of such partners. We cannot be certain that we will be able to reach agreement with additional distribution partners on a timely basis or at all, or that these distribution partners will devote adequate resources to selling our products. Furthermore, in the event that our distribution partners fail to adequately market or support our products, the reputation of our products in the market may suffer. In addition, we will need to manage potential conflicts between our direct sales force and third-party reselling efforts. We face risks associated with international expansion. We intend to continue to expand our international operations and enter new international markets. In addition, we intend to sell our products in international markets generally through indirect distribution channels. This expansion will require significant management attention and financial resources. Our international operations are subject to a number of risks and uncertainties, including: . the difficulties and costs of staffing and managing foreign operations; . our ability to establish relationships with distribution partners and the performance of such partners in selling our products; . the difficulties and costs of localizing products for foreign markets, including the development of multilingual capabilities in our product and the modification of our products to comply with local telecommunications certification requirements in each country; . unexpected changes in regulatory requirements; . legal uncertainties regarding liability, export and import restrictions, tariffs and other trade barriers; . inadequate protection of intellectual property in certain countries; . increased difficulty in collecting delinquent or unpaid accounts; . fluctuations in the value of the U.S. dollar relative to other currencies; . potentially adverse tax consequences; and . political and economic instability. In addition, we are unable to determine the effect that recent economic downturns in Asia or the adoption and use of the Euro will have on our business. Any of these factors could impair our ability to expand our international operations into these markets. Similarly, we cannot accurately predict the impact that future fluctuations in foreign currency exchange rates may have on our business, operating results or financial condition. Although we have historically 8 conducted transactions with customers outside the United States in U.S. dollars, to the extent future revenue is denominated in foreign currencies, we would be subject to increased risks relating to foreign currency exchange rate fluctuations. To date, we have not engaged in any hedging transactions in connection with our international operations. Although we may attempt to hedge currency rate exposure in the future, any hedging policies that we might implement could be unsuccessful. We need to integrate our products with third-party technology. Our products are designed to integrate with our customers' data and voice networks, as well as with enterprise applications such as browsers and collaborative software applications. Accordingly, the reliability and performance of a MeetingPlace system at a customer's site are largely dependent on a number of factors relating to the third party software and hardware products used by the customer, such as the customer's voice and data network systems and corporate firewall, the configurations on end users' personal computers and the end users' methods of access such as cellular telephones and laptop computers. In addition, if we are not able to readily integrate our products with these networks or enterprise applications (for instance, as a result of technology enhancements or upgrades of such systems), we could be required to redesign our products to ensure compatibility. We may not be able to redesign our products or be certain that any redesign we may develop would achieve market acceptance. In addition, we will need to continually modify our products as newer versions of the enterprise applications with which our products integrate are introduced. Our ability to do so largely depends on our ability to gain access to the advanced programming interfaces, or APIs, for such applications, and we cannot assure you that we will have access to necessary APIs in the future. Our inability to integrate our product with third-party technology or to develop modifications to our products in a timely manner to integrate with newer versions of third party technology could materially and adversely affect our business. We may experience difficulties managing our expected growth. We have been experiencing a period of rapid growth over recent years. Our total revenue has grown from approximately $6.0 million in 1996 to $21.1 million in 1998. The number of our employees has grown from approximately 61 at the end of the fourth quarter of 1996 to 112 at the end of the fourth quarter of 1998. This growth has placed, and we expect that any future growth we experience will continue to place, a significant strain on our management systems and resources. To manage the anticipated growth of our operations, we will be required to: . improve existing and implement new operational, financial and management information controls, reporting systems and procedures; . hire, train and manage additional qualified personnel; and . manage our relationships with our customers, suppliers and distributors. We may not be able to install management information and control systems in an efficient and timely manner, and our current or planned personnel, systems, procedures and controls may not be adequate to support our future operations. We may not be able to recruit and retain additional qualified personnel. Competition for qualified personnel in the San Francisco Bay area, as well as other markets in which we recruit, is extremely intense and characterized by rapidly increasing salaries, which may increase our operating expenses or hinder our ability to recruit qualified candidates. In the future, we may experience difficulties meeting the demand for our products and services. The installation and use of our products requires training. If we are unable to provide training and support for our products, the implementation process will be longer and customer satisfaction may be lower. In addition, our management team may not be able to achieve the rapid execution necessary to fully exploit the market for our 9 products and services. Any failure to manage growth effectively could materially adversely affect our business, operating results and financial condition. We depend on certain key employees. Our future success depends, to a significant degree, on the ability of our management to operate effectively, both individually and as a group. In addition, three of our seven executive officers joined us during the past 12 months. Accordingly, our executive officers' ability to function effectively as a management team remains unproven. Given our early stage of development, we are dependent on our ability to attract, retain and motivate high caliber personnel. Competition for qualified personnel in our industry and geographic region is intense, and we may not be successful in attracting and retaining such personnel. There may only be a limited number of people with the requisite skills, and it may become increasingly difficult to recruit such individuals. We rely on technology licensed to us by third parties. We license technology that is incorporated into our products from certain third parties, including certain digital signal processing algorithms and the MeetingPlace server's operating system and relational database. Any significant interruption in the supply or support of any licensed software could adversely affect our sales, unless and until we can replace the functionality provided by this licensed software. Because our products incorporate software developed and maintained by third parties, we depend on such third parties to deliver and support reliable products, enhance their current products, develop new products on a timely and cost-effective basis and respond to emerging industry standards and other technological changes. The failure of these third parties to meet these criteria could harm our business. We rely on outside manufacturers and suppliers. Our internal manufacturing operations consist primarily of materials planning and procurement, final assembly, system integration and testing. We rely on third parties to obtain most of the components of the MeetingPlace server and integrate them with other standard components, such as the central processing unit and disk drives. We internally configure each server to meet each customer's specific requirements and perform final testing before shipping the product to the customer. If these third parties are no longer able to supply and assemble these components or are unable to do so in a timely manner, we may experience substantial delays in shipping our products and have to invest resources in finding an alternative manufacturer or manufacture our products internally. Other risks associated with our dependence on third party manufacturing include the following: . reduced control over delivery schedules; . quality assurance; and . the potential lack of adequate capacity if we encounter greater than expected demand. In addition, although we generally use standard parts and components in our products, we obtain certain components, including the processors and digital signal processing devices used in the MeetingPlace server, from sole source suppliers. In the past, we have experienced problems in obtaining some of these components in a timely manner from these sources, and we cannot be certain that we will be able to continue to obtain an adequate supply of these components in a timely manner or, if necessary, from alternative sources. If we are unable to obtain sufficient quantities of components or to locate alternative sources of supply, we may experience substantial delays in shipping our products and incur additional costs to find an alternative manufacturer or manufacture our products internally. Our products may suffer from defects, errors or breaches of security. Software and hardware products as complex as ours are likely to contain undetected errors or defects, especially when first introduced or when new versions are released. Moreover, all of our hardware components 10 are manufactured by third parties, and we have little or no direct control over their quality assurance procedures. Our products may not be free from errors or defects after commercial shipments have begun, and we are aware of instances in which some of our customers have experienced product failures or errors. Any errors or defects that are discovered after commercial release could result in loss of revenue or delay in market acceptance, diversion of development resources, damage to our customer relationships or reputation or increased service and warranty cost. Many of our customers conduct conferences on MeetingPlace that involve confidential information. In addition, our customers may be transmitting confidential data over the Internet using MeetingPlace. Concerns over the security of information sent over the Internet and the privacy of its users may inhibit the market acceptance of our products. In addition, unauthorized users in the past have gained, and in the future may be able to gain, access to our customers' MeetingPlace systems. Any compromise of security could deter people from using MeetingPlace and could significantly harm our reputation and business and result in claims against us. Furthermore, we may be required to incur significant costs to protect against security breaches. We may be unable to adequately protect our proprietary rights. We rely primarily on a combination of patents, copyrights, trademarks, trade secret laws and contractual obligations with employees and third parties to protect our proprietary rights. Despite our efforts to protect our proprietary rights, unauthorized parties may copy aspects of our products and obtain and use information that we regard as proprietary. In addition, other parties may breach confidentiality agreements or other protective contracts we have entered into, and we may not be able to enforce our rights in the event of such breaches. Our competitors may independently develop technologies that are substantially equivalent or superior to ours. Furthermore, the laws of many foreign countries do not protect our intellectual property rights to the same extent as the laws of the United States. Although we attempt to avoid infringing known proprietary rights of third parties in our product development efforts, we expect that we may be subject to legal proceedings and claims for alleged infringement of third party proprietary rights, such as patents, trademarks or copyrights, by us or our licensees from time to time in the ordinary course of business. We may increasingly be subject to infringement claims as the number of products and competitors in our industry grow and functionalities of products overlap. Furthermore, former employers of our current and future employees may assert that our employees have improperly disclosed confidential or proprietary information to us. If we discover that any element of our products violates third party proprietary rights, we may be unable to obtain licenses on commercially reasonable terms, if at all, and to avoid or settle litigation without substantial expense and damage awards. Any claims relating to the infringement of third party proprietary rights, even if not meritorious, could result in costly litigation, divert management's attention and resources, or require us to enter into royalty or license agreements which are not advantageous to us. Parties making such claims may be able to obtain injunctive or other equitable relief, which could prevent us from selling our products in the United States or abroad. Any of these results could harm our business. Dell Computer Corporation has registered the "Latitude" mark for computers in the United States and certain other countries. Dell's United States trademark registration and Canadian application have blocked our ability to register the "Latitude Communications" and "Latitude" with logo marks in the United States and the "Latitude Communications" mark in Canada. Since we believe that we have priority of trade name usage in the United States, we have petitioned to cancel Dell's United States registration and opposed its Canadian application. The outcome of these proceedings is uncertain. If Dell's registration for the "Latitude" mark is not canceled or if we are unable to obtain consent from Dell for our registration of our marks, we may not be able to register our marks and would have to rely solely on common law protection for such marks. We cannot assure you that we will be free from challenges of or obstacles to our use or registration of our marks. We are subject to government regulation. Our products are subject to various regulations that require, among other things, that the products meet certain emissions standards (FCC Part 15) and are compatible with the public telephone networks (FCC 11 Part 68). In addition, these products have been registered against certain recognized safety standards (UL 1459 and IEC 950). Our products also have been certified to meet specific safety, emissions and immunity CE requirements that are required for deployment throughout Europe. In addition, certain international markets require telephony certifications that are indigenous to local telephony infrastructure. We cannot be certain that we will be successful in obtaining or maintaining the necessary regulatory approvals for our products. If we are unable to obtain or maintain these approvals, we may be prohibited from selling our products in certain territories, or at all. We depend on telecommunications carriers and the Internet. Our MeetingPlace system uses the telephone lines to send voice signals and the Internet to send data. Telecommunications carriers may experience disruptions that are not easily remedied. The Internet is subject to outages and delays from time to time as a result of damage to or overuse of portions of its infrastructure. If voice and data communications suppliers fail to provide either our customers or us with network services in the quantities, at the quality levels or at the times we require, it will be difficult, if not impossible, for our products to work, which could harm our business. We face Year 2000 risks. Many currently installed computer systems are not capable of distinguishing 21st century dates from 20th century dates. As a result, beginning on January 1, 2000, computer systems and software used by many companies and organizations in a wide variety of industries, including technology, transportation, utilities, finance and telecommunications, will produce erroneous results or fail unless they have been modified or upgraded to process date information correctly. Year 2000 compliance efforts may involve significant time and expense, and uncorrected problems could materially adversely affect our business, financial condition and operating results. Although we believe the current versions of our hardware and software products are Year 2000 compliant, we may face claims based on Year 2000 issues arising from the integration of multiple products within an overall system. We may also experience reduced sales of our products as potential customers reduce their budgets for voice and data conferencing products due to increased expenditures on their own Year 2000 compliance efforts. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000 Readiness Disclosure." Our stock price may be volatile. Prior to this offering, there has been no public market for our common stock. An active public market for our common stock may not develop or be sustained after this offering. If you purchase shares of common stock in this offering, you will pay a price that was not established in a competitive market. Rather, you will pay the price that we negotiated with the representatives of the underwriters. The price of the common stock that will prevail in the market after this offering may be higher or lower than the price you pay. Many factors could cause the market price of our common stock to rise and fall. Some of these factors are: . variations in our quarterly results; . announcements of technological innovations by us or by our competitors; . introduction of new products or new pricing policies by us or by our competitors; . acquisitions or strategic alliance by us or by our competitors; . recruitment or departure of key personnel; . the gain or loss of significant orders; . changes in the estimate of our performance or changes in recommendations by securities analysts; and . market conditions in the industry and the economy as a whole. In addition, the stock market in general has experienced extreme price and volume fluctuations that have affected the market price for many companies in industries similar or related to ours and that have been 12 unrelated to these companies' operating performance. These broad market fluctuations could adversely affect the market price of our common stock. In the past, securities class action litigation has often been brought against a company following period of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management's attention and resources, which could materially adversely affect our business, operating results and financial condition. Certain existing stockholders own a large percentage of our voting stock. On completion of this offering, executive officers and directors and their respective affiliates will beneficially own, in the aggregate, approximately % of our outstanding common stock. As a result, these stockholders will be able to exercise control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may delay, deter or prevent transactions that would result in the change of control, which in turn could reduce the market price of our common stock. Our certificate of incorporation and bylaws and Delaware law contain provisions that could discourage a takeover. Certain provisions of our certificate of incorporation and bylaws and Delaware law may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable. Such provisions include: . authorizing our Board of Directors to issue additional preferred stock; . limiting the persons who may call special meetings of stockholders; . prohibiting stockholder action by written consent; . establishing advance notice requirements for nominations for election of our Board of Directors or for proposing matters that can be acted on by stockholders at stockholder meetings; and . prohibiting cumulative voting in the election of directors and establishing a classified Board of Directors, commencing on the first annual meeting of stockholders when we have at least 800 stockholders. Future sales of our common stock may depress our stock price. After this offering, we will have outstanding shares of common stock. Sales of a substantial number of shares of common stock in the public market following this offering could materially adversely affect the market price of our common stock. All the shares sold in this offering will be freely tradable. Upon the expiration of certain lock-up arrangements between our stockholders and Latitude or the underwriters, all of the remaining 15,574,857 shares of common stock outstanding after this offering will be eligible for sale in the public market 180 days following the date of this prospectus. Of these shares, 11,682,572 shares will be subject to volume limitations under federal securities laws. If our stockholders sell substantial amounts of common stock (including shares issued upon the exercise of outstanding options and warrants) in the public market, the market price of our common stock could fall. See "Shares Eligible for Future Sale" and "Underwriting." You will experience immediate and substantial dilution. If you purchase shares of common stock in this offering, you will experience immediate and substantial dilution, in that the price you pay will be substantially greater than the net tangible book value per share of the shares you acquire. This dilution is in large part because the earlier investors in Latitude paid substantially less than the public offering price when they purchased their shares of common stock. You will experience additional dilution upon the exercise of outstanding stock options or warrants to purchase common stock. 13 Our management and Board of Directors have broad discretion to use the offering proceeds. We have not designated any specific use for the net proceeds of this offering. We expect to use the proceeds primarily for working capital and general corporate purposes. As a result, our management and Board of Directors will have broad discretion in spending the proceeds of this offering. See "Use of Proceeds." We do not intend to pay dividends. We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings for funding growth and, therefore, do not expect to pay any dividends in the foreseeable future. See "Dividend Policy." Special note regarding forward-looking statements. Some of the statements under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business," and elsewhere in this prospectus are forward-looking statements. These statements involve known and unknown risks, uncertainties, and other factors that may cause our or our industry's actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, those listed under "Risk Factors" and elsewhere in this prospectus. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," or "continue" or the negative of such terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. We are under no duty to update any of the forward-looking statements after the date of this prospectus to conform such statements to actual results. 14 USE OF PROCEEDS The net proceeds to us from the sale of the shares of common stock offered by us are estimated to be approximately $ million (approximately $ million if the underwriters' over-allotment option is exercised in full) at an assumed public offering price of $ per share, after deducting the estimated underwriting discounts and commissions and the estimated offering expenses. We intend to use the net proceeds of this offering primarily for general corporate purposes, including working capital, capital expenditures, geographic expansion and additional sales and marketing efforts. We also may use a portion of the net proceeds to acquire additional businesses, products and technologies or to establish joint ventures that we believe will complement our current or future business. However, we have no specific plans, agreements or commitments to do so and are not currently engaged in any negotiations for any acquisition or joint venture. The amounts that we actually expend for working capital purposes will vary significantly depending on a number of factors, including future revenue growth, if any, and the amount of cash we generate from operations. As a result, we will retain broad discretion in the allocation of the net proceeds of this offering. Pending the uses described above, we will invest the net proceeds in short-term, interest-bearing, investment-grade securities. DIVIDEND POLICY We have never paid cash dividends on our common stock. We currently intend to retain any future earnings to fund the development and growth of our business. Therefore, we do not currently anticipate paying any cash dividends in the foreseeable future. In addition, the terms of our current credit facility prohibits us from paying dividends without our lender's consent. CERTAIN INFORMATION Our principal executive offices are located at 2121 Tasman Drive, Santa Clara, California, 95054, and our telephone number is (408) 988-7200. Our web site is located at "www.latitude.com." Information contained on our web site is not a part of this prospectus. 15 CAPITALIZATION The following table sets forth the following information: . the actual capitalization of Latitude as of December 31, 1998; . the pro forma capitalization of Latitude after giving effect to the conversion of all outstanding shares of convertible preferred stock into 11,836,227 shares of common stock; and . the pro forma as adjusted capitalization to give effect to the sale of shares of common stock at an assumed initial public offering price of $ per share in this offering after deducting the estimated underwriting discounts and commissions Latitude expects to pay in connection with this offering and estimated offering expenses payable by Latitude. This table should be read in conjunction with the Consolidated Financial Statements and the Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus.
As of December 31, 1998 -------------------------------- Actual Pro Forma As Adjusted -------- --------- ----------- (In thousands, except share data) Total long term debt........................... $ 838 $ 838 $ 838 Stockholders' equity: Preferred stock, $.001 par value per share, 12,211,366 shares authorized, 11,836,227 shares issued and outstanding, actual; 5,000,000 shares authorized, none issued or outstanding, pro forma and as adjusted...... 12 -- -- Common stock, $.001 par value per share, 15,000,000 shares authorized, 3,738,630 shares issued and outstanding, actual; 75,000,000 shares authorized, 15,574,857 shares issued and outstanding, pro forma, shares issued and outstanding, as adjusted.. 4 16 Additional paid-in capital................... 22,095 22,095 Notes receivable from common stockholders.... (165) (165) (165) Deferred stock compensation.................. (2,836) (2,836) (2,836) Accumulated deficit.......................... (14,325) (14,325) (14,325) -------- -------- -------- Total stockholders' equity................. 4,785 4,785 -------- -------- -------- Total capitalization..................... $ 5,623 $ 5,623 $ ======== ======== ========
- -------- This table is based on shares outstanding as of December 31, 1998. This table excludes: (a) 1,352,496 shares subject to outstanding options at a weighted average exercise price of $2.24 as of December 31, 1998, and 233,868 shares of common stock available for future issuance under our 1993 Stock Plan; (b) 134,386 shares of common stock reserved for issuance on the exercise of outstanding warrants, at a weighted average price of $1.05 per share as of December 31, 1998; (c) 2,700,000 shares of common stock available for issuance under our 1999 Stock Plan; (d) 250,000 shares of common stock available for issuance under our 1999 Directors' Stock Option Plan; and (e) 500,000 shares of common stock available for issuance under our 1999 Employee Stock Purchase Plan. 16 DILUTION The pro forma net tangible book value of our common stock on December 31, 1998 was $4.8 million, or approximately $0.31 per share. Pro forma net tangible book value represents the amount of our total tangible assets less total liabilities, divided by the number of shares of common stock outstanding. Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the net tangible book value per share of our common stock immediately following this offering. After giving effect to our sale of shares of common stock offered by this prospectus and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our net tangible book value would have been $ , or approximately $ per share. This represents an immediate increase in net tangible book value of $ per share to existing stockholders and an immediate dilution in net tangible book value of $ per share to new investors. Assumed initial public offering price per share.................... $ Pro forma net tangible book value per share as of December 31, 1998............................................................ $0.31 Increase per share attributable to new investors................. ----- Pro forma net tangible book value per share after this offering.... ---- Dilution in pro forma net tangible book value per share to new in- vestors........................................................... $ ====
This table excludes 1,352,496 shares subject to outstanding options and 134,386 shares issuable upon exercise of outstanding warrants as of December 31, 1998. See Note 7 of the Notes to Consolidated Financial Statements. The exercise of outstanding options and warrants having an exercise price less than the offering price would increase the dilutive effect to new investors. The following table sets forth, as of December 31, 1998, the differences between the number of shares of common stock purchased from us, the total price and average price per share paid by existing investors and by the new investors, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, assuming a public offering price of $ per share.
Shares Purchased Total Consideration --------------------- ---------------------- Average Price Number Percentage Amount Percentage Per Share ---------- ---------- ----------- ---------- ------------- Existing stockholders... 15,574,857 % $19,009,610 % $1.22 New investors........... Total................. 100.0% 100.0% ===== =====
- -------- If the underwriters' over-allotment option is exercised in full, the following will occur: . the number of shares of common stock held by existing stockholders will decrease to approximately % of the total number of shares of our common stock outstanding after this offering; and . the number of shares held by new investors will be increased to or approximately % of the total number of shares of our common stock outstanding after this offering. 17 SELECTED CONSOLIDATED FINANCIAL DATA The tables that follow present portions of our consolidated financial statements and are not complete. You should read the following selected financial data in conjunction with our Consolidated Financial Statements and related Notes thereto and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The consolidated statement of operations data for the years ended December 31, 1996, 1997 and 1998, and the consolidated balance sheet data as of December 31, 1997 and 1998, are derived from and are qualified in their entirety by our Consolidated Financial Statements that have been audited by PricewaterhouseCoopers LLP, independent accountants, which are included elsewhere in this prospectus. The consolidated statement of operations data for the years ended December 31, 1994 and 1995 and the consolidated balance sheet data as of December 31, 1994, 1995 and 1996 are derived from audited consolidated financial statements that are not included in this prospectus. The historical results presented below are not necessarily indicative of the results to be expected for any future fiscal year. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Years Ended December 31, ----------------------------------------------- 1994 1995 1996 1997 1998 -------- -------- -------- -------- ------- (In thousands, except per share data) Consolidated Statement of Operations Data: Revenue: Product..................... $ 85 $ 1,393 $ 5,103 $ 10,620 $16,506 Service..................... 17 130 943 2,312 4,545 -------- -------- -------- -------- ------- Total revenue............. 102 1,523 6,046 12,932 21,051 -------- -------- -------- -------- ------- Cost of revenue: Product..................... 33 454 1,146 2,158 3,182 Service..................... 35 420 1,023 1,805 2,775 -------- -------- -------- -------- ------- Total cost of revenue..... 68 874 2,169 3,963 5,957 -------- -------- -------- -------- ------- Gross profit................. 34 649 3,877 8,969 15,094 Operating expenses: Research and development... 2,057 2,071 2,466 2,213 2,607 Marketing and sales........ 736 2,160 4,644 7,845 9,744 General and administrative............ 855 636 1,157 1,115 1,666 Amortization of deferred stock compensation........ -- -- -- 2 299 -------- -------- -------- -------- ------- Total operating expenses................ 3,648 4,867 8,267 11,175 14,316 -------- -------- -------- -------- ------- Income (loss) from opera- tions....................... (3,614) (4,218) (4,390) (2,206) 778 Interest income (expense), net......................... 117 115 138 (23) (41) -------- -------- -------- -------- ------- Income (loss) before provi- sion for income tax......... (3,497) (4,103) (4,252) (2,229) 737 Provision for income tax..... -- -- -- -- (34) -------- -------- -------- -------- ------- Net income (loss)............ $ (3,497) $ (4,103) $ (4,252) $ (2,229) $ 703 ======== ======== ======== ======== ======= Net income (loss) per share-- basic....................... $ (7.63) $ (3.10) $ (2.02) $ (0.78) $ 0.21 ======== ======== ======== ======== ======= Shares used in per share cal- culation--basic............. 459 1,325 2,110 2,850 3,279 ======== ======== ======== ======== ======= Net income (loss) per share-- diluted..................... $ (7.63) $ (3.10) $ (2.02) $ (0.78) $ 0.04 ======== ======== ======== ======== ======= Shares used in per share cal- culation--diluted........... 459 1,325 2,110 2,850 16,635 ======== ======== ======== ======== =======
December 31, --------------------------------------- 1994 1995 1996 1997 1998 ------- ------- ------- ------- ------- (In thousands) Consolidated Balance Sheet Data: Cash and cash equivalents............. $ 5,938 $ 1,751 $ 5,664 $ 3,578 $ 3,982 Working capital....................... 5,831 1,574 5,655 3,501 4,470 Total assets.......................... 6,820 3,501 8,680 7,715 11,870 Long-term obligations................. 368 308 760 757 838 Total stockholders' equity............ 6,072 2,040 5,906 3,748 4,785
18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section of this prospectus includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. We use words such as "anticipates," "believes," "expects," "future," and "intends," and similar expressions to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this prospectus. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or our predictions. For a description of these risks, see "Risk Factors." Overview We are a leading provider of integrated voice and data conferencing solutions for geographically dispersed organizations. We develop, market and support our MeetingPlace system, which allows companies to conduct "virtual" meetings and thereby extend real-time decision making processes irrespective of the geographic location of participants. With MeetingPlace, participants can schedule and attend a meeting, view, share and edit documents, and capture and retrieve meeting content. MeetingPlace is designed to be an enterprise-wide resource and to leverage existing technologies such as telephones, cellular phones and personal computers. We were incorporated in April 1993. From inception until December 1994, our operations consisted primarily of various start-up activities, such as research and development, recruiting personnel and raising capital. We first recognized revenue from product sales in December 1994 and generated revenue of $6.0 million, $12.9 million, and $21.1 million in 1996, 1997 and 1998, respectively. In addition, we incurred net losses of $4.3 million and $2.2 million in 1996 and 1997, respectively, and generated net income of approximately $703,000 in 1998. As of December 31, 1998, we had an accumulated deficit of $14.3 million. We generate revenue from sales of our MeetingPlace products and from customer support and consulting services. Revenue derived from product sales constituted 84%, 82% and 78% of our total revenue in 1996, 1997 and 1998, respectively. Product revenue is generally recognized upon shipment. Service revenue includes revenue from implementation and integration services, system management services, warranty coverage and customer support. Revenue from implementation and system integration services is recognized as the services are performed, while revenue from system management services, warranty coverage and customer support is recognized ratably over the period of the contract. We sell our MeetingPlace products primarily through our direct sales force and, to a lesser extent, through indirect distribution channels. The majority of our revenue is derived from Fortune 1000 companies, many of which initially purchase MeetingPlace servers and later expand deployment of our products as they require additional capacity for voice and data conferencing. In 1997, we expanded into international markets by opening a sales office in the United Kingdom and establishing distributor relationships in Hong Kong and Singapore, and in 1998, we established a distributor relationship in Australia. We intend to increase sales through indirect channels and internationally. In 1998, we expanded the breadth of our support services by establishing a consulting services group to provide expanded implementation services, system management services and customized project consulting. Total cost of revenue consists of component and materials costs, direct labor costs, warranty costs, royalties and overhead related to manufacturing of our products, as well as materials, travel and labor costs related to personnel engaged in our service operations. Product gross margin is impacted by the proportion of product revenue derived from software sales, which typically carry higher margins than hardware sales, and from indirect distribution channels, which typically carry lower margins than direct sales. Service gross margin is impacted by the mix of services we provide, which have different levels of profitability, and the efficiency with which we provide full care support to our customers. 19 Research and development expenses consist primarily of compensation and related costs for research and development personnel, facilities expenses for testing space and equipment and royalty payments. We expect to continue to make substantial investments in research and development and anticipate that research expenses will continue to increase in absolute dollars. Marketing and sales expenses consist primarily of compensation and related costs for marketing and sales personnel, sales commissions, marketing programs, public relations, promotional materials, travel expenses and trade show exhibit expenses. We expect to incur substantial expenditures related to marketing activities, the recruitment of additional sales and marketing personnel, and the expansion of our domestic and international distribution channels. General and administrative expenses consist primarily of salaries and related expenses, accounting and administrative expenses, professional fees and other general corporate expenses. We expect general and administrative expenses to increase in absolute dollars as we add personnel and incur additional costs related to the anticipated growth of our business and operation as a public company. While we expect each of these operating expense categories to increase in absolute dollars, they may vary as a percentage of total revenue. We have a limited operating history and face a number of risks and uncertainties encountered by early stage companies. These risks include, among others: . our substantial dependence on our MeetingPlace products, which have limited market acceptance; . our need to expand our marketing, sales and support organizations; . our unproven ability to anticipate and respond to market competition; . our ability to retain existing customers; . the degree to which our customers perceive our products to be secure and reliable; . the market's acceptance of integrated real-time voice and data conferencing; and . our dependence upon key personnel. In addition, although our revenue has grown in recent quarters, we cannot be certain that our revenue will continue to grow or that we will maintain profitability in the future. We expect to continue to incur significant product development, sales and marketing, and administrative expenses. As a result, we will need to generate significant revenue to sustain profitability. Because our product market is new and evolving, we cannot accurately predict the future growth rate, if any, or the ultimate size of our market. Our ability to increase revenue and sustain profitability also depends on a number of factors outside our control, including the extent to which: . our products are able to gain market acceptance; . our competitors develop competing products; . we are able to maintain the average selling price of our products; and . our distributors and other marketing partners dedicate resources to selling our products. As a result, we may not be able to increase revenue or achieve profitability on a quarterly or annual basis. See "Risk Factors--We have a limited operating history," "--Our future profitability is uncertain" and "--Our operating results may fluctuate significantly." 20 Results of Operations The following table sets forth, for the periods indicated, the percentage of total revenue of each line item:
Years Ended December 31, ------------------------------ 1996 1997 1998 -------- -------- -------- As a Percentage of Total Revenue: Revenue: Product................... 84.4% 82.1% 78.4% Service................... 15.6 17.9 21.6 -------- -------- -------- Total revenue........... 100.0 100.0 100.0 Cost of revenue: Product................... 19.0 16.7 15.1 Service................... 16.9 14.0 13.2 -------- -------- -------- Total cost of revenue... 35.9 30.7 28.3 -------- -------- -------- Gross profit............... 64.1 69.3 71.7 Operating expenses: Research and development.. 40.8 17.1 12.4 Marketing and sales....... 76.8 60.6 46.3 General and administrative........... 19.1 8.6 7.9 Amortization of deferred stock compensation....... -- -- 1.4 -------- -------- -------- Total operating expenses............... 136.7 86.3 68.0 Income (loss) from operations................ (72.6) (17.0) 3.7 -------- -------- -------- Interest income (expense), net....................... 2.3 (0.2) (0.2) -------- -------- -------- Income (loss) before provision for income tax.. (70.3) (17.2) 3.5 -------- -------- -------- Provision for income tax... -- -- (0.2) -------- -------- -------- Net income (loss).......... (70.3)% (17.2)% 3.3% ======== ======== ========
Fiscal Years Ended December 31, 1996, 1997 and 1998 Product Revenue Product revenue increased 108% from $5.1 million in 1996 to $10.6 million in 1997 and increased 55% to $16.5 million in 1998. The increases in product revenue were due primarily to increased sales of our MeetingPlace products domestically to new customers, increased sales of additional products and features to existing customers, and, to a lesser extent, increased international sales. International sales represented 4% and 7% of product revenue in 1997 and 1998, respectively. Service Revenue Service revenue increased 145% from approximately $943,000 in 1996 to $2.3 million in 1997 and increased 97% to $4.5 million in 1998. The increases in service revenue were attributable primarily to growth in our customer base during these periods, which led to increased sales of full care support services, as well as to the introduction of additional consulting services such as managed services and expanded implementation and integration services. Total Cost of Revenue Total cost of revenue increased 83% from $2.2 million in 1996 to $4.0 million in 1997 and increased 50% to $6.0 million in 1998. The increases in total cost of revenue were attributable primarily to increased sales of our MeetingPlace products and related services, as well as the increased size of our services staff and the costs 21 of providing services to support an increasingly geographically dispersed customer base. Gross margin increased from 64% in 1996 to 69% in 1997 and to 72% in 1998. The increases in gross margins are attributable primarily to increased economies of scale resulting from increased product and service revenue, as well as to increased sales of MeetingPlace software and enhanced features to existing customers. On a forward-looking basis, we anticipate that gross margins may decline somewhat as the proportions of revenue derived from sales made through distributors and from services are expected to increase as percentages of total revenue. Product gross margin in 1996, 1997 and 1998 was 78%, 80% and 81%, respectively. The growth in product gross margin over this period was attributable primarily to increased economies of scale and the sale of software add-ons to new and existing customers. We expect product gross margin to decrease over time due in part to anticipated pricing pressure and an expected increase in the proportion of revenue derived from indirect distribution channels. Service gross margin in 1996, 1997 and 1998 was (9)%, 22% and 39%, respectively. The growth in service gross margin was attributable to the creation and development of our service organization in 1995 and 1996, followed by the subsequent revenue generated by our service organization. We expect service gross margin to decline gradually over time as a result of anticipated pricing pressure and the expected international expansion of our service operation. Research and Development Expenses Research and development expenses decreased 10% from $2.5 million in 1996 to $2.2 million in 1997 and increased 18% to $2.6 million in 1998. The decrease in 1997 was due principally to one-time special project consulting costs incurred in 1996, while the increase in 1998 was attributable primarily to the addition of personnel in our research and development organization associated with product development. Research and development expenses represented 41%, 17% and 12% of total revenue for 1996, 1997 and 1998, respectively. The decreases as a percentage of total revenue resulted primarily from increased total revenue during such periods. Marketing and Sales Expenses Marketing and sales expenses increased 69% from $4.6 million in 1996 to $7.8 million in 1997 and increased 24% to $9.7 million in 1998. The increases in 1997 and 1998 reflected the addition of personnel in our sales and marketing organizations, as well as costs associated with increased selling efforts to develop market awareness of our products and services. Marketing and sales expenses were 77%, 61% and 46% of total revenue for 1996, 1997 and 1998, respectively. The decreases in marketing and sales expenses as a percentage of revenue in 1997 and 1998 are attributable primarily to increased productivity of our sales personnel and increased total revenue in such periods. General and Administrative Expenses General and administrative expenses decreased slightly from $1.2 million in 1996 to $1.1 million in 1997, due primarily to lower legal fees and facilities costs in 1997. General and administrative expenses increased from $1.1 million in 1997 to $1.7 million in 1998, due primarily to the addition of personnel performing general and administrative functions. General and administrative expenses were 19%, 9% and 8% of total revenue for 1996, 1997 and 1998, respectively. The decreases as a percentage of total revenue resulted primarily from increased total revenue during such periods. Amortization of Deferred Stock Compensation In connection with the completion of our initial public offering, certain options granted in 1997 and 1998 have been considered to be compensatory. Total deferred stock compensation associated with such options as of December 31, 1998 amounted to $3.1 million. These amounts are being amortized on a straightline basis 22 over the 48-month vesting period of such options. Of the total deferred stock compensation, approximately $299,000 was amortized in 1998. The Company expects amortization of approximately $783,000 in 1999, $783,000 in 2000, $781,000 in 2001 and $489,000 in 2002 related to these options. Interest Income (Expense), Net In 1996, we had net interest income of approximately $138,000, while in 1997 and 1998, we incurred net interest expense of approximately $23,000 and $41,000, respectively. Interest income (expense), net is comprised primarily of interest earned on cash and cash equivalents, offset by interest expense related to obligations under capital leases and equipment loans. The increases in net interest expense in 1997 and 1998 were due primarily to declining balances of cash and cash equivalents and to declining interest rates during such periods, as well as to increases in our long-term debt obligations. Income Taxes From inception through September 30, 1997, we incurred net losses for federal and state tax purposes and did not recognize any tax provision or benefit during such period. For the quarter ended December 31, 1997, the provision for income tax was immaterial. For the year ended December 31, 1998, the provision for income tax was approximately $34,000. As of December 31, 1998, we had $6.7 million of federal and $3.6 million of state net operating loss carryforwards to offset future taxable income. These carryforwards, if not utilized, expire in 2000 through 2012. As of December 31, 1998, we had approximately $524,000 of federal and $390,000 of state carryforwards for research and development and other credits. These carryforwards, if not utilized, expire in 2010 through 2018. The Tax Reform Act of 1986 limits the use of net operating loss and tax credit carryforwards in certain situations where changes occur in the stock ownership of a company. If we should have an ownership change, as defined in the Tax Reform Act of 1986, our utilization of these carryforwards could be restricted. We have placed a valuation allowance against our deferred tax asset due to the uncertainty surrounding the realization of such assets. We evaluate on a quarterly basis the recoverability of the deferred tax asset and the level of the valuation allowance. At such time as it is determined that it is more likely than not the deferred tax assets are realizable, the valuation allowance will be reduced. 23 Quarterly Results of Operations The following table sets forth certain unaudited consolidated statement of operations data for the six quarters ended December 31, 1998, as well as such data expressed as a percentage of our total revenue for the periods indicated. This data has been derived from unaudited consolidated financial statements that, in the opinion of our management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such information when read in conjunction with our annual audited consolidated financial statements and notes thereto. The operating results for any quarter are not necessarily indicative of results for any future period.
Quarters Ended ---------------------------------------------------------- Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, 1997 1997 1998 1998 1998 1998 --------- -------- -------- -------- --------- -------- (In thousands, except per share data) Consolidated Statement of Operations Data: Revenue: Product............... $ 2,897 $ 3,291 $ 3,688 $ 3,867 $ 4,270 $ 4,681 Service............... 612 771 673 1,034 1,282 1,556 ------- ------- ------- ------- ------- ------- Total revenue....... 3,509 4,062 4,361 4,901 5,552 6,237 Cost of revenue: Product............... 590 623 644 631 879 1,028 Service............... 467 522 601 689 747 738 ------- ------- ------- ------- ------- ------- Total cost of revenue............ 1,057 1,145 1,245 1,320 1,626 1,766 ------- ------- ------- ------- ------- ------- Gross profit........... 2,452 2,917 3,116 3,581 3,926 4,471 Operating expenses: Research and development.......... 499 525 605 600 625 777 Marketing and sales... 2,096 2,099 1,978 2,374 2,564 2,828 General and administrative....... 231 274 410 401 412 443 Amortization of deferred stock compensation......... -- 2 38 61 66 134 ------- ------- ------- ------- ------- ------- Total operating expenses........... 2,826 2,900 3,031 3,436 3,667 4,182 ------- ------- ------- ------- ------- ------- Income (loss) from operations............ (374) 17 85 145 259 289 Interest income (expense), net........ (19) (16) (11) (10) (13) (7) ------- ------- ------- ------- ------- ------- Income (loss) before provision for income tax................... (393) 1 74 135 246 282 Provision for income tax .................. -- -- (4) (6) (10) (14) ------- ------- ------- ------- ------- ------- Net income (loss)...... $ (393) $ 1 $ 70 $ 129 $ 236 $ 268 ======= ======= ======= ======= ======= ======= Net income (loss) per share--basic(1)....... $ (0.13) $ 0.00 $ 0.02 $ 0.04 $ 0.07 $ 0.08 ======= ======= ======= ======= ======= ======= Shares used in per share calculation-- basic(1).............. 2,918 3,053 3,166 3,243 3,323 3,385 ======= ======= ======= ======= ======= ======= Net income (loss) per share--diluted(1)..... $ (0.13) $ 0.00 $ 0.00 $ 0.01 $ 0.01 $ 0.02 ======= ======= ======= ======= ======= ======= Shares used in per share calculation-- diluted(1)............ 2,918 15,641 15,949 16,145 16,251 17,083 ======= ======= ======= ======= ======= =======
- -------- (1) See Note 2 of the Notes to Consolidated Financial Statements for a description of the method used to determine the number of shares used in computing net loss per share. 24
Percentage of Total Revenue ------------------------------------------------------- Quarters Ended ------------------------------------------------------- Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, 1997 1997 1998 1998 1998 1998 --------- -------- -------- -------- --------- -------- Consolidated Statement of Operations Data: Revenue: Product............... 82.6% 81.0% 84.6% 78.9% 76.9% 75.1% Service............... 17.4 19.0 15.4 21.1 23.1 24.9 ----- ----- ----- ----- ----- ----- Total revenue....... 100.0 100.0 100.0 100.0 100.0 100.0 Cost of revenue: Product............... 16.8 15.3 14.7 12.9 15.8 16.5 Service............... 13.3 12.9 13.8 14.1 13.5 11.8 ----- ----- ----- ----- ----- ----- Total cost of revenue............ 30.1 28.2 28.5 27.0 29.3 28.3 ----- ----- ----- ----- ----- ----- Gross profit........... 69.9 71.8 71.5 73.0 70.7 71.7 Operating expenses: Research and development.......... 14.3 12.9 13.9 12.2 11.3 12.5 Marketing and sales... 59.7 51.7 45.4 48.4 46.2 45.4 General and administrative....... 6.6 6.8 9.4 8.2 7.3 7.1 Amortization of deferred stock compensation......... -- -- 0.9 1.2 1.2 2.1 ----- ----- ----- ----- ----- ----- Total operating expenses........... 80.6 71.4 69.6 70.0 66.0 67.1 ----- ----- ----- ----- ----- ----- Income (loss) from operations............ (10.7) 0.4 1.9 3.0 4.7 4.6 ----- ----- ----- ----- ----- ----- Interest income (expense), net........ (0.5) (0.4) (0.3) (0.2) (0.2) (0.1) ----- ----- ----- ----- ----- ----- Income (loss) before provision for income tax................... (11.2) 0.0 1.6 2.8 4.5 4.5 Provision for income tax................... -- -- (0.1) (0.1) (0.2) (0.2) ----- ----- ----- ----- ----- ----- Net income (loss)...... (11.2)% 0.0% 1.5% 2.7% 4.3% 4.3% ===== ===== ===== ===== ===== =====
Quarterly product revenue has increased in each of the quarters shown above due to increased sales of MeetingPlace products, including increased follow-on sales of products to existing customers. Quarterly service revenue has increased in each of the three quarters ended December 31, 1998, both in absolute dollars and as a percentage of total revenue, due primarily to the increasing size of our customer base. Gross margins were relatively constant during the six quarters ended December 31, 1998. The increase in gross margin in the quarter ended June 30, 1998 was attributable primarily to a higher proportion of sales from software add-ons during such period, which typically carry higher margins. Total operating expenses increased in absolute dollars in each of the quarters presented above, but generally decreased as a percentage of total revenue. Research and development expenses generally increased in absolute dollars during these periods as a result of increased development efforts related to new products and enhancements of existing products. For the quarter ended December 31, 1998, research and development expenses increased in both absolute dollars and as a percentage of total revenue, reflecting the addition of research and development personnel. Sales and marketing expenses generally increased in absolute dollars during the quarters presented above as a result of increased spending for salary and commissions, trade show expenses, public relations and other promotional expenses. General and administrative expenses generally increased in absolute dollars during the quarters presented above as a result of the addition of personnel performing general and administrative functions. The amount and timing of our operating expenses generally will vary from quarter to quarter depending on our level of actual and anticipated business activities. Research and development expenses will vary as we develop new products and enhance existing products. In addition, we have a limited backlog of orders, and total revenue for any future quarter is difficult to predict. Supply, manufacturing or testing constraints could result in delays in the delivery of our products. We expect to experience significant fluctuations in our future quarterly operating results due to a variety of other factors, many of which are outside our control. See "Risk Factors--Our operating results may fluctuate significantly." 25 Our quarterly revenue and operating results are difficult to forecast, and we believe that period-to-period comparisons of its operating results will not necessarily be meaningful. As a result, you should not rely upon them as an indication of future performance. It is likely that our future quarterly operating results from time to time will not meet the expectations of security analysts or investors. In such event, the price of the common stock would likely decline. Liquidity and Capital Resources Since inception, we have financed our operations primarily through private sales of convertible preferred stock, which totaled $18.7 million in aggregate net proceeds through December 31, 1998. We have also financed our operations through equipment loans, which totaled $1.4 million in principal amount at December 31, 1998. As of December 31, 1998, we had $4.0 million of cash and cash equivalents and a $2.0 million line of credit, all of which was available at December 31, 1998. Net cash used in operating activities was $4.0 million and $1.6 million in 1996 and 1997, respectively, and net cash provided by operating activities was $1.0 million in 1998. For 1997, cash used by operating activities was attributable primarily to a net loss of $2.2 million and an increase in trade accounts receivable of $1.1 million, offset in part by depreciation and amortization of $619,000 and increases in accrued expenses and deferred revenue of $471,000 and $506,000, respectively. For 1998, cash provided by operating activities was attributable primarily to net income of approximately $703,000, depreciation and amortization of approximately $696,000 and increases in accounts payable, accrued expenses and deferred revenue of approximately $442,000, $629,000 and $1.9 million, respectively. These amounts were offset in part by an increase in trade accounts receivable of $3.1 million. Net cash used in investing activities was approximately $778,000, $597,000 and $780,000 in 1996, 1997 and 1998, respectively. For each of these years, cash used in investing activities was attributable primarily to purchases of property and equipment. Net cash provided by financing activities was $8.5 million, approximately $287,000 and $143,000 in 1996, 1997 and 1998, respectively. For 1996, cash provided by financing activities was attributable to proceeds for the issuance of preferred stock and notes payable, offset in part by repayment of notes payable and capital lease obligations. For 1997 and 1998, cash provided by financing activities was attributable to proceeds from the issuance of notes payable, offset in part by repayment of notes payable and capital lease obligations. As of December 31, 1998, our principal commitments consisted of obligations outstanding under operating leases and capital equipment leases. Although we have no material commitments for capital expenditures, we anticipate a substantial increase in capital expenditures and lease commitments consistent with our anticipated growth in operations, infrastructure and personnel. We also may establish additional operations as we expand globally. We believe that the net proceeds from this offering, together with our current cash and cash equivalents, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next twelve months. If cash generated from operations is insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities or to obtain a credit facility. If additional funds are raised through the issuance of debt securities, these securities could have certain rights, preferences and privileges senior to holders of common stock, and the term of this debt could impose restrictions on our operations. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders, and we cannot be certain that such additional financing will be available in amounts or on terms acceptable to us, if at all. If we are unable to obtain this additional financing, we may be required to reduce the scope of our planned product development and marketing efforts, which could harm our business, financial condition and operating results. 26 Year 2000 Readiness Disclosure Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. As a result, software that records only the last two digits of the calendar year may not be able to distinguish between twentieth and twenty-first century dates. This may result in software failures or the creation of erroneous results. We have conducted the first phases of a Year 2000 readiness review for the current versions of our products. The review includes assessment, implementation (including remediation, upgrading and replacement of certain product versions), validation testing, and contingency planning. We continue to respond to customer questions about prior versions of our products on a case- by-case basis. We have largely completed all phases of this plan, except for contingency planning, for the current versions of our products. As a result, all current versions of our products are "Year 2000 Compliant," as defined below, when configured and used in accordance with the related documentation, and provided that the underlying operating system of the host machine and any other software used with or in the host machine or our products are also Year 2000 Compliant. We have not tested our products on all platforms or all versions of operating systems that we currently support. We have defined "Year 2000 Compliant" as the ability to: . correctly handle date information needed for the December 31, 1999 to January 1, 2000 date change; . function according to the product documentation provided for this date change, without changes in operation resulting from the advent of a new century, assuming correct configuration; . where appropriate, respond to two-digit date input in a way that resolves the ambiguity as to century in a disclosed, defined, and predetermined manner; . if the date elements in interfaces and data storage specify the century, store and provide output of date information in ways that are unambiguous as to century; and . recognize the year 2000 as a leap year. We have tested software obtained from third parties (licensed software, shareware, and freeware) that is incorporated into our products, and we are seeking assurances from our vendors that licensed software is Year 2000 Compliant. Despite testing by us and by current and potential clients, and assurances from developers of products incorporated into our products, our products may contain undetected errors or defects associated with Year 2000 date functions. Known or unknown errors or defects in our products could result in delay or loss of revenue, diversion of development resources, damage to our reputation, or increased service and warranty costs, any of which could materially adversely affect our business, operating results or financial condition. Some commentators have predicted significant litigation regarding Year 2000 compliance issues, and we are aware of such lawsuits against other software vendors. Because of the unprecedented nature of such litigation, it is uncertain whether or to what extent we may be affected by it. Our internal systems include both our information technology, or IT, and non-IT systems. We have initiated an assessment of our material internal IT systems (including both our own software products and third-party software and hardware technology) but we have not initiated an assessment of our non-IT systems. We expect to complete testing of our IT systems in 1999. To the extent that we are not able to test the technology provided by third-party vendors, we are seeking assurances from vendors that their systems are Year 2000 Compliant. We are not currently aware of any material operational issues or costs associated with preparing our internal IT and non-IT systems for the Year 2000. However, we may experience material unanticipated problems and costs caused by undetected errors or defects in the technology used in our internal IT and non- IT systems. We do not currently have any information concerning the Year 2000 compliance status of our customers. If our current or future customers fail to achieve Year 2000 compliance or if they divert technology expenditures (especially technology expenditures that were reserved for conferencing products) to address Year 2000 compliance problems, our business could suffer. 27 We have funded our Year 2000 plan from available cash and have not separately accounted for these costs in the past. To date, these costs have not been material. We will incur additional costs related to the Year 2000 plan for administrative personnel to manage the project, outside contractor assistance, technical support for our products, product engineering and customer satisfaction. In addition, we may experience material problems and costs with Year 2000 compliance that could adversely affect our business, results of operations, and financial condition. We have not yet fully developed a contingency plan to address situations that may result if we are unable to achieve Year 2000 readiness of our critical operations. The cost of developing and implementing such a plan may itself be material. Finally, we are also subject to external forces that might generally affect industry and commerce, such as utility or transportation company Year 2000 compliance failures and related service interruptions. Impact of Recently Issued Accounting Standards In December 1998, AcSEC released Statement of Position 98-9, or SOP 98-9, Modification of SOP 97-2, "Software Revenue Recognition," with Respect to Certain Transactions. SOP 98-9 amends SOP 97-2 to require that an entity recognize revenue for multiple element arrangements by means of the "residual method" when (1) there is vendor-specific objective evidence ("VSOE") of the fair values of all the undelivered elements that are not accounted for by means of long-term contract accounting, (2) VSOE of fair value does not exist for one or more of the delivered elements, and (3) all revenue recognition criteria of SOP 97-2 (other than the requirement for VSOE of the fair value of each delivered element) are satisfied. The provisions of SOP 98-9 that extend the deferral of certain paragraphs of SOP 97-2 became effective December 15, 1998. These paragraphs of SOP 97-2 and SOP 98-9 will be effective for transactions that are entered into in fiscal years beginning after March 15, 1999. Retroactive application is prohibited. We are evaluating the requirements of SOP 98-9 and the effects, if any, on our current revenue recognition policies. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, or SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This standard requires companies to capitalize qualifying computer software costs which are incurred during the application development stage and amortize them over the software's estimated useful life. SOP 98-1 is effective for fiscal years beginning after December 15, 1998. We are currently evaluating the impact of SOP 98-1 on our financial statements and related disclosures. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, or SOP 98-5, "Reporting on the Costs of Start-Up Activities." This standard requires companies to expense the costs of start-up activities and organization costs as incurred. In general, SOP 98-5 is effective for fiscal years beginning after December 15, 1998. We believe the adoption of SOP 98-5 will not have a material impact on our results of operations. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, or SFAS 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133 establishes new standards of accounting and reporting for derivative instruments and hedging activities. SFAS 133 requires that all derivatives be recognized at fair value in the statement of financial position, and that the corresponding gains or losses be reported either in the statement of operations or as a component of comprehensive income, depending on the type of hedging relationship that exists. SFAS 133 will be effective for fiscal years beginning after June 15, 1999. We do not currently hold derivative instruments or engage in hedging activities. 28 BUSINESS Overview We are a leading provider of integrated voice and data conferencing solutions for geographically dispersed organizations. We develop, market and support our MeetingPlace system, which allows companies to conduct "virtual" meetings and thereby extend real-time decision making processes irrespective of the geographic location of participants. With MeetingPlace, participants can schedule and attend a meeting, view, share and edit documents, and capture and retrieve meeting content. MeetingPlace is designed to be an enterprise-wide resource and to leverage existing technologies such as telephones, cellular phones and personal computers. Moreover, we expect the dramatic growth in web browsers and collaborative software applications to drive data conferencing as an important business application of the Internet. MeetingPlace consists of three components: (a) the MeetingPlace conference server; (b) MeetingPlace software; and (c) system integration options. MeetingPlace incorporates many easy-to-use features that allow participants to emulate the voice and data collaboration that occurs in a face-to-face meeting, such as breakout sessions, roll calls and meeting handouts. MeetingPlace provides simultaneous voice and data conferencing and the ability to record and access meeting content while lowering the enterprise's overall conferencing costs. We began commercial shipment of MeetingPlace in December 1994 and, as of December 31, 1998, had over 200 customers. In addition to enterprise-wide general deployment, customers have purchased and used MeetingPlace for a variety of specific business applications, including morning brokerage calls, crisis management, training and education, customer and client services, supply chain management and merger integration. Furthermore, over 60% of our customers have purchased additional products or services after their initial system installations. MeetingPlace has been installed in some of the world's leading enterprises, including 3Com, Aetna, Cisco, Credit Suisse First Boston, Hewlett- Packard, Honeywell, Merrill Lynch, Microsoft, Oracle, State Farm Insurance, Union Pacific Railroad and the U.S. Federal Reserve Bank. Industry Background The proliferation of communications technologies is revolutionizing the way people conduct business. Today, businesses of all sizes are empowering their employees with a diverse array of communications tools to facilitate information flow and improve productivity. From voicemail, fax machines and cellular phones to e-mail, laptop computers and handheld devices, businesses have demonstrated their continued willingness to adopt technologies that enable their employees, vendors and customers to communicate more efficiently across disparate geographies and time zones. An enterprise's willingness to adopt a new communications technology depends largely on the technology's ability to efficiently replace or enhance an existing business practice. Voicemail is a more convenient and cost effective substitute for the traditional pad-and-paper answering service. E-mail provides a similar improvement over traditional inter-office mail. Cellular phones and laptop computers provide added flexibility for mobile workers over the traditional telephone and desktop computer. In addition, enterprises have sought to enhance their competitive advantage by creating a "virtual" presence with their customers and vendors through such means as e-commerce and extranets. Each of these technologies has increased productivity by extending the workplace beyond the physical office. An integral part of this workplace extension is the ability to coordinate communications and decision making among people in different locations. As a result, companies are expanding their use of existing technologies such as voice-oriented conferencing and data-oriented collaborative software. According to Frost & Sullivan, the total market for audio and video conferencing services and equipment in the United States is projected to grow from $8.5 billion in 1998 to more than $24 billion by 2003. Meanwhile, according to International Data Corporation, the total installed base of collaborative software clients in the United States is expected to grow from 47 million in 1998 to more than 114 million by 2002. 29 No single, widely deployable technology, however, has been able to effectively provide the integrated voice and data collaboration that occurs in a face-to-face meeting in a cost effective manner. In order to have a meeting today, a business typically must have everyone present in a conference room or invest in limited and often expensive technologies or services that allow people to communicate. For example, audio conferencing, although widely used and available, is relatively expensive and does not enable participants to share and modify documents. Video conferencing systems enable participants to see each other but have technical limitations, such as minimum bandwidth requirements, and are not widely available to users. Collaborative software applications, such as Microsoft Outlook and Lotus Notes, focus on workflow improvements rather than sharing documents real-time and allowing users to speak with other participants. To address this need for efficient, real-time voice and data communication, organizations have resorted to using a patchwork of such technologies, including conferencing, fax, e-mail and collaborative software applications. While these technologies have been widely implemented, the result has been the creation of discrete "islands" of communication within organizations, which fail to create a virtual meeting experience that promotes information flow and effective decision making. The growing geographic dispersion and mobility of workers further compound this problem. As a consequence, we believe there is significant demand for an integrated, cost-effective and easy-to-use product that enables simultaneous real-time voice communication and secure document collaboration irrespective of geographic location. Furthermore, we believe that such a product must leverage the existing voice and data infrastructure within the enterprise to facilitate widespread deployment and realize significant cost savings. Finally, the system must provide incremental capabilities to improve the meeting itself. Accordingly, we believe that there is a need for a solution that enables virtual meetings to further extend an enterprise's workplace. The Latitude Solution We have developed a solution, MeetingPlace, that allows companies to conduct virtual meetings which extend real-time decision making processes irrespective of the geographic locations of participants. With MeetingPlace, users can schedule and attend a meeting, share and edit documents, and record and access meeting content. Attendees can participate in a meeting using widely available communications devices such as telephones, cellular phones, laptop computers and desktop computers. MeetingPlace is designed to be an enterprise-wide resource and to integrate seamlessly into widely deployed enterprise software environments, including corporate intranets and certain collaborative software environments such as Microsoft Outlook. [Graphic depicting the Latitude MeetingPlace server in the center with four lines connecting four images of people attending a hypothetical conference. The images, from left to right, are a conference room, a mobile worker with a laptop and phone, a worker on a cellular phone and a document intended to reflect the data sharing capabilities of the MeetingPlace server. Additionally, there are two thicker lines, intended to look like pipes, representing voice and data streams, plugging into the MeetingPlace server.] Key benefits of MeetingPlace include: . Seamless integration of real-time voice and data conferencing. MeetingPlace allows participants to easily schedule and attend meetings that combine voice conferencing with real-time sharing and editing of data. By leveraging an enterprise's existing voice and data networks, MeetingPlace provides reliable and robust transport of toll-quality voice as well as real-time data sharing and editing. . Time-displaced access to meetings. MeetingPlace provides an integrated ability to record and archive meeting conversations and materials, enabling information generated during a meeting to be efficiently passed on to those unable to attend. In addition, audio or data information can be made available to participants in advance of the meeting. 30 . Lower overall cost of conferencing. With a MeetingPlace server installed, the cost of a conference is limited to the long-distance charge, if any, for each participant. In contrast, the cost of a conference using a third-party service bureau typically ranges between $0.30 and $0.55 per minute per participant within the United States. As such, a typical customer can realize significant cost savings relative to existing voice conferencing services provided by third-party service bureaus. . Security and control. MeetingPlace's customer premise-based system provides an architecture which enables an enterprise to manage data collaboration securely behind its corporate firewall, consistent with its other information technology strategies. Additionally, MeetingPlace eliminates certain risks associated with third party conferencing service bureaus, such as operators giving access to unwelcome participants. . Ease of use and broad feature set. MeetingPlace allows users to schedule, attend and review meetings easily from their telephones or familiar desktop environments such as browsers or Microsoft Outlook. In addition, MeetingPlace incorporates a large number of features that allow end users to emulate many aspects of a face-to-face meeting such as breakout sessions, roll calls and meeting hand-outs. . Scalability and configurability. MeetingPlace is scalable with an enterprise's conferencing needs. MeetingPlace servers are designed to be networked together to coordinate the deployment of servers on a global basis and to allow for large single meeting sessions of over 1,000 simultaneous participants. Moreover, MeetingPlace can be configured in a variety of ways in order to satisfy specific business applications, such as training and supply chain management. Strategy Our objective is to make MeetingPlace a standard communications tool within an enterprise. Underlying this objective is our vision of making integrated voice and data collaboration through MeetingPlace as widely utilized as e-mail and voice mail. The key elements of our strategy include: . Establish MeetingPlace as a ubiquitous desktop application. We intend to continue to integrate MeetingPlace seamlessly with a wide array of enterprise software, including browsers, collaborative software and ERP/CRM applications. For example, MeetingPlace is already available to end users through browser interfaces as well as Microsoft Outlook. We intend to leverage the large installed base of such applications to establish MeetingPlace as a standard desktop productivity tool by deploying MeetingPlace as an integral element of these applications. . Aggressively leverage installed customer base to increase market penetration. We will focus on developing prominent Fortune 1000 reference accounts to encourage widespread market acceptance of our products. We intend to apply the expertise that we have gained in penetrating existing vertical markets, such as financial services and high technology, to actively pursue new markets such as professional services, manufacturing, healthcare, transportation, education and government. Additionally, we will continue to promote increased usage and deployment of our products by our existing customers through after-market sales and support. . Leverage technological expertise to address significant market opportunities. We have gained significant technological expertise in both voice and data enterprise network environments, as well as in such areas as digital signal processing and system integration. Furthermore, we are developing new features and applications to enhance our existing product offerings and to address significant market opportunities such as voice over IP and IP video. In addition, our technology platform is designed to use open standards such as the T.120 specification for data conferencing and the H.323 specification for IP telephony. . Develop partnerships to expand distribution channels. We continue to expand our direct selling efforts in domestic markets. We also plan to increasingly utilize indirect distribution channels such as third party distributors and system integration partners. We expect to focus such partnership efforts on 31 expanding our geographic scope to reach customers in other countries and in certain regions of the United States, and on entering into distribution and co-marketing arrangements with partners that have expertise in specific vertical markets. . Provide value-added consulting services to our customers. In addition to our full-care support to customers, we offer a wide variety of value- added consulting services such as installation, training, system administration, help desk services, and web site and systems integration. We believe that providing these value-added services to our customers enhances our ability to achieve broad deployment within their enterprises. . Extend MeetingPlace functionality to enable "Collaborative Knowledge Management." Our long-term product development strategy includes the development of features and applications to enable what we refer to as Collaborative Knowledge Management, or CKM. We expect that CKM will extend the current capabilities of MeetingPlace for real-time capture, archival and retrieval of meeting content to allow enterprises to access and manage the information generated in their meetings. We intend to incorporate technologies such as voice recognition and search engines, as well as integrate MeetingPlace with handheld devices. Products and Services MeetingPlace Hardware and Software Platform Our MeetingPlace system enables the enterprise-wide deployment of real-time voice and data conferencing capabilities. Designed to integrate with an enterprise's existing telephone and data networks, MeetingPlace facilitates meetings among people in different locations using phones and network connected computers. The MeetingPlace system consists of three types of components: MeetingPlace Conference Server. At the core of the MeetingPlace system is the MeetingPlace conference server, an integrated hardware and software platform. The MeetingPlace server is built around an Intel Pentium processor and incorporates standard trunk interfaces to many analog and digital phone systems, an Ethernet interface for local area networks, and a SCSI-based storage system to manage internal database functions and conference recordings. In addition, the platform utilizes our advanced high-performance digital signal processing, or DSP, cards to manage voice communications. Each MeetingPlace server can scale from 8 to 120 concurrent users in any combination of different sized conferences, enabling customers to configure the MeetingPlace server on a concurrent user basis. In addition to the MeetingPlace conference server, an enterprise can increase scalability and reliability with the following options: . MeetingPlace Network Server. An integrated hardware and software platform that enables customers to manage up to eight MeetingPlace conference servers with centralized scheduling, administration and reporting. . MeetingPlace Shadow Network Server. An integrated hardware and software platform that provides redundancy in the event of failure of the MeetingPlace network server. MeetingPlace Software. The MeetingPlace conference server includes system software necessary to schedule, conduct and manage real-time voice and data conferences. Such software includes a UNIX-based operating system and a structured query language, or SQL, relational database, as well as integrated voice processing, conference scheduling and conference bridging software. The MeetingPlace system software also includes an optional simple network management protocol, or SNMP, agent for centralized network management. Enterprise customers can configure their MeetingPlace systems by choosing any of the following software options: . MeetingPlace Data Conferencing. Server-based software that facilitates real-time data collaboration using either standards-based collaboration software such as Microsoft NetMeeting or Java-compatible web browsers such as Microsoft Internet Explorer and Netscape Navigator. 32 . MeetingNotes. Software that facilitates management of meeting agendas, roll calls, attached electronic documents, related web hyperlinks, or URLs, and conference recordings. . MeetingPlace Flex Menus. Software that enables customization of telephone touch-tone menus to access particular meetings and their associated MeetingNotes information. . MeetingTime. Windows or Macintosh compatible client software that enables users to schedule, configure and monitor advanced meeting functions such as breakout sessions and lecture style, listen-only meetings. System Integration Options. We also offer several optional modules that enable the integration of MeetingPlace with other strategic communications tools used by the enterprise. Currently, these modules include: . MeetingPlace WebPublisher. Windows NT-based software that integrates MeetingPlace with an enterprise's web server to provide end users with browser-based scheduling and management of conferences. WebPublisher also integrates with RealAudio to provide streaming audio playback of conference recordings. . MeetingPlace Outlook Interface. Windows NT-based software that integrates MeetingPlace with Microsoft Exchange to facilitate conference scheduling and delivery of notifications through the Microsoft Outlook calendaring interface from the user's desktop. . MeetingPlace E-mail Gateway. Windows NT-based software that integrates MeetingPlace with popular e-mail systems, including Microsoft Exchange and Lotus Notes, for automated e-mail delivery of conference notifications and meeting materials. . MeetingPlace Fax Gateway. Windows NT-based software that integrates MeetingPlace with a Windows NT-based fax server for automated fax delivery of conference notifications and meeting materials. 33 Our MeetingPlace system is designed for deployment in enterprise IT environments with a wide array of standard and optional features for end users, help desk employees and system managers, including: - --------------------------------------------------------------------------------
Capability Features Meeting Set-Up. . ability to schedule in advance or real-time Automated scheduling and . schedule via MeetingTime software, web browser, notification of telephone or Microsoft Outlook meetings. . scheduling of recurring meetings . password and profile restrictions . notification through e-mail, Microsoft Outlook, fax or pager . automatic dial-out to participants - ------------------------------------------------------------------------------------ In-Session Capabilities. . roll calls Management and control . announced and screened entries of meeting attendance and . participant exclusion flow. . breakout sessions . lecture style, listen-only conferences . real-time speaker identification . interactive Q&A format . participant muting . automated dial-out to late participants - ------------------------------------------------------------------------------------ Attachments. . distribution and notification of meeting materials, Distribution of including electronic documents, prerecorded voice or electronic meeting video and Internet hyperlinks materials. . access before, during or after meeting . automatic forwarding by e-mail or fax . access to materials via the web, by e-mail or by fax - ------------------------------------------------------------------------------------ Recording. Recording, . on/off control during conference storage and playback of conferences. . automatic posting for playback . password or profile controlled access . access through telephone, downloaded audio file or streaming audio using RealAudio over the web - ------------------------------------------------------------------------------------ System Administration. . remote administration via IP-based network (e.g., Tools for Internet) management of . help desk monitoring via standard SNMP applications MeetingPlace by system administrators. . configuration, user profile management, capacity planning, internal billback and automated backups through MeetingTime software . system reporting capability
We license technology that is incorporated into our products from certain third parties, including certain digital signal processing algorithms and the MeetingPlace server's operating system and relational database. See "Risk Factors--We rely on technology licensed to us by third parties." Software and hardware products as complex as ours are likely to contain undetected errors or defects. See "Risk Factors--Our products may suffer from defects, errors or breaches of security." 34 Consulting and Support Services In addition to our MeetingPlace hardware and software offerings, we provide extensive follow-on consulting and support services to our customers to ensure successful deployment of MeetingPlace in their organizations. We offer implementation and integration services on an individual engagement basis, and full care support and managed services on an ongoing recurring basis. . Implementation Services. Implementation services include turnkey project management, database design, specific business application development, training and on-site installation. These services target seamless integration with a wide variety of telephone systems, local area network configurations, web servers and messaging systems. . Integration Services. Integration services include customization of web interfaces to MeetingPlace, custom programming of telephone access menus (through the MeetingPlace Flex Menu Option), custom reporting and billing, integration of MeetingPlace into non-standard voice or data networking infrastructures and advanced application support and training. These services are designed for customers with special application or integration needs. . Full Care Support. Full care support is an annual or multi-year service plan that provides telephone-based technical support to system managers. In addition, participating customers receive a software subscription service for new releases, access to a standby conference server and onsite hardware maintenance. . Managed Services. Managed services are designed for customers that desire on-site MeetingPlace systems but wish to outsource MeetingPlace's administration and management. Managed services include all user profile management, help desk support, rollout, capacity planning, technical support and monthly usage reporting. Technology MeetingPlace incorporates a wide variety of internally developed and third party licensed technologies. Key aspects of our technology platform include: . High-performance DSP engine. To meet the needs of a highly scalable conferencing system, we designed our own general purpose DSP card based on a RISC microprocessor and programmable Texas Instruments DSP chips. MeetingPlace configurations can contain up to four DSP cards to deliver up to five billion instructions per second, or BIPS, of processing power in a single server. Our software leverages the power of these DSP cards to provide high quality conference bridging that integrates DSP algorithms for echo cancellation, automatic gain control, background noise suppression, voice compression, and speaker and dial tone detection. . Conference scheduling engine. A sophisticated conference scheduling engine efficiently allocates MeetingPlace system resources, including conference licenses, access ports, recording space and meeting IDs. The scheduling agent utilizes a SQL relational database to manage transactions originating internally or externally from either the voice or data network. The software allows for sufficient flexibility to encompass real-world scenarios including early arrivals, unexpected participants, conference no-shows and meetings that run over their scheduled times. . Conference recording and playback. To record and play back conferences, MeetingPlace enables voice compression and decompression in addition to a proprietary voice file system. The integration of conference scheduling, bridging and recording enables MeetingPlace to facilitate impromptu recording and playback of voice conferences without operator intervention or external equipment. . Robust server software architecture. MeetingPlace utilizes a robust set of internally developed application programming interfaces, or APIs, that are designed to integrate with a variety of external applications, including web servers, e-mail systems and fax servers. 35 . Distributed network architecture. MeetingPlace enables the centralized administration and management of multiple servers distributed over an enterprise's local or wide area network. The system also incorporates an internal database replication engine, system-wide redundancy for MeetingPlace network servers and fault tolerance to network outages. To be successful, we will need to develop and introduce new products that respond to technological changes or evolving industry standards, such as voice over IP, in a timely manner and on a cost-effective basis. In addition, we will need to integrate our products with our customers' networks and enterprise applications on an ongoing basis. Furthermore, any significant interruption in the supply or support of any licensed software incorporated in our products could adversely affect our sales. See "Risk Factors--Our market is subject to rapid technological change," "--We need to integrate our products with third- party technology," and "--We rely on technology licensed to us by third parties." Customers We began commercial shipment of our products in December 1994 and, as of December 31, 1998, had over 200 customers. Our typical customers are medium to large businesses with geographically diverse employees, suppliers, customers and other constituents. In addition to enterprise-wide general deployment, customers have purchased and used MeetingPlace for a variety of specific business applications, including crisis management, training and education, customer and client services, supply chain management and merger integration. Furthermore, over 60% of our existing customers have purchased additional products or services after their initial system installations. The following is a representative list of our customers by vertical market: High Technology Software Hardware Networking and America Online, Inc. Apple Computer, Inc. Telecommunications Cadence Design Fujitsu Limited 3Com Corporation Systems, Inc. Hewlett-Packard Aspect Clarify Inc. Company Telecommunications Edify Corporation Honeywell Inc. Corporation Enterprise Systems, Hutchinson Bell Atlantic Inc. Technology Corporation Great Plains Incorporated Ciena Corporation Software, Inc. Natural Microsystems Cisco Systems, Inc. Informix Corporation Corporation Norstan Inc. Microsoft Quantum Corporation Tellabs, Inc. Corporation Rockwell NetManage, Inc. International Network Associates, Corporation Inc. Seagate Technology, Oracle Corporation Inc. Qualcomm Incorporated - -------------------------------------------------------------------------------- 36 Financial Services Investment Banking Insurance Other Financial BancBoston Robertson Stephens Inc. Services Aetna Inc. Credit Suisse First Boston Corporation Brown Brothers Harriman & Co. American International Group, Inc. J.C. Bradford & Co. CNA Financial Corporation Merrill Lynch & Co. CUNA Mutual Group Capital Group Companies Inc. John Hancock Mutual Life Insurance Company Morgan Stanley Dean Witter & Co. NationsBanc Montgomery Securities LLC Conseco, Inc. State Farm Insurance Fidelity Investments Prudential Securities Incorporated Commercial Banking Franklin Templeton SG Cowen Securities Corporation UBS AG ABN AMRO Bank NV Instinet Corp. BankBoston Southwest Securities Bank of America Group, Inc. Compass Bank The Vanguard Group Life Savings Bank KeyCorp Northern Trust Bank STAR Financial Bank - -------------------------------------------------------------------------------- Other Industry Sectors Professional Services Transportation Retail Andersen Consulting Air Canada Best Buy Co., Inc. Automatic Data Processing, Inc. CSX Corp. Pier 1 Imports, Inc. A.T. Kearney, Inc. Budget Rent a Car Corporation Rite Aid Corporation Burlington Northern Santa Fe Weight Watchers International, The Boston Consulting Group, Inc. Corp. Inc. Cambridge Technology Partners, Inc. Union Pacific Corp. Deloitte & Touche, LLP Education Electronic Data Systems, Corp. Healthcare California State University Gartner Group, Inc. Kaiser Permanente The Ohio State University Merck-Medco Managed Care, International Data Corporation L.L.C. Rio Salado College META Group, Inc. University of Illinois University of Texas Government U.S. Federal Reserve Bank NASA U.S. Court of Appeals State of Alaska State of New Mexico
- -------------------------------------------------------------------------------- No single customer accounted for more than 10% of our total revenues in 1997 or 1998. The following are specific examples of how customers use MeetingPlace to solve their collaboration needs: . Hewlett-Packard installed its first MeetingPlace servers with a total of 240 ports in January 1996 in its Palo Alto, California facilities. Since its initial installation, Hewlett-Packard has deployed MeetingPlace as a standard communications tool. Today, Hewlett-Packard has deployed over 23 MeetingPlace servers with a total of 2,300 ports in the United States, Asia and Latin America, connected through Hewlett-Packard's virtual private network. According to Hewlett-Packard, it saved approximately $300,000 per month in 1998 based on its current usage of approximately 6 million minutes per month. Hewlett-Packard continues to adopt new applications for MeetingPlace and is currently rolling out data conferencing and web integration system-wide. 37 . Credit Suisse First Boston's parent company, Credit Suisse, initially rolled out MeetingPlace in January 1995 as a cost effective conferencing solution to schedule, record and archive intraday conference calls. This enabled their worldwide sales force and securities traders to communicate with each other regarding market conditions and investment opportunities. Since its initial deployment with Credit Suisse, MeetingPlace has been adopted within divisions of Credit Suisse First Boston in North America, Europe and Asia to satisfy their conferencing needs. In addition, MeetingPlace's technology has resolved such issues as ambient noise from the trading floor and poor audio quality from telephones from various countries. Conference leaders have greater control over the calls, long distance connection delays have been eliminated, and participation has dramatically increased. . Budget Rent a Car chose MeetingPlace as a vital component of its distance learning solution. MeetingPlace creates a virtual classroom between three training labs in Lisle, Illinois, and 127 remote workstation sites across the United States. MeetingPlace breakout sessions enable paired role-play exercises and dialog sessions. Sessions are also recorded so that absent trainees can call into the MeetingPlace system and listen to them at their convenience. According to Budget, training costs have dropped from $2,000 to just $156 per trainee, and training penetration has increased from 60% to 99%. Marketing and Sales Marketing. In order to create awareness, market demand and sales opportunities for our products, we engage in a number of marketing activities which include exhibiting products and applications at industry trade shows and on our web site, direct marketing, advertising in selected publications aimed at targeted markets, public relations activities with trade and business press and distribution of sales literature, technical specifications and documentation. Our marketing efforts focus on educating the significant influencers within enterprises, targeting IT executives and IT managers to build a business case and closing on initial deployment applications. In addition, we cultivate relationships with major network and telecommunications equipment providers, and we intend to engage in co-marketing activities with enterprise software providers. Sales. Our distribution strategy is to sell our products and services to medium to large businesses with geographically dispersed employees, suppliers, customers and other constituents. We employ a direct sales force in the United States as our primary distribution channel to market to these enterprises. As of January 31, 1999, our direct sales force consisted of 39 sales representatives located in 15 cities. Latitude uses a consultative sales approach working closely with customers to understand and define their needs and determine how they can be addressed by our products and services. This strategy continues after the initial product implementation, the successful completion of which is typically a prerequisite to full scale deployment. While the sales cycle varies from customer to customer, it typically lasts between six and nine months. See "Risk Factors--Our sales cycle is lengthy and unpredictable." In addition to our direct sales force in the United States and the United Kingdom, we use indirect channels to extend our marketing effort. The indirect channels consist of resellers that target specific geographic regions and vertical markets, as well as usage-based resellers who offer access to MeetingPlace services on a per-minute basis. As of January 31, 1999, we had eight domestic resellers and three international resellers. We intend to grow all of our reseller channels. See "Risk Factors--We need to expand our sales and distribution channels" and "--We face risks associated with international expansion." Competition We compete in a market that is highly competitive and rapidly changing. We expect competition to persist and intensify in the future. We face competition from a number of different sources. Currently, our principal competitors include: . major telecommunications carriers that operate service bureaus for voice conferencing, such as AT&T Corp., MCI Worldcom, Inc. and Sprint Corporation; 38 . private branch exchange, or PBX, vendors that sell systems with voice conferencing capabilities; such as Lucent Technologies Inc. and Nortel Networks; . providers of video conferencing systems such as PictureTel Corporation, Pinnacle Data Systems Incorporated and 8x8, Inc.; and . smaller start-up companies that offer web-based voice and data conferencing products. In addition, we anticipate that, in the future, we may experience competition from potential competitors that include: . networking companies, such as Cisco Systems, Inc., 3Com Corporation, Lucent Technologies Inc. and Nortel Networks, that are focusing on providing hardware to enable voice over IP applications and that may offer voice and data conferencing functionality at a cost lower than ours or at no cost; and . collaborative software providers, such as Microsoft Corporation and Lotus Development Corporation, that are currently focusing on data conferencing products and that may in the future incorporate video conferencing functionality into their products at little or no incremental charge to their customers. We believe the principal competitive factors in our market include, or are likely to include, overall cost of conferencing, product performance and features such as the ability to integrate voice and data, reliability, ease of use, size of customer base, quality of service and technical support, sales and distribution capabilities and strength of brand name. We believe that we compete favorably with respect to each of the foregoing factors. However, many of our competitors have longer operating histories, stronger brand names and significantly greater financial, technical, marketing and other resources than we do. These companies also may have existing relationships with many of our prospective customers. In addition, these companies may be able to respond more quickly than we can to new or emerging technologies and changes in customer requirements. New competitors may emerge and rapidly acquire significant market share. Competitive pressure, including any reduction in the cost of audio conferencing services provided by service bureaus, may make it difficult for us to acquire and retain customers and may require us to reduce the price of our products and services. We cannot be certain that we will be able to compete successfully with existing or new competitors. If we fail to compete successfully against current or future competitors, our business could suffer. Patents and Intellectual Property Rights Our success is heavily dependent upon protecting our proprietary technology. We rely primarily on a combination of patents, copyright, trademark, trade secrets, non-disclosure agreements and other contractual provisions to protect our proprietary rights. As of January 31, 1999, we had four issued U.S. patents relating to such technologies as voice processing interfaces, recording and retrieval of audio conferences, and graphical computer interfaces for teleconference systems. We cannot be certain that these patents will provide us with any competitive advantages or will not be challenged, invalidated or circumvented by third parties or that the patents of others will not have an adverse effect on our ability to do business. Despite our efforts to protect our proprietary rights, unauthorized parties may copy aspects of our products and obtain and use information that we regard as proprietary. In addition, other parties may breach confidentiality agreements or other protective contracts we have entered into, and we may not be able to enforce our rights in the event of such breaches. Our competitors may independently develop technologies that 39 are substantially equivalent or superior to ours. Furthermore, the laws of many foreign countries do not protect our intellectual property rights to the same extent as the laws of the United States. Although we attempt to avoid infringing known proprietary rights of third parties in our product development efforts, we expect that we may be subject to legal proceedings and claims for alleged infringement of third party proprietary rights, such as patents, copyrights or trademarks, by us or our licensees from time to time in the ordinary course of business. We may increasingly be subject to infringement claims as the number of products and competitors in our industry grow and functionalities of products overlap. Furthermore, former employers of our current and future employees may assert that our employees have improperly disclosed confidential or proprietary information to us. If we discover that any element of our products violates third party proprietary rights, we may be unable to obtain licenses on commercially reasonable terms, if at all, and to avoid or settle litigation without substantial expense and damage awards. Any claims relating to the infringement of third party proprietary rights, even if not meritorious, could result in costly litigation, divert management's attention and resources, or require us to enter into royalty or license agreements which are not advantageous to us. Parties making such claims may be able to obtain injunctive or other equitable relief, which could prevent us from selling our products in the United States or abroad. Any of these results could harm our business. Dell Computer Corporation has registered the "Latitude" mark for computers in the United States and certain other countries. Dell's United States trademark registration and Canadian application have blocked our ability to register the "Latitude Communications" and "Latitude" with logo marks in the United States and the "Latitude Communications" mark in Canada. Since we believe that we have priority of trade name usage in the United States, we have petitioned to cancel Dell's United States registration and opposed its Canadian application. The outcome of these proceedings is uncertain. If Dell's registration for the "Latitude" mark is not canceled or if we are unable to obtain consent from Dell for our registration of our marks, we may not be able to register our marks and would have to rely solely on common law protection for such marks. We cannot assure you that we will be free from challenges of or obstacles to our use or registration of our marks. Manufacturing We currently outsource the manufacturing of all of the subassemblies and components of the MeetingPlace server to third parties. This strategy allows us to reduce costly investment in manufacturing capital and to leverage the expertise of our vendors. Our manufacturing operation consists primarily of final assembly and testing of fully-configured MeetingPlace servers. Certain components and parts used in our products are procured from sole sources, including the processor and digital signal processing device used in our MeetingPlace server. We typically obtain components from only one vendor even where multiple sources are available, to maintain quality control and enhance the working relationship with suppliers. These purchases are made under existing contracts or purchase orders. The failure of any sole source suppliers to deliver on schedule could delay or interrupt our delivery of products and thereby adversely affect our business. See "Risk Factors--We rely on outside manufacturers and suppliers." Employees As of January 31, 1999, we had a total of 115 employees, of which 28 were in research and development, 76 were in sales, marketing and customer support, and 11 were in finance, administration, and operations. Our future performance depends in significant part upon our ability to attract new personnel and the continued service of existing personnel in key areas including engineering, technical support and sales. Competition for such personnel is intense and there can be no assurance that we will be successful in attracting or retaining such personnel in the future. None of our employees are subject to a collective bargaining agreement. We consider our relations with our employees to be good. See "Risk Factors--We may experience difficulties managing our expected growth" and "--We depend on certain key employees." 40 Facilities We lease approximately 39,000 square feet for our headquarters facility in Santa Clara, California, which we expect to expand to approximately 51,000 square feet in the second quarter of 1999. The current lease for the Santa Clara facility expires in December 2000, at which time we have the option to extend it for an additional five years. We also lease space at eleven other locations in the U.S. and three internationally. Each of these other offices is leased on a month-to-month basis or under a lease with a term of 12 months or less. Legal Proceedings We are not currently a party to any material legal proceedings. 41 MANAGEMENT Executive Officers and Directors The following table sets forth certain information with respect to our executive officers and directors as of December 31, 1998.
Name Age Position ---- --- -------- Emil C.W. Wang.......... 47 President, Chief Executive Officer and Director Glenn A. Eaton.......... 36 Vice President, International Roberta H. Gray......... 47 Vice President, Marketing Janet A. Gregory........ 46 Vice President, North American Sales Christopher D. Harvey... 41 Vice President, Customer Support Rick M. McConnell....... 33 Chief Financial Officer and Vice President, Finance and Administration Edward D. Tracy......... 39 Vice President, Product Operations Thomas H. Bredt......... 58 Director Robert J. Finocchio, Jr. ................... 47 Director F. Gibson Myers, Jr. ... 56 Director James L. Patterson...... 60 Director
- -------- Messrs. Bredt and Finocchio comprise our audit committee. Messrs. Myers and Patterson comprise our compensation committee. Mr. Wang, Latitude's founder, has served as our President and Chief Executive Officer and as a Director since our inception in April 1993. Prior to founding Latitude, Mr. Wang served in various management positions with Aspect Telecommunications Corporation, a provider of call center systems ("Aspect"). Prior to Aspect, Mr. Wang was employed with ROLM Corporation, a manufacturer of PBX systems ("ROLM"), and was a consultant with Bain & Co., a management consulting firm. Mr. Wang holds a B.S. degree in civil engineering from Princeton University and an M.S. degree in structural engineering and an M.B.A. degree from Stanford University. Mr. Eaton has served as our Vice President, International since January 1999, and previously served as our Vice President, Business Development, from December 1997 to January 1999, Vice President, Marketing from October 1994 to December 1997 and Director of Marketing from May 1993 to October 1994. Prior to Latitude, Mr. Eaton served in various management positions with Aspect, including Director of Product Marketing for the Aspect CallCenter from May 1989 to April 1993. Prior to Aspect, Mr. Eaton was employed with ROLM for six years. Mr. Eaton holds an B.S. degree in electrical engineering from the Massachusetts Institute of Technology. Ms. Gray has served as our Vice President, Marketing since October 1998. From September 1997 to October 1998, Ms. Gray was Vice President, Strategy and Business Development at Intrepid Systems, Inc., a provider of retail management software. From June 1990 to August 1997, she served in various marketing management positions with SCO, a provider of network computing software, including Senior Director of Strategic Marketing from August 1996 to August 1997. Prior to SCO, Ms. Gray was a Market Development Manager with Sun Microsystems, Inc. from May 1985 to June 1990 and was Director of Software Engineering from May 1979 to May 1985. Ms. Gray holds a B.S. degree in mathematical sciences from Stanford University. 42 Ms. Gregory has served as our Vice President, North American Sales since March 1994. From July 1988 to January 1994, Ms. Gregory served in various management positions with Octel Communications Corporation, a provider of voice messaging systems ("Octel"), including Director of Marketing for Voice Information Services, Director of Sales for Voice Information Services and General Manager for CPE Sales. Prior to Octel, Ms. Gregory held various sales management positions with ROLM from 1980 to 1988. Ms. Gregory holds a B.A. degree in English from Guilford College. Mr. Harvey has served as our Vice President, Customer Support since April 1998. From January 1997 to March 1998, Mr. Harvey was an independent consultant in the field of customer support. From May 1992 to January 1997, he served as Director of Worldwide Technical Support at Auspex Systems, Inc. a manufacturer of network file servers ("Auspex"). Prior to Auspex, Mr. Harvey held various management positions in technical support and systems engineering with Minerva Systems, Inc., a provider of hardware and software for video compression, and Epoch Systems, Inc., a provider of optical storage devices. Mr. Harvey holds a B.S. degree in management from the University of San Francisco and an M.B.A. degree from Golden Gate University. Mr. McConnell has served as our Chief Financial Officer and Vice President, Finance and Administration since December 1998. From January 1994 to November 1998, Mr. McConnell was Chief Financial Officer and Vice President, Finance and Administration of Storm Technology, Inc., a maker of personal scanners ("Storm"), and served as Director of Finance and Administration of Storm from June 1992 until January 1994. From July 1987 to June 1990, Mr. McConnell was employed as a financial engineer by The First Boston Corporation, predecessor to Credit Suisse First Boston, a financial services firm. Mr. McConnell holds a B.A. degree in quantitative economics from Stanford University and an M.B.A. degree from the Stanford Graduate School of Business. Mr. Tracy has served as our Vice President, Product Operations since December 1996. From January 1986 to May 1993, Mr. Tracy served in various management positions with Aspect, including Director of Engineering from May 1991 to May 1993. Prior to Aspect, Mr. Tracy worked with DAVID Systems, Inc., a telecommunications company, as a designer of voice/data switching PBX systems. Mr. Tracy holds an Sc.B. degree in engineering from Brown University and an M.S.E.E. degree in electrical engineering from Stanford University. Mr. Bredt has served as a director of Latitude since April 1993. Since April 1986, Mr. Bredt has been a general partner and managing director of Menlo Ventures, a venture capital firm. Mr. Bredt is also a director of Clarify Inc., a developer and provider of integrated enterprise front office solutions. Mr. Bredt holds a B.S.E. degree in science engineering from the University of Michigan, an M.E.E. degree in electrical engineering from New York University and a Ph.D. degree in computer science from Stanford University. Mr. Finocchio has served as a director of Latitude since August 1995. Since July 1997, Mr. Finocchio has served as Chairman, President and Chief Executive Officer of Informix Corporation, a provider of information management software. From December 1988 until May 1997, Mr. Finocchio was employed with 3Com Corporation ("3Com"), a global data networking company, where he held various positions, most recently serving as President, 3Com Systems. Prior to his employment with 3Com, Mr. Finocchio held various executive positions in sales and service with Rolm Communications, a telecommunications and networking company, most recently as Vice President of Rolm Systems Marketing. Mr. Finocchio is also a Regent of Santa Clara University. Mr. Finocchio holds a B.S. degree in economics from Santa Clara University and an M.B.A. degree from the Harvard Business School. Mr. Myers has served as a director of Latitude since June 1997. Since 1970, Mr. Myers has been a general partner or managing director of various entities associated with Mayfield Fund, a venture capital firm. Mr. Myers also serves as a director of Spectralink Corporation, a provider of on-premises wireless telephone systems. Mr. Myers holds a B.A. degree in engineering from Dartmouth College and an M.B.A. degree from Stanford University. 43 Mr. Patterson has been a director of Latitude since July 1993. Mr. Patterson has been an independent consultant since June 1987. Mr. Patterson also serves as a director of Aspect Telecommunications Corporation. Mr. Patterson holds a B.S.E.E. degree in electrical engineering from the University of Colorado. Executive officers are appointed by the Board of Directors and serve until their successors are qualified and appointed. There are no family relationships among any of our directors or officers. Storm filed for Chapter 7 bankruptcy protection in November 1998 when Mr. McConnell was Storm's Chief Financial Officer and Vice President, Finance and Administration. Board Composition Our Bylaws currently provide for a Board of Directors consisting of five members. Commencing at the first annual meeting of stockholders following the annual meeting of stockholders when Latitude shall have had at least 800 stockholders, the Board of Directors will be divided into three classes, each serving staggered three-year terms: Class I, whose term will expire at the first annual meeting of stockholders following the annual meeting of stockholders when Latitude shall have had at least 800 stockholders; Class II, whose term will expire at the second annual meeting of stockholders following the annual meeting of stockholders when Latitude shall have had at least 800 stockholders; and Class III, whose term will expire at the third annual meeting of stockholders following the annual meeting of stockholders when Latitude shall have had at least 800 stockholders. As a result, only one class of directors will be elected at each annual meeting of stockholders of Latitude, with the other classes continuing for the remainder of their respective terms. Messrs. Bredt and Myers have been designated as Class I directors; Messrs. Patterson and Finocchio have been designated as Class II directors; and Mr. Wang has been designated as a Class III director. These provisions in our restated certificate of incorporation may have the effect of delaying or preventing changes in control or management of Latitude. See "Description of Capital Stock--Delaware Anti-Takeover Law and Certain Charter Provisions." Messrs. Bredt and Myers were elected to the Board of Directors pursuant to a voting agreement by and among Latitude and certain of its principal stockholders. This voting agreement will terminate upon completion of this offering. Board Compensation Except for reimbursement for reasonable travel expenses relating to attendance at Board meetings and the grant of stock options, directors are not compensated for their services as directors. Directors who are employees of Latitude are eligible to participate in our 1993 and 1999 Stock Plans and will be eligible to participate in the our 1999 Employee Stock Purchase Plan. Directors who are not employees of Latitude will be eligible to participate in our 1999 Stock Plan and 1999 Directors' Stock Option Plan. See "Stock Plans." Board Committees The Compensation Committee currently consists of Messrs. Myers and Patterson. The Compensation Committee reviews and approves the compensation and benefits for our executive officers, grants stock options under our stock option plans and makes recommendations to the Board of Directors regarding such matters. The Audit Committee consists of Messrs. Bredt and Finocchio. The Audit Committee makes recommendations to the Board of Directors regarding the selection of independent auditors, reviews the results and scope of the audit and other services provided by our independent auditors and reviews and evaluates our audit and control functions. 44 Compensation Committee Interlocks and Insider Participation The members of the Compensation Committee of Latitude's Board of Directors are currently Messrs. Myers and Patterson. Neither Mr. Myers nor Mr. Patterson has at any time been an officer or employee of Latitude. Executive Compensation Summary Compensation. The following table sets forth the compensation earned for services rendered to Latitude in all capacities for the year ended December 31, 1998 by our Chief Executive Officer and the four next most highly compensated executive officers whose total cash compensation exceeded $100,000 during the year ended December 31, 1998 (collectively, the "Named Executive Officers"). Summary Compensation Table
Long-Term Compensation Annual Compensation Awards -------------------- ------------ Securities Underlying All Other Name and Principal Position Salary ($) Bonus ($) Options (#) Compensation($) --------------------------- ---------- --------- ------------ --------------- Emil C.W.Wang................ $152,696 $17,348 151,200 $1,242(1) President and Chief Executive Officer Glenn A. Eaton............... 125,108 8,674 46,200 199(2) Vice President, International Janet A. Gregory............. 98,754 92,061 53,700 156(2) Vice President, North American Sales Edward D. Tracy.............. 118,529 26,090 46,200 192(2) Vice President, Product Operations
- -------- (1) Consists of life insurance premiums paid by Latitude and reimbursement for tax preparation expenses. (2) Consists of life insurance premiums paid by Latitude. Pursuant to the terms of a bonus plan adopted by the Board of Directors, certain of our executive officers will receive performance bonuses in 1999 based on Latitude's achievement of certain quarterly revenue targets set by the Board of Directors. Option Grants. The following table sets forth certain information with respect to stock options granted to each of the Named Executive Officers in the year ended December 31, 1998. In accordance with the rules of the Securities and Exchange Commission, also shown below is the potential realizable value over the term of the option (the period from the grant date to the expiration date) based on assumed rates of stock appreciation of 5% and 10%, compounded annually. These amounts are based on certain assumed rates of appreciation and do not represent our estimate of future stock price. Actual gains, if any, on stock option exercises will depend on the future performance of the common stock. 45 Option Grants in Last Fiscal Year(1)
% of Total Options Potential Realizable Value Number of Granted to at Assumed Annual Rates Shares Employees of Stock Price Appreciation Underlying in Last Exercise for Option Term(4) Options Fiscal Price Expiration ---------------------------- Name Granted(#) Year(2) ($/share)(3) Date 5% 10% ---- ---------- ---------- ------------ ---------- ------------- -------------- Emil C.W. Wang(5)....... 151,200 14.1% $1.00 1/16/08 $ 95,155 $ 241,179 Glenn A. Eaton(5)....... 46,200 4.3 1.00 1/16/08 29,075 73,693 Janet A. Gregory(5)..... 53,700 5.0 1.00 1/16/08 33,795 85,657 Edward D. Tracy(5)...... 46,200 4.3 1.00 1/16/08 29,075 73,693
- -------- (1) On January 8, 1999, the following Named Executive Officers were granted options at an exercise price of $4.33 per share: Mr. Wang, 20,337 shares; Mr. Eaton, 5,337 shares; Ms. Gregory, 20,337 shares; and Mr. Tracy, 20,337 shares. (2) Based on an aggregate of 1,074,209 shares subject to options granted by Latitude during the year ended December 31, 1998 to employees of and consultants to Latitude, including the Named Executive Officers. (3) The exercise price per share of each option was equal to the fair market value of the common stock on the date of grant as determined in good faith by the Board of Directors on such date based upon such factors as the purchase price paid by investors for shares of Latitude's preferred stock, the absence of a trading market for Latitude's securities and Latitude's financial outlook and results of operations. (4) The potential realizable value is based on the term of the option at its time of grant (ten years), and assumes that the fair market value of Latitude's common stock on the date of grant appreciates at the indicated annual rate compounded annually for the entire term of the option and that the option is exercised and sold on the last day of its term for the appreciated stock price. (5) These stock options, which were granted under the 1993 Stock Option Plan, become exercisable at a rate of 1/4 of the total number of shares of common stock subject to the option on the first anniversary of the date of grant, and 1/48 of the total number of shares monthly thereafter, as long as the optionee remains an employee with, consultant to, or director of Latitude. Aggregate Option Exercises and Option Values. The following table provides certain summary information concerning the shares of common stock represented by outstanding stock options held by each of the Named Executive Officers as of December 31, 1998. No options were exercised by the Named Executive Officers during the year ended December 31, 1998. Fiscal Year-End Option Values
Value of Unexercised Number of Securities In-the-Money Options Underlying Unexercised at December 31, Options at December 31, 1998(#) 1998($)(1) ----------------------------------- ------------------------- Name Exercisable Unexercisable Exercisable Unexercisable ---- -------------- ----------------- ----------- ------------- Emil C.W. Wang.......... 375 152,235 $1,225 $406,875 Glenn A. Eaton.......... 375 47,325 1,225 126,875 Janet A. Gregory........ 375 54,825 1,225 146,875 Edward D. Tracy......... 375 47,325 1,225 126,875
- -------- (1) Based on the fair market value as of December 31, 1998, as determined by the Board of Directors, minus the exercise price, multiplied by the number of shares underlying the option. 46 Stock Plans 1993 Stock Plan. Our 1993 Stock Plan provides for the grant of incentive stock options to employees and nonstatutory stock options and stock purchase rights to employees, directors and consultants. The purposes of the 1993 Stock Plan are to attract and retain the best available personnel, to provide additional incentives to our employees and consultants and to promote the success of our business. The 1993 Stock Plan was originally adopted by our Board of Directors in June 1993 and approved by our stockholders in September 1993. Unless terminated earlier by the Board of Directors, the 1993 Stock Plan shall terminate in June 2003. A total of 3,555,000 shares of common stock have been reserved for issuance under the 1993 Stock Plan. As of December 31, 1998, options to purchase 1,352,496 shares of common stock were outstanding at a weighted average exercise price of $2.24 per share, 1,968,636 shares had been issued upon exercise of outstanding options or pursuant to restricted stock purchase agreements, and 233,868 shares remained available for future grant. The 1993 Stock Plan may be administered by the Board of Directors or a committee of the Board (the "Administrator"). The Administrator determines the terms of options granted under the 1993 Stock Plan, including the number of shares subject to the option, exercise price, term and exercisability. Incentive stock options granted under the 1993 Stock Plan must have an exercise price of at least 100% of the fair market value of the common stock on the date of grant and at least 110% of such fair market value in the case of an optionee who holds more than 10% of the total voting power of all classes of our stock. Nonstatutory stock options granted under the 1993 Stock Plan must have an exercise price of at least 85% of the fair market value of the common stock on the date of grant (or at least 110% of such fair market value in the case of an optionee who holds more than 10% of the total voting power of all classes of our stock). Payment of the exercise price may be made in cash or such other consideration as determined by the Administrator. The Administrator determines the term of options, which may not exceed 10 years (or five years in the case of an option granted to a holder of more than 10% of the total voting power of all classes of our stock). No option may be transferred by the optionee other than by will or the laws of descent or distribution. Each option may be exercised during the lifetime of the optionee only by such optionee. The Administrator determines when options become exercisable. Options granted under the 1993 Stock Plan generally must be exercised within 60 days after the termination of the optionee's status as an employee, director or consultant of Latitude, or within 12 months if such termination is due to the death or disability of the optionee, but in no event later than the expiration of the option's term. Options granted under the 1993 Stock Plan generally vest at the rate of 1/4th of the total number of shares subject to the option 12 months after the date of grant, and 1/48th of the total number of shares subject to the option each month thereafter. In addition to stock options, the Administrator may issue employees, directors and consultants stock purchase rights under the 1993 Stock Plan. The Administrator determines the number of shares, price, terms, conditions and restrictions related to a grant of stock purchase rights. The purchase price of a stock purchase right granted under the 1993 Stock Plan must be at least 85% of the fair market value of the shares as of the date of the offer. The period during which the stock purchase right is held open is determined by the Administrator, but in no case shall such period exceed 30 days. Unless the Administrator determines otherwise, the recipient of a stock purchase right must execute a restricted stock purchase agreement granting Latitude an option to repurchase the unvested shares at cost upon termination of such recipient's relationship with us. In the event of our merger with or into another corporation, each option and stock purchase right may be assumed or an equivalent option or stock purchase right substituted by the successor corporation. However, if the successor corporation does not agree to such assumption or substitution of an option or stock purchase right, then, in the case of an option, the unvested shares under the option will automatically be accelerated such that an additional 50% of the total number of unvested shares will automatically become vested, and in the case of a stock purchase right, any rights of repurchase with respect to the stock purchase right will automatically terminate with respect to 50% of the total number of unvested shares. In addition, if the holder of an option or stock purchase right is an employee and such holder's employment is involuntarily terminated other than for 47 cause at any time within 24 months following our merger with or into another corporation, then, subject to certain limitations, then, in the case of an option, the unvested shares under the option will automatically be accelerated such that an additional 50% of the total number of unvested shares will automatically become vested, and in the case of a stock purchase right, any rights of repurchase with respect to the stock purchase right will automatically terminate with respect to 50% of the total number of unvested shares. The Administrator has the authority to amend or terminate the 1993 Stock Plan provided that no action that impairs the rights of any holder of an outstanding option may be taken without the holder's consent. In addition, stockholder approval is required to increase the number of shares subject to the 1993 Stock Plan or to change the designation of the class of persons eligible to be granted options. 1999 Stock Plan. Our 1999 Stock Plan (the "1999 Plan") was adopted by the Board of Directors in February 1999 and will be submitted for approval by our stockholders prior to completion of this offering. A total of 2,700,000 shares of common stock has been reserved for issuance under the Stock Plan, all of which remain available for future option grants. The purposes of the 1999 Plan are to attract and retain the best available personnel to Latitude and to provide additional incentives to our employees and consultants and to promote the success of our business. The 1999 Plan provides for the granting to employees, including officers and directors, of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") and for the granting to employees and consultants (including nonemployee directors) of nonstatutory stock options and stock purchase rights. If not terminated earlier, the 1999 Plan will terminate in February 2009. The 1999 Plan may be administered by the Board of Directors or a committee of the Board (the "Administrator"). The 1999 Plan is currently administered by the Compensation Committee. The Administrator determines the terms of options granted under the 1999 Plan, including the number of shares subject to the option, exercise price, term and exercisability. In no event, however, may an individual employee receive option grants for more than 2,700,000 shares under the 1999 Plan in any fiscal year. The exercise price of all incentive stock options granted under the 1999 Plan must be at least equal to the fair market value of the common stock on the date of grant. The exercise price of any incentive stock option granted to an optionee who owns stock representing more than 10% of the total combined voting power of all classes of outstanding capital stock of Latitude or any parent or subsidiary corporation of Latitude (a "10% Stockholder") must equal at least 110% of the fair market value of the common stock on the date of grant. The exercise price of all nonstatutory stock options must equal at least 85% of the fair market value of the common stock on the date of grant; provided, however, that the exercise price of any nonstatutory stock option granted to any individual who, on the last day of Latitude's most recently completed fiscal year, is the chief executive officer of Latitude (or is acting in such capacity) or among the four highest compensated officers (other than the chief executive officer) of Latitude whose total cash compensation exceeded $100,000 during such fiscal year must equal at least 100% of the fair market value of the common stock on the date of grant. Payment of the exercise price may be made in cash or other consideration as determined by the Administrator. The Administrator determines the term of options, which may not exceed 10 years (5 years in the case of an incentive stock option granted to a 10% Stockholder). No option may be transferred by the optionee other than by will or the laws of descent or distribution. Each option may be exercised during the lifetime of the optionee only by such optionee. The Administrator determines when options become exercisable. Options granted under the 1999 Plan generally become exercisable at the rate of 1/4th of the total number of shares subject to the options twelve months after the date of grant, and 1/48th of the total number of shares subject to the options each month thereafter. In addition to stock options, the Administrator may issue employees, directors and consultants stock purchase rights under the 1999 Stock Plan. The Administrator determines the number of shares, price, terms, conditions and restrictions related to a grant of stock purchase rights. The purchase price of a stock purchase right granted under the 1999 Stock Plan must be at least 85% of the fair market value of the shares as of the date of the offer (or 100% of the fair market value if stock purchase right is granted to a 10% Stockholder). 48 The period during which the stock purchase right is held open is determined by the Administrator, but in no case shall such period exceed 30 days. Unless the Administrator determines otherwise, the recipient of a stock purchase right must execute a restricted stock purchase agreement granting Latitude an option to repurchase the shares at cost upon termination of such recipient's relationship with us. In the event of the sale of all or substantially all of our assets or our merger with another corporation, then each option and stock purchase right may be assumed or an equivalent option or stock purchase right substituted by the successor corporation. However, if the successor corporation does not agree to such assumption or substitution of an option, the option or stock purchase right then, in the case of an option, the unvested shares under the option will automatically be accelerated such that an additional 50% of the total number of unvested shares will automatically become vested, and in the case of a stock purchase right, any rights of repurchase with respect to the stock purchase right will automatically terminate with respect to 50% of the total number of unvested shares. In addition, if the holder of an option or stock purchase right is an employee and such holder's employment is involuntarily terminated other than for cause at any time within 24 months following our merger with or into another corporation, then, subject to certain limitations, then, in the case of an option, the unvested shares under the option will automatically be accelerated such that an additional 50% of the total number of unvested shares will automatically become vested, and in the case of a stock purchase right, any rights of repurchase with respect to the stock purchase right will automatically terminate with respect to 50% of the total number of unvested shares. The Administrator has the authority to amend or terminate the 1999 Plan as long as such action does not adversely affect any outstanding option and provided that stockholder approval shall be required for an amendment to increase the number of shares subject to the 1999 Plan, to change the designation of the class of persons eligible to be granted options, or to change the limitation on grants to individual employees. 1999 Directors' Stock Option Plan. The 1999 Directors' Stock Option Plan (the "Directors' Plan") was adopted by the Board of Directors in February 1999 and will be submitted for approval by our stockholders prior to completion of this offering. A total of 250,000 shares of common stock has been reserved for issuance under the Directors' Plan, all of which remain available for future grants. The Directors' Plan provides for the grant of nonstatutory stock options to nonemployee directors of Latitude. The Directors' Plan is designed to work automatically without administration; however, to the extent administration is necessary, it will be performed by the Board of Directors. To the extent they arise, it is expected that conflicts of interest will be addressed by abstention of any interested director from both deliberations and voting regarding matters in which such director has a personal interest. The Directors' Plan provides that each person who is or becomes a nonemployee director of Latitude will be granted a nonstatutory stock option to purchase 20,000 shares of common stock (the "First Option") on the later of the date on which the optionee first becomes a nonemployee director of Latitude or the date of the closing of this offering. Thereafter, on the date of our Annual Stockholders Meeting each year, each nonemployee director will be granted an additional option to purchase 5,000 shares of common stock (a "Subsequent Option") if, on such date, he or she has served on Latitude's Board of Directors for at least six months. The Directors' Plan sets neither a maximum nor a minimum number of shares for which options may be granted to any one nonemployee director, but does specify the number of shares that may be included in any grant and the method of making a grant. No option granted under the Directors' Plan is transferable by the optionee other than by will or the laws of descent or distribution or pursuant to a qualified domestic relations order, and each option is exercisable, during the lifetime of the optionee, only by such optionee. The Directors' Plan provides that the First Option shall become exercisable in installments as to 25% of the total number of shares subject to the First Option on each of the first, second, third and fourth anniversaries of the date of grant of the First Option. Each Subsequent Option shall become exercisable in installments as to 50% of the total number of shares on each of the first and second anniversaries of the date of grant of that Subsequent Option. If a nonemployee Director ceases to serve as a Director for any reason other than death or disability, he or she 49 may, but only within 90 days after the date he or she ceases to be a Director of Latitude, exercise options granted under the Directors' Plan to the extent that he or she was entitled to exercise it at the date of such termination. To the extent that he or she was not entitled to exercise any such option at the date of such termination, or if he or she does not exercise such option (which he or she was entitled to exercise) within such 90 day period, such option shall terminate. The exercise price of all stock options granted under the Directors' Plan shall be equal to the fair market value of a share of our common stock on the date of grant of the option. Options granted under the Directors' Plan have a term of ten years. In the event of the dissolution or liquidation of Latitude, a sale of all or substantially all of our assets, our merger with or into another corporation or any other reorganization of Latitude in which more than 50% of the shares of Latitude entitled to vote are exchanged, each nonemployee director shall have either (1) a reasonable time within which to exercise the option, including any part of the option that would not otherwise be exercisable, prior to the effectiveness of such dissolution, liquidation, sale, merger or reorganization, at the end of which time the option shall terminate, or (ii) the right to exercise the option, including any part that would not otherwise be exercisable, or receive a substitute option with comparable terms, as to an equivalent number of shares of stock of the corporation succeeding Latitude or acquiring its business by reason of such dissolution, liquidation, sale, merger or reorganization. The Board of Directors may amend or terminate the Directors' Plan; provided, however, that no such action may adversely affect any outstanding option, and the provisions regarding the grant of options under the plan may be amended only once in any six-month period, other than to comport with changes in the Code. If not terminated earlier, the Directors' Plan will have a term of ten years. 1999 Employee Stock Purchase Plan. Our 1999 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in February 1999 and will be submitted for approval by our stockholders prior to completion of this offering. A total of 500,000 shares of common stock has been reserved for issuance under the Purchase Plan. The number of shares reserved for issuance under the Purchase Plan will automatically increase on the first day of each of the Company's fiscal years beginning in 2000, 2001, 2002, 2003 and 2004 by an amount equal to the lesser of 200,000 shares or one percent of the total shares outstanding on the last day of the immediately preceding fiscal year. The Purchase Plan, which is intended to qualify under Section 423 of the Code, will be implemented by an offering period commencing on the date of the closing of this offering and ending on October 31, 1999. Each subsequent offering period will have a duration of six months. Each offering period after the first offering period will commence on November 1 and May 1 of each year. The Purchase Plan will be administered by the Board of Directors or by a committee appointed by the Board. Employees (including officers and employee directors) of Latitude or of any majority-owned subsidiary designated by the Board, are eligible to participate in the Purchase Plan if they are employed by Latitude or any such subsidiary for at least 20 hours per week and more than five months per year. The Purchase Plan permits eligible employees to purchase common stock through payroll deductions, which may not exceed 15% of an employee's compensation, at a price equal to the lower of 85% of the fair market value of our common stock at the beginning or end of the offering period. The maximum number of shares an employee may purchase during each offering period is 1,000 shares. Employees may end their participation in the offering at any time during the offering period, and participation ends automatically on termination of employment with Latitude. If not terminated earlier, the Purchase Plan will have a term of 20 years. The Purchase Plan provides that in the event of our merger of with or into another corporation or a sale of all or substantially all of our assets, each right to purchase stock under the Purchase Plan will be assumed or an equivalent right substituted by the successor corporation unless the Board of Directors shortens the offering period so that employees' rights to purchase stock under the Purchase Plan are exercised prior to the merger or sale of assets. The Board of Directors has the power to amend or terminate the Purchase Plan as long as such action does not adversely affect any outstanding rights to purchase stock thereunder. 50 Limitation of Liability and Indemnification Matters Our certificate of incorporation limits the liability of directors to the maximum extent permitted by Delaware law. Delaware law provides that a director of a corporation will not be personally liable for monetary damages for breach of such individual's fiduciary duties as a director except for liability . for any breach of such director's duty of loyalty to Latitude or to its stockholders, . for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, . for unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law, or . for any transaction from which a director derives an improper personal benefit. Our bylaws provide that Latitude shall indemnify its directors and executive officers and may indemnify its officers, employees and other agents to the full extent permitted by law. We believe that indemnification under our bylaws covers at least negligence and gross negligence on the part of an indemnified party. Our bylaws also permit us to advance expenses incurred by an indemnified party in connection with the defense of any action or proceeding arising out of such party's status or service as a director, officer, employee or other agent of Latitude upon an undertaking by such party to repay such advances if it is ultimately determined that such party is not entitled to indemnification. We have entered into separate indemnification agreements with each of our directors and officers. These agreements require us to, among other things, indemnify such director or officer against expenses (including attorney's fees), judgments, fines and settlements (collectively, "Liabilities") paid by such individual in connection with any action, suit or proceeding arising out of such individual's status or service as a director or officer of Latitude (other than Liabilities arising from willful misconduct or conduct that is knowingly fraudulent or deliberately dishonest) and to advance expenses incurred by such individual in connection with any proceeding against such individual with respect to which such individual may be entitled to indemnification by us. We believe that our Certificate of Incorporation and Bylaw provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers. We also maintain directors' and officers' liability insurance. At present we are not aware of any pending litigation or proceeding involving any director, officer, employee or agent of Latitude where indemnification will be required or permitted. Furthermore, we are not aware of any threatened litigation or proceeding that might result in a claim for such indemnification. 51 CERTAIN TRANSACTIONS Certain stock option grants to directors and executive officers of Latitude are described herein under the caption "Management--Executive Compensation." Since our inception, we have issued, shares of preferred stock in private placement transactions as follows: an aggregate of 4,762,500 shares of Series A Preferred Stock at $0.67 per share in April 1993, an aggregate of 4,030,228 shares of Series B Preferred Stock at $1.83 per share in June 1994, and an aggregate of 3,043,499 shares of Series C Preferred Stock at $2.67 per share in March 1996. The share and per share data set forth herein and in the table below reflect our reincorporation in Delaware, our three-for-two stock split and the automatic conversion of our outstanding preferred stock into common stock upon the completion of this offering. The following table summarizes the shares of preferred stock purchased by Named Executive Officers, directors and 5% stockholders of Latitude and persons and entities associated with them in these private placement transactions:
Series A Series B Series C Preferred Preferred Preferred Investor(1) Stock Stock Stock ----------- --------- --------- --------- Entities affiliated with Mayfield Fund (F. Gibson Myers, Jr.)(2)(3)....................... 2,625,000 1,590,909 843,749 Menlo Ventures IV, L.P. (Thomas H. Bredt)(2).... 1,875,000 1,136,364 1,406,250 James L. Patterson(4)........................... 109,500 27,000 18,750 Robert J. Finocchio, Jr. ....................... -- 37,500 -- Entities affiliated with Canaan Partners........ 409,090 375,000
- -------- (1) Shares held by affiliated persons and entities have been aggregated. See "Principal Stockholders." (2) Holder is a 5% stockholder. (3) Includes shares held by Mayfield VII and Mayfield Associates Fund II. (4) Includes shares held by the Patterson Family Trust and the Patterson Grandchildren's Trust. Mr. Patterson is a trustee of both of these trusts. We have entered into an Affinity Alliance Agreement with Aspect Telecommunications Corporation under which we have agreed to develop and market certain software applications which are compatible with Aspect's products. James L. Patterson, one of our directors, is a director of Aspect. We also have entered into a co-marketing agreement with Spectralink Corporation under which Spectralink has agreed to market certain Latitude products. F. Gibson Myers, Jr. is a director of Spectralink. We have entered into indemnification agreements with our officers and directors containing provisions which may require us to, among other things, indemnify our officers and directors against certain liabilities that may arise by reason of their status or service as officers or directors (other than liabilities arising from willful misconduct of a culpable nature) and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. 52 PRINCIPAL STOCKHOLDERS The following table summarizes certain information with respect to beneficial ownership of our common stock as of December 31, 1998, and as adjusted to reflect the sale of common stock offered hereby, by (a) each person (or group of affiliated persons) known by us to own beneficially more than 5% of our outstanding common stock, as well as certain other principal stockholders, (b) each of the Named Executive Officers, (c) each of our directors and (d) all directors and executive officers of Latitude as a group. As of December 31, 1998, there were 15,574,857 shares of common stock outstanding. To our knowledge and except as otherwise indicated, we believe that the beneficial owners of the common stock listed below, based on information furnished by such owners, have sole voting power and investment power with respect to such shares, subject to community property laws where applicable. Except as otherwise noted, the following executive officers, directors and stockholders can be reached at the principal offices of Latitude.
Percent Beneficially Owned(1) ----------------- Number of Before After Name and Address Shares(1) Offering Offering ---------------- ---------- -------- -------- Entities affiliated with Mayfield Fund(2)........ 5,059,658 32.5% % 2800 Sand Hill Road Menlo Park, CA 94025 Menlo Ventures IV, L.P........................... 4,417,614 28.4 3000 Sand Hill Road, Bldg. 4, Ste. 100 Menlo Park, CA 94025 Entities affiliated with Canaan Ventures(3)...... 784,090 5.0 2884 Sand Hill Road, Bldg. 1, Ste. 115 Menlo Park, CA 94025 Asset Management Associates 1989, L.P. .......... 681,819 4.4 2275 E. Bayshore Road, Ste. 150 Palo Alto, CA 94303 Emil C.W. Wang(4)................................ 1,098,316 7.0 Glenn A. Eaton(5)................................ 355,192 2.3 Edward D. Tracy(6)............................... 283,942 1.8 Janet A. Gregory(7).............................. 198,379 1.3 F. Gibson Myers(2)............................... 5,059,658 32.5 Thomas H. Bredt(8)............................... 4,417,614 28.4 James L. Patterson(9)............................ 269,299 1.7 Robert J. Finocchio, Jr. ........................ 97,500 * All directors and executive officers as a group (11 persons)(10)................................ 11,779,900 75.6
- -------- *Less than 1%. (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. The number of shares beneficially owned by a person includes shares of common stock subject to options held by that person that are currently exercisable or exercisable within 60 days of January 31, 1999. Such shares issuable pursuant to such options are deemed outstanding for computing the percentage ownership of the person holding such options but are not deemed outstanding for the purposes of computing the percentage ownership of each other person. (2) Includes 4,819,801 shares held by Mayfield VII and 239,857 shares held by Mayfield Associates Fund II. F. Gibson Myers is a director of Latitude and a general partner of the Mayfield Fund, the general partner 53 of each of Mayfield VII and Mayfield Associates Fund II. Mr. Myers disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. (3) Includes 479,863 shares held by Canaan Ventures II Offshore Limited Partnership and 304,227 shares held by Canaan Ventures II Limited Partnership. (4) Includes 1,021,350 shares held by Emil C.W. Wang, 10,800 shares held by Mr. Wang as Custodian Under UGMA for Kevin E. Wang, 10,800 shares held by Mr. Wang as Custodian Under UGMA for Brian F. Wang and 10,800 shares held by Mr. Wang as custodian under UGMA for Katherine E. Wang. Also includes options to purchase 44,566 shares held by Mr. Wang that are currently exercisable or exercisable within 60 days of January 31, 1999. (5) Includes 341,250 shares held by Mr. Eaton and options to purchase 13,942 shares held by Mr. Eaton that are currently exercisable or exercisable within 60 days of January 31, 1999. (6) Includes 270,000 shares held by Mr. Tracy and options to purchase 13,942 shares held by Mr. Tracy that are currently exercisable or exercisable within 60 days from January 31, 1999. (7) Includes 182,250 shares held by Ms. Gregory and options to purchase 16,129 shares held by Ms. Gregory that are currently exercisable or exercisable within 60 days of January 31, 1999. (8) Thomas H. Bredt is a director of Latitude and a General Partner and Managing Member of Menlo Ventures, the general partner of Menlo Ventures IV, L.P. Mr. Bredt disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. (9) Includes 155,250 shares held by the Patterson Family Trust u/d/t August 26, 1998, 75,000 shares held by the Patterson Grandchildren's Trust UDT 1/6/98, James L. Patterson and Pamela L. Patterson Trustees, and 30,300 shares held by Mr. Patterson. Also, includes options to purchase 8,749 shares that are currently exercisable or exercisable within 60 days of January 31, 1999. Does not include 504,546 shares held by Aspect Telecommunications Corporation, of which Mr. Patterson is a director. (10) Includes an aggregate of 11,682,572 shares held by such executive officers and directors as a group and options to purchase an aggregate of 97,328 shares that are currently exercisable or exercisable within 60 days from January 31, 1999. 54 DESCRIPTION OF CAPITAL STOCK Upon the completion of this offering, we will be authorized to issue 75,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of preferred stock, $0.001 par value. The following description of our capital stock does not purport to be complete and is subject to and qualified in its entirety by our certificate of incorporation and bylaws, which are included as exhibits to the registration statement of which this prospectus is a part and by the provisions of applicable Delaware law. Common Stock As of December 31, 1998, there were 15,574,857 shares of common stock outstanding that were held of record by approximately 103 stockholders after giving effect to the conversion of our preferred stock into common stock at a one-to-one ratio and assuming no exercise or conversion of outstanding convertible securities after December 31, 1998. There will be shares of common stock outstanding (assuming no exercise of the underwriters' over- allotment option and no exercise or conversion of outstanding convertible securities after December 31, 1998) after giving effect to the sale of the shares of common stock offered hereby. The holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Subject to preferences that may be applicable to any outstanding preferred stock, the holders of common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available therefor. See "Dividend Policy." In the event of a liquidation, dissolution or winding up of Latitude, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior rights of preferred stock, if any, then outstanding. The common stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions available to the common stock. All outstanding shares of common stock are fully paid and non-assessable. Preferred Stock Effective upon the closing of this offering, Latitude will be authorized to issue 5,000,000 shares of undesignated preferred stock. The Board of Directors will have the authority to issue the undesignated preferred stock in one or more series and to determine the powers, preferences and rights and the qualifications, limitations or restrictions granted to or imposed upon any wholly unissued series of undesignated preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by the stockholders. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of Latitude without further action by the stockholders and may adversely affect the voting and other rights of the holders of common stock. At present, we have no plans to issue any shares of preferred stock. Registration Rights of Certain Holders The holders of 11,970,613 shares of common stock, including 134,386 shares issuable upon exercise of warrants, or their transferees are entitled to certain rights with respect to the registration of such shares under the Securities Act. These rights are provided under the terms of an agreement between Latitude and the holders of these registrable securities. Subject to certain limitations in this agreement, the holders of the registrable securities may require, on two occasions at any time after six months from the effective date of this offering, that Latitude use its best efforts to register the registrable securities for public resale, provided that the proposed aggregate offering price is at least $2,000,000. If we register any of our common stock either for our own account or for the account of other security holders, the holders of registrable securities are entitled to include their shares of common stock in the registration. A holder's right to include shares in an underwritten registration is subject to the ability of the underwriters to limit the number of shares included in this offering. All fees, costs and expenses of such registrations must be borne by Latitude and all selling expenses (including 55 underwriting discounts, selling commissions and stock transfer taxes) relating to registrable securities must be borne by the holders of the securities being registered. Delaware Anti-Takeover Law and Certain Charter Provisions We are subject to the provisions of Section 203 of the Delaware Law. In general, the statute prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date that the person became an interested stockholder unless (with certain exceptions) the business combination or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Generally, a "business combination" includes a merger, asset or stock sale or other transaction resulting in a financial benefit to the stockholder, and an "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years prior, did own) 15% or more of the corporation's outstanding voting stock. This provision may have the effect of delaying, deferring or preventing a change in control of Latitude without further action by the stockholders. In addition, upon completion of this offering, certain provisions of our charter documents, including a provision eliminating the ability of stockholders to take actions by written consent, may have the effect of delaying or preventing changes in control or management of Latitude, which could have an adverse effect on the market price of our common stock. Our stock option and purchase plans generally provide for assumption of such plans or substitution of an equivalent option of a successor corporation or, alternatively, at the discretion of the Board of Directors, exercise of some or all of the options stock, including non-vested shares, or acceleration of vesting of shares issued pursuant to stock grants, upon a change of control or similar event. The Board of Directors has authority to issue up to 5,000,000 shares of preferred stock and to fix the rights, preferences, privileges and restrictions, including voting rights, of these shares without any further vote or action by the stockholders. The rights of the holders of the common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock, thereby delaying, deferring or preventing a change in control of Latitude. Furthermore, such preferred stock may have other rights, including economic rights senior to the common stock, and, as a result, the issuance of such preferred stock could have a material adverse effect on the market value of the common stock. We have no present plan to issue shares of preferred stock. Commencing at the first annual meeting of stockholders following such time as Latitude shall have had at least 800 stockholders, the Board of Directors will be divided into three classes, each serving staggered three-year terms: Class I, whose term will expire at the first annual meeting of stockholders following the annual meeting of stockholders when Latitude shall have had at least 800 stockholders; Class II, whose term will expire at the second annual meeting of stockholders following the annual meeting of stockholders when Latitude shall have had at least 800 stockholders; and Class III, whose term will expire at the third annual meeting of stockholders following the annual meeting of stockholders when Latitude shall have had at least 800 stockholders. As a result, only one class of directors will be elected at each annual meeting of stockholders of Latitude, with the other classes continuing for the remainder of their respective terms. These provisions in our restated certificate of incorporation may have the effect of delaying or preventing changes in control or management of Latitude. Warrants As of December 31, 1998, warrants were outstanding to purchase an aggregate of 134,386 shares of common stock at a weighted average exercise price of $1.05 per share. Of such warrants, warrants to purchase an aggregate of 90,750 shares of common stock at a weighted average exercise price of $0.67 per share will automatically expire upon completion of this offering if they are not exercised prior to the completion of this offering. 56 Transfer Agent and Registrar The Transfer Agent and Registrar for our common stock is U.S. Stock Transfer Corporation. Listing We have applied to list our common stock on the Nasdaq National Market under the trading symbol "LATD." 57 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for the common stock. We cannot provide any assurances that a significant public market for the common stock will develop or be sustained after this offering. Future sales of substantial amounts of common stock in the public market, or the possibility of such sales occurring, could adversely affect prevailing market prices for the common stock or our future ability to raise capital through an offering of equity securities. After this offering, we will have outstanding shares of common stock. Of these shares, the shares to be sold in this offering ( shares if the underwriters' over-allotment option is exercised in full) will be freely tradable in the public market without restriction under the Securities Act, unless such shares are held by "Affiliates" of Latitude, as that term is defined in Rule 144 under the Securities Act. The remaining 15,574,857 shares outstanding upon completion of this offering will be "restricted securities" as that term is defined under Rule 144 (the "Restricted Shares"). We issued and sold the Restricted Shares in private transactions in reliance on exemptions from registration under the Securities Act. Restricted Shares may be sold in the public market only if they are registered or if they qualify for an exemption from registration under Rule 144 or Rule 701 under the Securities Act, as summarized below. Pursuant to certain "lock-up" agreements between our stockholders and either Latitude or the underwriters, substantially all of the holders of the Restricted Shares have agreed not to offer, sell, contract to sell, grant any option to purchase or otherwise dispose of any such shares for a period of 180 days from the date of this prospectus. We also have entered into an agreement with the underwriters that we will not offer, sell or otherwise dispose of common stock for a period of 180 days from the date of this prospectus. On the date of the expiration of the lock-up agreements, all of the Restricted Shares will be eligible for immediate sale (of which 11,682,572 shares will be subject to certain volume, manner of sale and other limitations under Rule 144). Following the expiration of such lock-up periods, certain shares issued upon exercise of options we granted prior to the date of this prospectus will also be available for sale in the public market pursuant to Rule 701 under the Securities Act. Rule 701 permits resales of such shares in reliance upon Rule 144 under the Securities Act but without compliance with certain restrictions, including the holding-period requirement, imposed under Rule 144. In general, under Rule 144 as in effect at the closing of this offering, beginning 90 days after the date of this prospectus, a person (or persons whose shares of Latitude are aggregated) who has beneficially owned Restricted Shares for at least one year (including the holding period of any prior owner who is not an Affiliate of Latitude) would be entitled to sell, within any three-month period, a number of shares that does not exceed the greater of (1) 1% of the then-outstanding shares of common stock or (2) the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale and notice requirements and to the availability of current public information about Latitude. Under Rule 144(k), a person who is not deemed to have been an Affiliate of Latitude at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years (including the holding period of any prior owner who is not an Affiliate of Latitude) is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. We intend to file, after the effective date of this offering, a Registration Statement on Form S-8 to register approximately 5,036,364 shares of common stock reserved for issuance under the 1993 Stock Plan, the 1999 Stock Plan, the 1999 Directors' Stock Option Plan and the 1999 Employee Stock Purchase Plan. The Registration Statement will become effective automatically upon filing. Shares issued under the foregoing Plans, after the filing of a Registration Statement on Form S-8, may be sold in the open market, subject, in the case of certain holders, to the Rule 144 limitations applicable to Affiliates, the above-referenced lock-up agreements and vesting restrictions imposed by us. 58 In addition, following this offering, the holders of 11,970,613 shares of common stock, including 134,386 shares issuable upon exercise of warrants, will, under certain circumstances, have rights to require us to register their shares for future sale. See "Description of Capital Stock--Registration Rights." ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission a Registration Statement (which term shall include any amendments thereto) on Form S-1 under the Securities Act with respect to the common stock offered hereby. This prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement, certain items of which are contained in exhibits to the Registration Statement as permitted by the rules and regulations of the Commission. For further information with respect to Latitude and the common stock offered hereby, reference is made to the Registration Statement, including the exhibits thereto, and the financial statements and notes filed as a part thereof. Statements made in this prospectus concerning the contents of any document referred to herein are not necessarily complete. With respect to each such document filed with the Commission as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved. The Registration Statement, including exhibits thereto and the financial statements and notes filed as a part thereof, as well as such reports and other information filed with the Commission, may be inspected without charge at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission located at Seven World Trade Center, 13th Floor, New York, NY 10048, and the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part thereof may be obtained from the Commission upon payment of certain fees prescribed by the Commission. Such reports and other information may also be inspected without charge at a web site maintained by the Commission. The address of the web site is http://www.sec.gov. 59 UNDERWRITING Under the terms and subject to the conditions contained in an underwriting agreement dated , 1999, we have agreed to sell to the underwriters named below, for whom Credit Suisse First Boston Corporation, Hambrecht & Quist LLC and Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, are acting as representatives, the following respective numbers of shares of common stock:
Number of Underwriter Shares ----------- --------- Credit Suisse First Boston Corporation............................. Hambrecht & Quist LLC.............................................. Dain Rauscher Wessels.............................................. ---- Total.......................................................... ====
The underwriting agreement provides that the underwriters are obligated to purchase all the shares of common stock in the offering if any are purchased, other than those shares covered by the over-allotment option described below. The underwriting agreement also provides that if an underwriter defaults the purchase commitments of non-defaulting underwriters may be increased or the offering of common stock may be terminated. We have granted to the underwriters a 30-day option to purchase on a pro rata basis up to additional shares from us at the initial public offering price less the underwriting discounts and commissions. The option may be exercised only to cover any over-allotments of common stock. The underwriters propose to offer the shares of common stock initially at the public offering price on the cover page of this prospectus and to selling group members at that price less a concession of $ per share. The underwriters and selling group members may allow a discount of $ per share on sales to other broker/dealers. After the initial public offering, the public offering price and concession and discount to dealers may be changed by the representatives. The following table summarizes the compensation and estimated expenses we will pay.
Total ----------------------------- Without With Per Share Over-allotment Over-allotment --------- -------------- -------------- Underwriting discounts and commissions payable by us........ $ $ $ Expenses payable by us............ $ $ $
The underwriters have informed us that they do not expect discretionary sales to exceed 5% of the shares of common stock being offered. We, our officers and directors and certain of our stockholders have agreed that we and they will not offer, sell, contract to sell, announce an intention to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Commission a registration statement under the Securities Act relating to, any additional shares of common stock or securities convertible into or exchangeable or exercisable for any shares of common stock without the prior written consent of Credit Suisse First Boston Corporation for a period of 180 days after the date of this prospectus, except in the case of issuances pursuant to the exercise of employee stock options outstanding on the date hereof. The underwriters have reserved for sale, at the initial public offering price up to shares of the common stock for employees, directors and certain other persons associated with us who have expressed an interest in purchasing common stock in the offering. The number of shares available for sale to the general public in the offering will be reduced to the extent such persons purchase such reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares. 60 We have agreed to indemnify the underwriters against certain liabilities under the Securities Act or contribute to payments which the underwriters may be required to make in that respect. We have made application to list the shares of common stock on The Nasdaq Stock Market's National Market under the symbol "LATD." Prior to this offering, there has been no public market for the common stock. The initial public offering price will be determined by negotiation between us and the underwriters. The principal factors to be considered in determining the public offering price include: the information set forth in this prospectus and otherwise available to the underwriters; the history and the prospects for the industry in which we will compete; the ability of our management; the prospects for our future earnings; the present state of our development and our current financial condition; the general condition of the securities markets at the time of this offering; and the recent market prices of, and the demand for, publicly traded common stock of generally comparable companies. The representatives may engage in over-allotment, stabilizing transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Securities Exchange Act of 1934. Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by such syndicate member are purchased in a syndicate covering transaction to cover syndicate short positions. Such stabilizing transactions, syndicate covering transactions and penalty bids may cause the price of the common stock to be higher than it would otherwise be in the absence of such transactions. These transactions may be effected on The Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. 61 NOTICE TO CANADIAN RESIDENTS Resale Restrictions The distribution of the common stock in Canada is being made only on a private placement basis exempt from the requirement that we prepare and file a prospectus with the securities regulatory authorities in each province where trades of common stock are effected. Accordingly, any resale of the common stock in Canada must be made in accordance with applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made in accordance with available statutory exemptions or pursuant to a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the common stock. Representations of Purchasers Each purchaser of common stock in Canada who receives a purchase confirmation will be deemed to represent to us and the dealer from whom the purchase confirmation is received that (i) the purchaser is entitled under applicable provincial securities laws to purchase the common stock without the benefit of a prospectus qualified under these securities laws, (ii) where required by law, that the purchaser is purchasing as principal and not as agent, and (iii) the purchaser has reviewed the text above under "Resale Restrictions". Rights of Action (Ontario Purchasers) The securities being offered are those of a foreign issuer and Ontario purchasers will not receive the contractual right of action prescribed by section 32 of the Regulation under the Securities Act (Ontario). As a result, Ontario purchasers must rely on other remedies that may be available, including common law rights of action for damages or recission of rights of action under the civil liability provisions of the U.S. federal securities laws. Enforcement of Legal Rights All of the issuer's directors and officers as well as the experts named herein may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon the issuer or these persons. All or a substantial portion of the assets of the issuer and these persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against the issuer or these persons in Canada or to enforce a judgment obtained in Canadian courts against the issuer or these persons outside of Canada. Notice to British Columbia Residents A purchaser of common stock to whom the Securities Act (British Columbia) applies is advised that the purchaser is required to file with the British Columbia Securities Commission a report within ten days of the sale of any common stock acquired by the purchaser pursuant to this offering. This report must be in the form attached to British Columbia Securities Commission Blanket Order BOR #95/17, a copy of which may be obtained from us. Only one report must be filed in respect of common stock acquired on the same date and under the same prospectus exemption. Taxation and Eligibility for Investment Canadian purchasers of common stock should consult their own legal and tax advisors with respect to the tax consequences of an investment in the common stock in their particular circumstances and with respect to the eligibility of the common stock for investment by the purchaser under relevant Canadian legislation. 62 LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for Latitude by Venture Law Group, A Professional Corporation, Menlo Park, California. Mark A. Medearis, a director of Venture Law Group, is the Secretary of Latitude. Certain legal matters in connection with this offering will be passed upon for the underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. An entity affiliated with Venture Law Group and certain directors of Venture Law Group hold an aggregate of 49,398 shares of our Common Stock. EXPERTS The consolidated balance sheets as of December 31, 1997 and 1998 and the consolidated statements of operations, stockholders' equity and cash flows for each of the years ended December 31, 1996, 1997 and 1998 included in this prospectus and in the related financial statement schedule included elsewhere in the Registration Statement, have been included herein in reliance on the report of PricewaterhouseCoopers, LLP, independent accountants, given on the authority of that firm as experts in accounting and auditing. 63 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Independent Accountants.......................................... F-2 Consolidated Balance Sheets................................................ F-3 Consolidated Statements of Operations...................................... F-4 Consolidated Statements of Stockholders' Equity............................ F-5 Consolidated Statements of Cash Flows...................................... F-6 Notes to Consolidated Financial Statements................................. F-7
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Latitude Communications, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Latitude Communications, Inc. and its subsidiary at December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. San Jose, California February 24, 1999 To the Board of Directors and Stockholders of Latitude Communications, Inc. The financial statements included herein have been adjusted to give effect to the reincorporation of the Company in Delaware and reflect the three for two stock split as described more fully in Note 12 to the financial statements. The above report is in the form that will be signed by PricewaterhouseCoopers LLP upon effectiveness of such reincorporation and stock split assuming that, from February 24, 1999, to the effective date of such reincorporation, no other events shall have occurred that would affect the accompanying financial statements or notes thereto. /s/ PricewaterhouseCoopers LLP San Jose, California February 25, 1999 F-2 LATITUDE COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except per share data)
December 31, Pro Forma ------------------ December 31, 1997 1998 1998 -------- -------- ------------- (see Note 11) (unaudited) ASSETS Current assets: Cash and cash equivalents.................. $ 3,578 $ 3,982 Trade accounts receivable, net of allowance for doubtful accounts of $147 in 1997 and $235 in 1998.............................. 2,519 5,627 Inventory.................................. 475 688 Prepaids and other assets.................. 139 420 -------- -------- Total current assets..................... 6,711 10,717 Property and equipment, net.................. 933 1,017 Deposits and other long-term assets.......... 71 136 -------- -------- Total assets............................. $ 7,715 $ 11,870 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable........................... $ 363 $ 805 Accrued expenses........................... 1,460 2,089 Deferred revenue........................... 920 2,794 Current portion of long-term debt.......... 467 559 -------- -------- Total current liabilities................ 3,210 6,247 -------- -------- Long-term debt............................... 757 838 -------- -------- Total liabilities........................ 3,967 7,085 -------- -------- Commitments (Note 6) Preferred stock, $0.001 par value: Authorized: 12,211 shares Issued and outstanding: 11,836 shares in 1997 and 1998 and no pro forma shares (Liquidation value of $18,680 at December 31, 1998)................................. 12 12 Common stock, $0.001 par value: Authorized: 15,000 shares Issued and outstanding: 3,755 shares in 1997, 3,739 shares in 1998 and 15,575 pro forma shares.............................. 4 4 $ 16 Additional paid-in capital................... 19,021 22,095 22,095 Notes receivable from common stockholders.... (187) (165) (165) Deferred stock compensation.................. (74) (2,836) (2,836) Accumulated deficit.......................... (15,028) (14,325) (14,325) -------- -------- -------- Total stockholders' equity............... 3,748 4,785 $ 4,785 -------- -------- ======== Total liabilities and stockholders' equity.................................. $ 7,715 $ 11,870 ======== ========
The accompanying notes are an integral part of these financial statements. F-3 LATITUDE COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
Years Ended December 31, ------------------------- 1996 1997 1998 ------- ------- ------- Revenue: Product.......................................... $ 5,103 $10,620 $16,506 Service.......................................... 943 2,312 4,545 ------- ------- ------- Total revenue.................................. 6,046 12,932 21,051 Cost of revenue: Product.......................................... 1,146 2,158 3,182 Service.......................................... 1,023 1,805 2,775 ------- ------- ------- Total cost of revenue.......................... 2,169 3,963 5,957 ------- ------- ------- Gross profit....................................... 3,877 8,969 15,094 ------- ------- ------- Operating expenses: Research and development......................... 2,466 2,213 2,607 Marketing and sales.............................. 4,644 7,845 9,744 General and administrative....................... 1,157 1,115 1,666 Amortization of deferred stock compensation...... -- 2 299 ------- ------- ------- Total operating expenses....................... 8,267 11,175 14,316 ------- ------- ------- Income (loss) from operations...................... (4,390) (2,206) 778 Interest income.................................... 276 177 142 Interest expense................................... (138) (200) (183) ------- ------- ------- Income (loss) before provision for income tax...... (4,252) (2,229) 737 Provision for income tax........................... -- -- (34) ------- ------- ------- Net income (loss).................................. $(4,252) $(2,229) $ 703 ======= ======= ======= Net income (loss) per share--basic................. $ (2.02) $ (0.78) $ 0.21 ======= ======= ======= Shares used in per share calculation--basic........ 2,110 2,850 3,279 ======= ======= ======= Net income (loss) per share--diluted............... $ (2.02) $ (0.78) $ 0.04 ======= ======= ======= Shares used in per share calculation--diluted...... 2,110 2,850 16,635 ======= ======= ======= Pro forma net income per share--basic.............. $ 0.05 ======= Shares used in pro forma per share calculation-- basic............................................. 15,115 ======= Pro forma net income per share--diluted............ $ 0.04 ======= Shares used in pro forma per share calculation-- diluted........................................... 16,635 =======
The accompanying notes are an integral part of these financial statements. F-4 LATITUDE COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY for the three years ended December 31, 1998 (in thousands)
Preferred Capital Notes Stock Common Stock in Excess Receivable Deferred ------------- -------------- of from Common Stock Accumulated Shares Amount Shares Amount Par Value Shareholders Compensation Deficit Total ------ ------ ------ ------ --------- ------------ ------------ ----------- ------- Balances, December 31, 1995................... 8,792 $ 9 3,146 $ 3 $10,676 $(103) $ (8,547) $ 2,038 Issuance of Series C preferred stock, net of issuance costs of $7.................... 3,044 3 -- -- 8,104 -- -- 8,107 Issuance of common stock................. -- -- 547 1 134 (114) -- 21 Repurchase of common stock................. -- -- (94) -- (16) 8 -- (8) Net loss............... -- -- -- -- -- -- (4,252) (4,252) ------ ---- ----- ---- ------- ----- ------- -------- ------- Balances, December 31, 1996, as previously reported............... 11,836 12 3,599 4 18,898 (209) (12,799) 5,906 Issuance of common stock................. -- -- 308 -- 86 (48) -- 38 Repurchase of common stock................. -- -- (152) -- (39) 27 -- (12) Payment of notes receivable from common stockholders.......... -- -- -- -- -- 43 -- 43 Deferred stock compensation related to grants of stock options and issuance of common stock.................. -- -- -- -- 76 -- $ (76) -- -- Amortization of deferred stock compensation..... -- -- -- -- -- -- 2 -- 2 Net loss............... -- -- -- -- -- -- (2,229) (2,229) ------ ---- ----- ---- ------- ----- ------- -------- ------- Balances, December 31, 1997................... 11,836 12 3,755 4 19,021 (187) (74) (15,028) 3,748 Issuance of common stock................. -- -- 35 -- 28 (4) -- 24 Repurchase of common stock................. -- -- (51) -- (15) 9 -- (6) Payment of notes receivable from common stockholders.......... -- -- -- -- -- 17 -- 17 Deferred stock compensation related to grants of stock options and issuance of common stock.................. -- -- -- -- 3,061 -- (3,061) -- -- Amortization of deferred stock compensation..... -- -- -- -- -- -- 299 -- 299 Net income............. -- -- -- -- -- -- 703 703 ------ ---- ----- ---- ------- ----- ------- -------- ------- Balances, December 31, 1998................... 11,836 $ 12 3,739 $ 4 $22,095 $(165) $(2,836) $(14,325) $ 4,785 ====== ==== ===== ==== ======= ===== ======= ======== =======
The accompanying notes are an integral part of these financial statements. F-5 LATITUDE COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Years Ended December 31, -------------------------- 1996 1997 1998 -------- ------- ------- Cash flows from operating activities: Net income (loss)................................ $ (4,252) $(2,229) $ 703 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization.................. 528 619 696 Provision for excess and obsolete inventory.... 55 66 149 Provision for doubtful accounts................ 59 56 88 Amortization of deferred stock compensation.... -- 2 299 Changes in operating assets and liabilities: Trade accounts receivable.................... (1,038) (1,069) (3,062) Inventory.................................... (104) (173) (496) Prepaids and other assets.................... (1) (8) (281) Accounts payable............................. (113) 133 442 Accrued expenses............................. 583 471 629 Deferred revenue............................. 319 506 1,874 -------- ------- ------- Net cash provided by (used in) operating activities................................ (3,964) (1,626) 1,041 -------- ------- ------- Cash flows from investing activities: Purchases of property and equipment.............. (778) (597) (743) Other............................................ -- -- (37) -------- ------- ------- Net cash used in investing activities...... (778) (597) (780) -------- ------- ------- Cash flows from financing activities: Deposits and other long-term assets.............. 13 (15) (65) Decrease (increase) in restricted cash........... (150) 150 -- Proceeds from issuance of preferred stock, net of issuance costs.................................. 8,107 -- -- Proceeds from issuance of common stock........... 21 38 24 Proceeds from payment of notes receivable from common stockholders............................. -- 43 17 Repurchase of common stock....................... (8) (12) (6) Proceeds from issuance of notes payable.......... 899 527 678 Repayment of notes payable and capital lease obligations..................................... (377) (444) (505) -------- ------- ------- Net cash provided by financing activities.. 8,505 287 143 -------- ------- ------- Net increase (decrease) in cash and cash equivalents....................................... 3,763 (1,936) 404 Cash and cash equivalents, beginning of year....... 1,751 5,514 3,578 -------- ------- ------- Cash and cash equivalents, end of year............. $ 5,514 $ 3,578 $ 3,982 ======== ======= ======= Supplemental disclosure of cash flow information: Cash payments for interest....................... $ 139 $ 193 $ 183 Supplemental disclosure of noncash financing information: Issuance of common stock for notes receivable from stockholder................................ $ 114 $ 48 $ 4
The accompanying notes are an integral part of these financial statements. F-6 LATITUDE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--FORMATION AND BUSINESS OF THE COMPANY: Latitude Communications, Inc. (the "Company"), founded in April 1993, is a leading provider of enterprise-based conferencing systems for geographically dispersed organizations. The Company develops, markets and supports its MeetingPlace system, which allows companies to conduct virtual meetings and thereby extend decision making processes across the disparate geographic locations of participants. MeetingPlace is designed to be an enterprise-wide resource and to leverage existing technologies, such as telephones, cellular phones and personal computers. The Company has distributed its product through distributors and a direct sales force to companies across many industries in the United States, Europe and Asia. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Basis of Consolidation The consolidated financial statements include the accounts of Latitude Communications, Inc. and its wholly owned subsidiary (the "Company"). All significant intercompany balances and transactions have been eliminated. Accounts denominated in foreign currencies have been remeasured into the U.S. dollar, the functional currency. Foreign currency gains and losses from remeasurements, which have been insignificant, are included in the consolidated statement of operations. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Revenue Recognition The Company adopted the provisions of Statement of Position 97-2, or SOP 97- 2, Software Revenue Recognition, as amended by Statement of Position 98-4, Deferral of the Effective Date of Certain Provisions of SOP 97-2, effective January 1, 1998. SOP 97-2 supersedes Statement of Position 91-1, Software Revenue Recognition, and delineates the accounting for software product, products including software that is not incidental to the product, and maintenance revenues. Under SOP 97-2, the Company recognizes product revenues upon shipment if a signed contract exists, the fee is fixed and determinable, collection of resulting receivables is probable and product returns are reasonably estimable. Provisions for estimated product returns are recorded at the time products are shipped. For contracts with multiple obligations (e.g., deliverable and undeliverable products, maintenance, installation and other services), revenue is allocated to each component of the contract based on objective evidence of its fair value, which is specific to the Company, or for products not being sold separately, the price established by management. The Company recognizes revenue allocated to undelivered products when the criteria for product revenue set forth above are met. The Company recognizes revenue allocated to maintenance fees, including amounts allocated from product revenue, for ongoing customer support and product updates ratably over the period of the maintenance contract. Payments for maintenance fees are generally made in advance and are non-refundable. For revenue allocated to consulting services, such as installation and training, the Company recognizes revenues as the related services are performed. F-7 LATITUDE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Prior to the adoption of SOP 97-2, effective January 1, 1998, the Company recognized revenue from the sale of products upon shipment if remaining obligations were insignificant and collection of the resulting accounts receivable was probable. The related estimated cost of product installation and provisions for estimated product returns were accrued upon shipment. Revenue from software maintenance contracts, including amounts unbundled from product sales, were deferred and recognized ratably over the period of the contract. The Company exchanged two systems and one upgrade for certain services and licenses which resulted in recognition of $282,000 of revenue in 1997 and research and development and marketing costs of $109,000 and $173,000, respectively. The Company exchanged two systems with two customers for certain marketing services and $81,000 in cash which resulted in the recognition of $497,000 in revenue in 1998, $95,000 of sales and marketing expense and $321,000 of prepaid sales and marketing expense. The assets and services were transferred between parties at their estimated fair value. Financial Instruments The Company considers all highly liquid investments with an original or remaining maturity of three months or less at the date of purchase to be cash equivalents. Commercial paper included in cash equivalents is classified as available- for-sale. Realized gains or losses are determined using the specific identification method and are included in interest income. There are no unrealized gross holding gains or losses. Amounts reported for cash and cash equivalents, accounts receivable, accounts payable and other accrued liabilities are considered to approximate fair value primarily due to their short maturities. Based on borrowing rates currently available to the Company for loans with similar terms, the carrying value of its notes payable and capital lease obligations approximate fair value. Certain Risks and Concentrations The Company's cash and cash equivalents as of December 31, 1998 are on deposit with two U.S. financial institutions. The Company performs ongoing credit evaluations of its customers, and collateral is not required. The Company maintains allowances for potential returns and credit losses, and such returns and losses have generally been insignificant. At December 31, 1997 and 1998, one customer accounted for 14% and another customer accounted for 23% of accounts receivable, respectively. MeetingPlace products and related services have accounted for substantially all of the Company's revenue to date. The market in which the Company competes is characterized by rapid technological change, frequent new product introductions, changes in customer requirements and emerging industry standards. Significant technological change could adversely affect the Company's operating results and subject the Company to returns of product and inventory losses. While the Company has ongoing programs to minimize the adverse effect of such changes and considers technological change in estimating its allowances, such estimates could change in the future. The Company licenses technology that is incorporated into its products from certain third parties, including certain digital signal processing alogorithms and the MeetingPlace server's operating system and relational databases. Any significant interruption in the supply or support of any licensed software could adversely affect the Company's sales, unless and until the Company can replace the functionality provided by this licensed software. Because the Company's products incorporate software developed and maintained by third parties, the Company depends on such third parties to deliver and support reliable products, enhance their current products, develop new products on a timely and cost-effective basis and respond to emerging industry standards and other technological changes. The failure of these third parties to meet these criteria could harm the Company's business. F-8 LATITUDE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company relies on third parties to obtain most of the components of the MeetingPlace server and integrate it with other standard components, such as the central processing unit and disk drives. If these third parties are no longer able to supply and assemble these components or are unable to do so in a timely manner, the Company may experience substantial delays in shipping its products and have to invest resources in finding an alternative manufacturer or manufacture our products internally. In addition, although the Company generally uses standard parts and components in its products, the Company obtains certain components, including the processors and digital signal processing devices used in the MeetingPlace server, from sole source suppliers. In the past, the Company has experienced problems in obtaining some of these components in a timely manner from these sources, and it may be unable to continue to obtain an adequate supply of these components in a timely manner or, if necessary, from alternative sources. If the Company is unable to obtain sufficient quantities of components or to locate alternative sources of supply, the Company may experience substantial delays in shipping its products and incur additional costs to find an alternative manufacturer or manufacture its products internally. Inventories Inventory is stated at the lower of cost or market. Cost is determined on a standard cost basis which approximates the first in, first out method. Property and Equipment Property and equipment are stated at cost and depreciated on a straight-line basis over the shorter of the estimated useful life of three years or the length of the capital lease for assets acquired under capital leases. Gains and losses from the disposal of property and equipment are taken into income in the year of disposition. Repairs and maintenance costs are expensed as incurred. Depreciation expense for 1996, 1997 and 1998 was $293,000, $537,000 and $607,000, respectively. Research and Development Costs Costs related to research, design and development of products are charged to research and development expenses as incurred. Software development costs are capitalized beginning when a product's technological feasibility has been established and ending when a product is available for general release to customers provided research and development activities for the related hardware portion of the product have been completed. Generally, the Company's products include hardware and software components that are developed concurrently. As a result, the Company has not capitalized any software development costs to date as such costs have not been significant. Income Taxes Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using current tax laws and rates. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Advertising The Company expenses advertising costs as they are incurred. Advertising expense for fiscal year 1996, 1997, and 1998 was $26,000, $19,000 and $115,000, respectively. Stock-Based Compensation The Company accounts for its stock based compensation in accordance with the provisions of Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees" and presents disclosure required by Statement of Financial Accounting Standard No. 123 ("SFAS No. 123"). F-9 LATITUDE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Net Income (Loss) Per Share Basic net income (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of vested common shares outstanding for the period. Diluted net income (loss) per share is computed giving effect to all dilutive potential common shares, including options, warrants and preferred stock. Options, warrants and preferred stock were not included in the computation of diluted net loss per share in 1996 and 1997 because the effect would be antidilutive. A reconciliation of the numerator and denominator used in the calculation of historical basic and diluted net (income) loss per share follows (in thousands, except per share data):
Year Ended December 31, ------------------------ 1996 1997 1998 ------- ------- ------ Historical net loss per share, basic and diluted: Numerator for net income (loss), basic and diluted.......................................... $(4,252) $(2,229) $703 ------- ------- ------ Denominator for basic earnings per share: Weighted average vested common shares outstanding.................................... 2,110 2,850 3,279 ------- ------- ------ Net income (loss) per share basic................. $ (2.02) $ (0.78) $ 0.21 ======= ======= ====== Denominator for diluted earnings per share: Weighted average vested common shares outstanding.................................... 2,110 2,850 3,279 ------- ------- ------ Effect of dilutive securities--nonvested common shares, common stock options, warrants and convertible preferred stock.................... 13,356 ------- ------- ------ Weighted average common and common equivalent shares......................................... 2,110 2,850 16,635 ------- ------- ------ Net income (loss) per share diluted............... $ (2.02) $ (0.78) $0.04 ======= ======= ====== Antidilutive securities including nonvested common shares, options, warrants, and preferred stock not included in diluted net income (loss) per share............................................ 13,128 13,970 -- ======= ======= ======
Comprehensive Income The Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. There was no difference between the Company's net income (loss) and its total comprehensive income (loss) for 1996, 1997 and 1998. Impact of Recently Issued Accounting Standards In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, or SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This standard requires companies to capitalize qualifying computer software costs which are incurred during the application development stage and amortize them over the software's estimated useful life. SOP 98-1 is effective for fiscal years beginning after December 15, 1998. The Company is currently evaluating the impact of SOP 98-1 on its financial statements and related disclosures. In December 1998, AcSEC released Statement of Position 98-9, or SOP 98-9, Modification of SOP 97-2, "Software Revenue Recognition," with Respect to Certain Transactions. SOP 98-9 amends SOP 97-2 to require that an entity recognize revenue for multiple element arrangements by means of the "residual method" F-10 LATITUDE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) when (1) there is vendor-specific objective evidence ("VSOE") of the fair values of all the undelivered elements that are not accounted for by means of long-term contract accounting, (2) VSOE of fair value does not exist for one or more of the delivered elements, and (3) all revenue recognition criteria of SOP 97-2 (other than the requirement for VSOE of the fair value of each delivered element) are satisfied. The provisions of SOP 98-9 that extend the deferral of certain paragraphs of SOP 97-2 became effective December 15, 1998. These paragraphs of SOP 97-2 and SOP 98-9 will be effective for transactions that are entered into in fiscal years beginning after March 15, 1999. Retroactive application is prohibited. The Company is evaluating the requirements of SOP 98-9 and the effects, if any, on the Company's current revenue recognition policies. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, or SOP 98-5, "Reporting on the Costs of Start-Up Activities." This standard requires companies to expense the costs of start-up activities and organization costs as incurred. In general, SOP 98-5 is effective for fiscal years beginning after December 15, 1998. The Company believes the adoption of SOP 98-5 will not have a material impact on its results of operations. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, or SFAS 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133 establishes new standards of accounting and reporting for derivative instruments and hedging activities. SFAS 133 requires that all derivatives be recognized at fair value in the statement of financial position, and that the corresponding gains or losses be reported either in the statement of operations or as a component of comprehensive income, depending on the type of hedging relationship that exists. SFAS 133 will be effective for fiscal years beginning after June 15, 1999. The Company does not currently hold derivative instruments or engage in hedging activities. Reclassifications Certain amounts in the financial statements have been reclassified to conform with the current year's presentation. These reclassifications did not change previously reported stockholders' equity or net loss. F-11 LATITUDE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 3--BALANCE SHEET ACCOUNTS (IN THOUSANDS): Inventory:
December 31, ---------------- 1997 1998 ------- ------- Raw materials............................................ $355 $359 Work in process.......................................... 3 36 Finished goods........................................... 117 293 ------- ------- $475 $688 ======= ======= Property and equipment, net: December 31, ---------------- 1997 1998 ------- ------- Leasehold improvements................................... $ 150 $ 165 Computer equipment....................................... 1,943 2,544 Office equipment......................................... 508 635 ------- ------- 2,601 3,344 ------- ------- Less accumulated depreciation and amortization........... (1,668) (2,327) ------- ------- $ 933 $ 1,017 ======= =======
Accrued expenses:
December 31, ------------- 1997 1998 ------ ------ Accrued commission expense.................................. $ 550 $ 544 Accrued sales incentives.................................... 176 143 Accrued vacation............................................ 136 227 Other....................................................... 598 1,175 ------ ------ $1,460 $2,089 ====== ======
NOTE 4--LONG-TERM DEBT: The long-term debt consists of notes payable for the purchase of equipment under a senior loan and security agreement with a leasing company. Under the terms of the agreement, the notes, which bear interest in the range from 12.18% to 16.27%, are collateralized by the underlying equipment and are due in monthly payments of interest and principal through June 2002. F-12 LATITUDE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Future minimum payments under the notes payable are as follows (in thousands):
Years Ending December 31, 1999............................................................. $ 720 2000............................................................. 560 2001............................................................. 281 2002............................................................. 110 ------ 1,671 Less amount representing interest.................................. (274) ------ 1,397 Less current portion............................................... (559) ------ $ 838 ======
NOTE 5--LINE OF CREDIT: The Company has a line of credit of $2,000,000 with a major U.S. financial institution, which bears interest at the prime rate, expires July 1999 and is collateralized by substantially all the Company's assets. Borrowings under the line of credit are limited to 80% of eligible accounts receivables. The line of credit contains certain financial covenants, which include maintaining a minimum quick ratio, minimum total net worth and a maximum debt to total net worth ratio, and prohibits the payment of dividends without the lenders consent. At December 31, 1998, the Company was in compliance with these covenants and no amounts were outstanding under the line of credit. NOTE 6--COMMITMENTS: The Company leases office space under a noncancellable operating lease which provides for an option to extend for an additional five years and expires in December 2000. Future annual minimum lease payments under the noncancellable operating lease are as follows (in thousands): 1999.................................................................. $470 2000.................................................................. 493 ---- $963 ====
Rent expense was $488,000, $639,000 and $759,000 in 1996, 1997, and 1998, respectively. At December 31, 1998, the Company has committed to purchase approximately $701,000 of raw materials inventory under noncancellable purchase orders. F-13 LATITUDE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 7--STOCKHOLDERS' EQUITY Convertible Preferred Stock: The convertible preferred stock comprise the series designated as follows (in thousands):
Common Number of Shares Number of Shares Reserved Shares Issued and for Liquidation Authorized Outstanding Conversion Value ---------- ----------- ---------- ----------- Series A..................... 4,950 4,763 4,763 $ 3,175 Series B..................... 4,074 4,029 4,029 7,389 Series C..................... 3,187 3,044 3,044 8,116 ------ ------ ------ ------- 12,211 11,836 11,836 $18,680 ====== ====== ====== =======
Each share of Series A, Series B and Series C preferred stock is convertible into one share of the Company's common stock at the option of the holder at any time after the date of issuance, subject to adjustments for certain dilutive issuances of securities, or automatically convertible upon the closing date of a public offering of the Company's common stock at an aggregate offering price of not less that $10,000,000 and a price per share of not less than $5.00. The preferred stockholders also have certain registration rights, the right to one vote for each share of common stock into which such shares of preferred stock are convertible and the right, voting as a class, to elect two members of the Company's Board of Directors. The Series A, Series B and Series C preferred stock have a liquidation preference of $0.67, $1.83 and $2.67 per share, respectively, subject to adjustment for splits or other recapitalizations, plus all declared but unpaid dividends. If funds are insufficient for full payment of these amounts, the entire assets and funds of the Company legally available are distributed ratably among the holders of preferred stock. After the preferred stockholders have received the full amount to which they are entitled, the remaining assets shall be distributed ratably to the holders of the common stock. The holders of Series A, Series B and Series C preferred stock are entitled to annual noncumulative dividends of $0.07, $0.18 and $0.27, respectively, per share, when and if declared by the Company's Board of Directors. As of December 31, 1998, no dividends have been declared. Convertible Preferred Stock Warrants The Company has issued fully exercisable warrants to purchase 91,000 shares of Series A preferred stock and 43,000 shares of Series B preferred stock at a price of $0.67 and $1.83 per share, respectively, which expire in June 2003 and September 2004, respectively, or with respect to the 91,000 shares of Series A preferred stock, upon an initial public offering. The Company has reserved 91,000 shares of Series A preferred stock and 44,000 shares of Series B preferred stock for the exercise of these warrants. The warrants were issued in conjunction with capital lease obligations and long-term equipment financing arrangements. The value of the warrants at the date of issuance was not significant. Founders' Common Stock The Company has sold 1,770,000 shares of its common stock to founders of the Company under agreements which provide that if the founders desire to sell or transfer their shares the Company has the right of first refusal at the then current fair market value. The Company's right of first refusal terminates upon initial public offering of the Company's common stock. F-14 LATITUDE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 1993 Stock Plan In March 1993, the Company's Board of Directors adopted the 1993 Plan (the "Plan") and through December 31, 1998 authorized 3,555,000 shares of common stock for issuance under the Plan. The Plan consists of Stock Purchase Rights and an Option Grant Program. Stock Purchase Rights provide for issuance of common stock at not less than 85% of the fair market value of the stock to employees and consultants. The Plan provides that the Administrator of the Plan shall advise the offeree in writing of the terms, conditions and restrictions related to the offer. Restricted stock purchases are subject to the company's right of repurchase at the employee purchase price upon termination of employment. The right to repurchase generally lapses 25% one year from the date of purchase and 1/48 each month thereafter. In addition, the Company has a right of first refusal similar to that for the founders' common stock. The Option Grant Program provides for grants of incentive stock options to employees and nonstatutory stock options to employees and consultants. The exercise price of incentive stock options and nonstatutory stock options granted under the Plan must be at least 100% and 85%, respectively, of the fair market value of the shares on the date of grant. Options generally expire ten years from the date of the grant or such shorter term as may be provided in the option agreement. Options granted under the Plan typically become exercisable over a four year period at a rate of 25% after the first year and 1/48 each month thereafter. Deferred Stock Compensation During 1997 and 1998, the Company issued stock purchase rights and options to certain employees under the 1993 Stock Plan with exercise prices below the deemed fair market value of the Company's common stock at the date of grant. In accordance with the requirements of APB 25, the Company has recorded deferred compensation for the difference between the purchase price of stock issued to employees under stock purchase rights or the exercise price of the stock options and the fair market value of the Company's stock at the date of grant. This deferred compensation is amortized to expense over the period during which the Company's right to repurchase the stock lapses or options become exercisable, generally four years. At December 31, 1998, the Company had recorded deferred compensation related to these options in the total amount of $3,137,000, of which $2,000, and $299,000 had been amortized to expense during 1997 and 1998. Future compensation expense from options granted through December 31, 1998 is estimated to be $783,000, $783,000, $781,000, and $489,000 for the years ending December 31, 1999, 2000, 2001, and 2002, respectively. F-15 LATITUDE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 1993 Stock Plan Activity The activity for the stock purchase rights and stock options are as follows (in thousands except per share amounts):
Restricted Stock Plan Stock Option Plan ----------------------- ----------------------- Weighted Weighted Average Average Purchase Exercise Number Price Number Price Shares of Per of Per Available Shares Share Amount Shares Share Amount --------- ------ -------- ------ ------ -------- ------ Balances, December 31, 1995................... 904 3,146 $0.05 153 Shares authorized....... 150 -- -- -- Shares purchased........ (547) 547 $0.25 134 Shares repurchased...... 94 (94) $0.17 (16) ------ ----- ----- ---- Balances, December 31, 1996................... 601 3,599 $0.07 271 Shares purchased........ (308) 308 $0.28 86 Shares repurchased...... 152 (152) $0.26 (39) Options granted......... (75) -- -- 75 $0.39 $ 29 ------ ----- ----- ---- ----- ----- ------ Balances, December 31, 1997................... 370 3,755 $0.09 318 75 $0.39 29 Additional shares reserved............... 1,125 -- -- -- -- -- Shares purchased........ (35) 35 $0.79 28 -- -- Shares repurchased...... 51 (51) $0.27 (15) -- -- Options granted......... (1,315) -- -- -- 1,315 $2.32 3,050 Options cancelled....... 38 -- -- -- (38) $1.47 (55) ------ ----- ----- ---- ----- ----- ------ Balances, December 31, 1998................... 234 3,739 $0.09 $331 1,352 $2.24 $3,024 ====== ===== ===== ==== ===== ===== ======
At December 31, 1996, 1997 and 1998, 1,082,000, 647,000 and 325,000 shares of outstanding common stock, respectively, were subject to the Company's right of repurchase at weighted average purchase prices of $0.17, $0.24, and $0.27, respectively. No options were exercisable as of December 31, 1997 and 17,000 were exercisable as of December 31, 1998. ProForma Stock Compensation The Company has adopted the disclosure-only provisions of SFAS No. 123. Accordingly, no compensation cost has been recognized for the Company's stock option plan. Had compensation cost been determined based on the fair value at the grant date for the awards in 1997 and 1998 consistent with the provisions of SFAS No. 123, the Company's net income (loss) for 1997 and 1998, respectively, would have been as follows (in thousands):
1997 1998 ------- ----- Net income (loss)--as reported............................. $(2,229) $ 703 Net income (loss)--pro forma............................... $(2,238) $ 618 Net income (loss) per share--basic as reported............. $ (0.78) $0.21 Net income (loss) per share--basic pro forma............... $ (0.79) $0.19 Net income (loss) per share--diluted as reported........... $ (0.78) $0.05 Net income (loss) per share--diluted pro forma............. $ (0.79) $0.04
Such pro forma disclosures may not be representative of future compensation cost because options vest over several years and additional grants are made each year. The weighted-average grant date fair value of stock options granted was, $2.13 and $6.96 common stock option for 1997 and 1998, respectively. F-16 LATITUDE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In accordance with the provisions of SFAS 123, the fair value of each stock option is estimated using the following assumptions for option grants during 1997 and 1998; dividend yield of 0%, volatility of 0%, risk-free interest rates of between 4.50% to 7.20% at the date of grant and an expected term of five years. During 1997 and 1998, stock purchase rights for 18,000 and 23,000 shares of the Company's common stock, with weighted-average exercise prices of $0.60 and $1.19 per share and weighted-average fair values of $1.66 and $3.85 per share, were granted with exercise prices below the estimated market value at the date of grant. During 1997 and 1998, options to purchase 47,000 and 877,000 shares of the Company's common stock, with weighted-average exercise prices of $0.62 and $3.48 per share and weighted-average fair values of $2.10 and $6.19 per share, were granted with exercise prices below the estimated market value at the date of grant. The following table summarizes information about stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable --------------------------------- --------------------- Weighted- Average Weighted- Weighted- Remaining Average Average Exercise Number Contractual Exercise Number Exercise Price Outstanding Life Price Exercisable Price ---------- ----------- ----------- --------- ----------- --------- $0.27-0.40 66,000 8.95 $0.39 17,000 $0.30 $1.00-1.40 401,000 9.09 1.02 -- -- $1.83-2.80 316,000 9.37 2.07 -- -- $3.27-3.67 569,000 9.86 3.40 -- -- ---------- --------- ---- ----- ------ ----- $0.27-3.67 1,352,000 9.47 $2.23 17,000 $0.30 ========== ========= ==== ===== ====== =====
NOTE 8--INCOME TAXES: The provision for income taxes consists of the following:
1996 1997 1998 ---- ---- ---- (in thousands) Current: Federal, net of benefit of net operating loss carryforwards of $246,000 in 1998...................... $-- $-- $17 State, net of benefit of net operating loss carryforwards of $23,000 in 1998....................... -- -- 17 ---- ---- --- $-- $-- $34 ==== ==== ===
In 1998, income before provision for income taxes consisted of $1,420,000 of income from U.S. operations and $384,000 of loss from foreign operations. In 1997, loss before provision for income taxes consisted of $1,816,000 of loss from U.S. operations and $413,000 of loss from foreign operations. In 1996, loss before provision for income tax consisted of $4,252,000 of loss from U.S. operations. F-17 LATITUDE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company's effective tax rate differs from the statutory federal income tax rate as follows:
1996 1997 1998 ----- ----- ----- Statutory federal income tax (benefit) rate....... (34.0)% (34.0)% 34.0 % State taxes net of federal benefits................. -- -- 4.0 Net operating losses not benefited................ 34.0 34.0 -- Benefit of net operating loss carryforwards....... -- -- (39.0) Alternative minimum tax... -- -- 5.0 Other..................... -- -- 1.0 ----- ----- ----- Effective tax rate...... 0.0% 0.0% 5.0% ===== ===== =====
The significant components of the net deferred tax asset are as follows:
December 31, ---------------- 1997 1998 ------- ------- (in thousands) Net operating loss carryforwards......................... $ 2,702 $ 2,728 Research and development credit.......................... 817 781 Property and equipment................................... 243 279 Capitalized research and development..................... 2,116 1,366 Other.................................................... 419 806 ------- ------- 6,297 5,960 Less valuation allowance................................. (6,297) (5,960) ------- ------- Net deferred tax asset................................... $ -- $ -- ======= =======
The valuation allowance increased by $890,000 in 1997 and decreased by $447,000 in 1998. The Company has placed a valuation allowance against its deferred tax assets due to the uncertainty surrounding the realization of such assets. Management evaluates on a quarterly basis the recoverability of the deferred tax asset and the level of the valuation allowance. At such time as it is determined that it is more likely than not that the deferred tax assets are realizable, the valuation allowances will be reduced. At December 31, 1998, the Company had federal and state net operating loss carryforwards of approximately $6,681,000 and $3,632,000, respectively, available to offset future regular and alternative minimum taxable income. The Company's federal and state net operating loss carryforwards expire in 2000 through 2012, if not utilized. At December 31, 1998, the Company had federal and state research and development and other credits of approximately $524,000 and $390,000, respectively. The research and development credit carryforwards expire in 2010 through 2018, if not utilized. The Tax Reform Act of 1986 limits the use of net operating loss and tax credit carryforwards in certain situations where changes occur in the stock ownership of a company. If the Company should have an ownership change, as defined, utilization of the carryforwards could be restricted. NOTE 9--EMPLOYEE BENEFIT PLANS: The Company sponsors the Latitude Communications Salary Savings Plan (the "Plan") which qualifies under Section 401(k) of the Internal Revenue Code. All employees meeting minimum age requirements are eligible to enroll in the Plan upon initiating employment. Currently, the Company is not offering an employer contribution. F-18 LATITUDE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 11--SIGNIFICANT CUSTOMER AND GEOGRAPHIC INFORMATION: The Company has adopted the Financial Accounting Standards Board's Statements of Financial Accounting Standards No. 131, or SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," effective for fiscal years beginning after December 31, 1997. SFAS 131 supersedes Statement of Financial Accounting Standards No. 14 or SFAS 14, "Financial Reporting for Segments of a Business Enterprise." SFAS 131 changes current practice under SFAS 14 by establishing a new framework on which to base segment reporting and also requires interim reporting of segment information. Management uses one measurement of profitability for its business. The Company markets its products and related services to customers in many industries in the United States, Europe and Asia. Revenue and long-lived-asset information by geographic area as of and for the year ended:
Long-Lived Revenues Assets -------- ---------- (in thousands) December 31, 1996: United States........................................ $ 6,046 $ 955 International........................................ -- -- ------- ------ Total.............................................. $ 6,046 $ 955 ======= ====== December 31, 1997: United States........................................ $12,493 $ 896 International........................................ 439 37 ------- ------ Total.............................................. $12,932 $ 933 ======= ====== December 31, 1998: United States........................................ $19,549 $ 979 International........................................ 1,502 38 ------- ------ Total.............................................. $21,051 $1,017 ======= ======
In 1997 and 1998, no customer accounted for more than 10% of total revenue. In 1996, one customer accounted for 12% of total revenue or $726,000. NOTE 12--UNAUDITED PRO FORMA NET INCOME (LOSS) PER SHARE AND PRO FORMA STOCKHOLDERS' EQUITY (DEFICIT): Pro forma basic net income per share has been computed as described in Note 2 and also gives effect to common equivalent shares from preferred stock that will automatically convert upon the closing of the Company's initial public offering (using the as-if-converted method). F-19 LATITUDE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) A reconciliation of the numerator and denominator used in the calculation of pro forma basic and diluted net income per share follow (in thousands except per share data):
Year Ended December 31, 1998 ------------ Pro forma net income per share, basic and diluted: Net income................................................ $ 703 ------ Shares used in computing net income per share, basic...... 3,279 Adjustment to reflect the effect of the assumed conversion of convertible preferred stock ......................... 11,836 ------ Shares used in computing pro forma net income per share, basic.................................................... 15,115 ------ Pro forma net income per share, basic..................... $ 0.05 ------ Shares used in computing net income per share, diluted.... 16,635 Adjustment to reflect the effect of the assumed conversion of convertible preferred stock ......................... -- ------ Shares used in computing pro forma net income per share, diluted.................................................. 16,635 ------ Pro forma net income per share, diluted................... $ 0.04 ======
If the offering contemplated by this Prospectus is consummated, all of the convertible preferred stock outstanding, as of the closing date will automatically be converted into an aggregate of approximately 11,836,000 shares of common stock based on the shares of convertible preferred stock outstanding at December 31, 1998. Unaudited pro forma stockholders' equity at December 31, 1998, as adjusted for the conversion of preferred stock, is disclosed on the balance sheet. NOTE 12--SUBSEQUENT EVENTS: In February 1999, the Company's Board of Directors, subject to shareholder approval, authorized the outstanding shares of the predecessor California Corporation's common stock and all classes of its preferred stock to be converted automatically into shares of the Delaware Corporation's common stock and its preferred stock on a three-for-two basis. All share and per share amounts in the consolidated financial statements have been restated to reflect the stock split which will be effected upon re-incorporation of the Company in Delaware. In addition, the Board of Directors, subject to stockholder approval, authorized an increase in the authorized common stock to 75,000,000 shares, par value $0.001, and 5,000,000 shares of preferred stock, par value $0.001. In addition, in February 1999, the Company's Board of Directors, subject to shareholder approval, adopted the 1999 Stock Option Plan (the "1999 Plan"), the 1999 Directors' Stock Option Plan (the "Directors Plan") and the 1999 Employee Stock Purchase Plan (the "Purchase Plan"). The 1999 Plan provides for the granting to employees, including officers and directors, of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") and for the granting to employees and consultants (including nonemployee directors) of nonstatutory stock options. If not terminated earlier, the 1999 Plan will terminate in February 2009. A total of 2,700,000 shares of common stock has been reserved for issuance under the 1999 Plan, all of which remain available for future option grants. F-20 LATITUDE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Directors' Plan provides that each person who is or becomes a nonemployee director of Latitude will be granted a nonstatutory stock option to purchase 20,000 shares of common stock (the "First Option") on the later of the date on which the optionee first becomes a nonemployee director of Latitude or the date of the closing of this offering. Thereafter, on the date of the Company's Annual Stockholders Meeting each year, each nonemployee director will be granted an additional option to purchase 5,000 shares of common stock (a "Subsequent Option") if, on such date, he or she has served on the Company's Board of Directors for at least six months. A total of 250,000 shares of common stock has been reserved for issuance under the Directors' Plan, all of which remain available for future grants. The Purchase Plan permits eligible employees to purchase common stock through payroll deductions, which may not exceed 15% of an employee's compensation, at a price equal to the lower of 85% of the fair market value of the Company's common stock at the beginning or end of the offering period. A total of 500,000 shares of common stock has been reserved for issuance under the Purchase Plan. F-21 [LOGO] PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by Latitude in connection with the sale of common stock being registered. All amounts are estimates except the SEC registration fee and the NASD filing fee and the Nasdaq National Market listing fee.
Amount to be Paid ---------- SEC registration fee................................................. $11,510 NASD filing fee...................................................... 4,640 Nasdaq National Market listing fee................................... * Printing and engraving expenses...................................... * Legal fees and expenses.............................................. * Accounting fees and expenses......................................... * Blue Sky qualification fees and expenses............................. 2,000 Transfer Agent and Registrar fees.................................... 15,000 Miscellaneous fees and expenses...................................... * Total.............................................................. *
- -------- * To be filed by amendment Item 14. Indemnification of Directors and Officers Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation's Board of Directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Act"). The Registrant's Amended and Restated Certificate of Incorporation provides for indemnification of its directors and officers to the maximum extent permitted by the Delaware General Corporation Law and the Registrant's Bylaws provides for indemnification of its directors, officers, employees and other agents to the maximum extent permitted by the Delaware General Corporation Law. In addition, the Registrant has entered into Indemnification Agreements with its directors and officers containing provisions which are in some respects broader than the specific indemnification provisions contained in the Delaware General Corporation Law. The indemnification agreements may require the Company, among other things, to indemnify its directors against certain liabilities that may arise by reason of their status or service as directors (other than liabilities arising from willful misconduct of culpable nature), to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified, and to obtain directors' insurance if available on reasonable terms. Reference is also made to Section 7 of the Underwriting Agreement contained in Exhibit 1.1 hereto, indemnifying officers and directors of the Company against certain liabilities. Item 15. Recent Sales of Unregistered Securities (a) Since January 1, 1996, the Registrant has issued and sold (without payment of any selling commission to any person) the following unregistered securities: (1) Prior to the completion of this offering, the Registrant intends to effect a three-for-two stock split of its outstanding common stock in which every two outstanding shares of common stock will be split into three shares of common stock. (2) In March 1996, the Registrant issued and sold shares of Series C Preferred Stock convertible into an aggregate of 3,043,500 shares of common stock to a total of 11 investors for an aggregate purchase price of $8,116,000. II-1 (3) As of December 31, 1998, 1,968,636 shares of common stock had been issued upon exercise of options or pursuant to restricted stock purchase agreements and 1,352,496 shares of common stock were issuable upon exercise of outstanding options under the Registrant's 1993 Stock Plan. (b) There were no underwritten offerings employed in connection with any of the transactions set forth in Item 15(a). The issuance described in Item 15(a)(1) was or will be exempt from registration under Section 2(3) of the Securities Act on the basis that such transaction did not involve a "sale" of securities. The issuances described in Items 15(a)(2) were deemed to be exempt from registration under the Securities Act in reliance upon Section 4(2) thereof as transactions by an issuer not involving any public offering. The issuances described in Items 15(a)(3) were deemed to be exempt from registration under the Securities Act in reliance upon Rule 701 promulgated thereunder in that they were offered and sold either pursuant to written compensatory benefit plans or pursuant to a written contract relating to compensation, as provided by Rule 701. In addition, such issuances were deemed to be exempt from registration under Section 4(2) of the Securities Act as transactions by an issuer not involving any public offering. The recipients of securities in each such transaction represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends where affixed to the securities issued in such transactions. All recipients had adequate access, through their relationships with the Company, to information about the Registrant. Item 16. Exhibits and Financial Statement Schedules (a) Exhibits 1.1 Form of Underwriting Agreement. 3.1 Certificate of Incorporation of the Registrant. 3.2 Form of Amended and Restated Certificate of Incorporation of the Registrant, to be filed and effective upon completion of this offering. 3.3 Bylaws of the Registrant. 4.1* Form of the Registrant's common stock certificate. 5.1* Opinion of Venture Law Group, a Professional Corporation. 10.1 Form of Indemnification Agreement. 10.2* 1993 Stock Plan, as amended, and forms of stock option agreement and restricted stock purchase agreement. 10.3* 1999 Stock Plan and forms of stock option agreement and restricted stock purchase agreement. 10.4* 1999 Employee Stock Purchase Plan and form of subscription agreement. 10.5* 1999 Directors' Stock Option Plan and form of stock option agreement. 10.6 Form of Warrant To Purchase Series B Preferred Stock. 10.7 Amended and Restated Registration Rights Agreement dated March 26, 1996. 10.8 Lease Agreement dated July 31, 1995 between the Registrant and the Arrillaga Family Trust and Richard T. Peery Separate Property Trust for offices at 2121 Tasman Drive, Santa Clara, CA. 10.9 Senior Loan and Security Agreement dated September 15, 1994 between the Registrant and Phoenix Leasing Incorporated and amendments thereto. 10.10 Master Equipment Lease dated July 2, 1998 between the Registrant and Norstan Financial Services, Inc. 10.11 1999 Executive Incentive Plan between the Registrant and certain executive officers of the Registrant. 10.12 1999 Executive Bonus Program 21 Subsidiaries 23.1 Consent of Independent Accountants. 23.2* Consent of Counsel (included in Exhibit 5.1). 24.1 Power of Attorney (see page II-4). 27.1 Financial Data Schedule.
- -------- * To be supplied by amendment. II-2 (b) Financial Statement Schedules Item 17. Undertakings The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1), or (4), or 497(h) under the Act shall be deemed to be a part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and this offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned Registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Santa Clara, State of California, on February 25, 1999. Latitude Communications, Inc. /s/ Emil C.W. Wang By: _________________________________ Emil C.W. Wang, President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Emil C.W. Wang and Rick M. McConnell, and each one of them, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any and all amendments to this Registration Statement (including post-effective amendments), 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 each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. This Power of Attorney may be signed in several counterparts. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement on Form S-1 has been signed by the following persons in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- /s/ Emil C.W. Wang President, Chief Executive February 25, 1999 ______________________________________ Officer and Director (Emil C.W. Wang) (Principal Executive Officer) /s/ Rick M. McConnell Vice President of Finance February 25, 1999 ______________________________________ and Administration and (Rick M. McConnell) Chief Financial Officer (Principal Financial and Accounting Officer) /s/ Thomas H. Bredt Director February 25, 1999 ______________________________________ (Thomas H. Bredt) /s/ Robert J. Finocchio, Jr. Director February 25, 1999 ______________________________________ (Robert J. Finocchio, Jr.) /s/ F. Gibson Myers, Jr. Director February 25, 1999 ______________________________________ (F. Gibson Myers, Jr.) /s/ James L. Patterson Director February 25, 1999 ______________________________________ (James L. Patterson)
II-4 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders Latitude Communications, Inc.: In connection with our audits of the consolidated financial statements of Latitude Communications, Inc. and subsidiary as of December 31, 1997 and 1998, and for each of the three years in the period ended December 31, 1998, which financial statements are included in the Prospectus, we have also audited the financial statement schedule listed in Item 16 herein. In our opinion, the financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. /s/ PricewaterhouseCoopers LLP San Jose, California February 24, 1999 S-1 Schedule II Latitude Communications, Inc. Valuation and Qualifying Accounts
Additions Balance at (Reductions) Balance at Beginning to Costs and End of of Period Expenses Write-Offs Period ---------- ------------ ---------- ---------- (In thousands) Allowance for doubtful accounts: Year ended December 31, 1996...................... $ 32 $ 59 $-- $ 91 Year ended December 31, 1997...................... 91 56 -- 147 Year ended December 31, 1998...................... 147 88 -- 235 Allowance for excess and obsolete inventory: Year ended December 31, 1996...................... $ 25 $ 55 $-- $ 80 Year ended December 31, 1997...................... 80 66 -- 146 Year ended December 31, 1998...................... 146 149 -- 295 Deferred tax asset valuation allowance: Year ended December 31, 1996...................... $3,607 $1,800 $-- $5,407 Year ended December 31, 1997...................... 5,407 890 -- 6,297 Year ended December 31, 1998...................... 6,297 (447) -- 5,960 Allowance for returns: Year ended December 31, 1996...................... $ 86 $ 127 $ $ 213 Year ended December 31, 1997...................... 213 122 (139) 196 Year ended December 31, 1998...................... 196 515 (386) 325
S-2 EXHIBIT INDEX 1.1 Form of Underwriting Agreement. 3.1 Certificate of Incorporation of the Registrant. 3.2 Form of Amended and Restated Certificate of Incorporation of the Registrant, to be filed and effective upon completion of this offering. 3.3 Form of Bylaws of the Registrant. 4.1* Form of the Registrant's common stock certificate. 5.1* Opinion of Venture Law Group, a Professional Corporation. 10.1 Form of Indemnification Agreement. 10.2* 1993 Stock Plan, as amended, and forms of stock option agreement and restricted stock purchase agreement. 10.3* 1999 Stock Plan and forms of stock option agreement and restricted stock purchase agreement. 10.4* 1999 Employee Stock Purchase Plan and form of subscription agreement. 10.5* 1999 Directors' Stock Option Plan and form of stock option agreement. 10.6 Form of Warrant To Purchase Series B Preferred Stock. 10.7 Amended and Restated Registration Rights Agreement dated March 26, 1996. 10.8 Lease Agreement dated July 31, 1995 between the Registrant and the Arrillaga Family Trust and Richard T. Peery Separate Property Trust for offices at 2121 Tasman Drive, Santa Clara, CA. 10.9 Senior Loan and Security Agreement dated September 15, 1994 between the Registrant and Phoenix Leasing Incorporated and amendments thereto. 10.10 Master Equipment Lease dated July 2, 1998 between the Registrant and Norstan Financial Services, Inc. 10.11 1999 Executive Incentive Plan between the Registrant and certain executive officers of the Registrant. 10.12 1999 Executive Bonus Program 21 Subsidiaries 23.1 Consent of Independent Accountants. 23.2* Consent of Counsel (included in Exhibit 5.1). 24.1 Power of Attorney (see page II-4). 27.1 Financial Data Schedule.
- -------- * To be supplied by amendment. EX-1.1 2 UNDERWRITING AGREEMENT Exhibit 1.1 DRAFT [Insert Principal Amount or Number of Shares] LATITUDE COMMUNICATIONS, INC. Common Stock UNDERWRITING AGREEMENT ---------------------- February __, 1999 Credit Suisse First Boston Corporation Hambrecht & Quist LLC Dain Rauscher Wessels, As Representatives of the Several Underwriters, c/o Credit Suisse First Boston Corporation, Eleven Madison Avenue, New York, N.Y. 10010-3629 Dear Sirs: 1. Introductory. Latitude Communications, Inc., a Delaware corporation ("Company"), proposes to issue and sell shares ("Firm Securities") of its Common Stock ("Securities") and also proposes to issue and sell to the Underwriters, at the option of the Underwriters, an aggregate of not more than additional shares ("Optional Securities") of its Securities as set forth below. The Firm Securities and the Optional Securities are herein collectively called the "Offered Securities". The Company hereby agrees with the several Underwriters named in Schedule A hereto ("Underwriters") as follows: 2. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with, the several Underwriters that: (a) A registration statement (No. 333- ) relating to the Offered Securities, including a form of prospectus, has been filed with the Securities and Exchange Commission ("Commission") and either (i) has been declared effective under the Securities Act of 1933 ("Act") and is not proposed to be amended or (ii) is proposed to be amended by amendment or post-effective amendment. If such registration statement ("initial registration statement") has been declared effective, either (i) an additional registration statement ("additional registration statement") relating to the Offered Securities may have been filed with the Commission pursuant to Rule 462(b) ("Rule 462(b)") under the Act and, if so filed, has become effective upon filing pursuant to such Rule and the Offered Securities all have been duly registered under the Act pursuant to the initial registration statement and, if applicable, the additional registration statement or (ii) such an additional registration statement is proposed to be filed with the Commission pursuant to Rule 462(b) and will become effective upon filing pursuant to such Rule and upon such filing the Offered Securities will all have been duly registered under the Act pursuant to the initial registration statement and such additional registration statement. If the Company does not propose to amend the initial registration statement or if an additional registration statement has been filed and the Company does not propose to amend it, and if any post-effective amendment to either such registration statement has been filed with the Commission prior to the execution and delivery of this Agreement, the most recent amendment (if any) to each such registration statement has been declared effective by the Commission or has become effective upon filing pursuant to Rule 462(c) ("Rule 462(c)") under the Act or, in the case of the additional registration statement, Rule 462(b). For purposes of this Agreement, "Effective Time" with respect to the initial registration statement or, if filed prior to the execution and delivery of this Agreement, the additional registration statement means (i) if the Company has advised the Representatives that it does not propose to amend such registration statement, the date and time as of which such registration statement, or the most recent post-effective amendment thereto (if any) filed prior to the execution and delivery of this Agreement, was declared effective by the Commission or has become effective upon filing pursuant to Rule 462(c), or (ii) if the Company has advised the Representatives that it proposes to file an amendment or post-effective amendment to such registration statement, the date and time as of which such registration statement, as amended by such amendment or post-effective amendment, as the case may be, is declared effective by the Commission. If an additional registration statement has not been filed prior to the execution and delivery of this Agreement but the Company has advised the Representatives that it proposes to file one, "Effective Time" with respect to such additional registration statement means the date and time as of which such registration statement is filed and becomes effective pursuant to Rule 462(b). "Effective Date" with respect to the initial registration statement or the additional registration statement (if any) means the date of the Effective Time thereof. The initial registration statement, as amended at its Effective Time, including all information contained in the additional registration statement (if any) and deemed to be a part of the initial registration statement as of the Effective Time of the additional registration statement pursuant to the General Instructions of the Form on which it is filed and including all information (if any) deemed to be a part of the initial registration statement as of its Effective Time pursuant to Rule 430A(b) ("Rule 430A(b)") under the Act, is hereinafter referred to as the "Initial Registration Statement". The additional registration statement, as amended at its Effective Time, including the contents of the initial registration statement incorporated by reference therein and including all information (if any) deemed to be a part of the additional registration statement as of its Effective Time pursuant to Rule 430A(b), is hereinafter referred to as the "Additional Registration Statement". The Initial Registration Statement and the Additional Registration Statement are herein referred to collectively as the "Registration Statements" and individually as a "Registration Statement". The form of prospectus relating to the Offered Securities, as first filed with the Commission pursuant to and in accordance with Rule 424(b) ("Rule 424(b)") under the Act or (if no such filing is required) as included in a Registration Statement, is hereinafter referred to as the "Prospectus". No document has been or will be prepared or distributed in reliance on Rule 434 under the Act. (b) If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement: (i) on the Effective Date of the Initial Registration Statement, the Initial Registration Statement conformed in all respects to the requirements of the Act and the rules and regulations of the Commission ("Rules and Regulations") and did not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) on the Effective Date of the Additional Registration Statement (if any), each Registration Statement conformed, or will conform, in all respects to the requirements of the Act and the Rules and Regulations and did not include, or will not include, any untrue statement of a material fact and did not omit, or will not omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading and (iii) on the date of this Agreement, the Initial Registration Statement and, if the Effective Time of the Additional Registration Statement is prior to the execution and delivery of this Agreement, the Additional Registration Statement each conforms, and at the time of filing of the Prospectus pursuant to Rule 424(b) or (if no such filing is required) at the Effective Date of the Additional Registration Statement in which the Prospectus is included, each Registration Statement and the Prospectus will conform, in all respects to the requirements of the Act and the Rules and Regulations, and neither of such documents includes, or will include, any untrue statement of a material fact or omits, or will omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. If the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement: on the Effective Date of the Initial Registration Statement, the Initial Registration Statement and the Prospectus will conform in all respects to the requirements of the Act and the Rules and Regulations, neither of such documents will include any untrue statement of a material fact or will omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and no Additional Registration Statement has been or will be filed. The two preceding sentences do not apply to statements in or omissions from a Registration Statement or the Prospectus based upon written information furnished to the Company by any Underwriter through the Representatives specifically for use therein, it being understood and agreed that the only such information is that described as such in Section 7(b) hereof. (c) The Company has been duly incorporated and is an existing corporation in good standing under the laws of the State of Delaware, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus; and the Company is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification and the failure to be so qualified would have a material adverse effect on the Company and its subsidiaries, taken as a whole. (d) Each subsidiary of the Company has been duly incorporated and is an existing corporation in good standing under the laws of the jurisdiction of its incorporation, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus; and each subsidiary of the Company is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification and the failure to be so qualified would have a material adverse effect on the Company and its subsidiaries, taken as a whole; all of the issued and outstanding capital stock of each subsidiary of the Company has been duly authorized and validly issued and is fully paid and nonassessable; and the capital stock of each subsidiary owned by the Company, directly or through subsidiaries, is owned free from liens, encumbrances and defects. (e) The Offered Securities and all other outstanding shares of capital stock of the Company have been duly authorized; all outstanding shares of capital stock of the Company are, and, when the Offered Securities have been delivered and paid for in accordance with this Agreement on each Closing Date (as defined below), such Offered Securities will have been, validly issued, fully paid and nonassessable and will conform to the description thereof contained in the Prospectus; and the stockholders of the Company have no preemptive rights with respect to the Securities. (f) Except as disclosed in the Prospectus, there are no contracts, agreements or understandings between the Company and any person that would give rise to a valid claim against the Company or any Underwriter for a brokerage commission, finder's fee or other like payment in connection with this offering. (g) There are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to a Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Act which have not been validly waived. (h) The Offered Securities have been approved for listing on the Nasdaq Stock Market's National Market, subject to notice of issuance. (i) No consent, approval, authorization, or order of, or filing with, any governmental agency or body or any court is required to be made or obtained by the Company for the consummation of the transactions contemplated by this Agreement in connection with the issuance and sale of the Offered Securities by the Company, except such as have been obtained and made under the Act and such as may be required under state securities laws. (j) The execution, delivery and performance of this Agreement, and the issuance and sale of the Offered Securities will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any statute, any rule, regulation or order of any governmental agency or body or any court, domestic or foreign, having jurisdiction over the Company or any subsidiary of the Company or any of their properties, or any agreement or instrument to which the Company or any such subsidiary is a party or by which the Company or any such subsidiary is bound or to which any of the properties of the Company or any such subsidiary is subject, or the charter or by-laws of the Company or any such subsidiary, and the Company has full power and authority to authorize, issue and sell the Offered Securities as contemplated by this Agreement. (k) This Agreement has been duly authorized, executed and delivered by the Company. (l) Except as disclosed in the Prospectus, the Company and its subsidiaries have good and marketable title to all real properties and all other properties and assets owned by them, in each case free from liens, encumbrances and defects that would materially affect the value thereof or materially interfere with the use made or to be made thereof by them; and except as disclosed in the Prospectus, the Company and its subsidiaries hold any leased real or personal property under valid and enforceable leases with no exceptions that would materially interfere with the use made or to be made thereof by them. (m) The Company and its subsidiaries possess all material certificates, authorities or permits issued by appropriate governmental agencies or bodies necessary to conduct the business now operated by them and have not received any notice of proceedings relating to the revocation or modification of any such certificate, authority or permit that, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a material adverse effect on the condition (financial or other), business, properties or results of operations of the Company and its subsidiaries taken as a whole ("Material Adverse Effect"). (n) No labor dispute with the employees of the Company or any subsidiary exists or, to the knowledge of the Company, is imminent that might have a Material Adverse Effect. (o) The Company and its subsidiaries own, possess or can acquire on reasonable terms, adequate trademarks, trade names and other rights to inventions, know-how, patents, copyrights, confidential information and other intellectual property (collectively, "intellectual property rights") necessary to conduct the business now operated by them, or presently employed by them, and have not received any notice of infringement of or conflict with asserted rights of others with respect to any intellectual property rights that, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a Material Adverse Effect. (p) Except as disclosed in the Prospectus, to the Company's knowledge, neither the Company nor any of its subsidiaries is in violation of any statute, any rule, regulation, decision or order of any governmental agency or body or any court, domestic or foreign, relating to the use, disposal or release of hazardous or toxic substances or relating to the protection or restoration of the environment or human exposure to hazardous or toxic substances (collectively, "environmental laws"), owns or operates any real property contaminated with any substance that is subject to any environmental laws, is liable for any off-site disposal or contamination pursuant to any environmental laws, or is subject to any claim relating to any environmental laws, which violation, contamination, liability or claim would individually or in the aggregate have a Material Adverse Effect; and the Company is not aware of any pending investigation which might lead to such a claim. (q) Except as disclosed in the Prospectus, there are no pending actions, suits or proceedings against, or to the Company's knowledge, affecting the Company, any of its subsidiaries or any of their respective properties that, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a Material Adverse Effect, or would materially and adversely affect the ability of the Company to perform its obligations under this Agreement, or which are otherwise material in the context of the sale of the Offered Securities; and no such actions, suits or proceedings are threatened or, to the Company's knowledge, contemplated. (r) The financial statements included in each Registration Statement and the Prospectus present fairly the financial position of the Company and its consolidated subsidiaries as of the dates shown and their results of operations and cash flows for the periods shown, and such financial statements have been prepared in conformity with the generally accepted accounting principles in the United States applied on a consistent basis, and the schedules included in each Registration Statement present fairly the information required to be stated therein. (s) Except as disclosed in the Prospectus, since the date of the latest audited financial statements included in the Prospectus there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or other), business, properties or results of operations of the Company and its subsidiaries taken as a whole, and, except as disclosed in or contemplated by the Prospectus, there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock. (t) The Company is not and, after giving effect to the offering and sale of the Offered Securities and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" as defined in the Investment Company Act of 1940. 3. Purchase, Sale and Delivery of Offered Securities. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to the Underwriters, and the Underwriters agree, severally and not jointly, to purchase from the Company, at a purchase price of $ per share, the respective numbers of shares of Firm Securities set forth opposite the names of the Underwriters in Schedule A hereto. The Company will deliver the Firm Securities to the Representatives for the accounts of the Underwriters, against payment of the purchase price in Federal (same day) funds by official bank check or checks or wire transfer to an account at a bank acceptable to Credit Suisse First Boston Corporation ("CSFBC") drawn to the order of at the office of Venture Law Group at A.M., New York time, on , or at such other time not later than seven full business days thereafter as CSFBC and the Company determine, such time being herein referred to as the "First Closing Date". For purposes of Rule 15c6-1 under the Securities Exchange Act of 1934, the First Closing Date (if later than the otherwise applicable settlement date) shall be the settlement date for payment of funds and delivery of securities for all the Offered Securities sold pursuant to the offering. The certificates for the Firm Securities so to be delivered will be in definitive form, in such denominations and registered in such names as CSFBC requests and will be made available for checking and packaging at the above office of Venture Law Group at least 24 hours prior to the First Closing Date. In addition, upon written notice from CSFBC given to the Company from time to time not more than 30 days subsequent to the date of the Prospectus, the Underwriters may purchase all or less than all of the Optional Securities at the purchase price per Security to be paid for the Firm Securities. The Company agrees to sell to the Underwriters the number of shares of Optional Securities specified in such notice and the Underwriters agree, severally and not jointly, to purchase such Optional Securities. Such Optional Securities shall be purchased for the account of each Underwriter in the same proportion as the number of shares of Firm Securities set forth opposite such Underwriter's name bears to the total number of shares of Firm Securities (subject to adjustment by CSFBC to eliminate fractions) and may be purchased by the Underwriters only for the purpose of covering over-allotments made in connection with the sale of the Firm Securities. No Optional Securities shall be sold or delivered unless the Firm Securities previously have been, or simultaneously are, sold and delivered. The right to purchase the Optional Securities or any portion thereof may be exercised from time to time and to the extent not previously exercised may be surrendered and terminated at any time upon notice by CSFBC to the Company. Each time for the delivery of and payment for the Optional Securities, being herein referred to as an "Optional Closing Date", which may be the First Closing Date (the First Closing Date and each Optional Closing Date, if any, being sometimes referred to as a "Closing Date"), shall be determined by CSFBC but shall be not later than five full business days after written notice of election to purchase Optional Securities is given. The Company will deliver the Optional Securities being purchased on each Optional Closing Date to the Representatives for the accounts of the several Underwriters, against payment of the purchase price therefor in Federal (same day) funds by official bank check or checks or wire transfer to an account at a bank acceptable to CSFBC drawn to the order of , at the above office of Venture Law Group. The certificates for the Optional Securities being purchased on each Optional Closing Date will be in definitive form, in such denominations and registered in such names as CSFBC requests upon reasonable notice prior to such Optional Closing Date and will be made available for checking and packaging at the above office of Venture Law Group at a reasonable time in advance of such Optional Closing Date. 4. Offering by Underwriters. It is understood that the several Underwriters propose to offer the Offered Securities for sale to the public as set forth in the Prospectus. 5. Certain Agreements of the Company. The Company agrees with the several Underwriters that: (a) If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, the Company will file the Prospectus with the Commission pursuant to and in accordance with subparagraph (1) or (2) (as consented to by CSFBC) of Rule 424(b) not later than the second business day following the execution and delivery of this Agreement) (or, if applicable and if consented to by CSFBC, subparagraph (4) or (5)). The Company will advise CSFBC promptly of any such filing pursuant to Rule 424(b). If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement and an additional registration statement is necessary to register a portion of the Offered Securities under the Act but the Effective Time thereof has not occurred as of such execution and delivery, the Company will file the additional registration statement or, if filed, will file a post-effective amendment thereto with the Commission pursuant to and in accordance with Rule 462(b) on or prior to 10:00 P.M., New York time, on the date of this Agreement or, if earlier, on or prior to the time the Prospectus is printed and distributed to any Underwriter, or will make such filing at such later date as shall have been consented to by CSFBC. (b) The Company will advise CSFBC promptly of any proposal to amend or supplement the initial or any additional registration statement as filed or the related prospectus or the Initial Registration Statement, the Additional Registration Statement (if any) or the Prospectus and will not effect such amendment or supplementation without CSFBC's consent (which consent shall not be unreasonably withheld); and the Company will also advise CSFBC promptly of the effectiveness of each Registration Statement (if its Effective Time is subsequent to the execution and delivery of this Agreement) and of any amendment or supplementation of a Registration Statement or the Prospectus and of the institution by the Commission of any stop order proceedings in respect of a Registration Statement and will use its best efforts to prevent the issuance of any such stop order and to obtain as soon as possible its lifting, if issued. (c) If, at any time when a prospectus relating to the Offered Securities is required to be delivered under the Act in connection with sales by any Underwriter or dealer, any event occurs as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend the Prospectus to comply with the Act, the Company will promptly notify CSFBC of such event and will promptly prepare and file with the Commission, at its own expense, an amendment or supplement which will correct such statement or omission or an amendment which will effect such compliance. Neither CSFBC's consent to, nor the Underwriters' delivery of, any such amendment or supplement shall constitute a waiver of any of the conditions set forth in Section 6. (d) As soon as practicable, but not later than the Availability Date (as defined below), the Company will make generally available to its securityholders an earnings statement covering a period of at least 12 months beginning after the Effective Date of the Initial Registration Statement (or, if later, the Effective Date of the Additional Registration Statement) which will satisfy the provisions of Section 11(a) of the Act. For the purpose of the preceding sentence, "Availability Date" means the 45th day after the end of the fourth fiscal quarter following the fiscal quarter that includes such Effective Date, except that, if such fourth fiscal quarter is the last quarter of the Company's fiscal year, "Availability Date" means the 90th day after the end of such fourth fiscal quarter. (e) The Company will furnish to the Representatives copies of each Registration Statement (four of which will be signed and will include all exhibits), each related preliminary prospectus, and, so long as a prospectus relating to the Offered Securities is required to be delivered under the Act in connection with sales by any Underwriter or dealer, the Prospectus and all amendments and supplements to such documents, in each case in such quantities as CSFBC requests. The Prospectus shall be so furnished on or prior to 3:00 P.M., New York time, on the business day following the later of the execution and delivery of this Agreement or the Effective Time of the Initial Registration Statement. All other documents shall be so furnished as soon as available. The Company will pay the expenses of printing and distributing to the Underwriters all such documents. (f) The Company will arrange for the qualification of the Offered Securities for sale under the laws of such jurisdictions as CSFBC designates and will continue such qualifications in effect so long as required for the distribution. (g) During the period of five years hereafter, the Company will furnish to the Representatives and, upon request, to each of the other Underwriters, as soon as practicable after the end of each fiscal year, a copy of its annual report to stockholders for such year; and the Company will furnish to the Representatives (i) as soon as available, a copy of each report and any definitive proxy statement of the Company filed with the Commission under the Securities Exchange Act of 1934 or mailed to stockholders, and (ii) from time to time, such other information concerning the Company as CSFBC may reasonably request. (h) The Company will pay all expenses incident to the performance of its obligations under this Agreement, for any filing fees and other expenses (including fees and disbursements of counsel) incurred in connection with qualification of the Offered Securities for sale for the filing fee incident to, and the reasonable fees and disbursements of counsel to the Underwriters in connection with, the review by the National Association of Securities Dealers, Inc. of the Offered Securities, for any travel expenses of the Company's officers and employees and any other expenses of the Company in connection with attending or hosting meetings with prospective purchasers of the Offered Securities and for expenses incurred in distributing preliminary prospectuses and the Prospectus (including any amendments and supplements thereto) to the Underwriters. (i) For a period of 180 days after the date of the initial public offering of the Offered Securities, the Company will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Commission a registration statement under the Act relating to, any additional shares of its Securities or securities convertible into or exchangeable or exercisable for any shares of its Securities, or publicly disclose the intention to make any such offer, sale, pledge, disposition or filing, without the prior written consent of CSFBC, except issuances of Securities pursuant to the conversion or exchange of convertible or exchangeable securities or the exercise of warrants or options, in each case outstanding on the date hereof, grants of employee stock options or restricted stock pursuant to the terms of a plan in effect on the date hereof, issuances of Securities pursuant to the exercise of such options. 6. Conditions of the Obligations of the Underwriters. The obligations of the several Underwriters to purchase and pay for the Firm Securities on the First Closing Date and the Optional Securities to be purchased on each Optional Closing Date will be subject to the accuracy of the representations and warranties on the part of the Company herein, to the accuracy of the statements of Company officers made pursuant to the provisions hereof, to the performance by the Company of its obligations hereunder and to the following additional conditions precedent: (a) The Representatives shall have received a letter, dated the date of delivery thereof (which, if the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, shall be on or prior to the date of this Agreement or, if the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement, shall be prior to the filing of the amendment or post-effective amendment to the registration statement to be filed shortly prior to such Effective Time), of PricewaterhouseCoopers LLP confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating to the effect that: (i) in their opinion the financial statements and schedules examined by them and included in the Registration Statements comply as to form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations; (ii) they have performed the procedures specified by the American Institute of Certified Public Accountants for a review of interim financial information as described in Statement of Auditing Standards No. 71, Interim Financial Information, on the unaudited financial statements included in the Registration Statements; (iii) on the basis of the review referred to in clause (ii) above, a reading of the latest available interim financial statements of the Company, inquiries of officials of the Company who have responsibility for financial and accounting matters and other specified procedures, nothing came to their attention that caused them to believe that: (A) the unaudited financial statements and summary of earnings included in the Registration Statements do not comply as to form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations or any material modifications should be made to such unaudited financial statements and summary of earnings for them to be in conformity with generally accepted accounting principles; (B) the unaudited consolidated net sales, net operating income, net income and net income per share amounts for the 3-month periods ended September 30, 1997, December 31, 1997, March 31, 1997, June 30, 1998, September 30, 1998 and December 31, 1998 included in the Prospectus do not agree with the amounts set forth in the unaudited consolidated financial statements for those same periods or were not determined on a basis substantially consistent with that of the corresponding amounts in the audited statements of income; (C) at the date of the latest available balance sheet read by such accountants, or at a subsequent specified date not more than three business days prior to the date of such letter, there was any change in the capital stock or any increase in short-term indebtedness or long-term debt of the Company and its consolidated subsidiaries or, at the date of the latest available balance sheet read by such accountants, there was any decrease in consolidated net current assets or net assets, as compared with amounts shown on the latest balance sheet included in the Prospectus; or (D) for the period from the closing date of the latest income statement included in the Prospectus to the closing date of the latest available income statement read by such accountants there were any decreases, as compared with the corresponding period of the previous year and with the period of corresponding length ended the date of the latest income statement included in the Prospectus, in consolidated net sales, net operating income or the total or per share amounts of consolidated net income, except in all cases set forth in clauses (C) and (D) above for changes, increases or decreases which the Prospectus discloses have occurred or may occur or which are described in such letter; and (iv) they have compared specified dollar amounts (or percentages derived from such dollar amounts) and other financial information contained in the Registration Statements (in each case to the extent that such dollar amounts, percentages and other financial information are derived from the general accounting records of the Company and its subsidiaries subject to the internal controls of the Company's accounting system or are derived directly from such records by analysis or computation) with the results obtained from inquiries, a reading of such general accounting records and other procedures specified in such letter and have found such dollar amounts, percentages and other financial information to be in agreement with such results, except as otherwise specified in such letter. For purposes of this subsection, (i) if the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement, "Registration Statements" shall mean the initial registration statement as proposed to be amended by the amendment or post- effective amendment to be filed shortly prior to its Effective Time, (ii) if the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement but the Effective Time of the Additional Registration is subsequent to such execution and delivery, "Registration Statements" shall mean the Initial Registration Statement and the additional registration statement as proposed to be filed or as proposed to be amended by the post-effective amendment to be filed shortly prior to its Effective Time, and (iii) "Prospectus" shall mean the prospectus included in the Registration Statements. If the Effective Time of the Initial Registration Statement is not prior to the execution and delivery of this Agreement, such Effective Time shall have occurred not later than 10:00 P.M., New York time, on the date of this Agreement or such later date as shall have been consented to by CSFBC. If the Effective Time of the Additional Registration Statement (if any) is not prior to the execution and delivery of this Agreement, such Effective Time shall have occurred not later than 10:00 P.M., New York time, on the date of this Agreement or, if earlier, the time the Prospectus is printed and distributed to any Underwriter, or shall have occurred at such later date as shall have been consented to by CSFBC. If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, the Prospectus shall have been filed with the Commission in accordance with the Rules and Regulations and Section 5(a) of this Agreement. Prior to such Closing Date, no stop order suspending the effectiveness of a Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or, to the knowledge of the Company or the Representatives, shall be contemplated by the Commission. (b) Subsequent to the execution and delivery of this Agreement, there shall not have occurred (i) any change, or any development or event involving a prospective change, in the condition (financial or other), business, properties or results of operations of the Company or its subsidiaries taken as one enterprise which, in the judgment of a majority in interest of the Underwriters including the Representatives, is material and adverse and makes it impractical or inadvisable to proceed with completion of the public offering or the sale of and payment for the Offered Securities; (ii) any downgrading in the rating of any debt securities of the Company by any "nationally recognized statistical rating organization" (as defined for purposes of Rule 436(g) under the Act), or any public announcement that any such organization has under surveillance or review its rating of any debt securities of the Company (other than an announcement with positive implications of a possible upgrading, and no implication of a possible downgrading, of such rating); (iii) any material suspension or material limitation of trading in securities generally on the New York Stock Exchange, or any setting of minimum prices for trading on such exchange, or any suspension of trading of any securities of the Company on any exchange or in the over-the- counter market; (iv) any banking moratorium declared by U.S. Federal authorities; or (v) any outbreak or escalation of major hostilities in which the United States is involved, any declaration of war by Congress or any other substantial national or international calamity or emergency if, in the judgment of a majority in interest of the Underwriters including the Representatives, the effect of any such outbreak, escalation, declaration, calamity or emergency makes it impractical or inadvisable to proceed with completion of the public offering or the sale of and payment for the Offered Securities. (c) The Representatives shall have received an opinion, dated such Closing Date, of Venture Law Group, a Professional Corporation, counsel for the Company, to the effect that: (i) The Company has been duly incorporated and is an existing corporation in good standing under the laws of the State of Delaware, with corporate power and authority to own its properties and conduct its business as described in the Prospectus; and the Company is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification and the failure to be so qualified would have a material adverse effect on the Company and its subsidiaries, taken as a whole; (ii) The Offered Securities delivered on such Closing Date and all other outstanding shares of the Common Stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable and conform to the description thereof contained in the Prospectus; and the stockholders of the Company have no preemptive rights with respect to the Securities; (iii) There are no contracts, agreements or understandings known to such counsel between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Act which have not been validly waived; (iv) The Company is not and, after giving effect to the offering and sale of the Offered Securities and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" as defined in the Investment Company Act of 1940. (v) No consent, approval, authorization or order of, or filing with, any governmental agency or body or any court is required to be made or obtained by the Company for the consummation of the transactions contemplated by this Agreement in connection with the issuance or sale of the Offered Securities by the Company, except such as have been obtained and made under the Act and such as may be required under state securities laws; (vi) The execution, delivery and performance of this Agreement and the issuance and sale of the Offered Securities will not result in a material breach or violation of any of the terms and provisions of, or constitute a default under, any statute, any rule, regulation or order of any governmental agency or body or any court having jurisdiction over the Company or any subsidiary of the Company or any of their properties, or any agreement or instrument known to counsel to which the Company or any such subsidiary is a party or by which the Company or any such subsidiary is bound or to which any of the properties of the Company or any such subsidiary is subject, or the charter or by-laws of the Company or any such subsidiary, and the Company has full power and authority to authorize, issue and sell the Offered Securities as contemplated by this Agreement; (vii) The Initial Registration Statement was declared effective under the Act as of the date and time specified in such opinion, the Additional Registration Statement (if any) was filed and became effective under the Act as of the date and time (if determinable) specified in such opinion, the Prospectus either was filed with the Commission pursuant to the subparagraph of Rule 424(b) specified in such opinion on the date specified therein or was included in the Initial Registration Statement or the Additional Registration Statement (as the case may be), and, to the best of the knowledge of such counsel, no stop order suspending the effectiveness of a Registration Statement or any part thereof has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the Act, and each Registration Statement and the Prospectus, and each amendment or supplement thereto, as of their respective effective or issue dates, complied as to form in all material respects with the requirements of the Act and the Rules and Regulations; such counsel have no reason to believe that any part of a Registration Statement or any amendment thereto, as of its effective date or as of such Closing Date, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus or any amendment or supplement thereto, as of its issue date or as of such Closing Date, contained any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; the descriptions in the Registration Statements and Prospectus of statutes, legal and governmental proceedings and contracts and other documents are accurate in all material respects and fairly present in all material respects the information required to be shown; and such counsel do not know of any legal or governmental proceedings required to be described in a Registration Statement or the Prospectus which are not described as required or of any contracts or documents of a character required to be described in a Registration Statement or the Prospectus or to be filed as exhibits to a Registration Statement which are not described and filed as required; it being understood that such counsel need express no opinion as to the financial statements or other financial data contained in the Registration Statements or the Prospectus; and (viii) This Agreement has been duly authorized, executed and delivered by the Company. (d) The Representatives shall have received from Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel for the Underwriters, such opinion or opinions, dated such Closing Date, with respect to the incorporation of the Company, the validity of the Offered Securities delivered on such Closing Date, the Registration Statements, the Prospectus and other related matters as the Representatives may require, and the Company shall have furnished to such counsel such documents as they reasonably request for the purpose of enabling them to pass upon such matters. (e) The Representatives shall have received a certificate, dated such Closing Date, of the President or any Vice President and a principal financial or accounting officer of the Company in which such officers, to the best of their knowledge after reasonable investigation, shall state that: the representations and warranties of the Company in this Agreement are true and correct; the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to such Closing Date; no stop order suspending the effectiveness of any Registration Statement has been issued and no proceedings for that purpose have been instituted or are contemplated by the Commission; the Additional Registration Statement (if any) satisfying the requirements of subparagraphs (1) and (3) of Rule 462(b) was filed pursuant to Rule 462(b), including payment of the applicable filing fee in accordance with Rule 111(a) or (b) under the Act, prior to the time the Prospectus was printed and distributed to any Underwriter; and, subsequent to the date of the most recent financial statements in the Prospectus, there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or other), business, properties or results of operations of the Company and its subsidiaries taken as a whole except as set forth in or contemplated by the Prospectus or as described in such certificate. (f) The Representatives shall have received a letter, dated such Closing Date, of PricewaterhouseCoopers LLP which meets the requirements of subsection (a) of this Section, except that the specified date referred to in such subsection will be a date not more than three days prior to such Closing Date for the purposes of this subsection. The Company will furnish the Representatives with such conformed copies of such opinions, certificates, letters and documents as the Representatives reasonably request. CSFBC may in its sole discretion waive on behalf of the Underwriters compliance with any conditions to the obligations of the Underwriters hereunder, whether in respect of an Optional Closing Date or otherwise. 7. Indemnification and Contribution. (a) The Company will indemnify and hold harmless each Underwriter, its partners, directors and officers and each person, if any, who controls such Underwriter within the meaning of Section 15 of the Act, against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement, the Prospectus, or any amendment or supplement thereto, or any related preliminary prospectus, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement in or omission or alleged omission from any of such documents in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representatives specifically for use therein, it being understood and agreed that the only such information furnished by any Underwriter consists of the information described as such in subsection (b) below and provided, further, that with respect to any untrue statement or alleged untrue statement in or omission or alleged omission from any preliminary prospectus the indemnity agreement contained in this subsection (a) shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages or liabilities purchased the Offered Securities concerned, to the extent that a prospectus relating to such Offered Securities was required to be delivered by such Underwriter under the Act in connection with such purchase and any loss, claim, damage or liability of such Underwriter results from the fact that there was not sent or given to such person, at or prior to the written confirmation of the sale of such Offered Securities to such person, a copy of the Prospectus if the Company had previously furnished copies thereof to such Underwriter. (b) Each Underwriter will severally and not jointly indemnify and hold harmless the Company, its directors and officers and each person, if any who controls the Company within the meaning of Section 15 of the Act, against any losses, claims, damages or liabilities to which the Company may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement, the Prospectus, or any amendment or supplement thereto, or any related preliminary prospectus, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter through the Representatives specifically for use therein, and will reimburse any legal or other expenses reasonably incurred by the Company in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred, it being understood and agreed that the only such information furnished by any Underwriter consists of the following information in the Prospectus furnished on behalf of each Underwriter: the concession and reallowance figures appearing in the fourth paragraph under the caption "Underwriting" and the information contained in the sixth and tenth paragraphs under the caption "Underwriting". (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under subsection (a) or (b) above, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under subsection (a) or (b) above. In case any such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party unless such settlement includes an unconditional release of such indemnified party from all liability on any claims that are the subject matter of such action. (d) If the indemnification provided for in this Section is unavailable or insufficient to hold harmless an indemnified party under subsection (a) or (b) above, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in subsection (a) or (b) above (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim which is the subject of this subsection (d). Notwithstanding the provisions of this subsection (d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this subsection (d) to contribute are several in proportion to their respective underwriting obligations and not joint. (e) The obligations of the Company under this Section shall be in addition to any liability which the Company may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Underwriter within the meaning of the Act; and the obligations of the Underwriters under this Section shall be in addition to any liability which the respective Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each director of the Company, to each officer of the Company who has signed a Registration Statement and to each person, if any, who controls the Company within the meaning of the Act. 8. Default of Underwriters. If any Underwriter or Underwriters default in their obligations to purchase Offered Securities hereunder on either the First or any Optional Closing Date and the aggregate number of shares of Offered Securities that such defaulting Underwriter or Underwriters agreed but failed to purchase does not exceed 10% of the total number of shares of Offered Securities that the Underwriters are obligated to purchase on such Closing Date, CSFBC may make arrangements satisfactory to the Company for the purchase of such Offered Securities by other persons, including any of the Underwriters, but if no such arrangements are made by such Closing Date, the non-defaulting Underwriters shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the Offered Securities that such defaulting Underwriters agreed but failed to purchase on such Closing Date. If any Underwriter or Underwriters so default and the aggregate number of shares of Offered Securities with respect to which such default or defaults occur exceeds 10% of the total number of shares of Offered Securities that the Underwriters are obligated to purchase on such Closing Date and arrangements satisfactory to CSFBC and the Company for the purchase of such Offered Securities by other persons are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company, except as provided in Section 9 (provided that if such default occurs with respect to Optional Securities after the First Closing Date, this Agreement will not terminate as to the Firm Securities or any Optional Securities purchased prior to such termination). As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section. Nothing herein will relieve a defaulting Underwriter from liability for its default. 9. Survival of Certain Representations and Obligations. The respective indemnities, agreements, representations, warranties and other statements of the Company or its officers and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation, or statement as to the results thereof, made by or on behalf of any Underwriter, the Company or any of their respective representatives, officers or directors or any controlling person, and will survive delivery of and payment for the Offered Securities. If this Agreement is terminated pursuant to Section 8 or if for any reason the purchase of the Offered Securities by the Underwriters is not consummated, the Company shall remain responsible for the expenses to be paid or reimbursed by it pursuant to Section 5 and the respective obligations of the Company and the Underwriters pursuant to Section 7 shall remain in effect, and if any Offered Securities have been purchased hereunder the representations and warranties in Section 2 and all obligations under Section 5 shall also remain in effect. If the purchase of the Offered Securities by the Underwriters is not consummated for any reason other than solely because of the termination of this Agreement pursuant to Section 8 or the occurrence of any event specified in clause (iii), (iv) or (v) of Section 6(c), the Company will reimburse the Underwriters for all out-of-pocket expenses (including fees and disbursements of counsel) reasonably incurred by them in connection with the offering of the Offered Securities. 10. Notices. All communications hereunder will be in writing and, if sent to the Underwriters, will be mailed, delivered or telegraphed and confirmed to the Representatives c/o Credit Suisse First Boston Corporation, Eleven Madison Avenue, New York, N.Y. 10010-3629, Attention: Investment Banking Department-- Transactions Advisory Group, or, if sent to the Company, will be mailed, delivered or telegraphed and confirmed to it at 2121 Tasman Drive, Santa Clara, CA 95054, Attention: Rick M. McConnell; provided, however, that any notice to an Underwriter pursuant to Section 7 will be mailed, delivered or telegraphed and confirmed to such Underwriter. 11. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors and the officers and directors and controlling persons referred to in Section 7, and no other person will have any right or obligation hereunder. 12. Representation of Underwriters. The Representatives will act for the several Underwriters in connection with this financing, and any action under this Agreement taken by the Representatives jointly or by CSFBC will be binding upon all the Underwriters. 13. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same Agreement. 14. Applicable Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without regard to principles of conflicts of laws. The Company hereby submits to the non-exclusive jurisdiction of the Federal and state courts in the Borough of Manhattan in The City of New York in any suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. If the foregoing is in accordance with the Representatives' understanding of our agreement, kindly sign and return to the Company one of the counterparts hereof, whereupon it will become a binding agreement between the Company and the several Underwriters in accordance with its terms. Very truly yours, Latitude Communications, Inc. By........................... Name: Emil C. W. Wang Title: President and Chief Executive Officer The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. Credit Suisse First Boston Corporation HAMBRECHT & QUIST LLC DAIN RAUSCHER WESSELS Acting on behalf of themselves and as the Representatives of the several Underwriters By Credit Suisse First Boston Corporation By................................. Name: Bill Brady Title: Managing Director SCHEDULE A UNDERWRITER [PRINCIPAL ----------- AMOUNT OF] [NUMBER OF] FIRM SECURITIES --------------- CREDIT SUISSE FIRST BOSTON CORPORATION............... [$] HAMBRECHT & QUIST LLC................................ DAIN RAUSCHER WESSELS................................ --------------- TOTAL................................. [$] =============== EX-3.1 3 CERTIFICATE OF INCORPORATION OF THE AGREEMENT EXHIBIT 3.1 CERTIFICATE OF INCORPORATION OF LATITUDE COMMUNICATIONS, INC. ARTICLE I The name of the corporation is Latitude Communications, Inc. (the "Corporation"). - ------------ ARTICLE II The address of the Corporation's registered office in the State of Delaware is 1013 Centre Road, Wilmington, County of New Castle. The name of its registered agent at such address is The Prentice-Hall Corporation System, Inc. ARTICLE III The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE IV (a) Authorized Shares. The corporation is authorized to issue two classes ----------------- of shares designated "Common Stock" and "Preferred Stock" respectively. The total number of shares that the corporation is authorized to issue is Twenty- three million one hundred forty thousand nine hundred eleven (23,140,911) shares. Fifteen million (15,000,000) shares shall be Common Stock, par value $.001 per share, and eight million one hundred forty thousand nine hundred eleven (8,140,911) shares shall be Preferred Stock, par value $.001 per share. The Preferred Stock shall be issued in three series. The first series of Preferred Stock shall be designated Series A Preferred Stock and shall consist of three million three hundred thousand (3,300,000) shares. The second series of Preferred Stock shall be designated Series B Preferred Stock and shall consist of two million seven hundred fifteen thousand nine hundred eleven (2,715,911) shares. The third series of Preferred Stock shall be designated Series C Preferred Stock and shall consist of two million one hundred twenty five thousand (2,125,000) shares. The Liquidation Amount for the Series A Preferred Stock is one dollar ($1.00) per share, the Liquidation Amount for the Series B Preferred Stock is two dollars and seventy-five cents ($2.75) per share, and the Liquidation Amount for the Series C Preferred Stock is four dollars ($4.00) per share, in each case subject to proportional and equitable adjustment for stock splits, reverse splits and similar recapitalizations." (b) Liquidation. ----------- (1) Upon the voluntary or involuntary liquidation, winding up or dissolution of the corporation, out of the assets available for distribution to stockholders, (A) the holders of Series A Preferred Stock shall be entitled to receive, in preference to any payment to the holders of Common Stock, the Liquidation Amount for the Series A Preferred Stock for each share of Series A Preferred Stock then held by them plus any dividends previously declared and unpaid on such Series A Preferred Stock, (B) the holders of Series B Preferred Stock shall be entitled to receive, in preference to any payment to the holders of Common Stock, the Liquidation Amount for the Series B Preferred Stock for each share of Series B Preferred Stock then held by them plus any dividends previously declared and unpaid on such Series B Preferred Stock, and (C) the holders of Series C Preferred Stock shall be entitled to receive, in preference to any payment to the holders of Common Stock, the Liquidation Amount for the Series C Preferred Stock for each share of Series C Preferred Stock then held by them plus any dividends previously declared and unpaid on such Series C Preferred Stock. In the event the assets of the corporation are insufficient to pay the entirety of such amount required to be paid to the holders of Series A Preferred Stock, to the holders of Series B Preferred Stock and to the holders of Series C Preferred Stock under this paragraph (1), the entire remaining assets shall be paid ratably to the holders of Series A Preferred Stock, to the holders of Series B Preferred Stock, and to the holders of Series C Preferred Stock (so that each shall receive the same percentage of the applicable preferential amount) and the Common Stock shall receive nothing. (2) After the entirety of the amount required under paragraph (1) has been paid to the holders of Series A Preferred Stock, to the holders of Series B Preferred Stock, and to the holders of Series C Preferred Stock, the remaining assets shall be paid ratably to the holders of Common Stock. (3) For the purposes of this subdivision (b), a liquidation, winding up or dissolution is deemed to include the acquisition of the corporation by another entity, whether by merger, transfer of all or substantially all the assets or otherwise, or a transaction or series of related transactions in which more than 50% of the voting power of the corporation is transferred. (4) Whenever the distribution provided for in this subdivision (b) shall be payable in securities or property other than cash, the value of such distribution shall be the fair market value of such securities or other property as determined in good faith by the Board of Directors. (c) Voting Rights. ------------- (1) Each holder of Common Stock is entitled to one vote per share of Common Stock and each holder of Preferred Stock is entitled to a number of votes equal to the number of shares of Common Stock into which the holder's Preferred Stock is then convertible; for such purpose, any and all fractional shares otherwise issuable to each holder of Preferred Stock shall be aggregated and any resulting fractional shall be rounded off to the nearest whole number of shares (with one-half being rounded up). Except as provided by law or by paragraph (2) following, the Common Stock and Preferred Stock shall vote together as a single class on all matters to come before the stockholders for approval. -2- (2) In addition to any class or series voting rights under applicable law, without the approval of at least two-thirds of the outstanding shares of Preferred Stock voting as a separate class, the corporation shall not: (i) amend the Certificate of incorporation or the bylaws; (ii) redeem or otherwise acquire any Common Stock, either directly or through a subsidiary, other than pursuant to redemption or repurchase provisions approved by the Board of Directors; (iii) redeem or otherwise acquire any Preferred Stock, either directly or through a subsidiary; (iv) authorize or issue another class or series of equity securities or any securities convertible into, or exchangeable for, equity securities having rights, preferences or privileges greater than, senior to or on a parity with the Series A Preferred Stock, the Series B Preferred Stock, or the Series C Preferred Stock; (v) merge or consolidate with or into any other corporation (directly or indirectly through one or more subsidiaries), sell all or substantially all its assets, or engage in any reorganization or recapitalization of the Company or change of control transaction or any reclassification or other similar change of, or with respect to, any stock; or (vi) voluntarily elect to wind up and dissolve. (d) Conversion. ---------- (1) Subject to paragraph (2) below, the Preferred Stock shall be convertible into Common Stock at any time at the option of the respective holders of Preferred Stock. (2) The Preferred Stock shall automatically be converted into Common Stock immediately upon the closing of a firm commitment underwritten public offering of Common Stock pursuant to an effective registration statement on Form S-1 under the Securities Act of 1933 covering the offer and sale of Common Stock by the corporation to the public at an aggregate offering price of at least $10,000,000 and a per share offering price to the public at least equal to seven dollars and fifty cents ($7.50). (3) For the purposes of any conversion under either paragraph (1) or paragraph (2) above, the number of shares of Common Stock issuable with respect to shares of a series of Preferred Stock upon conversion shall be determined by dividing the aggregate dollar equivalent Liquidation Amount of all shares of such series of Preferred Stock at any one time surrendered for conversion by any one holder thereof by the applicable conversion price for such series in effect at the date of conversion. The initial conversion price per share for each series of the Preferred Stock shall be the Liquidation Amount for such series per share, and such conversion price shall be subject to adjustment from time to time as provided in paragraph (5) of -3- this subdivision (d). Upon conversion, no fractional shares shall be issued and the corporation shall in lieu thereof pay in cash the value of any remaining fraction, taking the conversion price in effect at the time as the value of a whole share of Common Stock; for such purpose, any and all fractional shares otherwise issuable to each holder of shares of a series of Preferred Stock shall be aggregated and any resulting fractional share shall be paid in cash as provided earlier in this sentence. The corporation shall reserve and keep reserved out of its authorized but unissued shares of Common Stock sufficient shares to effect the conversion of all shares of Preferred Stock outstanding from time to time. (4) A holder of Preferred Stock desiring to convert shall deliver the share certificate to the corporation at its principal executive office, accompanied by a written request to convert, specifying the number of shares to be converted. The endorsement of the share certificate and the request to convert shall be in form reasonably satisfactory to the corporation. At the close of business on the date of such delivery, the conversion shall be deemed to have occurred and the person entitled to receive share certificates for Common Stock to which he is entitled upon the conversion. Upon the automatic conversion of Preferred Stock pursuant to paragraph (2) above, the holder of Preferred Stock shall similarly deliver the share certificate to the corporation and the Preferred Stock shall not be deemed to have been converted to Common Stock until immediately prior to the closing of a sale of securities as described in paragraph (2). (5) If at any time or from time to time the corporation shall declare or pay, without consideration, any dividend on the Common Stock payable in Common Stock or in any right to acquire Common Stock for no consideration, or shall subdivide its outstanding shares of Common Stock into a greater number of shares, the conversion price in effect immediately prior to such subdivision shall be proportionately and equitably reduced and conversely, in case the outstanding shares of Common Stock of the corporation shall be combined into a smaller number of shares, the conversion price in effect immediately prior to such combination shall be proportionately and equitably increased. (6) If at any time or from time to time the corporation alters its capital structure so as to change the rights, privileges and preferences of the Common Stock or changes the Common Stock into the same or a different number of shares of any other class or classes of stock, whether by capital reorganization, reclassification or otherwise (except pursuant to a transaction constituting a liquidation pursuant to paragraph (b)(3) above), then each series of Preferred Stock shall be convertible into such number and type of other securities as the holders of such series of Preferred Stock would have received if they had converted the shares of such series of Preferred Stock held by them immediately prior to such reorganization or recapitalization. (7) Promptly after any change in the conversion price for a series of Preferred Stock, the corporation shall cause to be prepared a written statement setting forth in detail the facts and the revised conversion ratio. The statement shall be signed by the chief executive officer and by the chief financial officer and filed with the secretary of the corporation. A copy -4- of the statement shall be promptly mailed to each holder of such series of Preferred Stock at its last known address on the stock records of the corporation. (e) Dividends. --------- (1) The holders of Series A Preferred Stock, the holders of Series B Preferred Stock, and the holders of Series C Preferred Stock are entitled to receive, out of funds legally available therefor, if, when and as declared by the board of directors, an annual per share, non-cumulative dividend equal to ten percent (10%) of the Liquidation Amount for their respective series of Preferred Stock prior and in preference to any dividends (whether in cash or other property, and whether or not any such property consists of securities of any third party) payable on account of the Common Stock. (2) No dividends shall be paid on any share of Common Stock unless a dividend is paid with respect to all outstanding shares of Series A Preferred Stock, all outstanding shares of Series B Preferred Stock, and all outstanding shares of Series C Preferred Stock in amounts equal to or greater than (on an as-converted basis) the amount paid on the Common Stock. (3) No dividend shall be payable without the approval of the Board of Directors. (f) Board of Directors. ------------------ (1) The Board of Directors of the corporation shall consist of five members. Two members shall be elected by (and may only be removed by) the holders of the Preferred Stock, voting as a separate class. One member shall be elected by (and may only be removed by) the holders of Common Stock, voting as a separate class. Two members shall be elected only by (and may only be removed by) the holders of the Preferred Stock and Common Stock, voting together as a single class. (2) If the office of any director becomes vacant, such director's replacement shall be elected by the class (or classes, as applicable) of shares of which such director is the representative. (g) No Impairment. The corporation will not, through any reorganization, ------------- transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action not permitted hereunder, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this Article III and in the taking of all such action as may be necessary or appropriate in order to protect the rights, privileges and preferences of the holders of the Preferred Stock against impairment. (h) Notices of Record Date. In the event of the establishment by the ---------------------- corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, or any -5- right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the corporation shall mail to each holder of Preferred Stock at least twenty (20) days prior to the date specified therein a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or rights, and the amount and character of such dividend, distribution and right. ARTICLE V The Board of Directors of the Corporation is expressly authorized to make, alter or repeal Bylaws of the Corporation. ARTICLE VI Elections of directors need not be by written ballot unless otherwise provided in the Bylaws of the Corporation. ARTICLE VII (A) To the fullest extent permitted by the Delaware General Corporation Law, as the same exists or as may hereafter be amended, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. (B) The Corporation shall indemnify to the fullest extent permitted by law any person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he, his testator or intestate is or was a director or officer of the Corporation or any predecessor of the Corporation, or serves or served at any other enterprise as a director or officer at the request of the Corporation or any predecessor to the Corporation. (C) Neither any amendment nor repeal of this Article VII, nor the adoption of any provision of the Corporation's Certificate of Incorporation inconsistent with this Article VII, shall eliminate or reduce the effect of this Article VII in respect of any matter occurring, or any action or proceeding accruing or arising or that, but for this Article VII, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. -6- ARTICLE VIII The name and mailing address of the incorporator are as follows: Edward Y. Kim Venture Law Group 2775 Sand Hill Road Menlo Park, CA 94025 Executed this 9th day of February, 1999. /s/ Edward Y. Kim _______________________________ Edward Y. Kim, Incorporator -7- EX-3.2 4 FORM OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION EXHIBIT 3.2 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF LATITUDE COMMUNICATIONS, INC. The Undersigned, Rick M. McConnell and Mark A. Medearis, hereby certify that: 1. They are the duly elected and acting Vice President and Chief Financial Officer and Secretary, respectively, of Latitude Communications, Inc., a Delaware corporation. 2. The Certificate of Incorporation of this corporation was originally filed with the Secretary of State of Delaware on February 9, 1999. 3. The Certificate of Incorporation of this corporation shall be amended and restated to read in full as follows: ARTICLE I "The name of this corporation is Latitude Communications, Inc. (the "Corporation"). ----------- ARTICLE II The address of the Corporation's registered office in the State of Delaware is 1013 Centre Road, Wilmington, County of New Castle. The name of its registered agent at such address is Corporation Service Company. ARTICLE III The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE IV (A) CLASSES OF STOCK. The Corporation is authorized to issue two classes ---------------- of stock to be designated, respectively, "Common Stock" and "Preferred Stock." ------------ --------------- The total number of shares which the Corporation is authorized to issue is 80,000,000 shares, each with a par value of $0.001 per share. 75,000,000 of such shares shall be Common Stock, and 5,000,000 of such shares shall be Preferred Stock. (B) The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized, within the limitations and restrictions stated in this Certificate of Incorporation, to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock and the number of shares constituting any such series and the designation thereof, or any of them; and to 1 increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. ARTICLE V The number of directors of the Corporation shall be fixed from time to time by a bylaw or amendment thereof duly adopted by the Board of Directors. ARTICLE VI "Listing Event" as used in this Amended and Restated Certificate of ------------- Incorporation shall mean the first annual meeting of stockholders following such time as the Corporation meets the criteria set forth in subdivisions (1), (2) or (3) of Section 2115(c) the California Corporations Code as of the record date of such meeting. For the management of the business and for the conduct of the affairs of the Corporation, and in further definition, limitation and regulation of the powers of the Corporation, its directors and its stockholders or any class thereof, as the case may be, it is further provided that, effective upon the occurrence of the Listing Event: (i) The number of directors which shall constitute the entire Board of Directors, and the number of directors in each class, shall be fixed exclusively by one or more resolutions adopted from time to time by the Board of Directors. The Board of Directors shall be divided into three classes, designated as Class I, Class II and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. Until changed by a resolution of the Board of Directors, Class I shall consist of two directors, each of whom shall be designated by the Board of Directors; Class II shall consist of two directors, each of whom shall be designated by the Board of Directors; and Class III shall consist of one director, each of whom shall be designated by the Board of Directors. Upon the occurrence of the Listing Event, the terms of office of the Class I directors shall expire, and Class I directors shall be elected for a full term of three years. At the first annual meeting of stockholders following the Listing Event, the term of office of the Class II directors shall expire, and Class II directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the Listing Event, the term of office of the Class III directors shall expire, and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. Any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal, or other causes shall be filled by either (i) the affirmative vote of the -2- holders of a majority of the voting power of the then-outstanding shares of voting stock of the corporation entitled to vote generally in the election of directors (the "Voting Stock") voting together as a single class; or (ii) by the ------------ affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors. Newly created directorships resulting from any increase in the number of directors shall, unless the Board of Directors determines by resolution that any such newly created directorship shall be filled by the stockholders, be filled only by the affirmative vote of the directors then in office, even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been elected and qualified. (ii) There shall be no right with respect to shares of stock of the Corporation to cumulate votes in the election of directors. (iii) Any director, or the entire Board of Directors, may be removed from office at any time (i) with cause by the affirmative vote of the holders of at least a majority of the voting power of the then-outstanding shares of the Voting Stock, voting together as a single class; or (ii) without cause by the affirmative vote of the holders of at least 66-2/3% of the voting power of the then-outstanding shares of the Voting Stock. ARTICLE VII No action shall be taken by the stockholders of the Corporation other than at an annual or special meeting of the stockholders, upon due notice and in accordance with the provisions of the Corporation's bylaws. ARTICLE VIII The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Amended and Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. ARTICLE IX The Board of Directors of the Corporation is expressly authorized to make, alter or repeal Bylaws of the Corporation. ARTICLE X Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision -3- contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation. ARTICLE XI The Corporation shall have perpetual existence. ARTICLE XII (A) To the fullest extent permitted by the General Corporation Law of Delaware, as the same may be amended from time to time, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. If the General Corporation Law of Delaware is hereafter amended to authorize, with the approval of a corporation's stockholders, further reductions in the liability of the Corporation's directors for breach of fiduciary duty, then a director of the Corporation shall not be liable for any such breach to the fullest extent permitted by the General Corporation Law of Delaware, as so amended. (B) Any repeal or modification of the foregoing provisions of this Article XII shall not adversely affect any right or protection of a director of the Corporation with respect to any acts or omissions of such director occurring prior to such repeal or modification. ARTICLE XIII (A) To the fullest extent permitted by applicable law, the Corporation is also authorized to provide indemnification of (and advancement of expenses to) such agents (and any other persons to which Delaware law permits the Corporation to provide indemnification) though bylaw provisions, agreements with such agents or other persons, vote of stockholders or disinterested directors or otherwise, in excess of the indemnification and advancement otherwise permitted by Section 145 of the Delaware General Corporation Law, subject only to limits created by applicable Delaware law (statutory or non-statutory), with respect to actions for breach of duty to a corporation, its stockholders, and others. (B) Any repeal or modification of any of the foregoing provisions of this Article XIII shall not adversely affect any right or protection of a director, officer, agent or other person existing at the time of, or increase the liability of any director of the Corporation with respect to any acts or omissions of such director, officer or agent occurring prior to such repeal or modification." * * * -4- The foregoing Amended and Restated Certificate of Incorporation has been duly adopted by this Corporation's Board of Directors and stockholders in accordance with the applicable provisions of Section 228, 242 and 245 of the General Corporation Law of the State of Delaware. Executed at Santa Clara, California, on ____________________, 1999. ____________________________________________ Rick M. McConnell, Vice President and Chief Financial Officer ____________________________________________ Mark A. Medearis, Secretary -5- EX-3.3 5 AMENDED AND RESTATED BYLAWS OF THE REGISTRANT EXHIBIT 3.3 BYLAWS OF LATITUDE COMMUNICATIONS, INC. TABLE OF CONTENTS
Page ---- ARTICLE I - CORPORATE OFFICES............................................................ 1 1.1 Registered Office.............................................................. 1 1.2 Other Offices.................................................................. 1 ARTICLE II - MEETINGS OF STOCKHOLDERS.................................................... 1 2.1 Place of Meetings.............................................................. 1 2.2 Annual Meeting................................................................. 1 2.3 Special Meeting................................................................ 3 2.4 Notice of Shareholder's Meeting; Affidavit of Notice........................... 3 2.5 Advance Notice of Stockholder Nominees......................................... 3 2.6 Quorum......................................................................... 4 2.7 Adjourned Meeting; Notice...................................................... 4 2.8 Conduct of Business............................................................ 4 2.9 Voting......................................................................... 5 2.10 Waiver of Notice............................................................... 5 2.11 Record Date for Stockholder Notice; Voting..................................... 5 2.12 Proxies........................................................................ 6 ARTICLE III - DIRECTOR................................................................... 6 3.1 Powers......................................................................... 6 3.2 Number of Directors............................................................ 6 3.3 Election, Qualification and Term of Office of Directors........................ 6 3.4 Resignation and Vacancies...................................................... 6 3.5 Place of Meetings; Meetings by Telephone....................................... 7 3.6 Regular Meetings............................................................... 8 3.7 Special Meetings; Notice....................................................... 8 3.8 Quorum......................................................................... 8 3.9 Waiver of Notice............................................................... 8 3.10 Board Action by Written Consent without a Meeting.............................. 9 3.11 Fees and Compensation of Directors............................................. 9 3.12 Approval of Loans to Officers.................................................. 9 3.13 Removal of Directors........................................................... 9 3.14 Chairman of the Board of Directors............................................. 10 ARTICLE IV - COMMITTEES.................................................................. 10 4.1 Committees of Directors........................................................ 10 4.2 Committee Minutes.............................................................. 11 4.3 Meetings and Action of Committees.............................................. 11 ARTICLE V - OFFICERS..................................................................... 11 5.1 Officers....................................................................... 11
i TABLE OF CONTENTS (CONTINUED)
PAGE ---- 5.2 Appointment of Officers............................................................... 11 5.3 Subordinate Officers.................................................................. 11 5.4 Removal and Resignation of Officers................................................... 12 5.5 Vacancies in Offices.................................................................. 12 5.6 Chief Executive Officer............................................................... 12 5.7 President............................................................................. 12 5.8 Vice Presidents....................................................................... 13 5.9 Secretary............................................................................. 13 5.10 Chief Financial Officer............................................................... 13 5.11 Representation of Shares of Other Corporations........................................ 13 5.12 Authority And Duties of Officers...................................................... 14 ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS................ 14 6.1 Indemnification of Directors and Officers............................................. 14 6.2 Indemnification of Others............................................................. 14 6.3 Payment of Expenses in Advance........................................................ 15 6.4 Indemnity Not Exclusive............................................................... 15 6.5 Insurance............................................................................. 15 6.6 Conflicts............................................................................. 15 ARTICLE VII - RECORDS AND REPORTS............................................................... 16 7.1 Maintenance and Inspection of Records................................................. 16 7.2 Inspection by Directors............................................................... 16 7.3 Annual Statement to Stockholders...................................................... 16 ARTICLE VIII - GENERAL MATTERS.................................................................. 16 8.1 Checks................................................................................ 16 8.2 Execution of Corporate Contracts and Instruments...................................... 17 8.3 Stock Certificates; Partly Paid Shares................................................ 17 8.4 Special Designation on Certificates................................................... 17 8.5 Lost Certificates..................................................................... 18 8.6 Construction; Definitions............................................................. 18 8.7 Dividends............................................................................. 18 8.8 Fiscal Year........................................................................... 18 8.9 Seal.................................................................................. 19 8.10 Transfer of Stock..................................................................... 19 8.11 Stock Transfer Agreements............................................................. 19 8.12 Registered Stockholders............................................................... 19 ARTICLE IX - AMENDMENTS......................................................................... 19
-ii- BYLAWS OF LATITUDE COMMUNICATIONS, INC. ARTICLE I CORPORATE OFFICES ----------------- 1.1 REGISTERED OFFICE. ----------------- The address of the Corporation's registered office in the State of Delaware is 1013 Centre Road, Wilmington, County of New Castle. The name of its registered agent at such address is The Prentice-Hall Corporation System, Inc. 1.2 OTHER OFFICES. ------------- The Board of Directors may at any time establish other offices at any place or places where the Corporation is qualified to do business. ARTICLE II MEETINGS OF STOCKHOLDERS ------------------------ 2.1 PLACE OF MEETINGS. ----------------- Meetings of stockholders shall be held at any place, within or outside the State of Delaware, designated by the Board of Directors. In the absence of any such designation, stockholders' meetings shall be held at the registered office of the Corporation. 2.2 ANNUAL MEETING. -------------- (a) The annual meeting of stockholders shall be held each year on a date and at a time designated by the Board of Directors. At the meeting, directors shall be elected and any other proper business may be transacted. (b) Nominations of persons for election to the Board of Directors of the Corporation and the proposal of business to be transacted by the stockholders may be made at an annual meeting of stockholders (i) pursuant to the Corporation's notice with respect to such meeting, (ii) by or at the direction of the Board of Directors or (iii) by any stockholder of the Corporation who was a stockholder of record at the time of giving of the notice provided for in this Section 2.2, who is entitled to vote at the meeting and who has complied with the notice procedures set forth in this Section 2.2. 1 (c) In addition to the requirements of Section 2.5, for nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of paragraph (b) of this Section 2.2, the stockholder must have given timely notice thereof in writing to the secretary of the Corporation and such business must be a proper matter for stockholder action under the General Corporation Law of Delaware. To be timely, a stockholder's notice shall be delivered to the secretary at the principal executive offices of the Corporation not less than 20 days nor more than 90 days prior to the first anniversary of the preceding year's annual meeting of stockholders; provided, however, that in the event that the date of the annual meeting is more than 30 days prior to or more than 60 days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the 90th day prior to such annual meeting and not later than the close of business on the later of the 20th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. Such stockholder's notice shall set forth (i) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (ii) as to any other business that the stockholder proposes to bring before the meeting, a brief description of such business, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (A) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (B) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (d) Only such business shall be conducted at an annual meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 2.2. The chairman of the meeting shall determine whether a nomination or any business proposed to be transacted by the stockholders has been properly brought before the meeting and, if any proposed nomination or business has not been properly brought before the meeting, the chairman shall declare that such proposed business or nomination shall not be presented for stockholder action at the meeting. (e) For purposes of this Section 2.2, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or a comparable national news service. (f) Nothing in this Section 2.2 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. -2- 2.3 SPECIAL MEETING. --------------- (a) A special meeting of the stockholders may be called at any time by the Board of Directors, or by the chairman of the board, or by the president. (b) Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to such notice of meeting (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in Section 2.5, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in Section 2.5. 2.4 NOTICE OF STOCKHOLDER'S MEETINGS; AFFIDAVIT OF NOTICE. ----------------------------------------------------- All notices of meetings of stockholders shall be in writing and shall be sent or otherwise given in accordance with this Section 2.4 of these Bylaws not less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting (or such longer or shorter time as is required by Section 2.5 of these Bylaws, if applicable). The notice shall specify the place, date, and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Written notice of any meeting of stockholders, if mailed, is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the Corporation. An affidavit of the secretary or an assistant secretary or of the transfer agent of the Corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. 2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES. -------------------------------------- Only persons who are nominated in accordance with the procedures set forth in this Section 2.5 shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors or by any stockholder of the Corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 2.5. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the secretary of the Corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 60 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the Corporation which are beneficially owned by -3- such person and (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including, without limitation, such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (b) as to the stockholder giving the notice (i) the name and address, as they appear on the Corporation's books, of such stockholder and (ii) the class and number of shares of the Corporation which are beneficially owned by such stockholder. At the request of the Board of Directors any person nominated by the Board of Directors for election as a director shall furnish to the secretary of the Corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 2.5. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by the Bylaws, and if he or she should so determine, he or she shall so declare to the meeting and the defective nomination shall be disregarded. 2.6 QUORUM. ------ The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the Certificate of Incorporation. If, however, such quorum is not present or represented at any meeting of the stockholders, then either (a) the chairman of the meeting or (b) the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed. 2.7 ADJOURNED MEETING; NOTICE. ------------------------- When a meeting is adjourned to another time or place, unless these Bylaws otherwise require, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the Corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 2.8 CONDUCT OF BUSINESS. ------------------- The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including the manner of voting and the conduct of business. -4- 2.9 VOTING. ------ (a) The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.11 of these Bylaws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners of stock and to voting trusts and other voting agreements). (b) Except as may be otherwise provided in the Certificate of Incorporation, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder. 2.10 WAIVER OF NOTICE. ---------------- Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the Certificate of Incorporation or these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice unless so required by the Certificate of Incorporation or these Bylaws. 2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING. ------------------------------------------ In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action. If the Board of Directors does not so fix a record date: (a) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (b) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. -5- 2.12 PROXIES. ------- Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for such stockholder by a written proxy, signed by the stockholder and filed with the secretary of the Corporation, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the stockholder or the stockholder's attorney-in-fact. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(e) of the General Corporation Law of Delaware. ARTICLE III DIRECTORS --------- 3.1 POWERS. ------ Subject to the provisions of the General Corporation Law of Delaware and any limitations in the Certificate of Incorporation or these Bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the Corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors. 3.2 NUMBER OF DIRECTORS. ------------------- The number of directors constituting the entire Board of Directors shall be five. 3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS. ------------------------------------------------------- Except as provided in Section 3.4 of these Bylaws, directors shall be elected at each annual meeting of stockholders to hold office until the next annual meeting. Directors need not be stockholders unless so required by the Certificate of Incorporation or these Bylaws, wherein other qualifications for directors may be prescribed. Each director, including a director elected to fill a vacancy, shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal. Elections of directors need not be by written ballot. 3.4 RESIGNATION AND VACANCIES. ------------------------- Any director may resign at any time upon written notice to the attention of the secretary of the Corporation. When one or more directors so resigns and the resignation is effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in this section in the filling of other vacancies. A vacancy created by the -6- removal of a director by the vote of the stockholders or by court order may be filled only by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute a majority of the quorum. Each director so elected shall hold office until the next annual meeting of the stockholders and until a successor has been elected and qualified. Unless otherwise provided in the Certificate of Incorporation or these Bylaws: (a) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. (b) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the Certificate of Incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If at any time, by reason of death or resignation or other cause, the Corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the Certificate of Incorporation or these Bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware. If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole Board of Directors (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least 10% of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the General Corporation Law of Delaware as far as applicable. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE. ---------------------------------------- The Board of Directors of the Corporation may hold meetings, both regular and special, either within or outside the State of Delaware. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in -7- the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 3.6 REGULAR MEETINGS. ---------------- Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the Board of Directors. 3.7 SPECIAL MEETINGS; NOTICE. ------------------------ Special meetings of the Board of Directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the Corporation. If the notice is mailed, it shall be deposited in the United States mail at least four days before the time of the holding of the meeting. If the notice is delivered personally or by telephone or by telegram, it shall be delivered personally or by telephone or to the telegraph company at least 48 hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the Corporation. 3.8 QUORUM. ------ At all meetings of the Board of Directors, a majority of the authorized number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Certificate of Incorporation. If a quorum is not present at any meeting of the Board of Directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 3.9 WAIVER OF NOTICE. ---------------- Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the Certificate of Incorporation or these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall -8- constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors, or members of a committee of directors, need be specified in any written waiver of notice unless so required by the Certificate of Incorporation or these Bylaws. 3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING. ------------------------------------------------- Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board of Directors or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. Written consents representing actions taken by the board or committee may be executed by telex, telecopy or other facsimile transmission, and such facsimile shall be valid and binding to the same extent as if it were an original. 3.11 FEES AND COMPENSATION OF DIRECTORS. ---------------------------------- Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, the Board of Directors shall have the authority to fix the compensation of directors. No such compensation shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. 3.12 APPROVAL OF LOANS TO OFFICERS. ----------------------------- The Corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the Corporation or of its subsidiary, including any officer or employee who is a director of the Corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the Corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the Corporation. Nothing in this Section 3.2 contained shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the Corporation at common law or under any statute. 3.13 REMOVAL OF DIRECTORS. -------------------- Unless otherwise restricted by statute, by the Certificate of Incorporation or by these Bylaws, any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors; provided, however, that if the stockholders of the Corporation are entitled to cumulative voting, if less than the entire Board of Directors is to be removed, no director may be removed without cause if the votes cast against his removal would be sufficient to elect him if then cumulatively voted at an election of the entire Board of Directors. -9- No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director's term of office. 3.14 CHAIRMAN OF THE BOARD OF DIRECTORS. ---------------------------------- The Corporation may also have, at the discretion of the Board of Directors, a chairman of the Board of Directors who shall not be considered an officer of the Corporation. ARTICLE IV COMMITTEES ---------- 4.1 COMMITTEES OF DIRECTORS. ----------------------- The Board of Directors may, by resolution passed by a majority of the whole Board of Directors, designate one or more committees, with each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors or in the Bylaws of the Corporation, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority to (a) amend the Certificate of Incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), (b) adopt an agreement of merger or consolidation under Sections 251 or 252 of the General Corporation Law of Delaware, (c) recommend to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, (d) recommend to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or (e) amend the Bylaws of the Corporation; and, unless the board resolution establishing the committee, the Bylaws or the Certificate of Incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. -10- 4.2 COMMITTEE MINUTES. ----------------- Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. 4.3 MEETINGS AND ACTION OF COMMITTEES. --------------------------------- Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Section 3.5 (place of meetings and meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and Section 3.10 (action without a meeting) of these Bylaws, with such changes in the context of such provisions as are necessary to substitute the committee and its members for the Board of Directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the Board of Directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the Board of Directors and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The Board of Directors may adopt rules for the government of any committee not inconsistent with the provisions of these Bylaws. ARTICLE V OFFICERS -------- 5.1 OFFICERS. -------- The officers of the Corporation shall be a chief executive officer, a president, a secretary, and a chief financial officer. The Corporation may also have, at the discretion of the Board of Directors, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and any such other officers as may be appointed in accordance with the provisions of Section 5.3 of these Bylaws. Any number of offices may be held by the same person. 5.2 APPOINTMENT OF OFFICERS. ----------------------- The officers of the Corporation, except such officers as may be appointed in accordance with the provisions of Sections 5.3 or 5.5 of these Bylaws, shall be appointed by the Board of Directors, subject to the rights, if any, of an officer under any contract of employment. 5.3 SUBORDINATE OFFICERS. -------------------- The Board of Directors may appoint, or empower the chief executive officer or the president to appoint, such other officers and agents as the business of the Corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these Bylaws or as the Board of Directors may from time to time determine. -11- 5.4 REMOVAL AND RESIGNATION OF OFFICERS. ----------------------------------- Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the Board of Directors at any regular or special meeting of the Board of Directors or, except in the case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors. Any officer may resign at any time by giving written notice to the attention of the secretary of the Corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the Corporation under any contract to which the officer is a party. 5.5 VACANCIES IN OFFICES. -------------------- Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors. 5.6 CHIEF EXECUTIVE OFFICER. ----------------------- Subject to such supervisory powers, if any, as may be given by the Board of Directors to the chairman of the board, if any, the chief executive officer of the Corporation shall, subject to the control of the Board of Directors, have general supervision, direction, and control of the business and the officers of the Corporation. He or she shall preside at all meetings of the stockholders and, in the absence or nonexistence of a chairman of the board, at all meetings of the Board of Directors and shall have the general powers and duties of management usually vested in the office of chief executive officer of a corporation and shall have such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. 5.7 PRESIDENT. --------- Subject to such supervisory powers, if any, as may be given by the Board of Directors to the chairman of the board (if any) or the chief executive officer, the president shall have general supervision, direction, and control of the business and other officers of the Corporation. He or she shall have the general powers and duties of management usually vested in the office of president of a corporation and such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. 5.8 VICE PRESIDENTS. --------------- In the absence or disability of the chief executive officer and president, the vice presidents, if any, in order of their rank as fixed by the Board of Directors or, if not ranked, a vice president designated by the Board of Directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the -12- president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors, these Bylaws, the president or the chairman of the board. 5.9 SECRETARY. --------- The secretary shall keep or cause to be kept, at the principal executive office of the Corporation or such other place as the Board of Directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and stockholders. The minutes shall show the time and place of each meeting, the names of those present at directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the Corporation or at the office of the Corporation's transfer agent or registrar, as determined by resolution of the Board of Directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors required to be given by law or by these Bylaws. He or she shall keep the seal of the Corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by these Bylaws. 5.10 CHIEF FINANCIAL OFFICER. ----------------------- The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the Corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all moneys and other valuables in the name and to the credit of the Corporation with such depositories as may be designated by the Board of Directors. He or she shall disburse the funds of the Corporation as may be ordered by the Board of Directors, shall render to the president, the chief executive officer, or the directors, upon request, an account of all his or her transactions as chief financial officer and of the financial condition of the Corporation, and shall have other powers and perform such other duties as may be prescribed by the Board of Directors or the Bylaws. 5.11 REPRESENTATION OF SHARES OF OTHER CORPORATIONS. ---------------------------------------------- The chairman of the board, the chief executive officer, the president, any vice president, the chief financial officer, the secretary or assistant secretary of this Corporation, or -13- any other person authorized by the Board of Directors or the chief executive officer or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this Corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this Corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by the person having such authority. 5.12 AUTHORITY AND DUTIES OF OFFICERS. -------------------------------- In addition to the foregoing authority and duties, all officers of the Corporation shall respectively have such authority and perform such duties in the management of the business of the Corporation as may be designated from time to time by the Board of Directors or the stockholders. ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS -------------------------------------------------------------------- 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS. ----------------------------------------- The Corporation shall, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, indemnify each of its directors and officers against expenses (including attorneys' fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the Corporation. For purposes of this Section 6.1, a "director" or "officer" of the Corporation includes any person (a) who is or was a director or officer of the Corporation, (b) who is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (c) who was a director or officer of a Corporation which was a predecessor corporation of the Corporation or of another enterprise at the request of such predecessor corporation. 6.2 INDEMNIFICATION OF OTHERS. ------------------------- The Corporation shall have the power, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, to indemnify each of its employees and agents (other than directors and officers) against expenses (including attorneys' fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the Corporation. For purposes of this Section 6.2, an "employee" or "agent" of the Corporation (other than a director or officer) includes any person (a) who is or was an employee or agent of the Corporation, (b) who is or was serving at the request of the Corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (c) who was an employee or agent of a corporation which was a predecessor corporation of the Corporation or of another enterprise at the request of such predecessor corporation. -14- 6.3 PAYMENT OF EXPENSES IN ADVANCE. ------------------------------ Expenses incurred in defending any action or proceeding for which indemnification is required pursuant to Section 6.1 or for which indemnification is permitted pursuant to Section 6.2 following authorization thereof by the Board of Directors shall be paid by the Corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined that the indemnified party is not entitled to be indemnified as authorized in this Article VI. 6.4 INDEMNITY NOT EXCLUSIVE. ----------------------- The indemnification provided by this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any Bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, to the extent that such additional rights to indemnification are authorized in the Certificate of Incorporation 6.5 INSURANCE. --------- The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the Corporation would have the power to indemnify him or her against such liability under the provisions of the General Corporation Law of Delaware. 6.6 CONFLICTS. --------- No indemnification or advance shall be made under this Article VI, except where such indemnification or advance is mandated by law or the order, judgment or decree of any court of competent jurisdiction, in any circumstance where it appears: (a) That it would be inconsistent with a provision of the Certificate of Incorporation, these Bylaws, a resolution of the stockholders or an agreement in effect at the time of the accrual of the alleged cause of the action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (b) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. -15- ARTICLE VII RECORDS AND REPORTS ------------------- 7.1 MAINTENANCE AND INSPECTION OF RECORDS. ------------------------------------- The Corporation shall, either at its principal executive offices or at such place or places as designated by the Board of Directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these Bylaws as amended to date, accounting books, and other records. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the Corporation's stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the Corporation at its registered office in Delaware or at its principal place of business. 7.2 INSPECTION BY DIRECTORS. ----------------------- Any director shall have the right to examine the Corporation's stock ledger, a list of its stockholders, and its other books and records for a purpose reasonably related to his or her position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the Corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper. 7.3 ANNUAL STATEMENT TO STOCKHOLDERS. -------------------------------- The Board of Directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the Corporation. ARTICLE VIII GENERAL MATTERS --------------- 8.1 CHECKS. ------ From time to time, the Board of Directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, -16- notes or other evidences of indebtedness that are issued in the name of or payable to the Corporation, and only the persons so authorized shall sign or endorse those instruments. 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS. ------------------------------------------------ The Board of Directors, except as otherwise provided in these Bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the Corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.3 STOCK CERTIFICATES; PARTLY PAID SHARES. -------------------------------------- The shares of the Corporation shall be represented by certificates, provided that the Board of Directors of the Corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation. Notwithstanding the adoption of such a resolution by the Board of Directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the Corporation by the chairman or vice-chairman of the Board of Directors, or the chief executive officer or the president or vice- president, and by the chief financial officer or an assistant treasurer, or the secretary or an assistant secretary of the Corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue. The Corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the Corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the Corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 8.4 SPECIAL DESIGNATION ON CERTIFICATES. ----------------------------------- If the Corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full -17- or summarized on the face or back of the certificate that the Corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the Corporation shall issue to represent such class or series of stock a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 8.5 LOST CERTIFICATES. ----------------- Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the Corporation and canceled at the same time. The Corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate previously issued by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or the owner's legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares. 8.6 CONSTRUCTION; DEFINITIONS. ------------------------- Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Delaware General Corporation Law shall govern the construction of these Bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. 8.7 DIVIDENDS. --------- The directors of the Corporation, subject to any restrictions contained in (a) the General Corporation Law of Delaware or (b) the Certificate of Incorporation, may declare and pay dividends upon the shares of its capital stock. Dividends may be paid in cash, in property, or in shares of the Corporation's capital stock. The directors of the Corporation may set apart out of any of the funds of the Corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the Corporation, and meeting contingencies. 8.8 FISCAL YEAR. ----------- The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors and may be changed by the Board of Directors. -18- 8.9 SEAL. ---- The Corporation may adopt a corporate seal, which may be altered at pleasure, and may use the same by causing it or a facsimile thereof, to be impressed or affixed or in any other manner reproduced. 8.10 TRANSFER OF STOCK. ----------------- Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in its books. 8.11 STOCK TRANSFER AGREEMENTS. ------------------------- The Corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the Corporation to restrict the transfer of shares of stock of the Corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware. 8.12 REGISTERED STOCKHOLDERS. ----------------------- The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments the person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE IX AMENDMENTS ---------- The Bylaws of the Corporation may be adopted, amended or repealed by the stockholders entitled to vote; provided, however, that the Corporation may, in its Certificate of Incorporation, confer the power to adopt, amend or repeal Bylaws upon the directors. The fact that such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal Bylaws. -19- EX-10.1 6 FORM OF INDEMNIFICATION AGREEMENT EXHIBIT 10.1 INDEMNIFICATION AGREEMENT ------------------------- This Indemnification Agreement (the "Agreement") is made as of ___________, --------- by and between Latitude Communications, Inc., a Delaware corporation (the "Company"), and ________________(the "Indemnitee"). ------- ---------- RECITALS -------- The Company and Indemnitee recognize the increasing difficulty in obtaining liability insurance for directors, officers and key employees, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance. The Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting directors, officers and key employees to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited. Indemnitee does not regard the current protection available as adequate under the present circumstances, and Indemnitee and agents of the Company may not be willing to continue to serve as agents of the Company without additional protection. The Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, and to indemnify its directors, officers and key employees so as to provide them with the maximum protection permitted by law. AGREEMENT --------- In consideration of the mutual promises made in this Agreement, and for other good and valuable consideration, receipt of which is hereby acknowledged, the Company and Indemnitee hereby agree as follows: 1. Indemnification. --------------- (a) Third Party Proceedings. The Company shall indemnify Indemnitee ----------------------- if Indemnitee is or was a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) actually and reasonably incurred by Indemnitee in connection with such action, suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe Indemnitee's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, or, with respect to any criminal action or proceeding, that Indemnitee had reasonable cause to believe that Indemnitee's conduct was unlawful. (b) Proceedings By or in the Right of the Company. The Company shall --------------------------------------------- indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made a party to any threatened, pending or completed action or proceeding by or in the right of the Company or any subsidiary of the Company to procure a judgment in its favor by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) and, to the fullest extent permitted by law, amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld), in each case to the extent actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such action or suit if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company and its stockholders, except that no indemnification shall be made in respect of any claim, issue or matter as to which Indemnitee shall have been finally adjudicated by court order or judgment to be liable to the Company in the performance of Indemnitee's duty to the Company and its stockholders unless and only to the extent that the court in which such action or proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper. (c) Mandatory Payment of Expenses. To the extent that Indemnitee has ----------------------------- been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 1(a) or Section 1(b) or the defense of any claim, issue or matter therein, Indemnitee shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by Indemnitee in connection therewith. 2. No Employment Rights. Nothing contained in this Agreement is intended -------------------- to create in Indemnitee any right to continued employment. 3. Expenses; Indemnification Procedure. ----------------------------------- (a) Advancement of Expenses. The Company shall advance all expenses ----------------------- incurred by Indemnitee in connection with the investigation, defense, settlement or appeal of any civil or criminal action, suit or proceeding referred to in Section l(a) or Section 1(b) hereof (including amounts actually paid in settlement of any such action, suit or proceeding). Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Company as authorized hereby. (b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a -------------------------------- condition precedent to his or her right to be indemnified under this Agreement, give the Company notice in -2- writing as soon as practicable of any claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive Officer of the Company and shall be given in accordance with the provisions of Section 12(d) below. In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. (c) Procedure. Any indemnification and advances provided for in --------- Section 1 and this Section 3 shall be made no later than twenty (20) days after receipt of the written request of Indemnitee. If a claim under this Agreement, under any statute, or under any provision of the Company's Certificate of Incorporation or Bylaws providing for indemnification, is not paid in full by the Company within twenty (20) days after a written request for payment thereof has first been received by the Company, Indemnitee may, but need not, at any time thereafter bring an action against the Company to recover the unpaid amount of the claim and, subject to Section 11 of this Agreement, Indemnitee shall also be entitled to be paid for the expenses (including attorneys' fees) of bringing such action. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in connection with any action, suit or proceeding in advance of its final disposition) that Indemnitee has not met the standards of conduct which make it permissible under applicable law for the Company to indemnify Indemnitee for the amount claimed, but the burden of proving such defense shall be on the Company and Indemnitee shall be entitled to receive interim payments of expenses pursuant to Section 3(a) unless and until such defense may be finally adjudicated by court order or judgment from which no further right of appeal exists. It is the parties' intention that if the Company contests Indemnitee's right to indemnification, the question of Indemnitee's right to indemnification shall be for the court to decide, and neither the failure of the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct required by applicable law, nor an actual determination by the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) that Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has or has not met the applicable standard of conduct. (d) Notice to Insurers. If, at the time of the receipt of a notice of ------------------ a claim pursuant to Section 3(b) hereof, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies. (e) Selection of Counsel. In the event the Company shall be obligated -------------------- under Section 3(a) hereof to pay the expenses of any proceeding against Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by Indemnitee, upon the delivery to Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel -3- by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same proceeding, provided that (i) Indemnitee shall have the right to employ counsel in any such proceeding at Indemnitee's expense; and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense or (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. 4. Additional Indemnification Rights; Nonexclusivity. ------------------------------------------------- (a) Scope. Notwithstanding any other provision of this Agreement, the ----- Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Certificate of Incorporation, the Company's Bylaws or by statute. In the event of any change, after the date of this Agreement, in any applicable law, statute, or rule which expands the right of a Delaware corporation to indemnify a member of its board of directors or an officer, such changes shall be deemed to be within the purview of Indemnitee's rights and the Company's obligations under this Agreement. In the event of any change in any applicable law, statute or rule which narrows the right of a Delaware corporation to indemnify a member of its board of directors or an officer, such changes, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement shall have no effect on this Agreement or the parties' rights and obligations hereunder. (b) Nonexclusivity. The indemnification provided by this Agreement -------------- shall not be deemed exclusive of any rights to which Indemnitee may be entitled under the Company's Certificate of Incorporation, its Bylaws, any agreement, any vote of stockholders or disinterested members of the Company's Board of Directors, the General Corporation Law of the State of Delaware, or otherwise, both as to action in Indemnitee's official capacity and as to action in another capacity while holding such office. The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though he or she may have ceased to serve in any such capacity at the time of any action, suit or other covered proceeding. 5. Partial Indemnification. If Indemnitee is entitled under any ----------------------- provision of this Agreement to indemnification by the Company for some or a portion of the expenses, judgments, fines or penalties actually or reasonably incurred in the investigation, defense, appeal or settlement of any civil or criminal action, suit or proceeding, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such expenses, judgments, fines or penalties to which Indemnitee is entitled. 6. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge --------------------- that in certain instances, Federal law or public policy may override applicable state law and prohibit the Company from indemnifying its directors and officers under this Agreement or otherwise. -4- For example, the Company and Indemnitee acknowledge that the Securities and Exchange Commission (the "SEC") has taken the position that indemnification is --- not permissible for liabilities arising under certain federal securities laws, and federal legislation prohibits indemnification for certain ERISA violations. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the SEC to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. 7. Officer and Director Liability Insurance. The Company shall, from ---------------------------------------- time to time, make the good faith determination whether or not it is practicable for the Company to obtain and maintain a policy or policies of insurance with reputable insurance companies providing the officers and directors of the Company with coverage for losses from wrongful acts, or to ensure the Company's performance of its indemnification obligations under this Agreement. Among other considerations, the Company will weigh the costs of obtaining such insurance coverage against the protection afforded by such coverage. In all policies of director and officer liability insurance, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if Indemnitee is a director; or of the Company's officers, if Indemnitee is not a director of the Company but is an officer; or of the Company's key employees, if Indemnitee is not an officer or director but is a key employee. Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain such insurance if the Company determines in good faith that such insurance is not reasonably available, if the premium costs for such insurance are disproportionate to the amount of coverage provided, if the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or if Indemnitee is covered by similar insurance maintained by a parent or subsidiary of the Company. 8. Severability. Nothing in this Agreement is intended to require or ------------ shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company's inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 8. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms. 9. Exceptions. Any other provision herein to the contrary ---------- notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement: (a) Claims Initiated by Indemnitee. To indemnify or advance expenses ------------------------------ to Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under Section 145 of the Delaware General Corporation Law, but such indemnification or -5- advancement of expenses may be provided by the Company in specific cases if the Board of Directors finds it to be appropriate; (b) Lack of Good Faith. To indemnify Indemnitee for any expenses ------------------ incurred by Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by Indemnitee in such proceeding was not made in good faith or was frivolous; (c) Insured Claims. To indemnify Indemnitee for expenses or -------------- liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) to the extent such expenses or liabilities have been paid directly to Indemnitee by an insurance carrier under a policy of officers' and directors' liability insurance maintained by the Company; or (d) Claims under Section 16(b). To indemnify Indemnitee for expenses -------------------------- or the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute. 10. Construction of Certain Phrases. ------------------------------- (a) For purposes of this Agreement, references to the "Company" shall ------- include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that if Indemnitee is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued. (b) For purposes of this Agreement, references to "other enterprises" ----------------- shall include employee benefit plans; references to "fines" shall include any ----- excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any ------------------------------------- service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants, or beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not --- opposed to the best interests of the Company" as referred to in this Agreement. - -------------------------------------------- 11. Attorneys' Fees. In the event that any action is instituted by --------------- Indemnitee under this Agreement to enforce or interpret any of the terms hereof, Indemnitee shall be entitled to be paid all court costs and expenses, including reasonable attorneys' fees, incurred by Indemnitee -6- with respect to such action, unless as a part of such action, the court of competent jurisdiction determines that each of the material assertions made by Indemnitee as a basis for such action were not made in good faith or were frivolous. In the event of an action instituted by or in the name of the Company under this Agreement or to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all court costs and expenses, including attorneys' fees, incurred by Indemnitee in defense of such action (including with respect to Indemnitee's counterclaims and cross-claims made in such action), unless as a part of such action the court determines that each of Indemnitee's material defenses to such action were made in bad faith or were frivolous. 12. Miscellaneous. ------------- (a) Governing Law. This Agreement and all acts and transactions ------------- pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of Delaware, without giving effect to principles of conflict of law. (b) Entire Agreement; Enforcement of Rights. This Agreement sets --------------------------------------- forth the entire agreement and understanding of the parties relating to the subject matter herein and merges all prior discussions between them. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, shall be effective unless in writing signed by the parties to this Agreement. The failure by either party to enforce any rights under this Agreement shall not be construed as a waiver of any rights of such party. (c) Construction. This Agreement is the result of negotiations ------------ between and has been reviewed by each of the parties hereto and their respective counsel, if any; accordingly, this Agreement shall be deemed to be the product of all of the parties hereto, and no ambiguity shall be construed in favor of or against any one of the parties hereto. (d) Notices. Any notice, demand or request required or permitted to ------- be given under this Agreement shall be in writing and shall be deemed sufficient when delivered personally or sent by telegram or forty-eight (48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the party to be notified at such party's address as set forth below or as subsequently modified by written notice. (e) Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. (f) Successors and Assigns. This Agreement shall be binding upon the ---------------------- Company and its successors and assigns, and inure to the benefit of Indemnitee and Indemnitee's heirs, legal representatives and assigns. (g) Subrogation. In the event of payment under this Agreement, the ----------- Company shall be subrogated to the extent of such payment to all of the rights of recovery of -7- Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company to effectively bring suit to enforce such rights. [Signature Page Follows] -8- The parties hereto have executed this Agreement as of the day and year set forth on the first page of this Agreement. Latitude Communications, Inc. By: _________________________________ Title: _________________________________ Address: 2121 Tasman Drive Santa Clara, CA 95054 AGREED TO AND ACCEPTED: ((IndemniteeName)) _________________________________ (Signature) Address: ((IndemniteeAddress1)) ((IndemniteeAddress2)) -9- EX-10.6 7 FORM OF WARRANT TO PURCHASE SERIES B PRE-STOCK EXHIBIT 10.6 THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NO SALE OR DISPOSITION OF SUCH SECURITIES MAY BE EFFECTED WITHOUT (i) AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO, (ii) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED, (iii) RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION, OR (iv) OTHERWISE COMPLYING WITH THE PROVISIONS OF ARTICLE III OF THIS WARRANT. WARRANT TO PURCHASE SHARES OF SERIES B PREFERRED STOCK AS HEREIN DESCRIBED Dated September 15, 1994 This certifies that for value received: PHOENIX LEASING INCORPORATED or registered assigns, is entitled, subject to the terms set forth herein, to purchase from Latitude Communications, Inc., a California corporation (the "Company"), up to Twenty-Nine Thousand Ninety-One (29,091) fully paid and non- - -------- assessable shares of the Company's Series B Preferred Stock, at the price of Two Dollars and Seventy-Five Cents ($2.75) per share. The initial purchase price of Two Dollars and Seventy-Five Cents ($2.75) per share, and the number of shares purchasable hereunder, are subject to adjustment in certain events, all as more fully set forth under Article IV herein. ARTICLE I DEFINITIONS ----------- "Acquisition of the Company" means the Company's consolidation or merger -------------------------- with or into another corporation in which the Company is not the surviving entity, or a reverse triangular merger in which the Company is the surviving entity but the shares of the Company's capital stock outstanding immediately prior to the merger are converted, by virtue of the merger, into other property, whether in the form of securities, cash or otherwise, or the sale or transfer of the Company's property as an entirety or substantially as an entirety. "Articles of Incorporation" means the Amended and Restated Articles of ------------------------- Incorporation of the Company, as filed with the California Secretary of State on May 27, 1994. "Closing Date" means September 15, 1994. ------------ "Commission" means the Securities and Exchange Commission, or any other ---------- federal agency then administering the Exchange Act or the Securities Act, as defined herein. "Common Stock" means the Company's Common Stock, any stock into which such ------------ stock shall have been changed or any stock resulting from any reclassification of such stock, and any other capital stock of the Company of any class or series now or hereafter authorized having the right to share in distributions either of earnings or assets of the Company without limit as to amount or percentage. "Company" means Latitude Communications, Inc., a California corporation, ------- and any successor corporation. "Conversion Price" means the Conversion Price for Series B Preferred Stock, ---------------- as determined in accordance with the Articles of Incorporation. "Convertible Securities" means evidences of indebtedness, shares of stock ---------------------- or other securities which are convertible into or exchangeable for, with or without payment of additional consideration, shares of Common Stock, either immediately or upon the arrival of a specified date or the happening of a specified event or both. "Exchange Act" means the Securities Exchange Act of 1934, as amended, or ------------ any successor federal statute, and the rules and regulations of the Securities and Exchange Commission promulgated thereunder, all as the same shall be in effect from time to time. "Exercise Period" means the period commencing on the Closing Date and --------------- terminating at the earlier to occur of: (i) 5:00 p.m., Pacific Time on the tenth (10th) anniversary of the Closing Date, or (ii) 5:00 p.m., Pacific Time on the fifth (5th) anniversary of the closing of the Company's initial sale and issuance of shares of Common Stock in an underwritten public offering, pursuant to a Registration. "Exercise Price" means the price per share of Series B Preferred Stock set -------------- forth in the Preamble to this Warrant, as such price may be adjusted pursuant to Article IV hereof. "Fair Market Value" means ----------------- (i) If shares of Series B Preferred Stock or Common Stock, as the case may be, are being sold pursuant to a Registration and Fair Market Value is being determined as of the closing of the public offering, the "price to public" specified for such shares in the final prospectus for such public offering; (ii) If shares of Series B Preferred Stock or Common Stock, as the case may be, are then listed or admitted to trading on any national securities exchange or traded on any national market system and Fair Market Value is not being determined as of the date described in clause (i) of this definition, the average of the daily closing prices for the thirty (30) trading days before such date, excluding any trades which are not bona fide, arm's length transactions. The closing price for each day shall be the last sale price on such date or, if no such sale takes place -2- on such date, the average of the closing bid and asked prices on such date, in each case as officially reported on the principal national securities exchange or national market system on which such shares are then listed, admitted to trading or traded; (iii) If no shares of Series B Preferred Stock or Common Stock, as the case may be, are then listed or admitted to trading on any national securities exchange or traded on any national market system or being offered to the public pursuant to a Registration, the average of the reported closing bid and asked prices thereof on such date in the over-the-counter market as shown by the National Association of Securities Dealers automated quotation system or, if such shares are not then quoted in such system, as published by the National Quotation Bureau, Incorporated or any similar successor organization, and in either case as reported by any member firm of the New York Stock Exchange selected by the Holder; or (iv) If no shares of Series B Preferred Stock or Common Stock, as the case may be, are then listed or admitted to trading on any national exchange or traded on any national market system, if no closing bid and asked prices thereof are then so quoted or published in the over-the-counter market and if no such shares are being offered to the public pursuant to a Registration, the Fair Market Value of a share of Series B Preferred Stock or Common Stock, as the case may be, shall be determined by the Board of Directors of the Company; provided, -------- however, that if the Holders of a majority in interest under the Warrant give - ------- the Company written notice of objection to such value determination within twenty (20) days of receipt of notice of such determination, then the Company and such Holders shall, within five (5) days from the date of the Company's receipt of the Holders' objection, jointly retain a valuation firm satisfactory to each of them. If the Company and such Holders are unable to agree on the selection of such a firm within such five (5) day period, the Company and such Holders shall, within twenty (20) days after expiration of such five day period, each retain a separate independent valuation firm. If either the Company or such Holders fail to retain such a valuation firm during such twenty (20) day period, then the valuation firm retained by such Holders or the Company, as the case may be, shall alone take the actions described below. Such firms shall determine within thirty (30) days of being retained the Fair Market Value of a share of Series B Preferred Stock or Common Stock, as the case may be, and deliver their opinion in writing to the Company and to such Holders as to the fair value. If such firms cannot jointly agree upon the Fair Market Value, then, unless otherwise directed in writing by both the Company and such Holders, such firms, in their sole discretion, shall choose another firm independent of the Company and such Holders, which firm shall make such determination and render such an opinion as promptly as practicable. In either case, the determination so made shall be conclusive and binding on the Company and the Holders. The fees and expenses for such determination made by such firms shall be shared equally by the Company and such Holders. In the determination of the Fair Market Value of a share of Series B Preferred Stock or Common Stock, as the case may be, there shall not be taken into consideration any premium for shares representing control of the Company or any discount related to shares representing a minority interest therein or related to any illiquidity or lack of marketability of shares arising from restrictions on transfer under federal and applicable state securities laws or otherwise. "Fiscal Year" means the fiscal year of the Company. ----------- -3- "Holder" and "Holders" means the Person or Persons, as applicable, in whose ------ ------- name this Warrant is registered on the books of the Company maintained for such purpose. "Option" means any right, warrant or option to subscribe for or purchase ------ shares of Common Stock or Convertible Securities. "Person" means and includes natural persons, corporations, limited ------ partnerships, general partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts, government entities and authorities and other organizations, whether or not legal entities. "Preferred Stock" means the Preferred Stock of the Company, as defined in --------------- the Articles of Incorporation. "Principal Executive Office" means the Company's office at 4001 Burton -------------------------- Drive, Santa Clara, California 95054, or such other office as designated in writing to the Holder by the Company. "Public Merger" means an Acquisition of the Company in which the Common ------------- Stock shareholders of the Company receive securities which are listed or admitted to trading on any national securities exchange or traded on any national market system or approved for quotation in the National Association of Securities Dealers, Inc. automated quotation system or any similar system of automated dissemination of quotations of securities prices. "Register," "Registered" and "Registration" refer to a registration -------- ---------- ------------ effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement. "Rights Agreement" means the Amended and Restated Registration Rights ---------------- Agreement, dated as of June 1, 1994, by and among the Company and the shareholders of the Company named therein, attached hereto as Exhibit "E". ---------- "Rule 144" means Rule 144 as promulgated by the Commission under the -------- Securities Act, as such Rule may be amended from time to time, or any similar successor rule that the Commission may promulgate. "Securities Act" means the Securities Act of 1933, as amended, or any -------------- successor federal statute, and the rules and regulations of the Commission promulgated thereunder, all as the same shall be in effect from time to time. "Series B Preferred Stock" means the Series B Preferred Stock of the ------------------------ Company, as defined in the Articles of Incorporation. "Series B Purchase Agreement" means the Series B Preferred Stock Purchase --------------------------- Agreement, dated as of June 1, 1994, by and among the Company and the shareholders of the Company named therein, attached hereto as Exhibit "G". ----------- -4- "Shareholder" means a holder of one or more Warrant Shares or shares of ----------- Common Stock acquired upon conversion of Warrant Shares. "Warrant" means the warrant dated as of Closing Date issued to Holder and ------- all warrants issued upon the partial exercise, transfer or division of or in substitution for any Warrant. "Warrant Shares" means the shares of Series B Preferred Stock issuable upon -------------- the exercise of this Warrant provided that under the terms hereof there shall be a change such that the securities purchasable hereunder shall be issued by an entity other than the Company or there shall be a change in the type or class of securities purchasable hereunder, then the term shall mean the securities issuable upon the exercise of the rights granted hereunder. ARTICLE II EXERCISE -------- 2.1 Exercise Right; Manner of Exercise. The purchase rights represented ---------------------------------- by this Warrant may be exercised by the Holder, in whole or in part, at any time and from time to time during the Exercise Period upon (i) surrender of this Warrant, together with an executed Notice of Exercise, substantially in the form of Exhibit "A" attached hereto, at the Principal Executive Office, and (ii) ----------- payment to the Company of the aggregate Exercise Price for the number of Warrant Shares specified in the Notice of Exercise (such aggregate Exercise Price, the "Total Exercise Price"). The Total Exercise Price shall be paid by check; - --------------------- provided, however, that if the Warrant Shares are acquired in conjunction with a - -------- ------- Registration of such Warrant Shares or the Common Stock acquirable upon conversions of such Warrant Shares, then Holder may arrange for the aggregate Exercise Price for such Warrant Shares to be paid to the company from the proceeds of the sale of such Warrant Shares or the Common Stock acquirable upon conversion of such Warrant Shares pursuant to such Registration. The Person or Person(s) in whose name(s) any certificate(s) representing the Warrant Shares which are issuable upon exercise of this Warrant shall be deemed to become the holder(s) of, and shall be treated for all purposes as the record holder(s) of, such Warrant Shares, and such Warrant Shares shall be deemed to have been issued, immediately prior to the close of business on the date on which this Warrant and Notice of Exercise are presented and payment made for such Warrant Shares, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such Warrant Shares shall not then be actually delivered to such Person or Person(s). Certificates for the Warrant Shares so purchased shall be delivered to the Holder within a reasonable time, not exceeding fifteen (15) days after this Warrant is exercised. If this Warrant is exercised in part only, the Company shall, upon surrender of this Warrant for cancellation, deliver a new Warrant evidencing the rights of the Holder to purchase the balance of the Warrant Shares which Holder is entitled to purchase hereunder. The issuance of Warrant Shares upon exercise of this Warrant shall be made without charge to the Holder for any issuance tax with respect thereto or any other cost incurred by the Company in connection with the exercise of this Warrant and the related issuance of Warrant Shares. -5- 2.2 Conversion of Warrant. --------------------- (a) Right to Convert. In addition to, and without limiting, the other ---------------- rights of the Holder hereunder, the Holder hall have the right (the "Conversion ---------- Right") to convert this Warrant or any part hereof into Warrant Shares at any - ----- time and from time to time during the term hereof. Upon exercise of the Conversion Right with respect to a particular number of Warrant Shares (the "Converted Warrant Shares"), the Company shall deliver to the Holder, without - ------------------------- payment by the Holder of any Exercise Price or any cash or other consideration, that number of Warrant Shares computed using the following formula: X= B-A --- Y Where: X= The number of Warrant Shares to be issued to the Holder Y= The Fair Market Value of one Warrant Share as of the Conversion Date B= The Aggregate Fair Market Value (i.e., Fair Market Value x ---- Converted Warrant Shares) A= The Aggregate Exercise Price (i.e., Exercise Price x Converted ---- Warrant Shares) (b) Method of Exercise. The Conversion Right may be exercised by the ------------------ Holder by the surrender of this Warrant at the Principal Executive Office, together with a written statement the "Conversion Statement") specifying that -------------------- the Holder intends to exercise the Conversion Right and indicating the number of Warrant Shares to be acquired upon exercise of the Conversion Right. Such conversion shall be effective upon the Company's receipt of this Warrant, together with the Conversion Statement, or on such later date as is specified in the Conversion Statement (the "Conversion Date") and, at the Holder's election, --------------- may be made contingent upon the closing of the consummation of the sale of Common Stock pursuant to a Registration. Certificates for the Warrant Shares so acquired shall be delivered to the Holder within a reasonable time, not exceeding fifteen (15) days after the Conversion Date. If applicable, the Company shall, upon surrender of this Warrant for cancellation, deliver a new Warrant evidencing the rights of the Holder to purchase the balance of the Warrant Shares which Holder is entitled to purchase hereunder. The issuance of Warrant Shares upon exercise of this Warrant shall be made without charge to the Holder for any issuance tax with respect thereto or any other cost incurred by the Company in connection with the conversion of this Warrant and the related issuance of Warrant Shares. 2.3 Company's Option to Acquire Warrant. ----------------------------------- (a) Acquisition of the Company. In the event of any Acquisition of -------------------------- the Company, other than a Public Merger, the Company shall have the option to purchase this Warrant on the closing date of such event for cash in an amount per Warrant Share equal to the greater of (x) three (3) times the Exercise Price, less the Exercise Price, or (y) the excess (if any) -6- of the Market Value of a Warrant Share over the Exercise Price; provided, -------- however, that such option shall not be exercisable to the extent that the - ------- Holder exercises this Warrant in connection with such Acquisition of the Company; provided further, however, that such option shall not be exercisable ---------------- ------- if in connection with such Acquisition of the Company all other warrants to acquire securities of the Company will not expire and/or terminate, whether by their terms, complete exercise by the holders thereof or the exercise of purchase rights by the Company. The Market Value of each Warrant Share shall be determined by dividing the total consideration to be received by the Company or its shareholders in connection with such event by the number of shares of Common Stock then outstanding (assuming that all convertible securities of the Company have been converted into Common Stock). Any securities to be delivered to the Company or its shareholders shall be valued as follows: (A) If then listed or admitted to trading on any national securities exchange or traded on any national market system, the value of the securities shall be the average of the daily closing prices for the thirty (30) trading days ending five (5) business days before the closing of the transaction, excluding any trades which are not bona fide, arm's length transactions. The closing price for each day shall be the last sale price on such date or, if no such sale takes place on such date, the average of the closing bid and asked prices on such date, in each case as officially reported on the principal national securities exchange or national market system on which such shares are then listed, admitted to trading or traded; (B) If traded over-the-counter, the value of the securities shall be the average of the closing bid and ask prices thereof over the thirty (30) day period ending five (5) business days prior to the closing of the transaction, as shown by the National Association of Securities Dealers automated quotation system or, if such securities are not then quoted in such system, as published by the National Quotation Bureau, Incorporated or any similar successor organization, and in either case as reported by any member firm of the New York Stock Exchange selected by the Holder; and (C) If there is no public market, the value shall be the fair market value thereof as determined by mutual agreement of the Company and the Holders of a majority in interest under the Warrant; provided, however, that if the Company and such Holders are -------- ------- unable to mutually agree upon the value, and the value asserted by the Holder is not greater than one hundred ten percent (110%) of the value asserted by the Company, then the value of the securities shall be the sum of (1) the value asserted by the Company and (2) fifty percent (50%) of the difference between the value asserted by the Company and the value asserted by such Holders; provided further, however, that if the Company and such ---------------- ------- Holders are unable to mutually agree upon the value of the securities and the immediately preceding proviso is not operative, the value shall be determined by a valuation firm -7- or valuation firms in accordance with the procedures of the proviso of clause (iv) of the definition of Fair Market Value set forth above, which is set forth in this clause (C) by this reference, mutatis mutandis. (b) Registration. If the Company is selling Common Stock pursuant to ------------ a Registration, then the Company shall have the option to purchase this Warrant on the closing date of such Registration for cash in an amount per Warrant Share equal to the greater of (x) three (3) times the Exercise Price, less the Exercise Price, or (y) the excess, if any, of the Fair Market Value of a Warrant Share over the Exercise Price; provided, however, that such option shall not be -------- ------- exercisable to the extent that the Holder exercises this Warrant in connection with such Registration; provided further, however, that such option shall not be exercisable if in connection with such Registration all other warrants to acquire securities of the Company will not expire and/or terminate, whether by their terms, complete exercise by the holders thereof or the exercise of purchase rights by the Company. 2.4 Termination of Warrant. This Warrant shall terminate upon the closing ---------------------- of a Public Merger. 2.5 Fractional Shares. The Company shall not issue fractional shares of ----------------- Series B Preferred Stock or Common Stock or scrip representing fractional shares of Series B Preferred Stock or Common Stock upon any exercise or conversion of this Warrant. As to any fractional share of Series B Preferred Stock or Common Stock which the Holder would otherwise be entitled to purchase from the Company upon such exercise or conversion, the Company shall purchase from the Holder such fractional share at a price equal to an amount calculated by multiplying such fractional share (calculated to the nearest 1/100th of a share) by the fair market value of a share of Series B Preferred Stock or Common Stock, as applicable, on the date of the Notice of Exercise or the Conversion Date, as applicable, as determined in good faith by the Company's Board of Directors. Payment of such amount shall be made in cash or by check payable to the order of the Holder at the time of delivery of any certificate or certificates arising upon such exercise or conversion. 2.6 Continued Validity. A Shareholder shall be entitled to all rights to ------------------ which a Holder of this Warrant is entitled pursuant to the provisions of this Warrant, except rights which by their terms apply only to a Warrant. The Company shall, at the time of the exercise of this Warrant, in whole or in part, upon the request of a Shareholder, acknowledge in writing, in form reasonably satisfactory to the Shareholder, its continuing obligation to afford to the Shareholder all rights to which the Shareholder is entitled in accordance with the provisions of this Warrant; provided, however, that if the Shareholder fails -------- ------- to make any such request, such failure shall not affect the continuing obligation of the Company to afford to the Shareholder all such rights. ARTICLE III REGISTRATION, TRANSFER, EXCHANGE AND REPLACEMENT ------------------------------------------------ 3.1 Maintenance of Registration Books. The Company shall keep at the --------------------------------- Principal Executive Office a register in which, subject to such reasonable regulations as it may prescribe, it -8- shall provide for the registration, transfer and exchange of this Warrant. The Company and any Company agent may treat the Person in whose name this Warrant is registered as the owner of this Warrant for all purposes whatsoever and neither the Company nor any Company agent shall be affected by any notice to the contrary. 3.2 Restrictions on Transfers. ------------------------- (a) Compliance with Securities Act. The Holder, by acceptance hereof, ------------------------------ agrees that this Warrant, the Series B Preferred Stock to be issued upon exercise hereof and the shares of Common Stock to be issued upon conversion of such shares of Series B Preferred Stock are being acquired for investment, solely for the Holder's own account and not as a nominee for any other Person, and that the Holder will not offer, sell or otherwise dispose of this Warrant, any such shares of Series B Preferred Stock or any such shares of Common Stock except under circumstances which will not result in a violation of the Securities Act. Upon exercise of this Warrant, the Holder shall confirm in writing, by executing the form attached as Exhibit "B" hereto, that the shares ----------- of Series B Preferred Stock or Common Stock purchased thereby are being acquired for investment, solely for the Holder's own account and not as a nominee for any other Person, and not with a view toward distribution or resale. (b) Certificate Legends. This Warrant, all shares of Series B ------------------- Preferred Stock issued upon exercise of this Warrant (unless Registered under the Securities Act) , and all shares of Common Stock issued upon conversion of such shares of Series B Preferred Stock (unless Registered under the Securities Act) shall be stamped or imprinted with a legend in substantially the following form (in addition to any legends required by applicable state securities laws) THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NO SALE OR DISPOSITION OF SUCH SECURITIES MAY BE EFFECTED WITHOUT (i) AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO, (ii) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED, (iii) RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION, OR (iv) OTHERWISE COMPLYING WITH THE PROVISIONS OF ARTICLE III OF THE WARRANT UNDER WHICH THIS SECURITY WAS ISSUED. (c) Disposition of Warrant or Shares. With respect to any offer, sale -------------------------------- or other disposition of this Warrant, any shares of Series B Preferred Stock issued upon exercise of this Warrant or shares of Common Stock acquired pursuant to conversion of such shares of Series B Preferred Stock prior to Registration of such shares, the Holder or the Shareholder, as the case may be, agrees to give written notice to the Company prior thereto, describing briefly the manner thereof, together with a written opinion of the Holder's or Shareholder's counsel, if reasonably requested by Company, to the effect that such offer, sale or other disposition may be effected without Registration under the securities Act or qualification under any applicable state securities laws of this Warrant or such shares, as the case may be, and indicating whether or not under the -9- Securities Act certificates for this Warrant or such shares, as the case may be to be sold or otherwise disposed of require any restrictive legend as to applicable restrictions on transferability in order to insure compliance with the Securities Act. Promptly upon receiving such written notice and reasonably satisfactory opinion, if so requested, the Company, as promptly as practicable, shall notify the Holder or the Shareholder, as the case may be, that it may sell or otherwise dispose of this Warrant or such shares, as the case may be, all In accordance with the terms of the notice delivered to the Company. If a determination has been made pursuant to this subsection (c) that the opinion of counsel for the Holder or the Shareholder, as the case may be, is not reasonably satisfactory to the Company, the Company shall so notify the Holder or the Shareholder, as the case may be, promptly after such determination has been made and shall specify the legal analysis supporting any such conclusion. Notwithstanding the foregoing, this Warrant or such shares, as the case may be, may be offered, sold or otherwise disposed of in accordance with Rule 144, provided that the Company shall have been furnished with such information as the Company may reasonable request to provide reasonable assurance that the provisions of Rule 144 have been satisfied. Each certificate representing this Warrant or the shares thus transferred (except a transfer pursuant to Rule 144) shall bear a legend as to the applicable restrictions on transferability in order to insure compliance with the Securities Act, unless in the aforesaid reasonably satisfactory opinion of counsel for the Holder or the Shareholder, as the case may be, such legend is not necessary in order to insure compliance with the Securities Act. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. In the event of any conflict between the provisions of this Section 3.2 and the provisions of Exhibit "A" or Exhibit "C" hereto, the provisions of this Section 3.2 shall control. (d) Warrant Transfer Procedure. Transfer of this Warrant to a third -------------------------- party, following compliance with the preceding subsections of this Section 3.2, shall be effected by execution of the Assignment Form attached hereto as Exhibit ------- "C", and surrender for registration of transfer of this Warrant at the Principal - --- Executive Office, together with funds sufficient to pay any applicable transfer tax. Upon receipt of the duly executed Assignment Form and the necessary transfer tax funds, if any, and compliance with this Section 3.2, the Company, at its expense, shall execute and deliver, in the name of the designated transferee or transferees, one or more new Warrants representing the right to purchase a like aggregate number of shares of Series B Preferred Stock. (e) Termination of Restrictions. The restrictions imposed under this --------------------------- Section 3.2 upon the transferability of the Warrant, the shares of Series B Preferred Stock acquired upon the exercise of this Warrant and the shares of Common Stock issuable upon conversion of such shares of Series B Preferred Stock shall cease when (i) a registration statement covering all shares of Common Stock issued or issuable upon conversion of the Series B Preferred Stock becomes effective under the Securities Act, (ii) the Company is presented with an opinion of counsel reasonably satisfactory to the Company that such restrictions are no longer required in order to insure compliance with the Securities Act or with a Commission "no-action" letter that future transfers of such securities by the transferor or the contemplated transferee would be exempt from registration under the Securities Act, or (iii) such securities may be transferred in accordance with Rule 144(k). When such restrictions terminate, -10- the Company shall, or shall instruct its transfer agent to, promptly, and without expense to the Holder or the Shareholder, as the case may be, issue new securities in the name of the Holder and/or the Shareholder, as the case may be, not bearing the legends required under subsection (b) of this Section 3.2. In addition, new securities shall be issued without such legends if such legends may be properly removed under the terms of Rule 144(k). 3.3 Exchange. At the Holder's option, this Warrant may be exchanged for -------- other Warrants representing the right to purchase a like aggregate number of shares of Series B Preferred Stock upon surrender of this Warrant at the Principal Executive Office. Whenever this Warrant is so surrendered to the Company at the Principal Executive Office for exchange, the Company shall execute and deliver the Warrants which the Holder is entitled to receive. All Warrants issued upon any registration of transfer or exchange of Warrants shall be the valid obligations of the Company, evidencing the same rights; and entitled to the same benefits, as the Warrants surrendered upon such registration of transfer or exchange. No service charge shall be made for any exchange of this Warrant. 3.4 Replacement. Upon receipt of evidence reasonably satisfactory to the ----------- Company of the loss, theft, destruction or mutilation of this Warrant and (i) in the case of any such loss theft or destruction, upon delivery of indemnity reasonably satisfactory to the Company in form and amount, or (ii) in the case of any such mutilation, upon surrender of such Warrant for cancellation at the Principal Executive Office, the Company, at its expense, shall execute and deliver, in lieu thereof, a new Warrant. ARTICLE IV ANTIDILUTION PROVISIONS ----------------------- 4.1 Conversion of Series B Preferred Stock. If all of the Series B -------------------------------------- Preferred Stock is converted into shares of Common Stock in connection with a Registration, then this Warrant shall automatically become exercisable for that number of shares of Common Stock equal to the number of shares of Common Stock that would have been received if this Warrant had been exercised in full and the shares of Series B Preferred Stock received thereupon had been simultaneously converted into shares of Common Stock immediately prior to such event, and the Exercise Price shall be automatically adjusted to equal the amount obtained by dividing (i) the aggregate Exercise Price of the shares of Series B Preferred Stock for which this Warrant was exercisable immediately prior to such conversion, by (ii) the number of shares of Common Stock for which this Warrant is exercisable immediately after such conversion. 4.2 Reorganization, Reclassification or Recapitalization of the Company. -------------------------------------------------------------------- In case of (1) a capital reorganization, reclassification or recapitalization of the Company's capital stock (other than in the cases referred to in of Section 4.4 hereof), (2) the Company's consolidation or merger with or into another corporation in which the Company is not the surviving entity, or a reverse triangular merger in which the Company is the surviving entity but the shares of the Company's capital stock outstanding immediately prior to the merger are converted, by virtue of the merger, into other property, whether in the form of securities, cash or otherwise, or (3) the -11- sale or transfer of the Company's property as an entirety or substantially as an entirety, then, as part of such reorganization, reclassification, recapitalization, merger, consolidation, sale or transfer, lawful provision shall be made so that there shall thereafter be deliverable upon the exercise of this Warrant or any portion thereof (in lieu of or in addition to the number of shares of Series B Preferred Stock theretofore deliverable, as appropriate), and without payment of any additional consideration, the number of shares of stock or other securities or property to which the holder of the number of shares of Series B Preferred Stock which would otherwise have been deliverable upon the exercise of this Warrant or any portion thereof at the time of such reorganization, reclassification, recapitalization, consolidation, merger, sale or transfer would have been entitled to receive in such reorganization, reclassification, recapitalization, consolidation, merger, sale or transfer. This Section 4.2 shall apply to successive reorganizations, reclassifications, recapitalizations, consolidations, mergers, sales and transfers and to the stock or securities of any other corporation that are at the time receivable upon the exercise of this Warrant. If the per-share consideration payable to the Holder for shares of Series B Preferred Stock in connection with any transaction described in this Section 4.2 is in a form other than cash or marketable securities, then the value of such consideration shall be determined in good faith by the Company's Board of Directors. 4.3 Splits and Combinations. If the Company at any time subdivides any of ----------------------- its outstanding shares of Series B Preferred Stock into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision shall be proportionately reduced, and, conversely if the outstanding shares of Series B Preferred Stock are combined into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall be proportionately increased. Upon any adjustment of the Exercise Price under this Section 4.3, the number of shares of Series B Preferred Stock issuable upon exercise of this Warrant shall equal the number of shares determined by dividing (i) the aggregate Exercise Price payable for the purchase of all shares issuable upon exercise of this Warrant Immediately prior to such adjustment by (ii) the Exercise Price per share in effect immediately after such adjustment. 4.4 Reclassifications. If the Company changes any of the securities as to ----------------- which purchase rights under this Warrant exist into the same or a different number of securities of any other class or classes, this Warrant shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the counties that were subject to the purchase rights under this Warrant immediately prior to such reclassification or other change and the Exercise Price therefor shall be appropriately adjusted. No adjustment shall be made pursuant to this Section 4.4 upon any conversion described in Section 4.1 hereof. 4.5 Dividends and Distributions. If the Company declares a dividend or --------------------------- other distribution on the Series B Preferred Stock or if a dividend or other distribution on the Series B Preferred Stock occurs pursuant to the Articles of Incorporation (other than a cash dividend or distribution), then, as part of such dividend or distribution, lawful provision shall be made so that there shall thereafter be deliverable upon the exercise of this Warrant or any portion thereof, in addition to the number of shares of Series B Preferred Stock receivable thereupon and without payment of any additional consideration, the amount of the dividend or other distribution to -12- which the holder of the number of shares of Series B Preferred Stock obtained upon exercise hereof would have been entitled to receive had the exercise occurred as of the record date for such dividend or distribution. 4.6 Liquidation; Dissolution. If the Company shall dissolve, liquidate or ------------------------ wind up its affairs, the Holder shall the right, but not the obligation, to exercise this Warrant effective as of the date of such dissolution, liquidation or winding up. If any such dissolution, liquidation or winding up results in any cash distribution to the Holder in excess of the aggregate Exercise Price for the shares of Series B Preferred Stock for which this Warrant is exercised, then the Holder may, at its option, exercise this Warrant without making payment of such aggregate Exercise Price and, in such case, the Company shall, upon distribution to the Holder, consider such aggregate Exercise Price to have been paid in full, and in making such settlement to the Holder, shall deduct an amount equal to such Aggregate Exercise Price from the amount payable to the Holder. 4.7 Maximum Exercise Price. At no time shall the Exercise Price exceed ---------------------- the amount set forth in the Preamble to this Warrant, unless the Exercise Price is adjusted pursuant to section 4.3 hereof. 4.8 Other Dilutive Events. If any event occurs as to which the other --------------------- provisions of this Article IV are not strictly applicable but the failure to make any adjustment would not fairly protect the purchase rights represented by this Warrant in accordance with the essential intent and principles hereof, then, in each such case, the Board of Directors of the Company shall determine in good faith the adjustments, if any, on a basis consistent with the essential intent and principles established in this Article IV, necessary to preserve, without dilution, the purchase rights represented by this Warrant. Upon such determination, the Company shall promptly make such adjustments and notify the Holder thereof. 4.9 Amendment of Articles of Incorporation. So long as the Warrant is -------------------------------------- outstanding and no shares of Series B Preferred Stock are issued and outstanding and the Series B Preferred Stock has not been converted into Common Stock in connection with a Registration, the Company shall not amend, or otherwise take any action that would affect, Article III, Section (d) of the Articles of Incorporation, without the prior written consent of the Holders of majority in interest under this Warrant, given in their sole discretion. If the Articles of Incorporation are amended in violation of this Section 4.9, then the provisions of this Article IV shall be adjusted so that the Holder shall receive with respect to the shares of Common Stock received upon conversion of the shares of Series B Preferred Stock obtained upon exercise of this Warrant thereafter, what would have been received had the Articles of Incorporation not been so amended, open payment of the same amount as would have been required had the Articles of Incorporation not been so amended. 4.10 Certificates and Notices. ------------------------ (a) Adjustment Certificates. Upon any adjustment of the Exercise ----------------------- Price and/or the number of shares of Series B Preferred Stock purchasable upon exercise of this -13- Warrant, a certificate, signed by (i) the Company's President or Chief Financial Officer, or (ii) any independent firm of certified public accountants of recognized national standing the Company selects at its own expense, setting forth in reasonable detail the events requiring the adjustment and the method by which such adjustment was calculated, shall be mailed to the Holder and shall specify the adjusted Exercise Price and the number of shares of Series B Preferred Stock purchasable upon exercise of the Warrant after giving effect to the adjustment. (b) Extraordinary Corporate Events. If the Company, after the date ------------------------------ hereof, proposes to effect (i) any transaction described in Sections 4.2 or 4.4 hereof, (ii) a liquidation, dissolution or winding up of the Company described in Section 4.6 hereof, or (iii) any payment of a dividend or distribution with respect to Series B Preferred Stock or Common Stock, then, in each such case, the Company shall mail to the Holder a notice describing such proposed action and specifying the date on which the Company's books shall close, or a record shall be taken, for determining the holders of Series B Preferred Stock or Common Stock, as appropriate, entitled to participate in such action, or the date on which such reorganization, reclassification, consolidation, merger, sale, transfer, Liquidation, dissolution or winding up shall take place or commence, as the case may be, and the date as of which it is expected that holders of Series B Preferred Stock and Common Stock of record shall be entitled to receive securities and/or other property deliverable upon such action, if any such date is to be fixed. Such notice shall be mailed to the Holder at least fifteen (15) days prior to the record date for such action in the case of any action described in clause (i) or clause (iii) above, and in the case of any action described in clause (ii) above, at least fifteen (15) days prior to the date on which the action described is to take place and at least fifteen (15) days prior to the record date for determining holders of Series B Preferred Stock or Common Stock, as appropriate, entitled to receive securities and/or other property in connection with such action. 4.11 No Impairment. The Company shall not, by amendment of the Articles ------------- of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but shall at all times in good faith assist in the carrying out of all the provisions of this Article IV and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder against impairment. 4.12 Application. Except as otherwise provided herein, all sections of ----------- this Article IV are intended to operate independently of one another. If an event occurs that requires the application of more than one section, all applicable sections shall be given independent effect. ARTICLE V REGISTRATION RIGHTS ------------------- Concurrently with the execution and delivery of this Warrant, the Company shall cause the Holder to become a party to the Rights Agreement and the Holder shall be deemed a "Holder" as defined in the Rights Agreement, for purposes of the Rights Agreement and shall be -14- entitled to all the rights, and be subject to all the obligations, of a Holder under the Rights Agreement and the Common Stock issuable upon conversion of the Warrant Shares shall be deemed "Registrable Stock," as defined in the Rights Agreement, for purposes of the Rights Agreement. Such actions shall be effected by the Company executing and delivering the Holder a fully-executed Amendment to Rights Agreement substantially in the form of Exhibit "F" hereto. ----------- ARTICLE VI INFORMATION ----------- 6.1 Financial Information. Until such time that the Company has a class --------------------- of its equity securities registered under the Exchange Act and is required to file reports thereunder pursuant to Sections 13 or 15(d) of the Exchange Act, the Company shall deliver to the Holder, concurrently with its delivery to Purchasers described in Section 5 of the Series B Purchase Agreement, the financial information described in Section 5.2(a), Section 5.2(b), and Section 5.2(c) of the Series B Purchase Agreement, as such sections are in effect from time to time during the term hereof. If the Series B Purchase Agreement is terminated for any reason, and for so long as the Company does not have a class of its equity securities registered under the Exchange Act and is not required to file reports thereunder pursuant to Sections 13 or 15(d) of the Exchange Act, the Company shall deliver to the Holder all information that was required to be delivered to the Purchasers described in Section 5 of the Series B Purchase Agreement, pursuant to Section 5.2(a), Section 5.2(b), and Section 5.2(c) of the Series B Purchase Agreement, as such sections are now in effect. 6.2 Inspection. The Company shall permit the Holder, at the Holder's ---------- expense, to visit and inspect the Company's properties, to examine its books of account and records and to discuss the Company's affairs, finances and accounts with its officers, all at such reasonable times as may be requested by the Holder. ARTICLE VII REPRESENTATIONS, WARRANTIES AND COVENANTS OF COMPANY ---------------------------------------------------- 7.1 Representations and Warranties. The Company represents and warrants ------------------------------ that: (a) Legal Status; Qualification. The Company is a corporation duly --------------------------- organized, validly existing and in good standing under the laws of the State of California and is qualified or licensed to do business in all other countries, states and provinces in which the laws thereof require the Company to qualify and/or be licensed, except where failure to qualify or be licensed would not have a material adverse effect on the business or assets of the Company taken as a whole; (b) Capitalization. The Company's authorized capital stock consists -------------- of: (i) Six Million (6,000,000) shares of Preferred Stock, of which (A) Three Million Three Hundred Thousand (3,300,000) shares are designated as Series A Preferred Stock, of which series Three -15- Million One Hundred Seventy-Five Thousand (3,175,000) shares are issued and outstanding, and (B) Two Million Seven Hundred Thousand (2,700,000) shares are designated as Series B Preferred Stock, of which series Two Million Six Hundred Sixty-One Thousand Eight Hundred Twenty (2,661,320) shares are issued and outstanding; and (ii) Ten Million (10,000,000) shares of Common Stock, of which One Million Seven Hundred Seventy-Eight Thousand (1,773,000) shares are issued and outstanding; (c) Options. Except as described in Exhibit "D" hereto there are no ------- ----------- options, warrants or similar rights to acquire from the Company, or agreements or other obligations by the Company, absolute or contingent, to issue or sell Common Stock, whether on conversion or exchange of Convertible Securities or otherwise; (d) Preemptive Rights. Except as described in Exhibit "D", no ----------------- ----------- shareholder of the Company has any preemptive rights to subscribe for shares of Common Stock; (e) Authority. The Company has the right and power, and is duly --------- authorized and empowered, to enter into, execute, deliver and perform this Warrant; (f) Binding Effect. This Warrant has been duly authorized, executed -------------- and delivered and constitutes a valid and binding obligation of the Company enforceable in accordance with its terms; (g) No Conflict. The execution, delivery and/or performance by the ----------- Company of this Warrant shall not, by the lapse of time, the giving of notice or otherwise, constitute a violation of any applicable law or a breach of any provision contained in the Company's Articles of Incorporation or By-laws or contained in any agreement, instrument, or document to which the Company is a Party or by which it is bound; (h) Consents. No consent, approval, authorization or other order of -------- any court, regulatory body, administrative agency or other governmental body is required for the valid issuance of the Warrant or for the performance of any of the Company's obligations hereunder, except for the filing pursuant to Section 25102(f) of the California Corporate Securities Law of 1968, as amended, and the rules promulgated thereunder, which filing will be effected in accordance with such section and rules; (i) Offering. Neither the Company nor any agent acting on its behalf -------- has, either directly or indirectly, sold, offered for sale or disposed of, or attempted or offered to dispose of, this Warrant or any part hereof, or any similar obligation of the Company, to, or has solicited any offers to buy any thereof from, any person or persons other than the Holder. Neither the Company nor any agent acting on its behalf will sell or offer for sale or dispose of, or attempt or offer to dispose of, this Warrant or any part thereof to, or solicit any offers to buy any warrant of like tenor from, or otherwise approach or in respect thereof, with, any Person or Persons so as thereby to bring the issuance of this Warrant within the provisions of Section 5 of the Securities Act; -16- (j) Registration. It is not necessary in connection with the issuance ------------ and sale of this Warrant to the Holder to Register this Warrant under the Securities Act; and 7.2 Covenants. The Company covenants that: --------- (a) Authorized Shares. The Company will at all times have authorized, ----------------- and reserved for the purpose of issue or transfer upon exercise of the rights evidenced by this Warrant, a sufficient number of shares of Series B Preferred Stock to provide for the exercise of the rights represented by this Warrant (for purposes of determining compliance with this covenant, the shares of Series B Preferred Stock issuable upon exercise of all other options and warrants shall be deemed issued and outstanding), and a sufficient number of shares of Common Stock to provide for the conversion into Common Stock of all the shares of Series B Preferred Stock issued and issuable upon the exercise of this Warrant but theretofore unconverted (for purposes of determining compliance with this covenant, the shares of Common Stock issuable upon exercise of all options and warrants to acquire Common Stock and upon conversion of all instruments convertible into Common Stock shall be deemed issued and outstanding); (b) Proper Issuance. The Company, at its expense, will take all such --------------- action as may be necessary to assure that the Series B Preferred Stock issuable upon the exercise of this Warrant, and the Common Stock issuable upon the conversion of such Series B Preferred Stock, may be so issued without violation of any applicable law or regulation, or of any requirements of any domestic securities exchange upon which any capital stock of the Company may be listed. Such action may include, but not be limited to, causing such shares to be duly registered or approved or listed on relevant domestic securities exchanges; and (c) Fully Paid Shares. The Company will take all actions necessary or ----------------- appropriate to validly and legally issue (i) fully paid and non-assessable shares of Series B Preferred Stock upon exercise of this Warrant and (ii) fully paid and non-assessable shares of Common Stock upon conversion of such shares of Series B Preferred Stock. All such shares will be free from all taxes, liens and charges with respect to the issuance thereof, other than any stock transfer taxes in respect to any transfer occurring contemporaneously with such issuance. ARTICLE VIII MISCELLANEOUS ------------- 8.1 Certain Expenses. The Company shall pay all expenses in connection ---------------- with, and all taxes (other than stock transfer taxes) and other governmental charges that may be imposed in respect of, the issuance, sale and delivery of the Warrant, the Warrant Shares and the shares of Common Stock issuable upon conversion of the Warrant Shares. 8.2 Holder Not a Shareholder. Prior to the exercise of this Warrant as ------------------------ herein before provided, the Holder shall not be entitled to any of the rights of a shareholder of the Company including, without limitation, the right as a shareholder (i) to vote on or consent to any proposed action of the Company or (ii) except as provided herein, to receive (a) dividends or any other distributions made to shareholders, (b) notice of or attend any meetings of shareholders of the -17- Company, or (c) notice of any other proceedings of the Company. Notwithstanding the foregoing, the Company shall provide to the Holder the information delivered to shareholders as required pursuant to Section 6.1 hereof. 8.3 Like Tenor. All Warrants shall at all times be substantially ---------- identical except as to the Preamble. 8.4 Remedies. The Company stipulates that the remedies at law of the -------- Holder in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate to the fullest extent permitted by law, and that such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. 8.5 Enforcement Costs. If any party to, or beneficiary of, this Warrant ----------------- seeks to enforce its rights hereunder by legal proceedings or otherwise, then the non-prevailing party shall pay all reasonable costs and expenses incurred by the prevailing party, including, without limitation, all reasonable attorneys' fees. 8.6 Nonwaiver; Cumulative Remedies. No course of dealing or any delay or ------------------------------ failure to exercise any right hereunder on the part of the Holder and/or any Shareholder shall operate as a waiver of such right or otherwise prejudice the rights, powers or remedies of the Holder or such Shareholder. No single or partial waiver by the Holder and/or any Shareholder of any provision of this Warrant or of any breach or default hereunder or of any right or remedy shall operate as a waiver of any other provision, breach, default right or remedy or of the same provision, breach, default, right or remedy on a future occasion. The rights and remedies provided in this Warrant are cumulative and are in addition to all rights and remedies which the Holder and each Shareholder may have in law or in equity or by statute or otherwise. 8.7 Notices. Any notice, demand or delivery to be made pursuant to this ------- Warrant will be sufficiently given or made if personally delivered or sent by first class mail, postage prepaid, addressed to (a) the Holder and the Shareholders at their last known addresses appearing on the books of the Company maintained for such purpose or (b) the Company at its Principal Executive Office. The Holder, the Shareholders and the Company may each designate a different address by notice to the other pursuant to this Section 8.7. A notice shall be deemed effective upon the earlier of (i) receipt or (ii) the third day after mailing in accordance with the terms of this Section 8.7. 8.8 Successors and Assigns. This Warrant shall be binding upon the ---------------------- Company and any Person succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets, and all of the obligations of the Company with respect to the shares of Series B Preferred Stock issuable upon exercise of this Warrant and the shares of Common Stock issuable upon the conversion of such shares of Series B Preferred Stock, shall survive the exercise, expiration or termination of this Warrant and all of the covenants and agreements of the Company shall inure to the benefit of the Holder, each Shareholder and their -18- respective successors and assigns. The company shall, at the time of exercise of this Warrant, in whole or in part, upon request of the Holder or any Shareholder but at the Company's expense, acknowledge in writing its continuing obligations hereunder with respect to rights of the Holder or such Shareholder to which it shall continue to be entitled after such exercise in accordance with the terms hereof; provided that the failure of the Holder or any Shareholder to make any such request shall not affect the continuing obligation of the Company to the Holder or such Shareholder in respect of such rights. 8.9 Modification; Severability. -------------------------- (a) If, in any action before any court or agency legally empowered to enforce any term, any term is found to be unenforceable, then such term shall be deemed modified to the extent necessary to make it enforceable by such court or agency. (b) If any term is not curable as set forth in subsection (a) above, the unenforceability of such term shall not affect the other provisions of this Warrant but this Warrant shall be construed as if such unenforceable term had never been contained herein. 8.10 Integration. This Warrant replaces all prior and contemporaneous ----------- agreements and supersedes all prior and contemporaneous negotiations between the parties with respect to the transactions contemplated herein and constitutes the entire agreement of the parties with respect to the transactions contemplated herein. 8.11 Survival of Representations and Warranties. The representations and ------------------------------------------ warranties of the Company in this Warrant shall survive the execution and delivery of this Warrant and the consummation of the transactions contemplated hereby, notwithstanding any investigation by the Holder or its agents. 8.12 Amendment. This Warrant may not be modified or amended except by --------- written agreement of the Company and Holders and Shareholders holding or entitled to acquire a majority of the Warrant Shares then outstanding or issuable upon exercise of this Warrant. 8.13 Headings. The headings of the Articles and Sections of this Warrant -------- are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant. 8.14 Meanings. Whenever used in this Warrant, any noun or pronoun shall -------- be deemed to include both the singular and plural and to cover all genders; and the words "herein," "hereof" and "hereunder" and words of similar import shall refer to this instrument as a whole, including any amendments hereto. 8.15 Governing Law. This Warrant shall be governed by, and construed in ------------- accordance with, the laws of the State of California applicable to contracts entered into and to be performed wholly within California by California residents. -19- IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its duly authorized officer as of September 15, 1994. LATITUDE COMMUNICATIONS, INC. /s/ Emil Wang By:______________________________________ President & CEO Title:___________________________________ -20- EXHIBIT "A" ----------- NOTICE OF EXERCISE FORM ----------------------- (To be executed only upon partial or full exercise of the within Warrant) The undersigned registered Holder of the within Warrant hereby irrevocably exercises the within Warrant for and purchases shares of Series B Preferred Stock of Latitude Communications, Inc. and herewith makes payment therefor in the amount; of $_____, all at the price and on the terms and conditions specified in the within Warrant and requests that a certificate (or ___________ certificates in denominations of shares) for the shares of Series B Preferred Stock of Latitude Communications, Inc. hereby purchased be issued in the name of and delivered to (choose one) (a) the undersigned or (b) [NAME], whose address is _________________________________________________________________________ and, if such shares of Series B Preferred Stock shall not include all the shares of Series B Preferred Stock issuable as provided in the within Warrant, that a new Warrant of like tenor for the number of shares of Series B Preferred Stock of Latitude Communications, Inc. not being purchased hereunder be issued in the name of and delivered to (choose one) (a) the undersigned or (b) [NAME], whose address is ______________________________________________________. Dated: ____________________________________________, 199__ Signature Guaranteed ________________________________________ ________________________________________ By:_____________________________________ (Signature of Registered Holder) Title:__________________________________ NOTICE: The signature to this Notice of Exercise must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatever. The signature to this Notice of Exercise must be guaranteed by a commercial bank or trust company in the United States or a member firm of the New York Stock Exchange. EXHIBIT "B" ----------- INVESTMENT REPRESENTATION CERTIFICATE ------------------------------------- Purchaser: Company: Latitude Communications, Inc. Security: Series B Preferred Stock Amount: Date: In connection with the purchase of the above-listed securities (the "Securities"), the undersigned (the "Purchaser") represents to the Company as - ----------- --------- follows: (a) The Purchaser is aware of the Company's business affairs and financial condition, and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. The Purchaser is purchasing the Securities for its own account for investment purposes only and not with a view to, or for the resale in connection with, any "distribution" thereof for purposes of the Securities Act of 1933, as amended (the "Securities ---------- Act"); - --- (b) The Purchaser understands that the Securities have not been registered under the Securities Act in reliance upon a specific exemption therefor, which exemption depends upon, among other things, the bona fide nature of the Purchaser's investment intent as expressed herein. In this connection, the Purchaser understands that, In the view of the Securities and Exchange Commission ("SEC"), the statutory basis for such exemption may be unavailable if --- the Purchaser's representation was predicated solely upon a present intention to hold these Securities for the minimum capital gains period specified under tax statutes, for a deterred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one year or any other fixed period in the future; (c) The Purchaser further understands that the Securities must be held indefinitely unless subsequently registered under the Securities Act or unless an exemption from registration is otherwise available. Moreover, the Purchaser understands that the Company is under no obligation to register the Securities. In addition, the Purchaser understands that the certificate evidencing the Securities will be imprinted with the legend referred to in the Warrant under which the Securities are being purchased; (d) The Purchaser is aware of the provisions of Rule 144, promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof (or from an affiliate of such issuer), in a non-public offering subject to the satisfaction of certain conditions, if applicable, including, among other things: (i) the availability of certain public information about the Company; (ii) the resale occurring not less than two (2) years after the party has purchased and paid for the securities to be sold; (iii) the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934) and the amount of securities being sold during any three-month period not exceeding the specified limitations stated therein; (e) The Purchaser further understands that at the time it wishes to sell the Securities there may be no public market upon which to make such a sale, and that, even if such a public market upon which to make such a sale then exists, the Company may not be satisfying the current public information requirements of Rule 144, and that, in such event, the Purchaser may be precluded from selling the Securities under Rule 144 even if the two-year minimum holding period had been satisfied; (f) The Purchaser further understands that in the event all of the requirements of Rule 144 are not satisfied, registration under the Securities Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding; the fact that Rule 144 is not exclusive, the staff of the SEC has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk; and (g) The Purchaser is an "accredited investor" as defined in Regulation D as promulgated by the SEC. Date: _________________________, 199___ PURCHASER: ______________________________________ EXHIBIT "C" ----------- ASSIGNMENT FORM --------------- (To be executed only upon the assignment of the within Warrant) FOR VALUE RECEIVED, the undersigned registered Folder of the within Warrant hereby sells, assigns and transfers unto _______ whose address is ___________ ________ all of the rights of the undersigned under the within Warrant, with respect to ____________________ shares of Series B Preferred Stock of Latitude Communications, Inc. and, if such shares of Series B Preferred Stock shall not include all the shares of Series B Preferred Stock issuable as provided in the within Warrant, that a new Warrant of like tenor for the number of shares of Series B Preferred Stock of Latitude Communications, Inc. not being transferred hereunder be issued in the name of and delivered to the undersigned, and does hereby irrevocably constitute and appoint ______________________________________ attorney to register such transfer on the books of Latitude Communications, Inc. maintained for the purpose, with full power of substitution in the premises. Dated: ____________________________________________, 199__ Signature Guaranteed ________________________________________ ________________________________________ By:_____________________________________ (Signature of Registered Holder) Title:__________________________________ NOTICE: The signature to this Assignment must correspond with the name upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatever. The signature to this Notice of Assignment must be guaranteed by a commercial bank or trust company in the United States or a member firm of the New York Stock Exchange. EXHIBIT "D" ----------- OUTSTANDING OPTIONS AND PREEMPTIVE RIGHTS ----------------------------------------- (Sections 7.1(c) and 7.1(d)) EXHIBIT "E" ----------- RIGHTS AGREEMENT ---------------- (Article I) EXHIBIT "F" ----------- AMENDMENT TO RIGHTS AGREEMENT ----------------------------- (Article V) EXHIBIT "G" ----------- SERIES B PURCHASE AGREEMENT --------------------------- (Article I) EX-10.7 8 AMENDED & RESTATED REGISTRATION RIGHTS AGMT. Exhibit 10.7 LATITUDE COMMUNICATIONS, INC. AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT March 26, 1996 TABLE OF CONTENTS ----------------- Page ------ 1. Termination of Prior Rights............................................2 2. Registration...........................................................2 2.1 Definitions.....................................................2 2.2 Required Registration...........................................3 2.3 Registration Procedures.........................................3 2.4 Limitations on Required Registrations...........................4 2.5 Incidental Registration.........................................5 2.6 Limitations on Incidental Registration..........................6 2.7 Designation of Underwriter......................................6 2.8 Form S-3........................................................7 2.9 Cooperation by Prospective Sellers..............................7 2.10 Expenses of Registration........................................8 2.11 Indemnification.................................................8 2.12 Rights Which May Be Granted to Subsequent Investors............10 2.13 Transfer of Registration Rights................................11 2.14 Stand-off Agreement............................................12 3. Miscellaneous.........................................................12 3.1 Notices........................................................12 3.2 Modification; Waiver...........................................13 3.3 Entire Agreement...............................................13 3.4 Successors and Assigns.........................................13 3.5 Enforcement....................................................13 3.6 Execution and Counterparts.....................................14 3.7 Governing Law and Severability.................................14 3.8 Headings.......................................................14 AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT THIS AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made as of March 26, 1996, by and among Latitude Communications, Inc., a California corporation (the "Company"), and the investors listed on Schedule A attached hereto, each of which is herein referred to as an "Investor." RECITALS -------- The Company and certain of the Investors have entered into a Series A Preferred Stock Purchase Agreement dated April 22, 1993 (the "First Series A Purchase Agreement") and the Company and another Investor have entered into a Series A Preferred Stock Purchase Agreement dated September 13, 1993 (the "Second Series A Purchase Agreement"), pursuant to both of which certain Investors (the "Series A Investors") acquired shares of the Company's Series A Preferred Stock (the "Series A Shares"). The Company and certain other Investors (the "Series A Warrant Investors") have entered into an Equipment Lease Agreement dated as of June 30, 1993. In connection with the Equipment Lease Agreement, the Company has issued warrants (the "Series A Warrants") to the Warrant Investors to purchase an aggregate of 60,500 shares of the Company's Series A Preferred Stock (the "Series A Warrant Shares"). The Company and certain of the Investors (the "First Series B Investors") have entered into a Series B Preferred Stock Purchase Agreement dated June 1, 1994 (the "Series B Purchase Agreement"), pursuant to which the Series B Investors acquired shares of the Company's Series B Preferred Stock (the "Series B Shares"), and the Company and another Investor, Robert J. Finocchio, Jr. (the "New Investor," and collectively with the First Series B Investors, the "Series B Investors"), have entered into a Series B Preferred Stock Purchase Agreement dated as of December 22, 1995, pursuant to which the New Investor acquired Series B Shares. The Company and Phoenix Leasing Incorporated ("Phoenix," and collectively with the Series A Warrant Investors, the "Warrant Investors") have entered into a Senior Loan and Security Agreement dated as of September 15, 1994. In connection with the Senior Loan and Security Agreement, the Company has issued a warrant (the "Phoenix Warrant," and collectively with the Series A Warrants, the "Warrants") to Phoenix to purchase 29,091 Series B Shares (the "Phoenix Warrant Shares," and collectively with the Series A Warrant Shares, the "Warrant Shares"). The Company and certain of the Investors (the "Series C Investors") are entering into a Series C Preferred Stock Purchase Agreement dated March 26, 1996 (the "Series C Purchase Agreement"), pursuant to which the Series C Investors are acquiring shares of the Company's Series C Preferred Stock (the "Series C Shares"). The Company, the Series A Investors, the Series B Investors and the Warrant Investors have entered into the Amended and Restated Registration Rights Agreement dated December 22, 1995 (the "Prior Rights Agreement"), and wish to amend the Prior Rights Agreement to grant the Series C Investors the registration rights provided herein. NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, the parties agree as follows: 1. Termination of Prior Rights. Effective upon the execution of this --------------------------- Agreement by the Company and by the holders of at least 66 2/3% of the aggregate of the Series A Shares, the Series B Shares and the Warrant Shares, the Prior Rights Agreement is hereby amended and restated to read in its entirety as set forth herein. 2. Registration. ------------ 2.1 Definitions. As used herein, the following terms, have the ----------- following meanings: (a) "Forms S-1," "S-2" and "S-3:" The forms so designated, promulgated by the Commission for registration of securities under the Securities Act of 1933, as amended (the "Securities Act"), and any forms succeeding to the functions of such forms, whether or not bearing the same designation. (b) "Commission:" The Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. (c) "Holder:" A holder of Registrable Stock, provided that anyone who acquires any Registrable Stock in a distribution pursuant to a registration statement filed by the Company under the Securities Act shall not thereby be deemed to be a "Holder." (d) "Register," "registered" and "registration" refer to a registration effected by filing a registration statement in compliance with the Securities Act, and the declaration or ordering by the Commission of effectiveness of such registration statement. (e) "Registrable Stock:" (i) the shares of Common Stock issuable or issued upon conversion of the Series A Shares, (ii) The shares of Common Stock issuable or issued upon conversion of the Series B Shares, (iii) The shares of Common Stock issuable or issued upon conversion of the Series C Shares, -2- (iv) the shares of Common Stock issuable or issued upon conversion of the Warrant Shares (the shares of Common Stock referred to in clauses (i), (ii), (iii), (iv) and (v) hereof are collectively referred to hereafter as the "Stock"), and (v) any other shares of Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, the Stock, excluding in all cases, however, any Registrable Securities sold by a person in a transaction in which his or her rights under this Agreement are not assigned; provided, however, that Common Stock or other securities shall only be treated - -------- ------- as Registrable Stock if and so long as they have not been (A) sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction, or (B) sold in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act under Section 4(1) thereof so that all transfer restrictions, and restrictive legends with respect thereto, if any, are removed upon the consummation of such sale. 2.2 Required Registration. --------------------- (a) If the Holder or Holders of an aggregate of at least fifty percent (50%) of the Registrable Stock propose to dispose of their Registrable Stock (such Holder or Holders being herein called the "Initiating Holders"), the Initiating Holders may request the Company in writing to effect such registration, stating the number of shares of Registrable Stock to be disposed of by such Initiating Holders and the intended method of disposition, including, but not limited to, registration on Form S-1. Upon receipt of such request, the Company shall give prompt written notice thereof to all other Holders, whereupon such other Holders shall give written notice to the Company within 20 days after the date of the Company's notice (the "Notice Period") if they propose to dispose of any shares of Registrable Stock pursuant to such registration, stating the number of shares of Registrable Stock to be disposed of by such Holder or Holders and the intended method of disposition. (b) The Company will use its best efforts to effect promptly after the Notice Period the registration under the Securities Act of all shares of Registrable Stock specified in the requests of the Initiating Holders and the requests of the other Holders subject, however, to the limitations set forth in Section 2.4. 2.3 Registration Procedures. Whenever the Company is required by ----------------------- the provisions of this Section 2 to use its best efforts to effect promptly the registration of shares of Registrable Stock, the Company will: (a) prepare and file with the Commission a registration statement with respect to such shares and use its best efforts to cause such registration statement to become and remain effective as provided herein; (b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be -3- necessary to keep such registration statement effective and current and to comply with the provisions of the Securities Act with respect to the disposition of all shares covered by such registration statement, including such amendments and supplements as may be necessary to reflect the intended method of disposition from time to time of the prospective seller or sellers of such shares, but for no longer than one hundred twenty (120) days subsequent to the effective date of such registration in the case of a registration statement on Form S-1 or S-2 and for no longer than ninety (90) days in the case of a registration statement on Form S-3; (c) furnish to each prospective seller such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as such seller may reasonably request in order to facilitate the public sale or other disposition of the shares owned by such seller; (d) use its best efforts to register or qualify the shares covered by such registration statement under such other securities or blue sky or other applicable laws of such jurisdiction within the United States as each prospective seller shall reasonably request, to enable such seller to consummate the public sale or other disposition in such jurisdictions of the shares owned by such seller; provided, however, that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not at the time so qualified or to take any action which would subject it to service of process in suits other than those arising out of the offer or sale of the Registrable Stock covered by such registration statement in any jurisdiction where it is not at the time so subject; and (e) furnish to each prospective seller, to the extent requested by such seller, a signed counterpart, addressed to the prospective sellers, of (i) an opinion of counsel for the Company, dated the closing date of the sale of the applicable Registrable Stock, and (ii) a "comfort" letter signed by the independent public accountants who have certified the Company's financial statements included in the registration statement, covering substantially the same matters with respect to the registration statement (and the prospectus included therein) and (in the case of the "comfort" letter) with respect to events subsequent to the date of the financial statements, as are customarily covered in opinions of issuer's counsel and in "comfort" letters delivered to the underwriters in underwritten public offerings of securities. 2.4 Limitations on Required Registrations. ------------------------------------- (a) The Company shall not be required to effect more than two registrations pursuant to Section 2.2. The Company shall not be required to effect any registration unless the anticipated aggregate offering price, net of underwriting discounts and commissions, would exceed $2,000,000. (b) The Company shall not be required to cause a registration requested pursuant to Section 2.2 to become effective prior to the earlier of (i) three years after the date of the first closing under the Series C Purchase Agreement or (ii) six (6) months after the Company's initial registration with the Commission (other than a registration effected solely to implement an employee benefit plan or a transaction to which Rule 145 of the Commission is applicable). -4- (c) The Company shall not register securities for sale for its own account or for the account of holders of securities other than Registrable Stock in any registration requested pursuant to Section 2.2 without the written consent of Initiating Holders who hold at least 51% of the Registrable Stock as to which registration has been requested, unless such securities are entitled to be included in such registration only to the extent that the inclusion of such securities will not diminish the amount of Registrable Stock included in such registration or otherwise materially and adversely affect the right of the Initiating Holders to have their Registrable Securities registered. The Company may not cause any other registration of securities for sale for its own account (other than a transaction to which Rule 145 of the Commission is applicable or a registration effected solely to implement an employee benefit plan) to be initiated after a registration requested pursuant to Section 2.2 and to become effective less than 90 days after the effective date of any registration requested pursuant to Section 2.2. (d) Whenever a requested registration is for an underwritten offering, only shares which are to be included in the underwriting may be included in the registration. Notwithstanding the provisions of Sections 2.2(b) and 2.4(c), if the underwriter determines that (i) marketing factors require a limitation of the total number of shares to be underwritten, or (ii) the offering price per share would be reduced by the inclusion of the shares of the Company or others, then the number of shares to be included in the registration and underwriting shall first be allocated among all Holders who indicated to the Company their decision to distribute any of their Registrable Stock through such underwriting, in proportion, as nearly as practicable, to the respective numbers of shares of Registrable Stock owned by such Holders at the time of filing the registration statement, then, if any, to the Company and others. No stock excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. If the Company disapproves of any such underwriting, the Company may elect to withdraw therefrom by written notice to the Initiating Holders and the underwriter. The securities so withdrawn from such underwriting shall also be withdrawn from such registration. (e) If at the time of any request to register Registrable Stock pursuant to Section 2.2 hereof, the Company is engaged, or has fixed plans to engage within 90 days of the time of the request, in a registered public offering as to which the Holders may include Registrable Stock pursuant to Section 2.5 hereof or the Company is engaged in any other activity which, in the good faith determination of the Board, would be adversely affected by the requested registration to the material detriment of the Company, then the Company may at its option direct that such request be delayed for a period not in excess of 120 days from the effective date of such offering, or the date of commencement of such other material activity, as the case may be, such right to delay a request to be exercised by the Company not more than once in any 12- month period while the rights set forth in Section 2.2 are in effect. 2.5 Incidental Registration. If the Company at any time proposes ----------------------- to register any of its Common Stock under the Securities Act (other than a registration effected solely to implement an employee benefit plan or a transaction to which Rule 145 of the Commission is applicable), it will each such time give written notice to all Holders of its intention so to do. Upon the written request of a Holder or Holders given within 20 days after receipt of any such notice (stating the number of shares of Registrable Stock to be disposed of by such Holder or Holders and the intended method of disposition), the Company will use its best efforts -5- to cause all such shares intended to be disposed of, which the Holders shall have requested registration thereof, to be registered under the Securities Act so as to permit the disposition (in accordance with the methods in said request) by such Holder or Holders of the shares so registered, subject, however, to the limitations set forth in Section 2.6. 2.6 Limitations on Incidental Registration. If the registration -------------------------------------- of which the Company gives notice pursuant to Section 2.5 is for an underwritten offering, only securities which are to be included in the underwriting may be included in the registration. Notwithstanding any provision of Section 2.5, if the underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the underwriter may exclude or otherwise limit the number of shares, including Registrable Stock, requested to be included in the registration and underwriting to a number of shares not less than twenty percent (20%) of the aggregate number of shares to be disposed of in the registration and underwriting, unless the registration is for an initial public offering (in which case the percentage may be less). The Company shall so advise all Holders of any limitation (except those Holders who have not indicated to the Company their decision to distribute any of their Registrable Stock through such underwriting), and the number of shares, including Registrable Stock, that may be included in the registration and underwriting shall be allocated among the selling shareholders in proportion, as nearly as practicable, to the respective amounts of securities, including Registrable Stock, owned by such Holders and other selling shareholders entitled to be included therein at the time of filing the registration statement, in accordance with Section 2.12(a). No Registrable Stock excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. If any Holder disapproves of any such underwriting, such person may elect to withdraw therefrom by written notice to the Company and the underwriter. The Registrable Stock and/or other securities so withdrawn from such underwriting shall also be withdrawn from such registration. The registration rights granted under Sections 2.2, 2.5 and 2.8 shall terminate as to any Holder or permissible transferee or assignee of such rights if such person (a) holds one percent (1%) or less of the outstanding shares of Common Stock of the Company (on an as-converted basis) and (b) is permitted to sell all of the Registrable Stock held by him or her in a single transaction to the public pursuant to Rule 144. 2.7 Designation of Underwriter. -------------------------- (a) In the case of any registration effected pursuant to Section 2.2 or Section 2.8, a majority in interest of the requesting Holders shall have the right to designate the managing underwriter in any underwritten offering, which underwriter shall be reasonably acceptable to the Company. (b) In the case of any registration initiated by the Company, the Company shall have the right to designate the managing underwriter in any underwritten offering. -6- 2.8 Form S-3. The Company shall register its Common Stock under -------- the Securities Exchange Act of 1934, as amended, as promptly as reasonably practicable following the effective date of the first registration of any securities of the Company on Form S-1 and the Company shall thereafter effect all qualifications and compliances as would permit or facilitate the sale and distribution of its stock on Form S-3, to the extent available. After the Company has qualified for the use of Form S-3, the Holders shall have the right to request an unlimited number of registrations on Form S-3 (such requests shall be in writing and shall state the number of shares of Registrable Stock to be disposed of and the intended method of disposition) except that the Company (a) shall not be required to effect more than one registration pursuant to this Section 2.8 in any six-month period, and (b) shall not be required to effect a registration pursuant to this Section 2.8 unless the Holder or Holders requesting registration hold an aggregate of at least thirty percent (30%) of the Registrable Stock then outstanding and propose to dispose of shares of Registrable Stock having an aggregate expected public offering price (before deduction of underwriting discounts and expenses of sale) of at least $500,000. The Company shall give notice to all Holders of the receipt of a request for registration pursuant to this Section 2.8 and shall provide a reasonable opportunity for other Holders to participate in the registration, provided that if the registration is for an underwritten offering, the terms of Section 2.4(d) shall apply to all participants in such offering. Subject to the foregoing, the Company will use its best efforts to effect promptly the registration of all shares of Registrable Stock on Form S-3 to the extent requested by the Holder or Holders thereof. 2.9 Cooperation by Prospective Sellers. ---------------------------------- (a) Each prospective seller of Registrable Stock, and each underwriter designated by each such seller, will furnish to the Company such information as the Company may reasonably require from such seller or underwriter in connection with the registration statement (and the prospectus included therein). (b) Failure of a prospective seller of Registrable Stock to furnish the information and agreements described in this Section 2 shall not affect the obligations of the Company under this Section 2 to the remaining sellers who furnish such information and agreements unless, in the reasonable opinion of counsel to the Company or the underwriters, such failure impairs or may impair the viability of the offering or the legality of the registration statement or the underlying offering. (c) The Holders holding shares included in the registration statement will not (until further notice) effect sales thereof after receipt of telegraphic or written notice from the Company to suspend sales to permit the Company to correct or update a registration statement or prospectus but the obligations of the Company with respect to maintaining any registration statement current and effective shall be extended by a period of days equal to the period such suspension is in effect unless (i) such extension would result in the Company's inability to use the financial statements in the registration statement initially filed pursuant to the Holder or Holders' request and (ii) such correction or update did not result from the Company's acts or failures to act. -7- At the end of the period during which the Company is obligated to keep the registration statement current and effective as described in Section 2.3(b) (and any extensions thereof required by the preceding sentence), the Holders holding shares included in the registration statement shall discontinue sales of shares pursuant to such registration statement upon receipt of notice from the Company of its intention to remove from registration the shares covered by such registration statement which remain unsold, and such Holders shall notify the Company of the number of shares registered which remain unsold immediately upon receipt of such notice from the Company. 2.10 Expenses of Registration. All expenses incurred in effecting ------------------------ any registration pursuant to this Section 2 including, without limitation, all registration and filing fees, printing expenses, expenses of compliance with blue sky laws, fees and disbursements of counsel for the Company and expenses of any audits incidental to or required by any such registration, shall be borne by the Company, except that (a) all expenses, fees and disbursements of any counsel retained by the Holders and all underwriting discounts and commissions shall be borne by the Holders holding the securities registered pursuant to such registration, according to the quantity of the securities so registered; (b) the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Section 2.2 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered (in which case all participating Holders shall bear such expenses), unless the Holders of a majority of the Registrable Securities agree to forfeit their right to one demand registration pursuant to Section 2.2, provided however, that if immediately prior to the time of such withdrawal, the Holders have learned of a materially adverse change in the condition, business or prospects of the Company from that known to the Holders at the time of their request, then the Holders shall not be required to pay any of such expenses and shall retain their rights pursuant to Section 2.2; and (c) the Company shall not be required to pay any expenses associated with any registration of Registrable Stock requested by Holders pursuant to Section 2.8. 2.11 Indemnification. --------------- (a) To the extent permitted by law, the Company will indemnify each Holder requesting or joining in a registration, each agent, officer and director of such Holders, each person controlling such Holder and each underwriter and selling broker of the securities so registered (collectively, "Indemnitees") against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document incident to any registration, qualification or compliance (or in any related registration statement, notification or the like) or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances in which they were made, or any violation by the Company of any rule or regulation promulgated under the Securities Act applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance, and will reimburse each such Indemnitee, promptly and on a current basis from time to time, for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, provided, however, -------- ------- that the Company will not be liable in any such case to the extent that any such claim, loss, -8- damage or liability is caused by any untrue statement or omission so made in strict conformity with written information furnished to the Company by an instrument duly executed by such Indemnitees and stated to be specifically for use therein and except that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any such untrue statement (or alleged untrue statement) or omission (or alleged omission) made in the preliminary prospectus but eliminated or remedied in the amended prospectus on file with the Commission at the time the registration statement becomes effective or in the amended prospectus filed with the Commission pursuant to Rule 424(b) (the "Final Prospectus"), such indemnity agreement shall not inure to the benefit of any underwriter, or any Indemnitee if there is no underwriter, if a copy of the Final Prospectus was not furnished to the person or entity asserting the loss, liability, claim or damage at or prior to the time such furnishing is required by the Securities Act; provided, further, that this indemnity shall not be deemed to relieve any underwriter of any of its due diligence obligations; provided, further, that the indemnity agreement contained in this Section 2.11(a) shall not apply to amounts paid in settlement of any such claim, loss, damage, liability or action if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld. (b) To the extent permitted by law, each Holder requesting or joining in a registration and each underwriter of the securities so registered will indemnify the Company and its officers and directors and each other Holder and each person, if any, who controls any thereof within the meaning of Section 15 of the Securities Act and their respective successors against all claims, losses, damages and liabilities or actions in respect thereof arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document incident to any registration, qualification or compliance (or in any related registration statement, notification or the like) or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances in which they were made and will reimburse, promptly and on a current basis from time to time, the Company and each other person indemnified pursuant to this Section 2.11(b) for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, provided, however, that this Section -------- ------- 2.11(b) shall apply only if (and only to the extent that) such statement or omission was made in reliance upon and in strict conformity with written information (including, without limitation, written negative responses to inquiries) furnished to the Company by an instrument duly executed by such Holder or underwriter and stated to be specifically for use in such prospectus, offering circular or other document (or related registration statement, notification or the like) or any amendment or supplement thereto and except that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any such untrue statement (or alleged untrue statement) or omission (or alleged omission) made in the preliminary prospectus but eliminated or remedied in the amended Prospectus on file with the Commission at the time the registration statement becomes effective or in the Final Prospectus, such indemnity agreement by a Holder other than an underwriter shall not inure to the benefit of (i) the Company and (ii) any underwriter or any Holder, if there is no underwriter, if a copy of the Final Prospectus was not furnished to the person or entity asserting the loss, liability, claim or damage at or prior to the time such furnishing is required by the Securities Act; provided, further, that this indemnity shall not be -------- ------- deemed to relieve any underwriter of any of its due diligence obligations; provided, further, that the indemnity agreement - -------- ------- -9- contained in this Section 2.11(b) shall not apply to amounts paid in settlement of any such claim, loss, damage, liability or action if such settlement is effected without the consent of the Holder or underwriter, as the case may be, which consent shall not be unreasonably withheld, and provided, -------- further, that the obligations of such Holders shall be limited to an amount - ------- equal to the proceeds to each such Holder from the sale of Registrable Stock as contemplated herein, unless such claim, loss, damage, liability or action resulted from such Holder's fraudulent misconduct. (c) Each party entitled to indemnification hereunder (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party (at its expense) to assume the defense of any claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be satisfactory to the Indemnified Party, and the Indemnified Party may participate in such defense at such party's expense, and provided, further, that the omission by any Indemnified Party to give notice as - -------- ------- provided herein shall not relieve the Indemnifying Party of its obligations under this Section 2.11 except to the extent that the omission results in a failure of actual notice to the Indemnifying Party and such Indemnifying Party is damaged solely as a result of the failure to give notice. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. (d) The reimbursement required by this Section 2.11 shall be made by periodic payments during the course of the investigation or defense, as and when bills are received or expenses incurred. (e) The obligations under this Section 2.11 shall survive the redemption and conversion, if any, of the Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock, the completion of any offering of Registrable Stock in a registration statement under this Section 2, or otherwise. 2.12 Rights Which May Be Granted to Subsequent Investors. --------------------------------------------------- (a) Within the limitations prescribed by this Section 2.12(a), but not otherwise, the Company may grant to subsequent investors in the Company rights of incidental registration (such as those provided in Section 2.5). Such rights may only pertain to shares of Common Stock, including shares of Common Stock into which any other securities may be converted. Such rights may be granted with respect to (i) registrations actually requested by Initiating Holders pursuant to Section 2.2, but only in respect of that portion of any such registration as remains after inclusion of all Registrable Stock requested by Holders and (ii) registrations initiated by the Company, but only in respect of that portion of such registration as is available under the limitations set forth in Section 2.6 (which limitations shall apply to all Holders) and such rights shall be limited in all cases to sharing in the available portion of the registration in question with Holders, such sharing to be based on the number of shares of Common Stock held by the respective Holders and held by such other investors, plus the number of shares of Common -10- Stock into which other securities held by the Holders and such other investors are convertible, which are entitled to registration rights. With respect to registrations which are for underwritten public offerings, "available portion" shall mean the portion of the underwritten shares which is available as specified in clauses (i) and (ii) of the third sentence of this Section 2.12(a). Shares not included in such underwriting shall not be registered. (b) The Company may not grant to subsequent investors in the Company rights of registration upon request (such as those provided in Section 2.2) unless (i) such rights are limited to shares of Common Stock, (ii) all Holders are given enforceable contractual rights to participate in registrations requested by such subsequent investors (the right of priority of registration being pro rata as between subsequent investors and Holders), where such participation is on a pro rata basis between subsequent investors and Holders, (iii) subject to the limitations described in the final three sentences of Section 2.12(a), such rights shall not become effective prior to 90 days after the effective date of the first registration by the Company pursuant to Section 2.2 and (iv) such rights shall not be more favorable than those granted to the Holders. 2.13 Transfer of Registration Rights. The registration rights ------------------------------- granted to each Investor under this Section 2 may be transferred only: (a) to a transferee who shall acquire not less than 50,000 shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Registrable Stock (as adjusted for Recapitalization Events); or (b) in connection with the distribution by an Investor of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Registrable Stock to the beneficial owners (including, without limitation, to partners of a general or limited partnership, shareholders of a corporation and beneficiaries of a trust) of securities of the Investor; or (c) in the case of the Phoenix Warrant and the Series B Stock and Registrable Stock acquirable thereby, to an affiliate of Phoenix. The registration rights may only be transferred if the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; and only if immediately following such transfer the further disposition of the applicable securities by the transferee or assignee is restricted under the Securities Act. Notwithstanding any provision of this Section 2.13, the registration rights granted to each Investor under this Section 2 may not be assigned to any person or entity which, in the Company's reasonable judgment, is a competitor of the Company. 2.14 "Stand-off" Agreement. In consideration for the Company --------------------- performing its obligations under this Section 2 each Investor agrees for a period of time (not to exceed 180 days) from the effective date of any registration of securities of the Company (upon request of the Company or of the underwriters managing any underwritten offering of the Company's securities) not to sell, make any short sale of, loan, grant any option for the purchase of, or -11- otherwise dispose of any Registrable Stock, other than shares of Registrable Stock included in the registration, without the prior written consent of the Company or such underwriters, as the case may be, provided, however, that all -------- ------- officers and directors of the Company and each holder of more than 5% of the outstanding Common Stock shall have entered into similar agreements. 3. Miscellaneous. ------------- 3.1 Notices. All notices, requests, consents and other ------- communications herein (except as stated in the last sentence of this Section 3.1) shall be in writing and shall be mailed by first-class or certified mail, postage prepaid, or personally delivered, as follows: (a) If to the Company: Latitude Communications, Inc. 2121 Tasman Drive Santa Clara, CA 95054 with a copy to: Mr. Mark A. Medearis Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 (b) If to the Investors: at their respective addresses set forth on Schedule A hereto ---------- with a copy to: Mr. Allen L. Morgan Wilson Sonsini Goodrich & Rosati Professional Corporation 650 Page Mill Road Palo Alto, CA 94304-1050 or such other addresses as each of the parties hereto may provide from time to time in writing to the other parties. For purposes of computing the time periods set forth herein, the date of mailing shall be deemed to be the delivery date. 3.2 Modification; Waiver. Neither this Agreement nor any -------------------- provision hereof may be changed, waived, discharged or terminated orally or in writing, except that any provision of this Agreement may be amended and the observance of any such provision may be waived (either generally or in a particular instance and either retroactively or prospectively) with (but only with) the written consent of (a) the Company, and (b) the Holders of at least 66-2/3% of the -12- Registrable Stock (assuming the exercise and/or conversion of all exercisable or convertible securities). Any amendment or waiver effected in accordance with this paragraph shall be binding upon each Holder of Registrable Securities, and the Company. In the event that an underwriting agreement is entered into between the Company and any Holder, and such underwriting agreement contains terms differing from this Agreement, as to any such Holder the terms of such underwriting agreement shall govern. 3.3 Entire Agreement. This Agreement contains the entire ---------------- agreement between the parties with respect to the transactions contemplated hereby, and supersedes all negotiations, agreements, representations, warranties, commitments, whether in writing or oral, prior to the date hereof. 3.4 Successors and Assigns. Subject to Section 2.13, all of the ---------------------- terms of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto. 3.5 Enforcement. ----------- (a) Remedies at Law or in Equity. If the Company shall default ---------------------------- in any of its obligations under this Agreement or if any representation or warranty made by or on behalf of the Company in this Agreement or in any certificate, report or other instrument delivered under or pursuant to any term hereof shall be untrue or misleading in any material respect as of the date of this Agreement or as of the date it was made, furnished or delivered, each Investor may proceed to protect and enforce its rights by suit in equity or action at law, whether for the specific performance of any term contained in this Agreement, the Company's Articles or for an injunction against the breach of any such term or in furtherance of the exercise of any power granted in this Agreement or the Company's Articles, or to enforce any other legal or equitable right of such Investor or to take any one or more of such actions. In the event any Investor brings such an action against the Company, the prevailing party in such dispute shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement or the Company's Articles, including without limitation such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all reasonable fees, costs and expenses of appeals. (b) Remedies Cumulative; Waiver. No remedy referred to herein is --------------------------- intended to be exclusive, but each shall be cumulative and in addition to any other remedy referred to above or otherwise available to each Investor at law or in equity. No express or implied waiver by any Investor of any default shall be a waiver of any future or subsequent default. The failure or delay of each Investor in exercising any rights granted it hereunder shall not constitute a waiver of any such right and any single or partial exercise of any particular right by any Investor shall not exhaust the same or constitute a waiver of any other right provided herein. -13- 3.6 Execution and Counterparts. This Agreement may be executed in -------------------------- any number of counterparts, each of which when so executed and delivered shall be deemed an original, and such counterparts together shall constitute one instrument. Each party shall receive a duplicate original of the counterpart copy or copies executed by it and by the Company. 3.7 Governing Law and Severability. This Agreement shall be ------------------------------ governed by the laws of the State of California as applied to agreements entered into and to be performed entirely within California. In the event any provision of this Agreement or the application of any such provision to any part shall be held by a court of competent jurisdiction to be contrary to law, the remaining provisions of this Agreement shall remain in full force and effect. 3.8 Headings. The descriptive headings of the Sections hereof are -------- inserted for convenience only and do not constitute a part of this Agreement. -14- IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. LATITUDE COMMUNICATIONS, INC. By: /s/Emil Wang ----------------------------- Title: President & CEO -------------------------- "INVESTOR" ---------------------------------- By: ----------------------------- Title: --------------------------- IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. LATITUDE COMMUNICATIONS, INC. By: ----------------------------- Title: -------------------------- "INVESTOR" Mayfield VII ---------------------------------- By: /s/Kevin A. Fong ----------------------------- Title: General Partner --------------------------- IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. LATITUDE COMMUNICATIONS, INC. By: ----------------------------- Title: -------------------------- "INVESTOR" Mayfield Associates Fund II ---------------------------------- By: /s/Kevin A. Fong ----------------------------- Title: General Partner --------------------------- IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. LATITUDE COMMUNICATIONS, INC. By: ----------------------------- Title: -------------------------- "INVESTOR" Menlo Ventures IV, L.P. By: MV Management IV, L.P. its General Partner By: /s/Thomas H. Bredt ----------------------------- General Partner IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. LATITUDE COMMUNICATIONS, INC. By: ----------------------------- Title: -------------------------- "INVESTOR" VLG Investments 1996 ---------------------------------- By: /s/Mark A. Medearis ----------------------------- Title: Partner --------------------------- IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. LATITUDE COMMUNICATIONS, INC. By: ----------------------------- Title: -------------------------- "INVESTOR" Mark A. Medearis ---------------------------------- By: /s/Mark A. Medearis ----------------------------- Title: --------------------------- IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. LATITUDE COMMUNICATIONS, INC. By: ----------------------------- Title: -------------------------- "INVESTOR" Craig W. Johnson ---------------------------------- By: /s/Craig W. Johnson ----------------------------- Title: --------------------------- IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. LATITUDE COMMUNICATIONS, INC. By: ----------------------------- Title: -------------------------- "INVESTOR" Canaan Ventures II Limited Partnership By: Canaan Venture Partners II L.P. By: /s/ Deepak Kamra ------------------------------ Deepak Kamra General Partner IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. LATITUDE COMMUNICATIONS, INC. By: ----------------------------- Title: -------------------------- "INVESTOR" Canaan Ventures II Offshore Limited Partnership C.V. By: Canaan Venture Partners II L.P. By: /s/ Deepak Kamra ------------------------------- Deepak Kamra General Partner ------------------------------- IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. LATITUDE COMMUNICATIONS, INC. By: -------------------------------- Title: ----------------------------- "INVESTOR" Asset Management Associates 1996, ------------------------------------- L.P. ------------------------------------- By: /s/ W. Ferrell Sanders -------------------------------- Title: General Partner of AMC ------------------------------ PARTNERS 96, L.P. THE GENERAL ------------------------------ PARTNER OF ASSET MANAGEMENT ------------------------------ ASSOCIATES 1996 L.P. ------------------------------ IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. LATITUDE COMMUNICATIONS, INC. By: ----------------------------- Title: -------------------------- "INVESTOR" James Patterson ----------------------------------- By: /s/Jason L. Patterson ----------------------------- Title: Trustee for the Patterson --------------------------- Family Trust dated 8/26/88 --------------------------- IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. LATITUDE COMMUNICATIONS, INC. By: ----------------------------- Title: -------------------------- "INVESTOR" Stanford University ----------------------------------- By: /s/Carol Gilmer ----------------------------- Title: --------------------------- SCHEDULE A ----------
Shares of Shares of Shares of Series A Shares of Series B Shares of Series A Preferred Series B Preferred Series C Name and Address Preferred Stock Preferred Stock Preferred Stock Subject to Stock Subject Stock Warrants to Warrants - ----------------------- ------------- ------------- ------------ ------------ -------------- Mayfield VII 1,671,250 1,007,576 534,375 2800 Sand Hill Road Menlo Park, CA 94025 Attn: Kevin A. Fong Mayfield Associates 78,750 53,030 28,125 Fund II 2800 Sand Hill Road Menlo Park, CA 94025 Attn: Kevin A. Fong Menlo Ventures IV, L.P. 1,250,000 757,576 937,500 3000 Sand Hill Road Building 4, Suite 100 Menlo Park, CA 94025 Attn: Thomas H. Bredt Aspect Telecommunications 50,000 36,364 Corporation 1730 Fox Drive San Jose, CA 95131 Attn: James R. Carreker Robert R. Maxfield, 25,000 Trustee Under Agreement Dated 12/14/87, As Amended 12930 Saratoga Avenue Suite B-3 Saratoga, CA 95070 VLG Investments 1993 20,000 4,365 2,000 2800 Sand Hill Road Menlo Park, CA 94025 Attn: Mark A. Medearis Mark A. Medearis and 2,500 545 Kathryn H. Medearis, Trustees of the Medearis Family Trust U/D/T dated March 18, 1992 527 Tennyson Palo Alto, CA 94301 Mark A. Medearis 1,000 527 Tennyson Palo Alto, CA 94301
Shares of Shares of Shares of Series A Shares of Series B Shares of Series A Preferred Series B Preferred Series C Name and Address Preferred Stock Preferred Stock Preferred Stock Subject to Stock Subject Stock Warrants to Warrants - ----------------------- ------------- ------------- ------------ ------------ -------------- Craig W. Johnson 2,500 545 1,000 c/o Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 William E. Kirsch 10,450 873 Santa Cruz Avenue Menlo Park, CA 94025 Glen McLaughlin 44,000 873 Santa Cruz Avenue Menlo Park, CA 94025 Steven M. Costella, 6,050 Trustee of The Steven M. Costella Trust, dated May 8, 1989 873 Santa Cruz Avenue Menlo Park, CA 94025 James Patterson 75,000 20,000 115 Glen Ridge Road Los Gatos, CA 95030 The Patterson Family 12,500 Trust, dated 8/26/88 115 Glen Ridge Road Los Gatos, CA 95030 Canaan Ventures II 105,818 97,000 Limited Partnership 2884 Sand Hill Road Building 1, Suite 115 Menlo Park, CA 94025 Attention: Deepak Kamra Canaan Ventures II 166,909 153,000 Offshore Limited Partnership C.V. 2884 Sand Hill Road Building 1, Suite 115 Menlo Park, CA 94025 Attention: Deepak Kamra Asset Management 454,546 Associates 1989, L.P. 2275 East Bayshore Road, Suite 150 Palo Alto, CA 94303 Attention: W. Ferrell Sanders
Shares of Shares of Shares of Series A Shares of Series B Shares of Series A Preferred Series B Preferred Series C Name and Address Preferred Stock Preferred Stock Preferred Stock Subject to Stock Subject Stock Warrants to Warrants - ----------------------- ------------- ------------- ------------ ------------ -------------- Asset Management 250,000 Associates 1996, L.P. 2275 East Bayshore Road, Suite 150 Palo Alto, CA 94303 Attention: W. Ferrell Sanders Stanford University 54,546 12,500 c/o Stanford Management Attn: Carol Gilmer 2770 Sand Hill Road Menlo Park, CA 94025 Robert J. Finocchio, 25,000 Jr. c/o 3Com Corporation 5400 Bayfront Plaza Santa Clara, CA 95052 Phoenix Leasing 29,091 Incorporated Attn: Marie F. Hogan 2401 Kerner Boulevard San Rafael, CA 94901
EX-10.8 9 LEASE AGREEMENT DATED JULY 31, 1995 EXHIBIT 10.8 LEASE AGREEMENT THIS LEASE, made this 31st day of July , 1995 between JOHN ARRILLAGA, Trustee, or his Successor Trustee, UTA dated 7/20/77 (ARRILLAGA FAMILY TRUST) as amended, and RICHARD T. PEERY, Trustee, or his Successor Trustee, UTA dated 7/20/77 (RICHARD T. PEERY SEPARATE PROPERTY TRUST) as amended , hereinafter called Landlord, and LATITUDE COMMUNICATIONS a California corporation, hereinafter called Tenant. WITNESSETH: Landlord hereby leases to Tenant and Tenant hereby hires and takes from Landlord those certain premises (the "Premises") outlined in red on Exhibit "A", attached hereto and incorporated herein by this reference thereto more particularly described as follows: A portion of that certain 51,200+ square foot, two-story building located at 2121 Tasman Drive, Santa Clara,. California 95054, consisting of approximately 39,157+ square feet of space. Said Premises is more particularly shown within the area outlined in Red on Exhibit A. The entire parcel, of which the Premises ---------- is a part, is shown within the area outlined in Green on Exhibit A attached --------- hereto. The Premises is leased on an "as-is" basis, and in the improved configuration as shown in Red on Exhibit B to be attached hereto. --------- As used herein the Complex shall mean and include all of the land outlined in Green and described in Exhibit "A", attached hereto, and all of the buildings, improvements, fixtures and equipment now or hereafter situated on said land. Said letting and hiring is upon and subject to the terms, covenants and conditions hereinafter set forth and Tenant covenants as a material part of the consideration for this Lease to perform and observe each and all of said terms, covenants and conditions. This Lease is made upon the conditions of such performance and observance. 1. USE Tenant shall use the Premises only in conformance with applicable governmental laws, regulations, rules and ordinances for the purpose of general office, light manufacturing, research and development, and storage and other uses necessary for Tenant to conduct Tenant's business, provided that such uses shall be in accordance with all applicable governmental laws and ordinances and for no other purpose. Tenant shall not do or permit to be done in or about the Premises or the Complex nor bring or keep or permit to be brought or kept in or about the Premises or the Complex anything which is prohibited by or will in any way increase the existing rate of (or otherwise affect) fire or any insurance coveting the Complex or any part thereof, or any of its contents, or will cause a cancellation of any insurance covering the Complex or any part thereof, or any of its contents. Tenant shall not do or permit to be done anything in, on or about the' Premises or the Complex which will in any way obstruct or interfere with the rights of other tenants or occupants of the Complex or injure or annoy them, or use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Premises or the Complex. No sale by auction shall be permitted on the Premises. Tenant shall not place any loads upon the floors, walls, or ceiling, which endanger the structure, or place any harmful fluids or other materials in the drainage system of the building, or overload existing electrical or other mechanical systems. No waste materials or refuse shall be dumped upon or permitted to remain upon any part of the Premises or outside of the building in which the Premises are a part, except in trash containers placed inside exterior enclosures designated by Landlord for that purpose or inside of the building proper where designated by Landlord. No materials, supplies, equipment, finished products or semi-finished products, raw materials or articles of any nature shall be stored upon or permitted to remain outside the Premises or on any portion of common area of the Complex. No loudspeaker or other device, system or apparatus which can be heard outside the Premises shall be used in or at the Premises without the prior written consent of Landlord. Tenant shall not commit or suffer to be committed any waste in or upon the Premises. Tenant shall indemnify, defend and hold Landlord harmless against any loss. expense, damage, attorneys' fees, or liability arising out of failure of Tenant to comply with any applicable law. Tenant shall comply with any covenant, condition, or restriction ("CC&R's") affecting the Premises. The provisions of this paragraph are for the benefit of Landlord only and shall not be construed to be for the benefit of any tenant or occupant of the Complex. 2. TERM * A. The term of this Lease shall be for a period of FIVE (5) years (unless sooner terminated as hereinafter provided) and, subject to Paragraphs 2(B) and 3, shall commence on the 1st day of January , 1996 and end on the 31st day December, of 2000. B. Possession of the Premises shall be deemed tendered and the term of this Lease shall commence when the first of the following occurs: (a) One day after a Certificate of Occupancy is granted by the proper governmental agency, or, if the governmental agency having jurisdiction over the area in which the Premises are situated does not issue certificates of occupancy, then the same number of days after certification by Landlord's architect or contractor that Landlord's construction work has been completed; or (b) Upon the occupancy of the Premises by any of Tenant's operating personnel; or (c) When the Tenant Improvements have been substantially completed for Tenant's use and occupancy, in accordance and compliance with Exhibit B of this Lease Agreement; Notwithstanding anything to the contrary herein, it is agreed by the parties hereto, that said Lease shall not commence prior to January 1, 1996 unless any of Tenant's operating personnel occupy any part of the Premises prior to January 1, 1996; or (d) As otherwise agreed in writing. 3. POSSESSION If Landlord, for any reason whatsoever, cannot deliver possession of said premises to Tenant at the commencement of the said term, as hereinbefore specified, this Lease shall not be void or voidable; no obligation of Tenant shall be affected thereby nor shall Landlord or Landlord's agents be liable to Tenant for any loss or damage resulting therefrom; but in that event the commencement and termination dates of the Lease, and all other dates affected thereby shall be revised to conform to the date of Landlord's delivery of possession, as specified in Paragraph 2 (b), above. The above is, however, subject to the provision that the period of delay, of delivery of the premises shall not exceed 60 days from the commencement date herein (except those delays caused by Acts of God, strikes, war, utilities, governmental bodies, weather, unavailable materials, and delays beyond Landlord's control shall be excluded in calculating such period) in which instance Tenant, at its option, may, by written notice to Landlord, terminate this Lease. * It is agreed in the event said Lease commences on a date other than the first day of the month the term of the Lease will be extended to account for the number of days in the partial month. The Basic Rent during the resulting partial month will be pro-rated (for the number of days in the partial month) at the Basic Rent scheduled for the projected commencement date as shown in Paragraph 43. page 1 of 8 4. RENT A. Basic Rent. Tenant agrees to pay to Landlord at such place as Landlord may designate without deduction, offset, prior notice, or demand, and Landlord agrees to accept as Basic Rent for the leased Premises the total sum of TWO MILLION TWO HUNDRED THIRTY ONE THOUSAND NINE HUNDRED FORTY NINE AND NO/100 ($2,231,949.00) Dollars in lawful money of the United States of America, payable as follows: See Paragraph 43 for Basic Rent Schedule. B. Time for Payment. In the event that the term of this Lease commences on a date other than the first day of a calendar month, on the date of commencement of the term hereof Tenant shall pay to Landlord as rent for the period from such date of commencement to the first day of the next succeeding calendar month that proportion of the monthly rent hereunder which the number of days between such date of commencement and the first day of the next succeeding calendar month bears to thirty (30). In the event that the term of this Lease for any reason ends on a date other than the last day of a calendar month, on the first day of the last calendar month of the term hereof Tenant shall pay to Landlord as rent for the period from said first day of said last calendar month to and including the last day of the term hereof that proportion of the monthly rent hereunder which the number of days between said first day of said last calendar month and the last day of the term hereof bears to thirty (30). C. Late Charge. Notwithstanding any other provision of this Lease, if Tenant is in default in the payment of rental as set forth in this Paragraph 4 when due, or any part thereof, Tenant agrees to pay Landlord, in addition to the delinquent rental due, a late charge for each rental payment in default ten (10) days. Said late charge shall equal ten (10%) percent of each rental payment so in default. D. Additional Rent. Beginning with the commencement date of the term of this Lease, Tenant shall pay to Landlord in addition to the Basic Rent and as Additional Rent following: (a) Tenant's proportionate share of all Taxes relating to the Complex as set forth in Paragraph 12, and (b) Tenant's proportionate share of all insurance premiums relating to the Complex, as set forth in Paragraph 15, and (c) Tenant's proportionate share of expenses for the operation, management, maintenance and repair of the Building (including common areas of the Building) and common Areas of the Complex in which the Premises are located as set forth in Paragraph 7, and (d) All charges, costs and expenses, which Tenant is required to pay hereunder, together with all interest and penalties, costs and expenses including attorneys' fees and legal expenses, that may accrue thereto in the event of Tenant's failure to pay such amounts, and all damages, reasonable costs and expenses which Landlord may incur by reason of default of Tenant or failure on Tenant's part to comply with the terms of this Lease. In the event of nonpayment by Tenant of Additional Rent, Landlord shall have all the rights and remedies with respect thereto as Landlord has for nonpayment of rent. The Additional Rent due hereunder shall be paid to Landlord or Landlord's agent (i) within five days for taxes and insurance and within thirty (30) days for all other Additional Rent items after presentation of invoice from Landlord or Landlord's agent setting forth such Additional Rent and/or (ii) at the option of Landlord, Tenant shall pay to Landlord monthly, in advance, Tenant's prorata share of an amount estimated by Landlord to be Landlord's approximate average monthly expenditure for such Additional Rent items, which estimated amount shall be reconciled within 120 days of the end of each calendar year or more frequently if Landlord so elects to do so at Landlord's sole and absolute discretion, as compared to Landlord's actual expenditure for said Additional Rent items, with Tenant paying to Landlord, upon demand, any amount of actual expenses expended by Landlord in excess of said estimated amount, or Landlord refunding to Tenant (providing Tenant is not in default in the performance of any of the terms, covenants and conditions of this Lease) any amount of estimated payments made by Tenant in excess of Landlord's actual expenditures for said Additional Rent items. The respective obligations of Landlord and Tenant under this paragraph shall survive the expiration or other termination of the term of this Lease, and if the term hereof shall expire or shall otherwise terminate on a day other than the last day of a calendar year, the actual Additional Rent incurred for the calendar year in which the term hereof expires or otherwise terminates shall be determined and settled on the basis of the statement of actual Additional Rent for such calendar year and shall be prorated in the proportion which the number of days in such calendar year preceding such expiration or termination bears to 365. Within thirty (30) days after receipt of Landlord's reconciliation, Tenant shall have the right, at Tenant's sole expense, to audit, at a mutually convenient time at Landlord's office, Landlord's records relating to the foregoing expenses. Such audit must be conducted by Tenant or an independent nationally recognized accounting firm that is not being compensated by Tenant or other third party on a contingency fee basis. If such audit reveals that Landlord has overcharged Tenant, the amount overcharged shall be credited to Tenant's account within thirty (30) days after the audit is concluded. E. Place of Payment of Rent and Additional Rent. All Basic Rent hereunder and all payments hereunder for Additional Rent shall be paid to Landlord at the office of Landlord at Peery/Arrillaga, File 1504, Box 60000: San Francisco, CA 94160 or to such other person or to such other place as Landlord may from time to time designate in writing. * F. Security Deposit. Subject to Paragraph 50, concurrently with Tenant's execution of this Lease, Tenant shall deposit with Landlord the sum of EIGHTY TWO THOUSAND TWO HUNDRED TWENTY NINE AND 70/100 ($82,229.70) Dollars. Said sum shall be held by Landlord as a Security Deposit for the faithful performance by Tenant of all of the terms, covenants, and conditions of this Lease to be kept and performed by Tenant during the term hereof. If Tenant defaults with respect to any provision of this Lease, including, but not limited to, the provisions relating to the payment of rent and any of the monetary sums due herewith. Landlord may (but shall not be required to) use, apply or retain all or any part of this Security Deposit for thc payment of any other amount which Landlord may spend by reason of Tenant's default or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of said Deposit is so used or applied, Tenant shall, within ten (10) days after written demand therefor, deposit cash with Landlord in the amount sufficient to restore the Security Deposit to its original amount. Tenant's failure to do so shall be a material breach of this Lease. Landlord shall not be required to keep this Security Deposit separate from its general funds, and Tenant shall not be entitled to interest on such Deposit. If Tenant fully and faithfully performs every provision of this Lease to be performed by it. the Security Deposit or any balance thereof shall be returned to Tenant (or at Landlord's option, to the last assignee of Tenant's interest hereunder) at the expiration of the Lease term and after Tenant has vacated the Premises. In the event of termination of Landlord's interest in this Lease. Landlord shall transfer said Deposit to Landlord's successor in interest whereupon Tenant agrees to release Landlord from liability for the return of such Deposit or the accounting therefor. 5. RULES AND REGULATIONS AND COMMON AREA Subject to the terms and conditions of this Lease and such Rules and Regulations as Landlord may from time to time prescribe, Tenant and Tenant's employees, invitees and customers shall, in common with other occupants of the Complex in which the Premises are located, and their respective employees, invitees and customers, and others entitled to the use thereof, have the non-exclusive right to use the access roads, parking areas, and facilities provided and designated by Landlord for the general use and convenience of the occupants of the Complex in which the Premises are located, which areas and facilities are referred to herein as "Common Area". This right shall terminate upon the termination of this Lease. Landlord reserves the right from time to time to make changes in the shape, size, location, amount and extent of Common Area. Landlord further reserves the right to promulgate such reasonable rules and regulations relating to the use of the Common Area, and any part or parts thereof, as Landlord may deem appropriate for the best interests of the occupants of the Complex. The Rules and Regulations shall be binding upon Tenant upon delivery of a copy of them to Tenant, and Tenant shall abide by them and cooperate in their observance. Such Rules and Regulations may be amended by Landlord from time to time, with or without advance notice, and all amendments shall be effective upon delivery of a copy to Tenant. Landlord shall not be responsible to Tenant for the non-performance by any other tenant or occupant of the Complex of any of said Rules and Regulations. Landlord shall operate, manage and maintain the Common Area. The manner in which the Common Area shall be maintained and the expenditures for such maintenance shall be at the discretion of Landlord. * $41,114.85 due upon Lease execution. $41,114.85 Promissory Note due January 1, 1997. page 2 of 8 6. PARKING Tenant shall have the right to use with other tenants or occupants of the Complex 144 parking spaces in the common parking areas of the Complex. Tenant agrees, that Tenant, Tenant's employees, agents, representatives and/or invitees shall not use parking spaces in excess of said 144 spaces allocated to Tenant hereunder. Landlord shall have the right, at Landlord's sole discretion, to specifically designate the location of Tenant's parking spaces within the common parking areas of the Complex in the event of a dispute among the tenants occupying the building and/or Complex referred to herein, in which event Tenant agrees that Tenant, Tenant's employees, agents, representatives and/or invitees shall not use any parking spaces other than those parking spaces specifically designated by Landlord for Tenant's use. Said parking spaces, if specifically designated by Landlord to Tenant, may be relocated by Landlord at any time, and from time to time. Landlord reserves the right, at Landlord's sole discretion, to rescind any specific designation of parking spaces, thereby returning Tenant's parking spaces to the common parking area. Landlord shall give Tenant written notice of any change in Tenant's parking spaces. Tenant shall not, at any time, park, or permit to be parked, any trucks or vehicles adjacent to the loading areas so as to interfere in any way with the use of such areas, nor shall Tenant at any time park. or permit the parking of Tenant's trucks or other vehicles or the trucks and vehicles of Tenant's suppliers or others, in any portion of the common area not designated by Landlord for such use by Tenant. Tenant shall not park nor permit to be parked, any inoperative vehicles or equipment on any portion of the common parking area or other common areas of the Complex. Tenant agrees to assume responsibility for compliance by its employees with the parking provision contained herein. If Tenant or its employees park in other than such designated parking areas, then Landlord may charge Tenant, as an additional charge, and Tenant agrees to pay, ten ($10.00) Dollars per day for each day or partial day each such vehicle is parked in any area other than that designated. Tenant hereby authorizes Landlord at Tenant's sole expense to tow away from the Complex any vehicle belonging to Tenant or Tenant's employees parked in violation of these provisions, or to attach violation stickers or notices to such vehicles. Tenant shall use the parking areas for vehicle parking only, and shall not use the parking areas for storage. 7. EXPENSES OF OPERATION, MANAGEMENT, AND MAINTENANCE OF THE COMMON AREAS OF THE COMPLEX AND BUILDING IN WHICH THE PREMISES ARE LOCATED As Additional Rent and in accordance with Paragraph 4 D of this Lease, Tenant shall pay to Landlord Tenant's proportionate share (calculated on a square footage or other equitable basis as calculated by Landlord) of all expenses of operation, management, maintenance and repair of the Common Areas of the Complex including, but not limited to, license, permit, and inspection fees; security: utility charges associated with exterior landscaping and lighting (including water and sewer charges): all charges incurred in the maintenance of landscaped areas, lakes, parking lots. sidewalks, driveways: maintenance, repair and replacement of all fixtures and electrical, mechanical, and plumbing systems: structural elements and exterior surfaces of the buildings; salaries and employee benefits of personnel and payroll taxes applicable thereto; supplies, materials, equipment and tools; the cost of capital expenditures which have the effect of reducing operating expenses, provided, however, that in the event Landlord makes such capital improvements, Landlord shall amortize its investment in said improvements (together with interest at the rate of fifteen (15%) percent per annum on the unamortized balance) as an operating expense in accordance with standard accounting practices, provided, that such amortization is not at a rate greater than the anticipated savings in the operating expenses. "Additional Rent" as used herein shall not include Landlord's debt repayments; interest on charges: expenses directly or indirectly incurred by Landlord for the benefit of any other tenant; cost for the installation of partitioning or any other tenant improvements; cost of attracting tenants; depreciation; interest, or executive salaries. As Additional Rent and in accordance with paragraph 4 D of this Lease. Tenant shall pay its proportionate share (calculated on a square footage or other equitable basis as calculated by Landlord) of the cost of operation (including common utilities), management, maintenance, and repair of the building (including common areas such as lobbies, restrooms, janitor's closets, hallways, elevators, mechanical and telephone rooms, stairwells, entrances, spaces above the ceilings and janitorization of said common areas) in which the Premises are located. The maintenance items herein referred to include, but are not limited to, all windows, window frames, plate glass, glazing, truck doors, main plumbing systems of the building (such as water and drain lines, sinks, toilets, faucets, drains, showers and water, fountains), main electrical systems (such as panels and conduits), heating and airconditioning systems (such as compressors, fans, air handlers, ducts, boilers, heaters), store fronts, roofs. downspouts, building common area interiors (such as wall coverings, window coverings, floor coverings and partitioning), ceilings, building exterior doors, skylights (if any), automatic fire extinguishing systems, and elevators: license, permit, and inspection fees; security; salaries and employee benefits of personnel and payroll taxes applicable thereto; supplies, materials, equipment and tools: the cost of capital expenditures which have the effect of reducing operating expenses, provided, however, that in the event Landlord makes such capital improvements, Landlord shall amortize its investment in said improvements (together with interest at the rate of fifteen (15%) percent per annum on the unamortized balance) as an operating expense in accordance with standard accounting practices, provided, that such amortization is not at a rate greater than the anticipated savings in the operating expenses. Tenant hereby waives all rights under, and benefits of, subsection 1 of Section 1932 and Sections 1941 and 1942 of the California Civil Code and under any similar law, statute or ordinance now or hereafter in effect. 8. ACCEPTANCE AND SURRENDER OF PREMISES By entry hereunder, Tenant accepts the Premises as being in good and sanitary order, condition and repair and accepts the building and improvements included in the Premises in their present condition and without representation or warranty by Landlord as to the condition of such building or as to the use or occupancy which may be made thereof. Any exceptions to the foregoing must be by written agreement executed by Landlord and Tenant. Tenant agrees on the last day of the Lease term, or on the sooner termination of this Lease, to surrender the Premises promptly and peaceably to Landlord in good condition and repair (damage by Acts of God, fire, normal wear and tear excepted), with all interior walls painted, or cleaned so that they appear freshly painted, and repaired and replaced, if damaged; all floors cleaned and waxed; all carpets cleaned and shampooed; the airconditioning and heating equipment serviced by a reputable and licensed service firm and in good operating condition (provided the maintenance of such equipment has been Tenant's responsibility during the term of this Lease) together with all alterations, additions, and improvements which may have been made in, to, or on the Premises (except movable trade fixtures installed at the expense of Tenant) except that Tenant shall ascertain from Landlord within thirty (30) days before the end of the term of this Lease whether Landlord desires to have the Premises or any part or parts thereof restored to their condition and configuration as when the Premises were delivered to Tenant and if Landlord shall so desire, then Tenant shall restore said Premises or such part or parts thereof before the end of this Lease at Tenant's sole cost and expense. Tenant, on or before the end of the term or sooner termination of this Lease, shall remove all of Tenant's personal property and trade fixtures from the Premises, and all property not so removed on or before the end of the term or sooner termination of this Lease shall be deemed abandoned by Tenant and title to same shall thereupon pass to Landlord without compensation to Tenant. Landlord may, upon termination of this Lease, remove all moveable furniture and equipment so abandoned by Tenant, at Tenant's sole cost, and repair any damage caused by such removal at Tenant's sole cost. If the Premises be not surrendered at the end of the term or sooner termination of this Lease. Tenant shall indemnify Landlord against loss or liability resulting from the delay by Tenant in so surrendering the Premises including, without limitation, any claims made by any succeeding tenant founded on such delay. Nothing contained herein shall be construed as an extension of the term hereof or as a consent of Landlord to any holding over by Tenant. The voluntary or other surrender of this Lease or the Premises by Tenant or a mutual cancellation of this Lease shall not work as a merger and. at the option of Landlord, shall either terminate all or any existing subleases or subtenancies or operate as an assignment to Landlord of all or any such subleases or subtenancies. 9. ALTERATIONS AND ADDITIONS Tenant shall not make, or suffer to be made, any alteration or addition to the Premises, or any part thereof, without the written consent of Landlord first had and obtained by Tenant, but at the cost of Tenant, and any addition to, or alteration of, the Premises, except moveable furniture and trade fixtures, shall at once become a part of the Premises and belong to Landlord, Landlord reserves the right to approve all contractors and mechanics proposed by Tenant to make such alterations and additions. Tenant shall retain title to all moveable furniture and trade fixtures placed in the Premises. All heating, lighting, electrical, airconditioning, floor-to-ceiling partitioning, drapery, carpeting, and floor installations made by Tenant, together with all property that has become an integral part of the Premises, shall not be deemed trade fixtures. Non-floor-to-ceiling cubicles shall be considered trade fixtures. Tenant agrees that it will not proceed to make such alteration or additions, without having obtained consent from Landlord to do so, and until five (5) days from the receipt of such consent, in order that Landlord may post appropriate notices to avoid any liability to contractors or material suppliers for payment for Tenant's improvements. Tenant will at all times permit such notices to be posted and to remain posted until the completion of work. Tenant shall, if required by Landlord. secure at Tenant's own cost and expense, a completion and lien indemnity bond, satisfactory to Landlord, for such work. Tenant further covenants and agrees that any mechanic's lien filed against the Premises or against the Complex for work claimed to have been done for, or materials claimed to have been furnished to Tenant, will be discharged by Tenant, by bond or otherwise, within ten (l0) days after the filing thereof, at the cost and expense of Tenant. Any exceptions to the foregoing must he made in writing and executed by both Landlord and Tenant. 10. TENANT MAINTENANCE. Subject to paragraphs 54 and 55 Tenant shall, at its sole cost and expense, keep and maintain the Premises (including appurtenances) and every part thereof in a high standard of maintenance and repair, and in good and sanitary condition. Tenant's maintenance and repair responsibilities herein referred to include, but are not limited to, janitorization, plumbing systems within the non-common areas of the Premises (such as water and drain lines, sinks), electrical systems within the non-common areas of the Premises (such as outlets, lighting fixtures, lamps, bulbs, tubes, ballasts), heating and airconditioning controls within the non-common areas of the Premises (such as mixing boxes, thermostats, time clocks, supply and return grills), all interior improvements within the premises including but not limited to: wall coverings, window coverings, acoustical ceilings, vinyl tile, carpeting, partitioning, doors (both interior and exterior, including closing mechanisms, latches, locks), and all other interior improvements of any nature whatsoever. Tenant agrees to provide carpet shields under all rolling chairs or to otherwise be responsible for wear and tear of the carpet caused by such rolling chairs if such wear and tear exceeds that caused by normal foot traffic in surrounding areas. Areas of excessive wear shall be replaced at Tenant's sole expense upon Lease termination. page 3 of 8 11. UTILITIES OF THE BUILDING IN WHICH THE PREMISES ARE LOCATED As Additional Rent and in accordance with paragraph 4 D of this Lease. Tenant shall pay its proportionate share (calculated on a square footage or other equitable basis as calculated by Landlord) of the cost of all utility charges such as water, gas, electricity, telephone, telex and other electronic communication, service, sewer service, waste-pick-up and any other utilities, materials or services furnished directly to the building in which the Premises are located, including, without limitation, any temporary or permanent utility surcharge or other exactions whether or not hereinafter imposed. Landlord shall not be liable for and Tenant shall not be entitled to any abatement or reduction of rent by reason of any interruption or failure of utility services to the Premises when such interruption or failure is caused by accident, breakage, repair, strikes, lockouts, or other labor disturbances or labor disputes of any nature, or by any other cause, similar or dissimilar, beyond the reasonable control of Landlord. Provided that Tenant is not in default in the performance or observance of any of the terms, covenants or conditions of this Lease to be performed or observed by it. Landlord shall furnish to the Premises between the hours of 8:00AM and 6:00PM Mondays through Fridays (holidays excepted) and subject to the rules and regulations of the Complex hereinbefore referred to, reasonable quantities of water gas and electricity suitable for the intended use of the Premises and heat and airconditioning required in Landlord's judgment for the comfortable use and occupation of the Premises for such purposes. Tenant agrees that at all times it will cooperate fully with Landlord and abide by all regulations and requirements that Landlord may prescribe for the proper functioning and protection of the building heating, ventilating and airconditioning systems. Whenever heat generating machines, equipment or any other devices (including exhaust fans) are used in the Premises by Tenant which affect the temperature or otherwise maintained by the airconditioning system. Landlord shall have the right to install supplementary airconditioning units in the Premises and the cost thereof, including the cost of installation and the cost of operation and maintenance thereof, shall be paid by Tenant to Landlord upon demand by Landlord, Tenant will not, without the written consent of Landlord, use any apparatus or device in the Premises (including, without limitation) electronic data processing machines or machines using current in excess of 110 Volts which will in any way increase the amount of electricity, gas, water or airconditioning usually furnished or supplied to premises being used as general office space, or connect with electric current (except through existing electrical outlets in the Premises), or with gas or water pipes an apparatus or device for the purposes of using electric current gas or water. If Tenant shall require water, gas, or electric current in excess of that usually furnished or supplied to premises being used as general office space, Tenant shall first obtain the written consent of Landlord which consent shall not be unreasonably withheld and Landlord may cause an electric current gas, or water meter to be installed in the Premises in order to measure the amount of electric current, gas or water consumed for any such excess use. The cost of any such meter and of the installation, maintenance and repair thereof all charges for such excess water, gas and electric current consumed (as shown by such meters and at the rates then charged by the furnishing public utility): and any additional expense incurred by Landlord in keeping account of electric current, gas or water so consumed shall be paid by Tenant, and Tenant agrees to pay Landlord therefor promptly upon demand by Landlord. Tenant may, from time to time, have its staff and equipment operate on a twenty-four (24) hours-a-day seven (7) days-a-week schedule, and Tenant shall pay for any extra utilities used by Tenant. Landlord acknowledges that Tenant may use electrical current up to 220 volts subject to the terms and conditions of this Paragraph 11. 12. TAXES. A. As Additional Rent and in accordance with Paragraph 4 D of this Lease. Tenant shall pay to Landlord Tenant's proportionate share of all Real Property Taxes. which prorata share shall be allocated to the leased Premises by square footage or other equitable basis, as calculated by Landlord. The term "Real Property Taxes", as used herein, shall mean (i) all taxes assessments, levies and other charges of any kind or nature whatsoever, general and special, foreseen and unforeseen (including all installments of principal and interest required to pay any general or special assessments for public improvements and any increases resulting from reassessments caused by any change in ownership of the Complex) now or hereafter imposed by any governmental or quasi-governmental authority or special district having the direct or indirect power to tax or levy assessments, which are levied or assessed against, or with respect to the value, occupancy or use of all or any portion of the Complex (as now constructed or as may at any time hereafter be constructed, altered or otherwise changed) or Landlord's interest therein: any improvements located within the Complex (regardless of ownership): the fixtures, equipment and other property of Landlord. real or personal, that are an integral part of and located in the Complex; or parking areas, public utilities, or energy within the Complex; (ii) all charges, levies or fees imposed by reason of environmental regulation or other governmental control of the Complex; and (iii) all costs and fees (including attorneys' fees) incurred by Landlord in contesting any Real Property Tax and in negotiating with public authorities as to any Real Property Tax. If at any time during the term of this Lease the taxation or assessment of the Complex prevailing as of the commencement date of this Lease shall be altered so that in lieu of or in addition to any Real Property Tax described above there shall be levied, assessed or imposed (whether by reason of a change in the method of taxation or assessment, creation of a new tax or charge, or any other cause) an alternate or additional tax or charge (i) on the value, use or occupancy of the Complex or Landlord's interest therein or (ii) on or measured by the gross receipts, income or rentals from the Complex, on Landlords business of leasing the Complex, or computed in any manner with respect to the operation of the Complex, then any such tax or charge, however designated, shall be included within the meaning of the term "Real Property Taxes" for purposes of this Lease. If any Real Property Tax is based upon property or rents unrelated to the Complex, then only that part of such real Property Tax that is fairly allocable to the Complex shall be included within the meaning of the term "Real Property Taxes". Notwithstanding the foregoing, the term "Real Property Taxes" shall not include estate, inheritance, gift or franchise taxes of Landlord or the federal or state net income tax imposed on Landlord's income from all sources. B. Taxes of Tenant's Property. (a) Tenant shall be liable for and shall pay ten days before delinquency, taxes levied against any personal property or trade fixtures placed by Tenant in or about the Premises If any such taxes on Tenant's personal property or trade fixtures are levied against Landlord or Landlord's property or if the assessed value of the Premises is increased by the inclusion therein of a value placed upon such personal property or trade fixtures of Tenant and if Landlord. after written notice to Tenant. pays the taxes based on such increased assessment, which Landlord shall have the right to do regardless of the validity thereof, but only under proper protest if requested by Tenant. Tenant shall upon demand, as the case may be, repay to Landlord the taxes so levied against Landlord. or the proportion of such taxes resulting from such increase in the assessment; provided that in any such event Tenant shall have the right, in the name of Landlord and with Landlord's full cooperation, to bring suit in any court of competent jurisdiction to recover the amount of any such taxes so paid under protest, and any amount so recovered shall belong to Tenant. (b) if the Tenant improvements in the Premises, whether installed, and/or paid for by Landlord or Tenant and whether or not affixed to the real property so as to become a part thereof, are assessed for real property tax purposes at a valuation higher than the valuation at which standard office improvements in other space in the Complex are assessed, then the real property taxes and assessments levied against Landlord or the Complex by reason of such excess assessed valuation shall be deemed to be taxes levied against personal property of Tenant and shall be governed by the provisions of 1213a, above. If the records of the County Assessor are available and sufficiently detailed to serve as a basis for determining whether said Tenant improvements are assessed at a higher valuation than standard office improvements in other space in the Complex, such records shall be binding on both the Landlord and the Tenant. If the records of the County Assessor are not available or sufficiently detailed to serve as a basis for making said determination the actual cost of construction shall be used. 13. LIABILITY INSURANCE Tenant at Tenant's expense, agrees to keep in force during the term of this Lease a policy of commercial general insurance with combined single limit coverage of not less than Two Million Dollars (2,000,000) for injuries to or death of persons occurring in, on or about the Premises or the Complex, and property damage. The policy or policies affecting such insurance, certificates of insurance of which shall be furnished to Landlord, shall name Landlord as additional insureds, and shall insure any liability of Landlord, contingent or otherwise, as respects acts or omissions of Tenant, its agents, employees or invitees or otherwise by any conduct or transactions of any of said persons in or about or concerning the Premises, including any failure of Tenant to observe or perform any of its obligations hereunder; shall be issued by an insurance company admitted to transact business in the State of California; and shall provide that the insurance effected thereby shall not be canceled, except upon thirty (30) days' prior written notice to Landlord. If, during the term of this Lease, in the considered opinion of Landlord's Lender, insurance advisor, or counsel, the amount of insurance described in this paragraph 13 is not adequate, Tenant agrees to increase said coverage to such reasonable amount as Landlord's Lender, insurance advisor, or counsel shall deem adequate. 14. TENANT'S PERSONAL PROPERTY INSURANCE AND WORKMAN'S COMPENSATION INSURANCE Tenant shall maintain a policy or policies of fire and property damage insurance in "all risk" form with a sprinkler leakage endorsement insuring the personal property, inventory, trade fixtures, and leasehold improvements within the leased Premises for the full replacement value thereof. The proceeds from any of such policies shall be used for the repair or replacement of such items so insured. Tenant shall also maintain a policy or policies of workman's compensation insurance and any other employee benefit insurance sufficient to comply with all laws. 15. PROPERTY INSURANCE Landlord shall purchase and keep in force and as Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant shall pay to Landlord (or Landlord's agent if so directed by Landlord) Tenant's proportionate share (calculated on a square footage or other equitable basis as calculated by Landlord) of the deductibles on insurance claims and the cost of policy or policies of insurance covering loss or damage to the Premises and Complex in the amount of the full replacement value thereof, providing protection against those perils included within the classification of "all risks" insurance and flood and/or earthquake insurance, if available, plus a policy of rental income insurance in the amount of one hundred ( 100% ) percent of twelve (12) months Basic Rent. plus sums paid as Additional Rent. If such insurance cost is increased due to Tenant's use of the Premises or the Complex. Tenant agrees to pay to Landlord the full cost of such increase. Tenant shall have no interest in nor any right to the proceeds of any insurance procured by Landlord for the Complex. Landlord and Tenant do each hereby respectively release the other, to the extent of insurance coverage of the releasing party, from any liability for loss or damage caused by fire or any of the extended coverage casualties included in the releasing party's insurance policies, irrespective of the cause of such fire or casualty; provided, however, that if the insurance policy of either releasing party prohibits such waiver, then this waiver shall not take effect until consent to such waiver is obtained. If such waiver is so prohibited, the insured party affected shall promptly notify the other party thereof. Page 4 of 8 16. INDEMNIFICATION Landlord shall not be liable to Tenant and Tenant hereby waives all claims against Landlord for any injury to or death of any person or damage to or destruction of property in or about the Premises or the Complex by or from any cause whatsoever, including, without limitation, gas, fire, oil, electricity or leakage of any character from the roof, walls, basement or other portion of the Premises or the Complex but excluding, however, the willful misconduct or negligence of Landlord, its agents, servants, employees, invitees, or contractors of which negligence Landlord has knowledge and reasonable time to correct. Except as to injury to persons or damage to property to the extent arising from the willful misconduct or the negligence of Landlord, its agents, servants, employees, invitees, or contractors, Tenant shall hold Landlord harmless from and defend Landlord against any and all expenses, including reasonable attorneys' fees, in connection therewith, arising out of any injury to or death of any person or damage to or destruction of property occurring in, on or about the Premises, or any part thereof, from any cause whatsoever. 17. COMPLIANCE Tenant, at its sole cost and expense, shall promptly comply with all laws, statutes, ordinances and governmental rules; regulations or requirements now or hereafter in effect; with the requirements of any board of fire underwriters or other similar body now or hereafter constituted: and with any direction or occupancy certificate issued pursuant to law by any public officer; provided, however, that no such failure shall be deemed a breach of the provisions if Tenant, immediately upon notification, commences to remedy or rectify said failure. The judgment of any court of competent jurisdiction or the admission of Tenant in any action against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any such law, statute, ordinance or governmental rule, regulation, requirement, direction or provision. shall be conclusive of that fact as between Landlord and Tenant. This paragraph shall not be interpreted as requiring Tenant to make structural changes or improvements, except to the extent such changes or improvements are required as a result of Tenant's use of the Premises. Tenant shall, at its sole cost and expense, comply with any and all requirements pertaining to said Premises. of any insurance organization or company, necessary or the maintenance of reasonable fire and public liability insurance coveting the Premises. SEE PARAGRAPH 54. 18. LIENS Tenant shall keep the Premises and the Complex free from any liens arising out of any work performed, materials furnished or obligation incurred by Tenant. In the event that Tenant shall not, within ten (10) days following the imposition of such lien, cause the same to be released of record, Landlord shall have, in addition to all other remedies provided herein and by law, the right, but no obligation, to cause the same to be released by such means as it shall deem proper, including payment of the claim giving rise to such lien. All sums paid by Landlord for such purpose, and all expenses incurred by it in connection therewith, shall be payable to Landlord by Tenant on demand with interest at the prime rate of interest as quoted by the Bank of America. 19. ASSIGNMENT AND SUBLETTING Tenant shall not assign, transfer, or hypothecate the leasehold estate under this Lease, or any interest therein, and shall hot sublet the Premises, or any part thereof, or any right or privilege appurtenant thereto, or suffer any other person or entity to occupy or use the Premises, or any portion thereof, without, in each case, the prior written consent of Landlord which consent will not be unreasonably withheld. As a condition for granting this consent to any assignment, transfer, or subletting, Landlord may require that Tenant agrees to pay to Landlord, as additional rent, fifty percent (50%) of all rents or additional consideration provided, however, that for sharing such excess rent, Tenant shall first be entitled to recover from such excess rent the amount of any reasonable leasing commissions paid by Tenant to third parties not affiliated with Tenant received by Tenant from its assignees, transferees, or subtenants in excess of the rent payable by Tenant to Landlord hereunder. Tenant shall, by thirty (30) ------- days written notice, advise Landlord of its intent to assign or transfer Tenant's interest in the Lease or sublet the Premises or any portion thereof for any portion of the term hereof. Within thirty (30) days after receipt of said written notice, Landlord may, in its sole discretion, elect to terminate this Lease as to the portion of the Premises described in Tenant's notice on the date specified in Tenant's notice by giving written notice of such election to terminate. If no such notice to terminate is given to Tenant within said thirty (30) day period, Tenant may proceed to locate an acceptable sublessee, assignee, or other transferee for presentment to Landlord for Landlord's approval, all in accordance with the terms, covenants, and conditions of this paragraph 19. If Tenant intends to sublet the entire Premises and Landlord elects to terminate this Lease, this Lease shall be terminated on the date specified in Tenant's notice. If, however, this Lease shall terminate pursuant to the foregoing with respect to less than all the Premises, the rent, as defined and reserved hereinabove shall be adjusted on a pro rata basis to the number of square feet retained by Tenant, and this Lease as so amended shall continue in full force and effect. In the event Tenant is allowed to assign, transfer or sublet the whole or any part of the Premises. with the prior written consent of Landlord, no assignee, transferee or subtenant shall assign or transfer this Lease, either in whole or in part, or sublet the whole or any part of the Premises, without also having obtained the prior written consent of Landlord which consent shall not be unreasonably withheld. A consent of Landlord to one assignment, transfer, hypothecation, subletting, occupation or use by any other person shall not release Tenant from any of Tenant's obligations hereunder or be deemed to be a consent to any subsequent similar or dissimilar assignment, transfer, hypothecation, subletting, occupation or use by any other person. Any such assignment, transfer, hypothecation, subletting, occupation or use without such consent shall be void and shall constitute a breach of this Lease by Tenant and shall, at the option of Landlord exercised by written notice to Tenant. terminate this Lease. The Leasehold estate under this Lease shall not, nor shall any interest therein, be assignable for any purpose by operation of law without the written consent of Landlord which consent shall not be unreasonably withheld. As a condition to its consent, Landlord may require Tenant to pay all expenses in connection with the assignment, and Landlord may require Tenant's assignee or transferee (or other assignees or transferees) to assume in writing all of the obligations under this Lease and for Tenant to remain liable to Landlord under the Lease. SEE PARAGRAPH 56. 20. SUBORDINATION AND MORTGAGES In the event Landlord's title or leasehold interest is now or hereafter encumbered by a deed of trust, upon the interest of Landlord in the land and buildings in which the demised Premises are located, to secure a loan from a lender (hereinafter referred to as "Lender") to Landlord, Tenant shall, at the request of Landlord or Lender, execute in writing an agreement subordinating its rights under this Lease to the lien of such deed of trust, or, if so requested, agreeing that the lien of Lender's deed of trust shall be or remain subject and subordinate to the rights of Tenant under this Lease. Notwithstanding any such subordination, Tenant's possession under this Lease shall not be disturbed if Tenant is not in default and so long as Tenant shall pay all rent and observe and perform all of the provisions set forth in this Lease. 21. ENTRY BY LANDLORD Landlord reserves, and shall at all reasonable times after at least 24 hours notice (except in emergencies) have, the right to enter the Premises to inspect them; to perform any services to be provided by Landlord hereunder; to submit the Premises to prospective purchasers, mortgagers or tenants; to post notices of nonresponsibility; and to alter, improve or repair the Premises and any portion of the Complex, all without abatement of rent; and may erect scaffolding and other necessary structures in or through the Premises where reasonably required by the character of the work to be performed; provided, however that the business of Tenant shall be interfered with to the least extent that is reasonably practical. For each of the foregoing purposes any entry to the Premises obtained by Landlord by any of said means, or otherwise, shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into or a detainer of the Premises or an eviction, actual or constructive, of Tenant from the Premises or any portion thereof. Landlord shall also have the right at any time to change the arrangement or location of entrances or passageways, doors and doorways, and corridors, elevators, stairs, toilets or other public parts of the Complex and to change the name, number or designation by which the Complex is commonly known, and none of the foregoing shall be deemed an actual or constructive eviction of Tenant, or shall entitle Tenant to any reduction of rent hereunder. 22. BANKRUPTCY AND DEFAULT The commencement of bankruptcy action or liquidation action or reorganization action or insolvency action or an assignment of or by Tenant for the benefit of creditors, or any similar action undertaken by Tenant, or the insolvency of Tenant, shall, at Landlord's option, constitute a breach of this Lease by Tenant. If the trustee or receiver appointed to serve during a bankruptcy, liquidation, reorganization, insolvency or similar action elects to reject Tenant's unexpired Lease, the trustee or receiver shall notify Landlord in writing of its election within thirty (30) days after an order for relief in a liquidation action or within thirty (30) days after the commencement of any action. Within thirty (30) days after court approval of the assumption of this Lease, the trustee or receiver shall cure (or provide adequate assurance to the reasonable satisfaction of Landlord that the trustee or receiver shall cure) any and all previous defaults under the unexpired Lease and shall compensate Landlord for all actual pecuniary loss and shall provide adequate assurance of future performance under said Lease to the reasonable satisfaction of Landlord. Adequate assurance of future performance, us used herein, includes, but shall not be limited to: (i) assurance of source and payment of rent, and other consideration due under this Lease; (ii) assurance that the assumption or assignment of this Lease will not breach substantially any provision, such as radius, location, use, or exclusivity provision, in any agreement relating to the above described Premises. Nothing contained in this section shall affect the existing right of Landlord to refuse to accept an assignment upon commencement of or in connection with a bankruptcy, liquidation, reorganization or insolvency action or an assignment of Tenant for the benefit of creditors or other similar act. Nothing contained in this Lease shall be construed as giving or granting or creating an equity in the demised Premises to Tenant. In no event shall the leasehold estate under this Lease, or any interest therein, be assigned by voluntary or involuntary bankruptcy proceeding without the prior written consent of Landlord. In no event shall this Lease or any rights or privileges hereunder be an asset of Tenant under any bankruptcy, insolvency or reorganization proceedings. The failure to perform or honor any covenant, condition or representation made under this Lease shall constitute a default hereunder by Tenant upon expiration of the appropriate grace period hereinafter provided. Tenant shall have a period of five (5) days from the date of written notice from Landlord within which to cure any default in the payment of rental or adjustment thereto. Tenant shall have a period of thirty (30) days from the date of written notice from Landlord within which to cure any other default under this Lease; provided, however, that if the nature of Tenant's failure is such that more than thirty (30) days is reasonably required to cure the same, Tenant shall not be in default so long as Tenant commences performance within such thirty (30) day period and thereafter prosecutes the same to completion. Upon an uncured default of this Lease by Tenant, Landlord shall have the following rights and remedies in addition to any other rights or remedies available to Landlord at law or in equity: (a). The rights and remedies provided for by California Civil Code Section 1951.2, including but not limited to recovery of the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of rental loss for the same period that Tenant proves could be reasonably avoided, as computed pursuant to subsection (b) of said Section 1952.2. Any proof by Tenant under subparagraphs (2) and (3) of Section 1951.2 of the California Civil Code of the amount of rental loss that could be reasonably avoided shall be made in the following manner: Landlord and Tenant shall each select a licensed real estate broker in the business of rented property of the same type and use as the Premises and in the same geographic vicinity. Such two real estate brokers shall select a third licensed real estate Page 5 of 8 broker, and the three licensed real estate brokers so selected shall determine the amount of the rental loss that could be reasonably avoided from the balance of the term of this Lease after the time of award. The decision of the majority of said licensed real estate brokers shall be final and binding upon the panics hereto. (b). The rights and remedies provided by California Civil Code Section which allows Landlord to continue the Lease in effect and to enforce all of its rights and remedies under this Lease, including the right to recover rent as it becomes due, for so long as Landlord does not terminate Tenant's right to possession; acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver upon Landlord's initiative to protect its interest under this Lease shall not constitute a termination of Tenant's right to possession. (c). The right to terminate this Lease by giving notice to Tenant in accordance with applicable law. (d). To the extent permitted by law the right and power to enter the Premises and remove therefrom all persons and property, to store such property in a public warehouse or elsewhere at the cost of and for the account of Tenant, and to sell such property and apply such proceeds therefrom pursuant to applicable California law. Landlord may from time to time sublet the Premises or any part thereof for such term or terms (which may extend beyond the term of this Lease) and at such rent and such other terms as Landlord in its sole discretion may deem advisable, with the right to make alterations and repairs to the Premises. Upon each subletting. (i) Tenant shall be immediately liable to pay Landlord, in addition to indebtedness other than rent due hereunder, the cost of such subletting, including, but not limited to, reasonable attorneys' fees, and any real estate commissions actually paid. and the cost of such alterations and repairs incurred by Landlord and the amount, if any, by which the rent hereunder for the period of such subletting (to the extent such period does not exceed the term hereof exceeds the amount to be paid as rent for the Premises for such period or (it) at the option of Landlord, rents received from such subletting shall be applied first to payment of indebtedness other than rent due hereunder from Tenant to Landlord; second, to the payment of any costs of such subletting and of such alterations and repairs; third to payment of rent due and unpaid hereunder; and the residue, if any, shall be held by Landlord and applied in payment of future rent as the same becomes due hereunder. If Tenant has been credited with any rent to be received by such subletting under option (i) and such rent shall not be promptly paid to Landlord by the subtenant(s), or if such rentals received from such subletting under option (it) during any month be less than that to be paid during that month by Tenant hereunder. Tenant shall pay any such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. For all purposes set forth in this subparagraph. No taking possession of the Premises by Landlord shall be construed as an election on its part to terminate this Lease unless a written notice of such intention be given to Tenant. Notwithstanding any such subletting without termination, Landlord may at any time hereafter elect to terminate this Lease for such previous breach. (e). The right to have a receiver appointed for Tenant upon application by Landlord, to take possession of the Premises and to apply any rental collected from the Premises and to exercise all other rights and remedies granted to Landlord pursuant to subparagraph d. above. 23. ABANDONMENT Tenant shall not vacate or abandon the Premises at any time during the term of this Lease (except that Tenant may vacate so long as it pays rent, provides an on-site security guard during normal business hours from Monday through Friday, and otherwise performs its obligations hereunder) and if Tenant shall abandon, vacate or surrender said Premises or be dispossessed by the process of law, or otherwise, any personal Property belonging to Tenant and left on the premises shall be deemed to be abandoned, at the option of Landlord, except such property as may be mortgaged to Landlord. 24. DESTRUCTION In the event the Premises are destroyed in whole or in part from any cause, except for routine maintenance and repairs and incidental damage and destruction caused from vandalism and accidents for which Tenant is responsible for under Paragraph 10, Landlord may, at its option: (a) Rebuild or restore the Premises to their condition prior to the damage or destruction, or (b) Terminate this Lease. (providing that the Premises is damaged to the extent of 33 1/3% of the replacement cost) If Landlord does not give Tenant notice in writing within thirty (30) days from the destruction of the Premises of its election to either rebuild and restore them, or to terminate this Lease, Landlord shall be deemed to have elected to rebuild or restore them, in which event Landlord agrees, at its expense, promptly to rebuild or restore the Premises to their condition prior to the damage or destruction. Tenant shall be entitled to a reduction in rent while such repair is being made in the proportion that the area of the Premises rendered untenantable by such damage bears to the total area of the Premises. If Landlord initially estimates that the rebuilding or restoration will exceed 180 days or if Landlord does not complete the rebuilding or restoration within one hundred eighty (180) days following the date of destruction (such period of time to be extended for delays caused by the fault or neglect of Tenant or because of Acts of God, acts of public agencies, labor disputes, strikes, fires, freight embargoes, rainy or stormy weather inability to obtain materials, supplies or fuels, acts of contractors or subcontractors, or delay of the contractors or subcontractors due to such causes or other contingencies beyond the control of Landlord), then Tenant shall have the right to terminate this Lease by giving fifteen (15) days prior written notice to Landlord. Notwithstanding anything herein to the contrary, Landlord's obligation to rebuild or restore shall be limited to the building and interior improvements constructed by Landlord as they existed as of the commencement date of the Lease and shall not include restoration of Tenant's trade fixtures, equipment, merchandise, or any improvements, alterations or additions made by Tenant to the Premises, which Tenant shall forthwith replace or fully repair at Tenant's sole cost and expense provided this Lease is not cancelled according to the provisions above. Unless this Lease is terminated pursuant to the foregoing provisions this Lease shall remain in full force and effect. Tenant hereby expressly waives the provisions of Section 1932. Subdivision 2, in Section 1933, Subdivision 4 of the California Civil Code. In the event that the building in which the Premises are situated is damaged or destroyed to the extent of not less that 33 1/3 % of the replacement cost thereof. Landlord may elect to terminate this Lease, whether the Premises be injured or not. 25 EMINENT DOMAIN If all or any part of the Premises shall be taken by any public or quasi-public authority under the power of eminent domain or conveyance in lieu thereof, this Lease shall terminate as to any portion of the Premises so taken or conveyed on the date when title vests in the condemnor, and Landlord shall be entitled to any and all payment, income, rent, award, or any interest therein whatsoever which may be paid or made in connection with such taking or conveyance, and Tenant shall have no claim against Landlord or otherwise for the value of any unexpired term of this Lease. Notwithstanding the foregoing paragraph, any compensation specifically awarded Tenant for loss of business, Tenant's personal property, moving cost or loss of goodwill, shall be and remain the property of Tenant. If (i) any action or proceeding is commenced for such taking of the Premises or any part thereof, or if Landlord is advised in writing by any entity or body having the right or power of condemnation of its intention to condemn the premises or any portion thereof, or (ii) any of the foregoing events occur with respect to the taking of any space in the Complex not leased hereby, or if any such spaces so taken or conveyed in lieu of such taking and Landlord shall decide to discontinue the use and operation of the Complex, or decide to demolish, alter or rebuild the Complex, then, in any of such events landlord shall have the right to terminate this Lease by giving Tenant written notice thereof within sixty (60) days of the date of receipt of said written advice, or commencement of said action or proceeding, or taking conveyance, which termination shall take place as of the first to occur of the last day of the calendar month next following the month in which such notice is given or the date of which title to the Premises shall vest in the condemnor. In the event of such a partial taking or conveyance of the Premises, if the portion of the premises taken or conveyed is so substantial that the Tenant can no longer reasonably conduct its business. Tenant shall have the privilege of terminating this Lease within sixty (60) days from the date of such taking or conveyance, upon written notice to landlord of its intention so to do, and upon giving of such notice this lease shall terminate on the last day of the calendar month next following the month in which such notice is given, upon payment by Tenant of the rent from the date of such taking or conveyance to the date of termination. If a portion of the premises be taken by condemnation or conveyance in lieu thereof and neither Landlord nor Tenant shall terminate this Lease as provided herein, this Lease shall continue in full force and effect as to the part of the Premises not so taken or conveyed, and the rent herein shall be apportioned as of the date of such taking or conveyance so that thereafter the rent to be paid by Tenant shall be in the ratio that the area of the portion of the Premises not so taken or conveyed bears to the total area of the Premises prior to such taking. 26. SALE OR CONVEYANCE BY LANDLORD In the event of a sale or conveyance of the Complex or any interest therein, by any owner of the reversion then constituting Landlord, the transferor shall thereby be released from any further liability upon any of the terms, covenants or conditions (express or implied) herein contained in favor of Tenant, and in such event, insofar as such transfer is concerned, Tenant agrees to look solely to the responsibility of the successor in interest of such transferor in and to the Complex and this Lease. This Lease shall not be affected by any such sale or conveyance, and Tenant agrees to attorn to the successor in interest of such transferor. SEE PARAGRAPH 57. 27. ATTORNMENT TO LENDER OR THIRD PARTY In the event the interest of Landlord in the land and buildings in which the leased Premises are located (whether such interest of Landlord is a fee title interest or a leasehold interest ) is encumbered by deed of trust, and such interest is acquired by the' lender or any third party through judicial foreclosure or by exercise of a power of sale at private trustee's foreclosure sale, Tenant hereby agrees to attorn to the purchaser at any such foreclosure sale and to recognize such purchaser as the Landlord under this Lease. In the event the lien of the deed of trust securing the loan from a Lender to Landlord is prior and paramount to the Lease. this Lease shall nonetheless continue in full force and effect for the remainder of the unexpired term hereof, at the same rental herein reserved and upon all the other terms, conditions and covenants herein contained. 28. HOLDING OVER Any holding over by Tenant after expiration or other termination of the term of this Lease with the written consent of Landlord delivered to Tenant shall not constitute a renewal or extension of the Lease or give Tenant any rights in or to the leased Premises except as expressly provided in this Lease. Any holding over after the expiration or other termination of the term of this Lease, with the consent of Landlord, shall be construed to be a tenancy from month to month on the same terms and conditions herein specified insofar as applicable except that the monthly Basic Rent shall be increased to an amount equal to one hundred fifty (150%) percent of the monthly Basic Rent required during the last month of the Lease term. Page 6 of 8 29. CERTIFICATE OF ESTOPPEL Tenant shall at any time upon not less than ten (10) business days' prior written notice to Landlord execute, acknowledge and deliver to Landlord a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or. if modified. Mating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date to which the rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder, or specifying such defaults, if any, are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Premises. Tenant's failure to deliver such statement within such time shall be conclusive upon Tenant that this Lease is in full force and effect, without modification except as may be represented by Landlord; that there are no uncured default, in Landlord's performance, and that not more than one month's rent has been paid in advance. 30. CONSTRUCTION CHANGES It is understood that the description of the Premises and the location of ductwork, plumbing and other facilities therein are subject to such minor changes as Landlord or Landlord's architect determines to be desirable in the course of construction of the Premises, and no such changes, or any changes in plans for any other portions of the Complex shall affect this Lease or entitle Tenant to any reduction of rent hereunder or result in any liability of Landlord to Tenant. Landlord does not guarantee the accuracy of any drawings supplied to Tenant and verification of the accuracy of such drawings rests with Tenant. 31. RIGHT OF LANDLORD TO PERFORM All terms, covenants and conditions of this Lease to be performed or observed by Tenant shall be performed or observed by Tenant at Tenant's sole cost and expense and without any reduction of rent. If Tenant shall fail to pay any sum of money, or other rent. required to be paid by it hereunder or shall fail to perform any other term or covenant hereunder on its part to be performed, and such failure shall continue for five (5) days after written notice thereof by Landlord, Landlord, without waiving or releasing Tenant from any obligation of Tenant hereunder, may. but shall not be obligated to. make any such payment or perform any such other term or covenant on Tenant's part to be performed. All sums so paid by Landlord and all necessary costs of such performance by Landlord together with interest thereon at the rate of the prime rate of interest per annum as quoted by the Bank of America from the date of such payment or performance by Landlord, shall be paid (and Tenant covenants to make such payment) to Landlord on demand by Landlord, and Landlord shall have (in addition to any other right or remedy of Landlord) the same rights and remedies in the event of nonpayment by Tenant as in the case of failure by Tenant in the payment of rent hereunder. 32. ATTORNEYS' FEES. (A) In the event that either Landlord or Tenant should bring suit for the possession of the Premises, lot the recovery of any sum due under this Lease, or because of the breach of any provision of this Lease, or for any other relief against the other party hereunder, then all costs and expenses, including reasonable attorneys' fees, incurred by the prevailing party therein shall be paid by the other party, which obligation on the part of the other party shall be deemed to have accrued on the date of the commencement of such action and shall be enforceable whether or not the action is prosecuted to judgement. (B) Should Landlord be named as a defendant in any suit brought against Tenant in connection with or arising out of Tenant's occupancy hereunder. Tenant shall pay to Landlord its costs and expenses incurred in such suit, including a reasonable attorney's fee. 33. WAIVER The waiver by either party of the other party's failure to perform or observe any term, covenant or condition herein contained to be performed or observed by such waiving party shall not be deemed to be a waiver of such term. covenant or condition or of any subsequent failure of the party failing to perform or observe the same or any other such term, covenant or condition therein contained, and no custom or practice which may develop between the parties hereto during the term hereof shall be deemed a waiver of or in any way affect, the right of either party to insist upon performance and observance by the other party in strict accordance with the terms hereof. 34. NOTICES All notices, demands, requests, advices or designations which may be or are required to be given by either party to the other hereunder shall be in writing. All notices, demands, requests, advices or designations by Landlord to Tenant shall be sufficiently given, made or delivered if personally served on Tenant by leaving the same at the Premises or if sent by United States certified or registered mail, postage prepaid, addressed to Tenant at the Premises. All notices demands, requests, advices or designations by Tenant to Landlord shall be sent by United States certified or registered mail, postage prepaid, addressed to Landlord at its offices at Peery/Arrillaga, 2560 Mission College Blvd., Suite 101 Santa Clara, CA 95054. Each notice, request, demand, advice or designation referred to in this paragraph shall be deemed received on the date of the personal service/or mailing thereof in the manner herein provided, as the case may be. 35. EXAMINATION OF LEASE Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or option for a lease, and this instrument is not effective as a lease or otherwise until its execution and delivery by both Landlord and Tenant. 36. DEFAULT BY LANDLORD Landlord shall not be in default unless Landlord fails to perform obligations required of Landlord within a reasonable time, but in no event earlier than thirty (30) days after written notice by Tenant to Landlord and to the holder of any first mortgage or deed of trust coveting the Premises whose name and address shall have heretofore been furnished to Tenant in writing, specifying wherein Landlord has tailed to perform such obligations; provided, however, that if the nature of Landlord's obligations is such that more than thirty (30) days are required for performance, then Landlord shall not be in default if Landlord commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion. 37. CORPORATE AUTHORITY If Tenant is a corporation, (or a partnership) each individual executing this Lease on behalf of said corporation (or partnership) represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation (or partnership) in accordance with the by- laws of said corporation (or partnership in accordance with the partnership agreement) and that this Lease is binding upon said corporation (or partnership) in accordance with its terms. If Tenant is a corporation, Tenant shall, within thirty (30) days after execution of this Lease. deliver to Landlord a certified copy of the resolution of the Board of Directors of said corporation authorizing or ratifying the execution of this Lease. 39. LIMITATION OF LIABILITY In consideration of the benefits accruing hereunder. Tenant and all successors and assigns covenant and agree that. in the event of any actual or alleged failure, breach or default hereunder by Landlord: (i) the sole and exclusive remedy shall be against Landlord and Landlord's assets: (ii) no partner of Landlord shall be sued or named as a party in any suit or action (except as may be necessary to secure jurisdiction of the partnership) (iii) no service of process shall be made against any partner of Landlord (except as may be necessary to secure jurisdiction of the partnership) (iv) no partner of Landlord shall be required to answer or otherwise plead to any service of process: (v) no judgment will be taken against any partner of Landlord: (vi) any judgment taken against any partner of Landlord may be vacated and set aside at any time without hearing: (vii) no writ of execution will ever be levied against the assets of any partner of Landlord: (viii) these covenants and agreements are enforceable both by Landlord and also by any partner of Landlord. Tenant agrees that each of the foregoing covenants and agreements shall be applicable to any covenant or agreement either expressly contained in this Lease or imposed by statute or at common law. Page 7 of 8 40. MISCELLANEOUS AND GENERAL PROVISIONS a. Tenant shall not, without the written consent of Landlord, use the name of the building for any purpose other than as the address of the business conducted by Tenant in the Premises. b. This Lease shall in all respects be governed by and construed in accordance with the laws of the State of California. If any provision of this Lease shall be invalid, unenforceable or ineffective for any reason whatsoever, all other provisions hereof shall be and remain in full force and effect. c. The term "Premises" includes the space leased hereby and any improvements now or hereafter installed therein or attached thereto. The term "Landlord" or any pronoun used in place thereof includes the plural as well as the singular and the successors and assigns of Landlord. The term "Tenant or any pronoun used in place thereof includes the plural as well as the singular and individuals, firms, associations, partnerships and corporations, and their and each of their respective heir, executors, administrators, successors and permitted assigns, according to the context hereof, and the provisions of this Lease shall inure to the benefit of and bind such heirs, executors, administration, successors and permitted assigns. The term "person" includes the plural as well as the singular and individuals, firms, associations, partnerships and corporations. Words used in any gender include other genders. If there be more than one Tenant the obligations of Tenant hereunder are joint and several. The paragraph headings of this Lease are for convenience of reference only and shall have no effect upon the construction or interpretation of any provision hereof. d. Time is of the essence of this Lease and of each and all of its provisions. e. At the expiration or earlier termination of this Lease, Tenant shall execute, acknowledge and deliver to Landlord, within ten (10) days after written demand from Landlord to Tenant. any quitclaim deed or other document required by any reputable title company, licensed to operate in the State of California, to remove the cloud or encumbrance created by this Lease from the real properly of which Tenant's Premises are a part. f. This instrument along with any exhibits and attachments hereto constitutes the entire agreement between Landlord and Tenant relative to the Premises and this agreement and the exhibits and attachments may be altered, amended or revoked only by an instrument in writing signed by both Landlord and Tenant. Landlord and Tenant agree hereby that all prior or contemporaneous oral agreements between and among themselves and their agents or representatives relative to the leasing of the Premises are merged in or revoked by this agreement. g. Neither Landlord nor Tenant shall record this Lease or a short form memorandum hereof without the consent of the other. h. Tenant further agrees to execute any amendments required by a lender to enable Landlord to obtain financing, so long as Tenant's rights hereunder are not substantially affected. i. Paragraphs 43 through 58 are added hereto and are included as a part of this lease. j. Clauses, plats and riders, if any, signed by Landlord and Tenant and endorsed on or affixed to this Lease are a part hereof. k. Tenant covenants and agrees that no diminution or shutting off of light, air or view by any structure which may be hereafter erected (whether or not by Landlord) shall in any way affect his Lease entitle Tenant to any reduction of rent hereunder or result in any liability of Landlord to Tenant. 41. BROKERS Tenant warrants that it had dealings with only the following real estate brokers or agents in connection with the negotiation of this Lease: none ---- and that it knows of no other real estate broker or agent who is entitled to a commission in connection with this Lease. 42. SIGNS No sign, placard, picture, advertisement, name or notice shall be inscribed, displayed or printed or affixed on or to any part of the outside of the Premises or any exterior windows of the Premises without the written consent of Landlord first had and obtained and Landlord shall have the right to remove any such sign, placard, picture, advertisement, name or notice without notice to and at the expense of Tenant. If Tenant is allowed to print or affix or in any way place a sign in, on, or about the Premises, upon expiration or other sooner termination of this Lease, Tenant at Tenant's sole cost and expense shall both remove such sign and repair all damage in such a manner as to restore all aspects of the appearance of the Premises to the condition prior to the placement of said sign. All approved signs or lettering on outside doors shall be printed, painted, affixed or inscribed at the expense of Tenant by a person approved of by Landlord. Tenant shall not place anything or allow anything to be placed near the glass of any window, door partition or wall which may appear unsightly from outside the Premises. Subject to approval by the City of Santa Clara, Landlord shall install, at Landlord's cost and expense, a monument on the berm, in a location to be selected by Landlord, and Tenant may use up to 76% of said monument for its sign. In the event Tenant leases 100% of said building, Tenant may use 100% of said monument for its sign. Tenant shall pay for all costs and expenses related to the installation of its sign and the eventual removal thereof. IN WITNESS WHEREOF. Landlord and Tenant have executed and delivered this Lease as of the day and year last written below. LANDLORD: TENANT: ARRILLAGA FAMILY TRUST LATITUDE COMMUNICATIONS, a California corporation By /s/ John Arrillaga By /s/ Emil Wang ------------------------------------- -------------------------- John Arrillaga, Trustee Dated: 8/24/95 Title PRESIDENT & CEO ---------------------------------- ---------------------- RICHARD T. PEERY SEPARATE PROPERTY TRUST Type or Print Name EMIL WANG --------- BY /s/ Richard T. Peery Dated: 8/24/95 -------------------------------------- ---------------------- Richard T. Peery, Trustee Dated: 8/30/95 ---------------------------------- Paragraphs 43 through 58 to Lease Agreement Dated July 31, 1995, By and Between the Arrillaga Family Trust and the Richard T. Peery Separate Property Trust, as Landlord, and LATITUDE COMMUNICATIONS, a California corporation, as Tenant for 39,157+ Square Feet of Space Located at 2121 Tasman Drive, Santa Clara, California. 43. BASIC RENT: In accordance with Paragraph 4A herein, the total aggregate sum --------- of TWO MILLION TWO HUNDRED THIRTY ONE THOUSAND NINE HUNDRED FORTY NINE AND NO/100 DOLLARS ($2,231,949.00), shall be payable as follows: On January 1, 1996, the sum of THIRTY THREE THOUSAND TWO HUNDRED EIGHTY THREE AND 45/100 DOLLARS ($33,283.45) shall be due, and a like sum due on the first day of each month thereafter, through and including December 1, 1996. On January 1, 1997, the sum of THIRTY FIVE THOUSAND TWO HUNDRED FORTY ONE AND 30/100 DOLLARS ($35,241.30) shall be due, and a like sum due on the first day of each month thereafter, through and including December 1, 1997. On January 1, 1998, the sum of THIRTY SEVEN THOUSAND ONE HUNDRED NINETY NINE AND 15/100 DOLLARS ($37,199.15) shall be due, and a like sum due on the first day of each month thereafter, through and including December 1, 1998. On January 1, 1999, the sum of THIRTY NINE THOUSAND ONE HUNDRED FIFTY SEVEN AND NO/100 DOLLARS ($39,157.00) shall be due, and a like sum due on the first day of each month thereafter, through and including December 1, 1999. On January 1, 2000, the sum of FORTY ONE THOUSAND ONE HUNDRED FOURTEEN AND 85/100 DOLLARS ($41,114.85) shall be due, and a like sum due on the first day of each month thereafter, through and including December 1, 2000; or until the entire aggregate sum of TWO MILLION TWO HUNDRED THIRTY ONE THOUSAND NINE HUNDRED FORTY NINE AND NO/100 DOLLARS ($2,231,949.00) has been paid. 44. EARLY ENTRY: Subject to the provisions of Paragraph 47, ("Tenant Interior ----------- Improvements") Tenant and its agents and contractors shall be permitted to enter the Premises prior to the Commencement Date for the purpose of installing at Tenant's sole cost and expense, Tenant's trade fixtures and equipment, telephone equipment, security systems and cabling for computers. Such entry shall be subject to all of the terms and conditions of this Lease, except that Tenant shall not be required to pay any Rent on account thereof. Any entry or installation work by Tenant and its agents in the Premises pursuant to this Paragraph 44 shall (i) be undertaken at Tenant's sole risk, (ii) not interfere --------- with or delay Landlord's work in the Premises (if any), and (iii) not be deemed occupancy or possession of the Premises for purposes of the Lease. Tenant shall indemnify, defend, and hold Landlord harmless From any and all loss, damage, liability, expense (including reasonable attorney's fees), claim or demand of whatsoever character, direct or consequential, including, but without limiting thereby the generality of the foregoing, injury to or death of persons and damage to or loss of property arising out of the exercise by Tenant of any early entry right granted hereunder. In the event Tenant's work in said Premises delays the completion of the interior improvements to be provided by Landlord, if any, or in the event Tenant has not completed construction of it's interior improvements by the scheduled Commencement Date, it is agreed between the parties that this Lease will commence on the scheduled Commencement Date of January 1, 1996 regardless of the construction status of said interior improvements completed or to be completed by Tenant or Landlord. Landlord and Tenant acknowledge that the date on which Tenant's obligation to pay Rent under the Lease would otherwise commence may be delayed because of a delay in completion of construction of the Tenant Improvements due to (i) any act by Tenant which interferes with or delays construction of the Tenant Improvements, including Tenant's entry to install trade fixtures pursuant to Paragraph 44 hereof, (ii) any changes, modifications and/or additions in the Tenant Improvements requested by Tenant and approved by Landlord, or (iii) special materials or equipment ordered or specified by Tenant that cannot be obtained by Landlord at normal cost within a reasonable period of time because of limited availability. It is the intent of the parties hereto that the commencement of Tenant's obligation to pay Rent under the Lease not be delayed by any of such causes or by any other act of Tenant (except as expressly provided herein) and, in the event it is so delayed, Tenant's obligation to pay Rent under the Lease shall commence as of the date it would otherwise have commenced absent delay caused by Tenant. Page 9 45. EARLY OCCUPANCY: Notwithstanding anything to the contrary in this Lease, in --------------- the event the Premises leased hereunder become available for Tenant's use and occupancy prior to the scheduled Commencement Date hereof, Tenant shall have the right to occupy the Premises as of the date Landlord so completes said Premises for Tenant's use and occupancy. This Lease shall commence and Tenant shall pay to Landlord, effective as of the data Premises are delivered to Tenant, all Additional Rent expenses which are Tenant's responsibility hereunder (however, Tenant shall not be responsible for paying Basic Rent during the early occupancy period), and Tenant shall be obligated to perform, and be bound by, each and every term, covenant, and condition of this Lease. In the event Tenant occupies the Premises prior to January 1, 1996, the Term of this Lease will be extended to include the early occupancy period (i.e. If Tenant occupies said space on December 1, 1995, the Lease Term will be extended for one month from a five year Term to a five year one month Term). 46. "AS-IS" BASIS: Subject only to Paragraphs 47, 54 and 55, and to Landlord ------------ making the improvements shown on Exhibit B to be attached hereto, it is hereby --------- agreed that the Premises leased hereunder is leased strictly on an "as-is" basis and in its present condition, and in the configuration as shown on Exhibit B to --------- be attached hereto, and by reference made a part hereof. Except as noted herein, it is specifically agreed between the parties that after Landlord makes the interior improvements as shown on Exhibit B, Landlord shall not be required to --------- make, nor be responsible for any cost, in connection with any repair, restoration, and/or improvement to the Premises in order for this Lease to commence, or thereafter, throughout the Term of this Lease. Landlord makes no warranty or representation of any kind or nature whatsoever as to the condition or repair of the Premises, nor as to the use or occupancy which may be made thereof. 47. TENANT INTERIOR IMPROVEMENTS: Landlord shall, at its sole cost and expense, ---------------------------- construct certain interior improvements (the "Tenant Improvements") in the Premises, as shown on Exhibit B to be attached to the Lease and Landlord agrees --------- to deliver the Premises leased hereunder to Tenant, at Landlord's expense, in the configuration shown in Red on Exhibit B to be attached hereto. --------- Notwithstanding anything to the contrary above, it is specifically understood and agreed that Landlord shall be required to furnish only a standard air conditioning/heating system, normal electrical outlets, standard fire sprinkler systems, standard bathroom, standard lobby, 2'x 4' suspended acoustical tile drop ceiling throughout the entire space leased, carpeting and/or vinyl-coated floor tile, and standard office partitions and doors, as shown on Exhibit B to --------- be attached hereto; provided however, that any special HVAC and/or plumbing and/or electrical requirements over and above that normally supplied by Landlord shall be 100 percent the responsibility of and be paid for 100 percent by Tenant. Notwithstanding anything to the contrary, it is agreed that in the event Tenant makes changes, additions, or modifications to the plans and specifications to be constructed by Landlord as set forth herein, or improvements are installed for Tenant in excess of those to be provided Tenant by Landlord as set forth on Exhibit B, any increased cost(s) resulting from said changes, additions, and/or - --------- modifications and/or improvements in excess of those to be provided Tenant shall be contracted for with Landlord and paid for one hundred percent (100%) by Tenant. The interior shall be constructed in accordance with Exhibit B of the Lease, it --------- being agreed, however, that if the interior improvements relating thereto do not conform exactly to the plans and specifications as set forth in the Lease, and the general appearance, structural integrity, and Tenant's uses and occupancy of the Premises and interior improvements relating thereto are not materially or unreasonably affected by such deviation, it is agreed that the commencement date of the Lease, and Tenant's obligation to pay rental, shall not be affected, and Tenant hereby agrees, in such event, to accept the Premises and interior improvements as constructed by Landlord. Tenant shall have forty five (45) days after the Commencement Date to provide Landlord with a "punch list" pertaining to Landlord's work With respect to Tenants interior improvements. As soon as reasonably possible thereafter, Landlord, or one of Landlord's representatives (if so approved by Landlord), and Tenant shall conduct a joint walk-through of the Premises (if Landlord so requires), and inspect such Tenant Improvements, using their best efforts to agree on the incomplete or defective construction related to the Tenant Improvements Landlord. After such inspection has been completed, Landlord shall prepare, and both parties shall sign, a list of all "punch list" items which the parties reasonably agree are to be corrected Page 10 by Landlord (but which shall exclude any damage or defects caused by Tenant, its employees, agents or parties Tenant has contracted with to work on the Premises). Landlord shall have thirty (30) days thereafter (or longer if necessary, provided Landlord is diligently pursuing the completion of the same) to complete, at Landlord's expense, the repairs on the "punch list" without the Commencement Date of the Lease and Tenant's obligation to pay Rental thereunder being affected. This Paragraph shall be of no force and effect if Tenant shall fail to give any such notice to Landlord within thirty (30) days after the Commencement Date of this Lease. 48. OPTION TO EXTEND LEASE FOR FIVE (5) YEARS: Provided Tenant is not in ----------------------------------------- default (pursuant to Paragraph 22 of the Lease, i.e., Tenant has received notice ---- and any applicable cure period has expired without cure) of any of the terms, covenants, and conditions of this Lease Agreement, Landlord hereby grants to Tenant an Option to Extend this Lease Agreement for an additional five (5) year period (the "Extended Term") upon the following terms and conditions: A. Tenant shall give Landlord written notice of Tenant's exercise of this Option to Extend not later than six (6) months prior to the scheduled Lease Termination Date, which Termination Date is currently projected to be December 31, 2000, in which event the Lease shall be considered extended for an additional five (5) years upon the same terms and conditions, absent this Paragraph 48, and subject to the Basic Rental set forth below. In the event that Tenant fails to timely exercise Tenant's option as set forth herein in writing, Tenant shall have no further Option to Extend this Lease, and this Lease shall continue in full force and effect for the full remaining term hereof, absent of this Paragraph 48. B. The following summarizes the per square foot charge by period under the Lease Agreement that would be applied to the Extended Term:
Extended Monthly Term Period PSF Rate Basic Rental ----------- -------- ------------ 01/01/01-12/31/01 $1.10 $43,072.70 01/01/02-12/31/02 $1.15 $45,030.55 01/01/03-12/31/03 $1.20 $46,988.40 01/01/04-12/31/04 $1.25 $48,946.25 01/01/05-12/31/05 $1.30 $50,904.10
C. The option rights of Tenant under this Paragraph 48, and the Extended Term thereunder, are granted for Tenant's personal benefit and may not be assigned or transferred by Tenant, except to a parent corporation, subsidiary corporation, or corporation with which Tenant merges or consolidates or to whom Tenant sells all or substantially all of its assets as provided for in Paragraph 56, either voluntarily or by operation of law, in any manner whatsoever. In the event that Landlord consents to a sublease or assignment under Paragraph 19, the option granted herein and any Extended Term thereunder shall be Void and of no force and effect, whether or not Tenant shall have purported to exercise such option prior to such assignment or sublease. D. INCREASED SECURITY DEPOSIT: In the event the Term of Tenant's Lease is -------------------------- extended pursuant to this Paragraph 48, Tenant's Security Deposit shall be increased to equal twice the Basic Rental due for the last month of the Extended Term (i.e. $50,904.10 per month X 2 = $101,808.20). 49. FIRST RIGHT OF REFUSAL: Beginning with the thirty-sixth month of the Lease ---------------------- Term, and provided Tenant is not in default in any of the terms, covenants, and conditions of this Lease Agreement, Tenant, during the Term of this Lease and subject to the provisions hereinafter contained, shall have the First Right of Refusal to lease approximately 12,043+ square feet of space as shown in Blue on the attached Exhibit C, consisting of the remaining space on the first floor in --------- the building in which the Leased Premises are located (hereinafter referred to as "First Right Space") upon the following terms and conditions: A. It is understood that said First Right Space is, as of the date of this Lease, vacant and unleased. Landlord agrees that, after the thirty-sixth month of the Lease Term, in the event Landlord receives an offer to lease said First Right Space from a third party, rental and upon terms and conditions which are satisfactory to Landlord, Landlord shall, prior to executing a lease agreement with a third party for said First Right Space, offer said First Right Page 11 Space to Tenant at the same Basic Rent per square foot rate as scheduled in this Lease Agreement dated July 3l, 1995, as amended, between Landlord and Tenant, and upon the same terms, covenants, and conditions outlined in this Lease Agreement between Landlord and Tenant. If said third party lease offer is for a period which extends beyond this Tenant's Lease Termination Date, Landlord shall have the right to require Tenant's Lease Term be extended to coincide with the termination of said third party lease, in which case Tenant's Basic Rent per square foot rate shall be increased by $.05 per square foot on an annual basis, commencing with the extended term or, Landlord may elect, at its sole and absolute discretion, not to extend Tenant's Term. Tenant shall have five (5) business days after receipt of said rental and terms and conditions in which to accept said rental and terms and conditions in writing. In the event Tenant rejects or fails to accept said rent, terms, and conditions and execute a lease agreement for said First Right Space at the rental and upon the terms and conditions so presented by Landlord within said five (5) business day period, Tenant shall have no further First Right of Refusal and Landlord shall be free to execute a lease with a third party without further obligation to Tenant with respect to said First Right Space, and this Lease Agreement dated July 3 l, 1995 shall continue in full force and effect for the full remaining term hereof, absent of this Paragraph 49. B. The First Right of Refusal of Tenant under this Paragraph 49 is granted for Tenant's personal benefit and may not be assigned or transferred by Tenant, except to a parent corporation, subsidiary corporation, or corporation with which Tenant merges or consolidates or to whom Tenant sells all or substantially all of its assets as provided for in Paragraph 56, either voluntarily or by operation of law, in any manner whatsoever. In the event that Landlord consents to a sublease or assignment under Paragraph 19, the First Right option granted herein shall be void and of no force and effect, whether or not Tenant shall have purported to exercise such First Right option prior to such assignment or sublease. C. Notwithstanding the above, Landlord acknowledges that during the first thirty-six (36) months of the Lease Term, Landlord shall not lease the First Right Space to a third party tenant for a term that exceeds the first thirty-six (36) months of the Lease Term. In the event Landlord enters into a third party lease as described above during said thirty-six (36) month period, Tenant's First Right of Refusal option shall be effective as of the termination date of said third party lease, upon the terms and conditions set forth in Paragraph 49A above. 50. SECURITY DEPOSIT CONTINUED: Providing Tenant (i) is not in default -------------------------- (pursuant to Paragraph 22 of the Lease, i.e., Tenant has received notice and any ---- applicable cure period has expired without cure) of any of the terms, covenants, and conditions of this Lease Agreement and (ii) pays all Basic Rent and Additional Rent by the due date, as specified in Paragraph 4D and Paragraph 43, during the first twelve months of the Lease Term, the maturity date of the Promissory Note (representing one-half of Tenant's Security Deposit), shall be extended to January l, 1998. Notwithstanding the above, in the event the Promissory Note is extended pursuant to this Paragraph 50, said Promissory Note shall be due in full immediately if: (i) Tenant subsequently fails to pay its Basic Rent and/or Additional Rent by the due date and/or (ii) Tenant is in default of the Lease at any time prior to January l, 1998. 51. UTILITIES: It is understood that Tenant is the sole occupant of the --------- building located at 2121 Tasman Drive, Santa Clara, of which the Leased Premises is a part. Tenant agrees to be responsible for paying 100% of the utilities, including, but not limited to, water, sewer, gas and electricity, for the entire building until such time as the remaining vacant space in the building is leased. Tenant agrees that the utilities for said building will be placed in Tenant's name and that Tenant will pay all utilities directly to the respective company(s). When any of the remaining vacant space in said building is leased, Landlord will notify Tenant and Landlord will transfer all utilities into Landlord's name and Tenant will pay its share of said utilities monthly in advance as described in and subject to Paragraph 4 "Rent" and Paragraph 11 "Utilities of the Building in Which the Premises are Located" of this Lease. 52. CONSENT: Whenever the consent of one party to the other is required ------- hereunder, such consent shall not be unreasonably withheld. 53. HAZARDOUS MATERIALS: Landlord and Tenant agree as follows with respect to ------------------- existence or use of "Hazardous Materials" (as defined herein) on, in, under or about the Premises and real property located beneath said Premises (hereinafter collectively referred to as Page 12 the "Property") and the Complex: As used herein, the term "Hazardous Materials" shall mean any hazardous or toxic substance, material or waste which is or becomes subject to or regulated by any local governmental authority, the State of California, or the United States Government. The term "Hazardous Materials" includes, without limitation any material or hazardous substance which is (i) listed under Article 9 or defined as "hazardous" or "extremely hazardous" pursuant to Article 11 of Title 22 of the California Administrative Code, Division 4, Chapter 30, (ii) listed or defined as a "hazardous waste" pursuant to the Federal Resource Conservation and Recovery Act, Section 42 U.S.C. Section 6901 et. seq., (iii) listed or defined as a "hazardous substance" pursuant to the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601 et. seq. (42 U.S.C. Section 9601), (iv) petroleum or any derivative of petroleum, or (v) asbestos. To the best of Landlord's knowledge, the Property, including all underlying land and groundwater, are free from contamination by toxic or otherwise hazardous substances; however, Landlord shall have no obligation to investigate. Subject to the terms of this Paragraph 53, Tenant shall have no obligation to "clean up", reimburse, release, indemnify, or defend Landlord with respect to any Hazardous Materials or wastes which Tenant (prior to and during the term of the Lease) or other parties on the Property or Complex, as described below, (during the term of this Lease) did not store, dispose, or transport in, use, or cause to be on the Property or which Tenant, its agents, employees, contractors, invitees or its future subtenants and/or assignees (if any) (during the Term of this Lease), did not store, dispose, or transport in, use or cause to be on the Complex in violation of applicable law as stated below. Tenant shall be 100 percent liable and responsible for: (i) any and all "investigation and cleanup" of said Hazardous Materials contamination which Tenant, its agents, employees, contractors, invitees or its future subtenants and/or assignees (if any), or other parties on the Property, does store, dispose, or transport in, use or cause to be on the Property, and which Tenant, its agents, employees, contractors, invitees or its future subtenants and/or assignees (if any) does store, dispose, or transport in, use or cause to be on the Complex and Tenant shall not be responsible for such hazardous materials contamination stored, disposed, transported in, used, or caused to be on the Complex by other parties on the Complex, and (ii) any claims, including third party claims, resulting from such Hazardous Materials contamination. Tenant shall indemnify Landlord and hold Landlord harmless from any liabilities, demands, costs, expenses and damages, including, without limitation, attorney fees incurred as a result of any claims resulting from such Hazardous Materials contamination. Tenant also agrees not to use or dispose of any Hazardous Materials on the Property or the Complex without first obtaining Landlord's written consent. Tenant agrees to complete compliance with governmental regulations regarding the use or removal or remediation of Hazardous Materials used, stored, disposed of, transported or caused to be on the Property or the Complex as stated above, and prior to the termination of said Lease Tenant agrees to follow the proper closure procedures and will obtain a clearance from the local fire department and/or the appropriate governing agency. If Tenant uses Hazardous Materials, Tenant also agrees to install, at Tenant's expense, such Hazardous Materials monitoring devices as Landlord deems reasonably necessary. It is agreed that the Tenant's responsibilities related to Hazardous Materials will survive the termination date of the Lease and that Landlord may obtain specific performance of Tenant's responsibilities under this Paragraph 53. 54. COMPLIANCE CONTINUED: Any non-conformance of the improvements installed and -------------------- paid for by Landlord as set forth on Exhibit B, required to be corrected by the --------- governing agency, shall be corrected at the cost and expense of Landlord if such non-conformance exists as of the Commencement Date of the Lease and further provided that such governing agency's requirement to correct the non-conformance is not initiated as a result of: (i) any future improvements made by or for Tenant; or (ii) any permit request made to a governing agency by or for Tenant. Any non-conformance of the Premises occurring after the Commencement Date of this Lease Agreement shall be the responsibility of Tenant to correct at Tenant's cost and expense. Landlord agrees to amortize the cost of capital improvements necessitated by any new laws, statutes, ordinances or governmental rules, regulations, or requirements as an operating expense over the life of said improvement and Tenant shall pay its pro rata share of said capital improvement cost based on the remaining Term (and/or extended Term, if any) of the Lease. For example: (i) Landlord incurs capital improvement costs of $10,000 one year prior to Lease Page 13 Termination Date, and (ii) said capital improvement's life is ton (10) years; Tenant shall pay upon receipt of invoice from Landlord its pro rata share of $1,000.00). In the event the Term of the Lease is extended, pursuant to Paragraph 48 or by any other agreement between Landlord and Tenant, Tenant's pro rata share of the capital improvement cost shall be increased to include the additional amount payable to Landlord due to the Extended Term of the Lease. For Example: In the event: (i) Landlord incurred capital, improvement costs illustrated above; and (ii) Tenant exercises its Option to Extend this Lease for an additional five (5) year period, Tenant would be liable for an additional payment to Landlord of $5,000.00 as Additional Rent. Said payment would be due in full immediately upon Tenant's exercise of its Option to Extend. 55. MAINTENANCE OF THE PREMISES: In addition to, and notwithstanding anything --------------------------- to the contrary in Paragraph 10, Landlord shall maintain the structural shell, foundation, and roof structure (but not the interior improvements, roof membrane, or glazing) of the building leased hereunder at Landlord's cost and expense provided Tenant has not caused such damage, in which event Tenant shall be responsible for 100 percent of any such costs for repair or damage so caused by the Tenant. Notwithstanding the foregoing, a crack in the foundation, or exterior walls that does not endanger the structural integrity of the building, or which is not life-threatening, shall not be considered material, nor shall Landlord be responsible for repair of same. 56. ASSIGNMENT AND SUBLETTING CONTINUED: In addition to and notwithstanding ----------------------------------- anything to the contrary in Paragraph 19 of this Lease, Tenant shall be entitled to assign or sublet without Landlord's consent (but shall still give Landlord notice thereof) to: (i) any parent or subsidiary corporation, or corporation with which Tenant merges or consolidates, or (ii) any third party or entity to whom Tenant sells all or substantially all of its assets; provided, that the net worth of the resulting or acquiring corporation has a net worth after the merger, consolidation or acquisition equal to or greater than the net worth of Tenant at the time of such merger, consolidation or acquisition. No such assignment or subletting will release the Tenant from its liability and responsibility under this Lease to the extent Tenant continues in existence following such transaction. Notwithstanding the above, Tenant shall be required to (a) give Landlord written notice prior to such assignment or subletting to any party as described in (i) and (ii) above, and (b) execute an acknowledgement document prepared by Landlord reflecting the assignment or subletting. 57. SALE OR CONVEYANCE BY LANDLORD (CONTINUED): Not withstanding anything to ----------------------------------------- the contrary in the Lease, if Landlord sells or otherwise conveys its interest in the Premises, Landlord shall not be relieved of its obligation under the Lease, unless and until the successor assumes in writing Landlord's obligations under the Lease. 58. ASSIGNMENT OF WARRANTIES: Upon Lease commencement and during the Term of ------------------------ the Lease, Landlord hereby assigns to Tenant all of Landlord's Contractor's warranties specifically related to Tenant's Leased Premises and shall cooperate with Tenant in enforcing any of such warranties except that Landlord shall not be required to pay any legal fees or incur any expenses in this regard. (THIS SPACE LEFT INTENTIONALLY BLANK) Initial: /s/ EW,JA ------------------------- Page 14 [FLOOR PLAN APPEARS HERE] EXHIBIT A TO LEASE AGREEMENT DATED JULY 31, 1995 BY AND BETWEEN ARRILLAGA FAMILY - --------- TRUST AND RICHARD T. PEERY SEPERATE PROPERTY TRUST, AS LANDLORD, AND LATITUDE COMMUNICATIONS, AS TENANT. GUADELOUPE A EXHIBIT B TO LEASE AGREEMENT DATED JULY 31, 1995 BY AND BETWEEN THE ARRILLAGA - --------- FAMILY TRUST AND THE RICHARD T. PEERY SEPARATE PROPERTY TRUST, AS LANDLORD, AND LATITUDE COMMUNICATIONS, AS TENANT. TENANT IMPROVEMENT SPECIFICATIONS - --------------------------------- Responsible Party (L = Landlord; T = Tenant) DOORS: - ------ L Building standard, solid core veneer (ash) three foot by 9'-0" doors and frames to comply with all necessary fire ratings as required. Doors stained and sealed to match architect's finish selection. Schlage or equal door lever hardware in polished stainless steel finish, provide all necessary hardware. L New roll up door to be installed in Manufacturing area (per drawing). L Provide locksets on ten (10) doors. T Provide locksets on any doors over the ten (10) doors to be furnished by Landlord. T Provide Card Key access for the doors leading to the restroom core area (if desired). PARTITIONS AND GLAZING: - ----------------------- L Provide layout per drawing. All interior partitions shall be 3 1/2", metal studs with 5/8" drywall each side. Provide approximately 20 LF of Herc. glass and double doors in the board room. CEILING: - -------- L 2'x 4' ceiling grid system (with 2'x 2' "second look" tile). 9' 0" FF. with standard ceiling tile in open staff areas, offices, lounges, etc. WINDOW COVERING: - ---------------- T All perimeter windows shall receive vertical blind window treatment. MILLWORK: - --------- L As indicated on drawings, in utility areas, all exposed surfaces to be plastic laminate. (2 of 2) FLOOR-COVERING: - --------------- L Carpet Border: In conference room and lobby: Shaw or approved equivalent. All carpet to be glue down, base is to be 2 1/2" rubber. Lunch room, coffee/copy, lab, supply rooms and data room shall have 12" x 12" Vinyl tile. Provide allowance for granite or ceramic tile in the lobby area. HVAC: - ----- L Predicated on population density and equipment, and lighting levels, Landlord shall design and install a complete building standard and supplemental heating, cooling and ventilation system. Separate zone control shall be provided for the conference rooms, and any other areas deemed necessary by the mechanical engineers. * Assume that each desk, workstation, office, etc. shall eventually receive a Macintosh or IBM personal computer at an average of 300 watts of power. HVAC calculations shall assume a 100% operating demand for any given time period (based on 250 square feet per person load). L In all occupied areas, exhaust and supply fresh air conditioning to the latest accepted standards as set forth by the American Society of Heating, Refrigeration, Air Conditioning and Engineers. T Upgrade HVAC systems to be capable of accommodating 110% of equipment heat loads within any one room (10% safety margin) - if requested. T Provide a remote motor ducted exhaust fan in all conference rooms. T Lab area is to be on a dedicated zone with 24 hour operation; suitable to accommodate electrical load in the lab. T Any other requirements above those provided for by Landlord above. LIGHTING/ELECTRICAL AND DATA: - ----------------------------- L For all lighting, switch each room and/or area separately. Provide slide bar dimmer switches on incandescent downlights in conference rooms. L Florescent lighting shall be illuminated with 2'x 4' lamp parabolic fixtures (recessed) or approved equal throughout the space. Upgrade lights to be installed in the boardroom, lunchroom and sconce type fixtures to be installed in the stairways. L In addition to building standard lighting, additional fluorescent lighting shall be (2 of 2) installed so as to initially allow 80' candle lighting at all remaining conference room, offices, and open office areas. L Provide all necessary exit and emergency lighting as required. All lighting to comply with local and state title 24 requirements. L All conference rooms shall have one phone and two electrical outlets each. L Open office area is to receive J-boxes above the suspended ceiling system 24'-0" on center for open office cubicles. Each office cubicle is to be capable of having one phone/data and two electrical outlets. All Hardwall offices are to have two electrical outlets and two phone/data outlets. The data and lab areas are to have two electrical and two data outlets per wall. L Provide separate circuit outlets at all copiers and lounge areas as required in locations to be specified by Tenant. L Provide all necessary electrical components including panels, transformers, as required. T Provide occupancy switch sensors by "Novitas" or approved equal for all offices. T Hook up electrical to furniture provided by Tenant. T Provide separate circuit outlets for any sensitive equipment. T The lab area is to have a total of thirty 120 volt 20 amp single phase circuits with 26 of those circuits being duplex. Install 8 cord drops 48" from the finish floor. Provide additional panel capacity for 40% growth serving this area. L The lunch room will require sufficient electrical capacity to service additional vending equipment that Tenant may elect to install at their expense. TELEPHONE: - ---------- T All offices, workstations, secretary and conference areas shall be wired for data and to telephone room for network connections. Outlets to receive modular receptacles for both telephone and data (Tenant to provide requirements) T Design, engineer, furnish and install a empty conduit stub - ups as may be required to install tenant telephone and data system wiring as noted above, including all necessary back boards and electrical outlets. DATA PROCESSING: - ---------------- (2 of 2) T Provide conduit and power feeds as required for internal accounting, word processing computer systems and PC rooms. Power feeds for c.p.u.'s must be dedicated, isolated grounded outlets. PLUMBING: - --------- L Engineer, furnish and install at the lunch room, a stainless steel sink with goose neck faucet. Hot and cold running water. Water taps and for ice maker and coffee maker (which will be provided by Tenant). L Provide an 120 gallon water heater. L Men's and women's toilet rooms to comply with local, California and ADA codes and requirements as required. FIRE PROTECTION: - ---------------- T Provide fire alarm system and fire monitoring system. MISCELLANEOUS: - -------------- L Exterior entry way is to be upgraded and re-worked per the requirements of Tenant. Initial: /s/ EW, JA ------------------------- (2 of 2) EX-10.9 10 SENIOR LOAN AND SECURITY AGREEMENT SEPT. 15, 1994 EXHIBIT 10.9 SENIOR LOAN AND SECURITY AGREEMENT THIS SENIOR LOAN AND SECURITY AGREEMENT (this "Security Agreement") is dated as of September 15, 1994 between Latitude Communications, Inc., a California corporation ("Borrower") and Phoenix Leasing Incorporated, a California corporation ("Lender"). RECITALS A. Borrower desires to borrow from Lender in one or more borrowings an amount not to exceed $1,000,000 in the aggregate, and Lender desires to loan, subject to the terms and conditions herein set forth, such amount to Borrower. Such borrowings shall be evidenced by one or more Senior Secured Promissory Notes (each, a "Note" and collectively, the "Notes"), in the form attached hereto. B. As security for Borrower's obligations to Lender under this Security Agreement and the Notes, Borrower will grant to Lender hereunder a first perfected security interest in certain of its equipment, machinery and fixtures, including but not limited to computers, workstations, furniture, test equipment and software, whether now owned by Borrower or hereafter acquired, and all substitutions and replacements of and additions, improvements, accessions and accumulations to said equipment, machinery and fixtures, together with all rents, issues, income, profits and proceeds therefrom to the extent of the items described in Schedule 1 attached to each Note (collectively, the "Collateral"). NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS: SECTION 1. THE LOANS. --------- (a) General Terms. Subject to the terms and conditions of this ------------- Security Agreement, Lender hereby agrees to make one or more senior secured loans (each, a "Loan" and collectively, the "Loans") to Borrower, subject to the following conditions: (i) each Loan shall be evidenced by a Note; (ii) the total principal amount of the Loans shall not exceed $1,000,000 in the aggregate (the "Commitment"); (iii) at the time of each Loan, no Event of Default or event which with the giving of notice or passage of time, or both, could become an Event of Default shall have occurred and be continuing, as reasonably determined by Lender, and certified by Borrower; (iv) that in no event shall Lender be obligated to make a Loan if the value of all Collateral held by it hereunder (as determined by such proof as Lender shall deem satisfactory, in its sole discretion) is less than the sum of (x) the proposed Loan and (y) the unpaid balance of, together with accrued interest thereon, all prior Loans and provided further that not more than 5% of the Collateral by value shall consist of software; (v) the amount of each Loan shall be at least $50,000 except for a final Loan which may be less than $50,000; (vi) Lender shall not be obligated to make any Loan after September 30, 1995; (vii) for each Loan, Borrower shall present to Lender a list of proposed Collateral for approval by Lender in its sole discretion; (viii) for each Loan, Borrower shall have provided Lender with each of the closing documents described in Exhibit A hereto (which documents shall be in form and substance acceptable to Lender); (ix) Borrower is performing according to its business plan referred to as "Section 10: Financial Analysis, pages 55 through 66, consisting of Tables 10.1 to 10.6" dated April 19, 1994, (the "Business Plan") as may be amended from time to time in form and substance acceptable to Lender; (x) there shall be no material adverse change in Borrower's condition financial or otherwise, not contemplated in Borrower's Business Plan, as reasonably determined by Lender, and Borrower so certifies, from (yy) the date of the most recent financial statements delivered by Borrower to Lender to (zz) the date of the proposed Loan; (xi) prior to September 30, 1995, Borrower shall not offer any loan secured by (or leases of) any equipment, furniture or fixtures to any -1- other person or entity other than Lender or the Seller of such equipment, furniture or fixtures, unless Lender declines to finance such transaction or Borrower and Lender are unable to agree on the terms of such financing within 10 days after notice from Borrower to Lender; (xii) Borrower shall use the proceeds of all Loans hereunder for working capital or for the purchase of Collateral; (xiii) at the time of each Loan, Borrower has reimbursed Lender for all reasonable UCC filing and search costs and appraisal fees; (xiv) all Collateral has been marked and labeled by Lender or Lender's agent; and (xv) Lender has received in form and substance acceptable to Lender: (a) Borrower's interim financial statements signed by a financial officer of Borrower; and (b) evidence of Borrower's $7,937,000 cash position as of June 30, 1994. (b) The Notes. Each Loan shall be evidenced by a Note. Each Note --------- shall bear interest and be payable and prepayable at the times and in the manner provided therein. Following payment of the Indebtedness related to each Note, Lender shall return such Note, marked "canceled," to Borrower. SECTION 2. SECURITY INTERESTS. ------------------ (a) Borrower hereby grants to Lender a first security interest in all Collateral. (b) This Security Agreement secures (i) the payment of the principal of and interest on the Notes and all other sums due thereunder and under this Security Agreement (the "Indebtedness") and (ii) the performance by Borrower of all of its other covenants now or hereafter existing under the Notes and this Security Agreement (the "Obligations"). SECTION 3. BORROWER'S REPRESENTATIONS AND WARRANTIES. ----------------------------------------- Borrower represents and warrants that (a) it is a corporation in good standing under the laws of the state of its incorporation, and duly qualified to do business in each state where necessary to carry on its present business and operations, including the jurisdiction(s) where the Collateral will be located; (b) it has full authority to execute and deliver this Security Agreement and the Notes and perform the terms hereof and thereof, and this Security Agreement and the Notes have been duly authorized, executed and delivered and constitute valid and binding obligations of Borrower enforceable in accordance with their terms; (c) the execution and delivery of this Security Agreement and the Notes will not contravene any law, regulation or judgment affecting Borrower or result in any breach of any agreement or other instrument binding on Borrower; (d) no consent of Borrower's shareholders or holder of any indebtedness, or filing with, or approval of, any governmental agency or commission, which has not already been obtained or performed, as appropriate, is a condition to the performance of the terms of this Security Agreement or the Notes; (e) there is no action or proceeding pending or threatened against Borrower before any court or administrative agency which might have a materially adverse effect on the business, financial condition or operations of Borrower; (f) Borrower owns all of the Collateral free and clear of all liens, claims and encumbrances, and, except for this Security Agreement, there is no deed of trust, mortgage, security agreement or other third party interest against any of the Collateral; (g) Borrower has good and marketable title to the Collateral; (h) all Collateral has been received, installed and is ready for use and is satisfactory in all respects for the purposes of this Security Agreement; (i) the Collateral is, and will remain at all times under applicable law, removable personal property, which is free and clear of any lien or encumbrance in favor of Borrower or any other person other than Lender, notwithstanding the manner in which the Collateral may be attached to any real property; (j) all credit and financial information submitted to Lender herewith or at any other time is and will be true and correct; and (k) the security interest granted to Lender hereunder is a perfected first security interest. -2- SECTION 4. METHOD AND PLACE OF PAYMENT. --------------------------- Borrower will pay to Lender, at its office at the address specified in the Notes, or such other address as Lender shall specify in writing, all amounts payable to it in respect of the principal of or interest on the Notes, without any presentation thereof. SECTION 5. AFFIRMATIVE COVENANTS REGARDING THE COLLATERAL. ---------------------------------------------- Borrower covenants and agrees that so long as any portion of the Indebtedness is unpaid and as long as any of the Obligations are outstanding it will comply with the following covenants: (a) Location; Inspection. All of the Collateral shall be located at the -------------------- address (the "Collateral Location") shown on the Schedule 1 to each Note and shall not be moved without Lender's prior written consent. All of the records regarding the Collateral shall be located at 4001 Burton Drive, Santa Clara, California 95054. Lender shall have the right to inspect Collateral and records relating thereto at any reasonable time. Borrower shall be responsible for all labor, material and freight charges incurred in connection with any removal or relocation of Collateral which is requested by the Borrower and consented to by Lender, as well as for any charges due to the installation or moving of the Collateral. Payments under the Notes and under this Security Agreement shall continue during any period in which the Collateral is in transit during a relocation. Lender or its agent shall mark and label Collateral, which labels (to be provided by Lender) shall state that such Collateral is subject to a security interest of Lender, and Borrower shall keep such labels on the Collateral as so labeled. (b) Collateral Maintenance. (a) General. Borrower will locate or base each ---------------------- ------- item of Collateral where designated in a Schedule to each Note and will reasonably permit Lender to inspect such item of Collateral and its maintenance records. Borrower will at its sole expense comply with all applicable laws, rules, regulations, requirements and orders with respect to the use, maintenance, repair, condition, storage and operation of each item of Collateral. Except as required herein, Borrower will not make any addition or improvement to any item of Collateral that is not readily removable without causing material damage to any item or impairing its original value or utility. Any addition or improvement that is so required or cannot be so removed will immediately become the property of Lender. (b) Service and Repair. With respect ------------------ to computer equipment, Borrower has entered into, and will maintain in effect, Vendor's standard maintenance contract or another contract satisfactory to Lender for a period equal to the term of each Loan and extensions thereto which provides for the maintenance of the Collateral in good condition and working order and repairs and replacement of parts thereof, all in accordance with the terms of such maintenance contract. Borrower shall have the Collateral certified for the Vendor's standard maintenance agreement prior to delivery to Lender upon expiration of this Loan. With respect to any other Collateral, Borrower will at its sole expense maintain and service and repair any damage to each item of Collateral in a manner consistent with prudent industry practice and Borrower's own practice so that such item of Collateral is at all times (i) in the same condition as when delivered to Borrower, except for ordinary wear and tear, and (ii) in good operating order for the function intended by its manufacturer's warranties and recommendations. (c) Loss or Damage. Borrower assumes the entire risk of loss to the -------------- Collateral through use, operation or otherwise. Borrower hereby indemnifies and holds harmless Lender from and against all claims, loss of Loan payments, costs, damages, and expenses relating to or resulting from any loss, damage or destruction of the Collateral, any such -3- occurrence being hereinafter called a "Casualty Occurrence." Following a Casualty Occurrence that results in a total loss of an item of Collateral, Borrower shall, on the first day payment is due on each Note following the Casualty Occurrence or, if there is no such payment date, thirty (30) days after such Casualty Occurrence, prepay the principal of the Notes on a pro rata basis (as provided below) in a total amount equal to the sum of (1) the product of (x) the aggregate principal balance of the Notes then outstanding times (y) a fraction, the numerator of which shall be the Collateral Value (defined as the fair market value as of the date of this Security Agreement as determined by Lender in good faith) of the Collateral that suffered the Casualty Loss and the denominator of which shall be the aggregate Collateral Value (as so defined) of all the Collateral and (2) the amount of prepayment premium payable on such principal amount as provided for an optional prepayment under the Notes. Prepayments of principal following a Casualty Occurrence shall be allocated pro rata to each Note in the percentage that the original principal amount of each Note bears to the total original principal amount of all Notes. Upon the making of such payments, Lender shall release such item of Collateral from its lien hereunder. Notwithstanding the above, Borrower may replace any item of Collateral which has suffered a Casualty Occurrence with Collateral acceptable to Lender in its complete discretion and, in such event, the provisions of the previous paragraph shall not apply. Borrower's tender of such Collateral shall constitute a representation and warranty that such Collateral is free of all liens, claims and encumbrances, and otherwise qualifies as Collateral under this Security Agreement. Following such tender, Lender shall have a first security interest in such Collateral. (d) Insurance. As long as any Indebtedness remains outstanding and as long --------- as any Obligations remain unperformed, Borrower at its expense shall keep the Collateral insured against all risks for the value of the Collateral and in no event for less than the amount payable following a Casualty Event (as provided in Section 5(c)). Such insurance shall provide for (a) loss payable endorsement to Lender or any assignee of Lender, (b) property damage insurance naming Lender as additional insured and (c) public liability coverage naming Lender as an additional insured in an amount not less than $5,000,000. Borrower will provide Lender and any assignee of Lender with a certificate of insurance from the insurer evidencing Lender's or such assignee's interest in the policy of insurance. Such insurance shall cover any Casualty Occurrence to any unit of Collateral. Notwithstanding anything in Section 5(c) or this Section 5(d) to the contrary, this Security Agreement and Borrower's obligations hereunder shall remain in full force and effect with respect to any unit of Collateral which is not subject to a Casualty Occurrence. SECTION 6. MISCELLANEOUS AFFIRMATIVE COVENANTS. ----------------------------------- Borrower covenants and agrees that so long as any portion of the Indebtedness is unpaid and as long as any of the Obligations are outstanding it will: (a) duly pay all governmental taxes and assessments at the time they become due and payable; (b) maintain the Collateral in good repair, working order and condition, free and clear of all liens and encumbrances (other than Lender's security interest hereunder); (c) comply with all applicable material governmental laws, rules and regulations; (d) punctually pay amounts due under the Notes and all other sums owed to Lender under this Security Agreement; -4- (e) punctually perform all of the Obligations owed to Lender; (f) maintain Lender's security interest in the Collateral as a first and prior perfected security interest; (g) permit a representative of Lender to inspect the Collateral and Borrower's books and records at any time (upon reasonable notification) during regular business hours, such books and records to be maintained in accordance with generally accepted accounting principles; (h) furnish Lender with its annual audited financial statements within ninety (90) days following the end of Borrower's fiscal year, unaudited quarterly financial statements within thirty (30) days after the end of each fiscal quarter, and within fifteen (15) days of the end of each month a financial statement for that month prepared by the Borrower, including all financial information which would be required to be disclosed in 10-Q, 10-K or 8-K filings with the Securities Exchange Commission if Borrower were required to make such filings and given to Borrower's Board of Directors, and including an income statement and balance sheet, all of which shall be certified by an officer of the Borrower as fairly representing the financial condition and results of operations of the Borrower and shall be prepared in accordance with generally accepted accounting principles consistently applied, and such other information as Lender may reasonably request; (i) promptly (but in no event more than five (5) days after the occurrence of such event) notify Lender of the occurrence of any Event of Default; and (j) take all steps deemed by Lender reasonable or advisable to validate or perfect the security interest of Lender in the Collateral. SECTION 7. NEGATIVE COVENANTS. ------------------ Borrower covenants and agrees that so long as any portion of the Indebtedness is unpaid and as long as any of the Obligations are unperformed it will not: (a) sell all or substantially all of its assets or transfer title to any of the Collateral to any other entity, whether or not such entity is owned by Borrower, without Lender's prior written consent; (b) create, assume or permit to exist any lien on any portion of the Collateral (other than Lender's security interest hereunder and the liens listed on Exhibit C attached hereto); or (c) except as required by Section 5(b) hereof, make any addition or improvement to any portion of the Collateral that is not readily removable without causing material damage or impairing its original value or utility. SECTION 8. INDEMNITIES. ----------- (a) General. Borrower will protect, indemnify and save harmless ------- Lender and any assignees on an after-tax basis from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (including reasonable attorneys fees and expenses), imposed upon or incurred by or asserted against Lender or any assignee of Lender by Borrower or any third party by reason of the occurrence or existence (or -5- alleged occurrence or existence) of any act or event relating to or caused by any portion of the Collateral, or its purchase, acceptance, possession, use, maintenance or transportation, including without limitation, consequential or special damages of any kind related thereto, any failure on the part of Borrower to perform or comply with any of the terms of this Security Agreement or the Notes, claims for latent or other defects related to the Collateral, claims for patent, trademark or copyright infringement related to the Collateral and claims for personal injury, death or property damage related to the Collateral, including those based on Lender's negligence or strict liability in tort and excluding only those based on Lender's gross negligence or willful misconduct. In the event that any action, suit or proceeding is brought against Lender by reason of any such occurrence, Borrower, upon request of Lender, will, at Borrower's expense, resist and defend such action, suit or proceeding and will provide reasonable assistance to Borrower, as requested by Borrower, at Borrower's expense, including defense by counsel designated by Borrower and reasonably approved by Lender. Lender will not enter into any settlement without the consent of Borrower. (b) Tax Indemnity. Borrower agrees to reimburse Lender (or pay directly ------------- if instructed by Lender) and any assignee of Lender for, and to indemnify and hold Lender and any assignee harmless from, all fees (including, but not limited to, license, documentation, recording and registration fees), and all sales, use, gross receipts, personal property, occupational, value added or other taxes,levies, imposts, duties, assessments, charges, or withholdings of any nature whatsoever, together with any penalties, fines, additions to tax, or interest thereon (all of the foregoing being hereinafter referred to as "Impositions"), except same as may be attributable to Lender's income, arising at any time prior to or during the term of any Notes or of this Security Agreement, or upon termination or early termination of this Security Agreement and levied or imposed upon Lender directly or otherwise by any Federal, state or local government in the United States or by any foreign country or foreign or international taxing authority upon or with respect to (i) the Collateral, (ii) the exportation, importation, registration, purchase, ownership, delivery, leasing, possession, use, operation, storage, maintenance, repair, return, sale, transfer of title, or other disposition thereof, (iii) the rentals, receipts, or earnings arising from the Collateral, or any disposition of the rights to such rentals, receipts, or earnings, (iv) any payment pursuant to this Security Agreement or the Notes, or (v) this Security Agreement, the Notes or any transaction or any part hereof or thereof, excluding all taxes on or measured by Lender's or assignee's net income. (c) Survivability. Borrower's obligations under this Section 8 shall ------------- survive the payment in full of all the Indebtedness and the performance of all Obligations with respect to acts or events occurring or alleged to have occurred prior to the payment in full of all the Indebtedness and the performance of all Obligations. SECTION 9. RELEASE OF LIENS. ---------------- Upon payment of all of the Indebtedness and performance of all of the Obligations, Lender shall execute UCC termination statements and such other documents as Borrower shall reasonably require to evidence the release of Lender's lien relating to the Collateral. SECTION 10. ASSIGNMENT. ---------- WITHOUT LENDER'S PRIOR WRITTEN CONSENT, BORROWER SHALL NOT (a) ASSIGN, TRANSFER, PLEDGE, HYPOTHECATE OR OTHERWISE DISPOSE OF THIS SECURITY AGREEMENT, ANY COLLATERAL, OR ANY INTEREST THEREIN, (b) LEASE OR LEND COLLATERAL OR PERMIT IT TO BE USED BY ANYONE OTHER THAN BORROWER OR BORROWER'S EMPLOYEES OR (c) MERGE INTO, CONSOLIDATE WITH OR CONVEY OR -6- TRANSFER ITS PROPERTIES SUBSTANTIALLY AS AN ENTIRETY TO ANY OTHER PERSON OR ENTITY. Lender may assign any of the Notes, this Security Agreement or its security interest in any or all Collateral, or any or all of the above, in whole or in part to one or more assignees or secured parties without notice to Borrower. If Borrower is given notice of such assignment it agrees to acknowledge receipt thereof in writing and Borrower shall execute such additional documentation as Lender's assignee shall reasonably require. Each such assignee and/or secured party shall have all of the rights, but (except as provided in Section 9 hereof) none of the obligations, of Lender under this Agreement, unless such assignee or secured party expressly agrees to assume such obligations in writing. Borrower shall not assert against any assignee and/or secured party any defense, counterclaim-or offset that Borrower may have against Lender. Notwithstanding any such assignment, and providing no Event of Default has occurred and is continuing, Lender, or its assignees, secured parties, or their agents or assigns, shall not interfere with Borrower's right to quietly enjoy use of Collateral subject to the terms and conditions of this Security Agreement. Subject to the foregoing, the Notes and this Security Agreement shall inure to the benefit of and are binding upon the successors and assignees of the parties hereto. SECTION 11. DEFAULT. ------- (a) Events of Default. Any of the following events or conditions shall ----------------- constitute an "Event of Default" hereunder: (i) Borrower's failure to pay any monies due to Lender hereunder or under any Note beyond the fifth (5th) day after the same is due; (ii) Borrower's failure to comply with its obligations under Section 5(d) or Section 10; (iii) any representation or warranty of Borrower made in this Security Agreement or the Notes or in any other agreement, statement or certificate furnished to Lender in connection with this Security Agreement or the Notes shall prove to have been incorrect in any material respect when made or given; (iv) Borrower's failure to comply with or perform any term, covenant or condition, of this Security Agreement or any Note or under any other agreement between Borrower and Lender if such failure to comply or perform is not cured by Borrower within thirty (30) days of receipt of notice thereof; (v) seizure of any of the Collateral under legal process; (vi) the filing by Borrower of a petition for reorganization or liquidation under the Bankruptcy Code or any amendment thereto or under any other insolvency law providing for the relief of debtors; (vii) the voluntary making of an assignment of a substantial portion of its assets by Borrower or by any Guarantor under any Guaranty executed in connection with this Loan for the benefit of its creditors, the appointment of a receiver or trustee for Borrower or any Guarantor or for any of Borrower's or Guarantor's assets, the institution by Borrower or any Guarantor of any formal or informal proceeding for dissolution, liquidation, settlement of claims against or winding up of the affairs of Borrower or any Guarantor; (viii) commencement against Borrower of any case, proceeding or other action of a nature referred to in clauses (vi) or (vii) above which remains undismissed, undischarged or unbonded for a period of sixty (60) days; or (ix) the making by Borrower or by any Guarantor under any Guaranty executed in connection with this Loan of a transfer of all or substantially all of Borrower's or Guarantor's assets or inventory not in the ordinary course of business. (b) Remedies. If any Event of Default has occurred, Lender may in its sole -------- discretion exercise one or more of the following remedies with respect to any or all of the Collateral: (i) declare all amounts under this Security Agreement and the Notes immediately due and payable; (ii) proceed by court action to enforce performance by Borrower of the Notes and this Security Agreement or to recover all damages and expenses incurred by Lender by reason of an Event of Default; (iii) without court order or prior demand, enter upon the premises where the Collateral is located and take immediate possession of and remove it without liability of Lender to Borrower; (iv) terminate this Security Agreement and sell the Collateral at public or private sale, or otherwise dispose -7- of, hold, use or lease any or all of the Collateral to the extent permitted under applicable law; or (v) exercise any other right or remedy available to it under applicable law. If Lender has declared any or all amounts under this Security Agreement and/or the Notes immediately due and payable, Borrower will pay immediately to Lender (a) all unpaid principal and interest under the Notes, (b) as liquidated damages, and not as a penalty, and which the parties agree are fair and reasonable under the circumstances existing as of the date of this Security Agreement, the following percentages of unpaid principal under each Note: Acceleration Date Percentage of Unpaid Principal ----------------- ------------------------------ 1st-12th month of such Note 20% 12th-18th month of such Note 15% 19th-24th month of such Note 10% 25th-last month of such Note 5%, and (c) all other amounts due under this Security Agreement and under the Notes as of the date of the above-described declaration (all amounts described in clauses (a), (b) and (c) above shall be referred to as "Lender's Return"). The net proceeds of any sale or lease of such Collateral will be credited against Lender's Return. The net proceeds of a sale of the Collateral pursuant to this Section 11(b) is defined as the sales price of the Collateral less selling expenses, including, without limitation, costs of remarketing the Collateral and all refurbishing costs and commissions paid with respect to such remarketing. The net proceeds of a lease of the Collateral pursuant to this Section 11(b) is defined as the amount equal to the rental payments due under such lease (discounted at a rate per annum equal to the discount rate for 13-week Treasury Bills as of the date on which Lender notifies Borrower that this Security Agreement is terminated (the "Termination Date") (as such rate is reported in the Money Rates column in the Wall Street Journal) or the Termination Date or, ------------------- if the Wall Street Journal is not published on such date, the next date after ------------------- the Termination Date that the Wall Street Journal is published (the "Discount ------------------- Rate")) plus the residual value of the Collateral at the end of the basic term of such lease, as reasonably determined by Lender, and discounted at the Discount Rate. Borrower agrees to pay all reasonable out-of-pocket costs of Lender related to the exercise of its remedies, including, but not limited to, legal fees and litigation expenses. At Lender's request, Borrower shall assemble the Collateral and make it available to Lender at such location as Lender may designate. Borrower waives any right it may have to redeem the Collateral. Declaration that any or all amounts under this Security Agreement and/or the Notes are immediately due and payable shall not terminate this Security Agreement or any of the Notes unless Lender so notifies Borrower in writing. Any amount required to be paid under this Section shall accrue interest at a rate of 23% per annum, or the highest rate of interest permitted by applicable law, whichever is less, accruing from the date the amounts are payable hereunder until such amounts are paid. All such remedies are cumulative and may be enforced separately or concurrently. (c) Application of Proceeds. The proceeds of any sale of all or any part of ----------------------- the Collateral and the proceeds of any remedy afforded to Lender by this Security Agreement shall be paid to and applied as follows: -8- First, to the payment of reasonable costs and expenses of suit or ----- foreclosure, if any, and of the sale, if any, and all reasonable out-of-pocket costs of Lender related to the exercise of its remedies, including legal fees and litigation expenses and of all proper expenses, liabilities and advances incurred or made pursuant to this Security Agreement by Lender or by any holder of any Note in connection with foreclosure, suit, sale or enforcement of this Security Agreement or the Notes, and to the payment of all taxes, assessments or liens superior to Lender's security interest granted by this Security Agreement, except any taxes, assessments or superior liens subject to which the sale was made; Second, to the payment of all other amounts due under this Security ------ Agreement and all Notes not described in items Third and Fourth below; ----- ------ Third, to pay Lender an amount equal to Lender's Return, to the extent ----- not previously paid by Borrower; and Fourth, to the payment of any surplus to Borrower or to whomever may ------ lawfully be entitled to receive it. (d) Effect of Delay; Waiver; Foreclosure on Collateral. No delay or -------------------------------------------------- omission of Lender, or of any holder of any Note, in exercising any right or power arising from any default on the part of Borrower shall prevent Lender or such holder from exercising that right or power if the default continues. No waiver of a default, whether full or partial, by Lender or such holder shall be taken to extend to any subsequent default, or to impair the rights of Lender or such holder in respect of any damages suffered as a result of the default. The giving, taking or enforcement of any other or additional security, collateral or guaranty for the payment or discharge of the Indebtedness and performance of the Obligations shall in no way operate to prejudice, waive or affect the security interest created by this Security Agreement or any rights, powers or remedies exercised hereunder or thereunder. Neither Lender nor such holder shall be required first to foreclose on the Collateral prior to bringing an action against Borrower for sums owed to Lender or such holder hereunder or under any Note. SECTION 12. LATE PAYMENTS. ------------- Interest at a rate of 18% per annum, or the highest interest rate permitted by applicable law, whichever is less, shall be paid by Borrower to Lender on all amounts owed Lender by Borrower which are not paid when due. If such amounts have not been received by Lender at Lender's place of business or by Lender's designated agent by the date such amounts are due under this Security Agreement or the Notes, Lender shall bill Borrower for such charges. Borrower acknowledges that invoices for amounts due hereunder or under the Notes are sent by Lender for Borrower's convenience only. Borrower's non-receipt of an invoice will not relieve Borrower of its obligation to make payments hereunder or under the Notes. SECTION 13. LENDER'S EXPENSES; PAYMENTS BY LENDER. ------------------------------------- (a) Borrower shall pay Lender all reasonable costs and expenses including, but not limited to, reasonable attorney's fees and the fees of collection agencies, incurred by Lender in enforcing any of the terms, conditions or provisions hereof or the Notes. (b) If Borrower shall fail to make any payment or perform any act required hereunder (including, but not limited to, maintenance of any insurance required by Section 5(d)), then Lender may, but shall not be required to, after such notice to Borrower as is -9- reasonable under the circumstances, make such payment or perform such act with the same effects as if made or performed by Borrower. Borrower will upon demand reimburse Lender for all sums paid and all costs and expenses incurred in connection with the performance of any such act. SECTION 14. FINANCING STATEMENTS. -------------------- Borrower will execute all financing statements pursuant to the Uniform Commercial Code and all such other documents reasonably requested by Lender to perfect Lender's security interests hereunder. Borrower authorizes Lender to file financing statements signed only by Lender (where such authorization is permitted by law) at all places where Lender reasonably deems necessary. SECTION 15. NATURE OF TRANSACTION. --------------------- Except as expressly set forth herein, Lender makes no representation whatsoever, express or implied, concerning the legal character of the transaction evidenced hereby, for tax or any other purpose. SECTION 16. SUSPENSION OF LENDER'S OBLIGATIONS. ---------------------------------- The obligations of Lender hereunder will be suspended to the extent that Lender is hindered or prevented from complying therewith because of labor disturbances, including but not limited to strikes and lockouts, acts of God, fires, floods, storms, accidents, industrial unrest, strike, acts of war, insurrection, riot or civil disorder, any order, decree, law or governmental regulations or interference, or any cause whatsoever not within the sole and exclusive control of Lender. SECTION 17. STOCK WARRANT. ------------- Borrower agrees that it will issue to Lender upon execution of this Loan a Warrant in the form of Warrant Agreement attached hereto as Exhibit B. Borrower and Lender agree that the value of the Warrant hereunder is ten dollars ($10.00). SECTION 18. COMMITMENT FEE. -------------- Borrower has paid to Lender a commitment fee ("Fee") of $10,000. The Fee shall be applied by Lender first to reimburse Lender for all out-of-pocket UCC search costs and appraisal fees incurred by Lender, and then proportionally to the first monthly payment for each Note hereunder in the proportion that the Collateral Value for such Note bears to Lender's entire commitment. However, the portion of the Fee which is not applied to such monthly payments shall be non- refundable except if Lender defaults in its obligations pursuant to Section 1. SECTION 19. MISCELLANEOUS. ------------- (a) Borrower shall provide Lender with such corporate resolutions, financial statements, opinions of counsel and other documents as Lender shall reasonably request from time to time. (b) Borrower represents that the Collateral hereunder is used solely for business purposes. (c) Time is of the essence with respect to this Agreement. (d) All notices hereunder shall be in writing, by registered or certified mail, return receipt requested or by courier service, and shall be directed, as the case may be, to Lender at 2401 Kerner Boulevard, San Rafael, California 94901, Attention: Lease Administration and to Borrower at 4001 Burton Avenue, Santa Clara, California 95054, Attention: Emil Wang. -10- Such notices shall be effective on receipt if delivered personally, five days after dispatch if mailed and one business day after dispatch if sent by courier service. (e) Borrower acknowledges that Borrower has read this Security Agreement and the Notes, understands them and agrees to be bound by their terms and further agrees that this Security Agreement and the Notes constitute the entire agreement between Lender and Borrower with respect to the subject matter hereof and supersede all previous agreements, promises, or representations. (f) This Security Agreement and the Notes may not be changed, altered or modified except by an instrument in writing signed by an officer of Lender and Borrower. (g) Any failure of Lender to require strict performance by Borrower or any waiver by Lender of any provision herein or in a Note shall not be construed as a consent or waiver of any other breach of the same or any other provision. (h) If any provision of this Security Agreement or a Note is held invalid, such invalidity shall not affect any other provisions hereof or thereof. (i) The obligations of Borrower to pay the Indebtedness and perform the Obligations shall survive the expiration or earlier termination of this Security Agreement or the Notes until all Obligations of Borrower to Lender have been met and all Liabilities of Borrower to Lender have been paid in full. (j) Borrower will notify Lender at least 30 days before changing its name, principal place of business or chief executive office. (k) Borrower will, at its expense, promptly execute and deliver to Lender such documents and assurances (including financing statements) and take such further action as Lender may reasonably request in order to carry out the intent of this Security Agreement and Lender's rights and remedies. SECTION 20. JURISDICTION AND WAIVER OF JURY TRIAL. ------------------------------------- This Security Agreement and the Notes shall be governed by and construed under the laws of the State of California, excluding principles of conflicts of laws. It is agreed that exclusive jurisdiction and venue for any legal action between the parties arising out of or relating to this Security Agreement or a Note shall be in the Superior Court for Marin County, California, or, in cases where federal diversity jurisdiction is available, in the United States District Court for the Northern District of California situated in San Francisco. BORROWER TO THE EXTENT IT MAY LAWFULLY DO SO, HEREBY WAIVES ITS RIGHT TO TRIAL BY JURY IN ANY ACTION BROUGHT ON OR WITH RESPECT TO THIS AGREEMENT, ANY PROMISSORY NOTE, ANY SECURITY DOCUMENTS, OR ANY OTHER AGREEMENTS EXECUTED IN CONNECTION HEREWITH. IN WITNESS WHEREOF, Borrower and Lender have caused this Security Agreement to be executed as of the date and year first above written. LATITUDE COMMUNICATIONS, INC. PHOENIX LEASING INCORPORATED - ------------------------------ ---------------------------- BORROWER LENDER By: /s/ Emil Wang By: /s/ Gray Martinez ----------------------------- ----------------------------- Its: President & CEO Its: S.V.P. ----------------------------- ---------------------------- EXHIBITS AND SCHEDULES: Exhibit A -- Closing Memorandum Exhibit B -- Stock Warrant -11- AMENDMENT TO SENIOR LOAN AND SECURITY AGREEMENT This amendment to Senior Loan and Security Agreement is made and entered into as of this 22nd day of June, 1995 by and between PHOENIX LEASING INCORPORATED ("LENDER") and LATITUDE COMMUNICATIONS ("BORROWER"). WHEREAS, Lender and Borrower have entered into a Senior Loan and Security Agreement dated as of September 15, 1994 (the "Security Agreement"). WHEREAS, Lender and Borrower now desire to amend the Security Agreement as hereinafter set forth: NOW, THEREFORE, the parties agree as follows: 1) Section 1(vi) of the Security Agreement is herby amended in its entirety to read as follows: "Lender shall not be obligated to make any Loan after March 31, 1996." 2) Except as herein specifically amended, all of the terms, covenants and provisions of the Security Agreement remain in full force and effect. 3) All defined terms used herein shall have the same meaning as in the Security Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the Senior Loan and Security Agreement as of the day and date first above written. Lender Borrower PHOENIX LEASING INCORPORATED LATITUDE COMMUNICATIONS BY: BY /s/ Emil Wang ------------------------------ ------------------------------- TITLE TITLE President & CEO ---------------------------- ---------------------------- AMENDMENT NO. 2 TO SENIOR LOAN AND SECURITY AGREEMENT This Amendment No. 2 to Senior Loan and Security Agreement No. L993609 (Amendment No. 2") is made and entered into as of December 26, 1996 by and between PHOENIX LEASING INCORPORATED ("Lender") and LATITUDE COMMUNICATIONS, INC. ("Borrower"). WHEREAS, Lender and Borrower have entered into a Senior Loan and Security Agreement dated as of September 15, 1994 ("the Security Agreement"). WHEREAS, Lender and Borrower now desire to amend the Security Agreement as hereinafter set forth: NOW, THEREFORE, the parties agree as follows: 1) Section l(a)(ii) is replaced with the following: (ii) the total principal amount of the Loans shall not exceed $2,000,000 in the aggregate (the "Commitment"); 2) Section l(a)(iv) is replaced with the following: (iv) no more than 15% of the utilized Commitment at any funding shall be used to finance soft costs; 3) Section l(a)(v) is replaced with the following: (v) the amount of each loan shall be at least $25,000, except for a final loan which may be less than $50,000; 4) Section l(a)(vi) is replaced with the following: (vi) Lender shall not be obligated to make any Loan after December 31, 1997; 5) Section 1(a)(ix) is replaced with the following: (ix) Borrower is performing according to its business plan referred to as "1997 Plan," dated November 14, 1996, consisting of 4 pages (the "Business Plan") as may be amended from time to time in form and substance acceptable to Lender; 6) Section 17 is amended by adding the following to the end thereof: As of the date of the Amendment, Borrower has paid to Lender an additional commitment fee of $10,000 which shall be utilized as described in this Section 17; 7) Except as amended by this Amendment No. 2, the Security Agreement shall continue in full force and effect as constituted, is ratified by the parties hereto, and all of the terms, covenants and provisions of the Security Agreement remain in full force and effect. 8) All defined terms used herein shall have the same meaning as in the Security Agreement. 9) The Security Agreement as amended by this Amendment No. 2 constitutes the 1 entire agreement between Borrower and Lender with respect to the subject matter hereof and supersedes all prior and contemporaneous negotiations, communications, discussions and agreements concerning such subject matter. Borrower acknowledges and agrees that Lender has not made any representation, warranty or covenant in connection with this Amendment No. 2. 10) This Amendment No. 2 is not intended to be, and shall not be construed to create a novation or accord and satisfaction, and, except as otherwise provided herein, the Security Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 2 to the Senior Loan and Security Agreement as of the date first above written. LESSOR BORROWER PHOENIX LEASING INCORPORATED LATITUDE COMMUNICAITONS, INC. BY /s/ Jean A. Rodovick BY: /s/ Emil Wang ---------------------------- ------------------------------ TITLE: Jean A. Rodovick TITLE: PRESIDENT & CEO --------------------------- Contract Administrator ----------------------- 2 EX-10.10 11 MASTER EQUIPMENT LEASE Exhibit 10.10 ---------------------------------------- NORSTAN MASTER LEASE NO. COMMENCEMENT DATE FINANCIAL SERVICES, INC. 2273-000 7-1-98 6900 WEDGWOOD ROAD SUITE 150 PO BOX 9003 ---------------------------------------- MAPLE GROVE, MN 55311 SALES REP PHONE: 612-420-1100 ---------------------------------------- MASTER EQUIPMENT LEASE ------------------------------------------------------------------- LESSEE ------------------------------------------------------------------- NAME (CORRECT LEGAL NAME) LATITUDE COMMUNICATIONS ------------------------------------------------------------------- ADDRESS 2121 TASMAN DRIVE ------------------------------------------------------------------- CITY STATE ZIP SANTA CLARA CA 95054 ------------------------------------------------------------------- LESSEE CONTACT PHONE NO. JOLYNN JOHNSSON (408) 988-7281 ------------------------------------------------------------------- MASTER TERMS AND CONDITIONS - PLEASE READ CAREFULLY BEFORE SIGNING 1. ENTIRE AGREEMENT. This Lease which includes the provisions on the reverse side hereof and any other Schedule(s) made a part hereof by the parties, constitute the entire agreement between Lessor and Lessee. 2. TERM/RENT. Upon acceptance hereof, Lessor agrees to lease to Lessee the "Equipment" indicated in the Schedule(s) to be annexed hereto for the "Basic Term" indicated on said Schedule(s). Lessee promises to pay to Lessor, or order, the aggregate Basic Rent as provided on said Schedule(s), and all other payments provided herein, in Lessor's corporate office. The Term and the first rental period and monthly payment for the Equipment will commence on the first day of the month following Lessee's acceptance of the Equipment and shall continue for the number of months indicated on said Schedule(s). In addition, Lessee shall pay to Lessor an interim rent payment equal to a prorata amount of the monthly rent payment for each day from the date of acceptance of the Equipment until the first day of the following month. The Basic Rent, shall be adjusted and increased by Lessor to cover any and all sales, use or rental taxes imposed from time to time upon Lessor, the Basic Rent, and/or the Equipment. Lessee understands and agrees that neither the supplier nor any marketing officer is an agent of Lessor. No such supplier nor marketing officer is authorized to alter, waive or add to any term or condition of this Lease, and no representation as to the Equipment, Lease or any other matter by any supplier or any marketing officer shall in any way affect Lessee's duty to pay Basic Rent, and/or to perform its other obligations as set forth herein. LESSEE SHALL PAY AND PERFORM THIS LEASE WITHOUT NOTICE, DEMAND, OFFSET, DEDUCTION, DEFENSE OR DEFERMENT, AND ANY CLAIMS BY LESSEE AGAINST LESSOR SHALL ONLY BE ASSERTED IN AN INDEPENDENT ACTION. THIS LEASE CANNOT BE CANCELLED OR TERMINATED BY LESSEE EXCEPT AS PROVIDED HEREIN. 3. DISCLAIMERS. LESSOR, NOT BEING THE MANUFACTURER OR SUPPLIER OF ANY OF THE EQUIPMENT, HAS NOT MADE AND DOES NOT MAKE TO LESSEE ANY REPRESENTATION, WARRANTY OR COVENANT, EXPRESS OR IMPLIED, WITH RESPECT TO THE EQUIPMENT, OR THE DELIVERY, INSTALLATION OR TIMELINESS THEREOF, NOR WITH RESPECT TO THE EQUIPMENT'S MANUFACTURE, DESIGN, CONDITION, FITNESS FOR USE, OR MERCHANTABILITY, AND ALL EQUIPMENT SHALL BE ACCEPTED AND LEASED BY LESSEE "AS IS". IN NO EVENT SHALL LESSOR BE LIABLE FOR ANY SPECIAL, CONSEQUENTIAL OR INCIDENTAL DAMAGES TO LESSEE AS A RESULT OF THIS LEASING TRANSACTION. LESSEE AGREES ALL SUCH CLAIMS SHALL BE ASSERTED AND/OR SETTLED DIRECTLY WITH THE SUPPLIER(S) AND NO SUCH CLAIMS SHALL BE ASSERTED AGAINST LESSOR. 4. EQUAL OPPORTUNITY. NORSTAN shall observe its responsibilities under Executive Order 11246, as amended and the regulations at 41 CFR Parts 60-1 through 60- 80, and Sections 402/503 and the regulations at 41 CFR Parts 250 and 60-741. 5. EQUIPMENT SELECTION/ORDERING/ACCEPTANCE. Lessee has selected the suppliers, type, design and quality of Equipment and hereby requests Lessor to acquire and lease the same upon the terms hereof. LESSEE ASSUMES THE RESPONSIBILITY FOR DELIVERY, INSPECTION AND ACCEPTANCE OF THE EQUIPMENT AND LESSOR SHALL NOT BE LIABLE OR RESPONSIBLE FOR ANY DELAY OR FAILURE OF DELIVERY OF SAID ORDERED EQUIPMENT. LESSEE ASSUMES ALL RISKS AND OBLIGATIONS TO ANY SUPPLIER ON ACCOUNT OF NONACCEPTANCE OF THE EQUIPMENT OR TERMINATION OF THIS LEASE. So long as Lessee is not in default, Lessee may, at its expense, enforce damage and warranty claims to its interest directly against the supplier(s), and the same shall be deemed part of the Equipment and Collateral described in Section 10 hereof. 6. LOCATION/INSPECTION. The location of the Equipment shall be as indicated hereon (or on its Schedule). The location shall not be changed without Lessor's prior written consent. Lessee shall permit Lessor, its agents, and potential purchasers of the Equipment, access at reasonable times to inspect the Equipment, and observe its use and condition. 7. LIENS AND ENCUMBRANCES. Lessee will at all times protect and defend, at its own cost and expense, the interest and priority of Lessor and keep the Equipment (and additions or attachments of Lessee thereto, if any) free and clear from any and all claims, liens and processes and other encumbrances. 8. SECURITY INTEREST. Lessor and Lessee intend this transaction to be a leasing transaction only, but to the extent, at any time or from time to time, this Lease is construed or asserted to be a transaction intended as a security, Lessor retains and/or Lessee hereby grants to Lessor a security interest in and to all the Equipment, the proceeds of any contracts, sale, assignment, lease or sub-lease thereof, any insurance proceeds, and any other rights of Lessee in and to the Equipment, the Lease and/or their proceeds. No title equity or right in or to the Equipment shall pass to Lessee except in accordance with the terms hereof. Lessee agrees that Lessor is authorized to file a copy of this Lease as a financing statement and file it or other financing statements or amendments thereto with or without the signature of Lessee with respect to any or all of the Equipment and, if Lessee's signature is required thereon by law, Lessee irrevocable appoints Lessor as Lessee's attorney-in-fact to execute any such financing statements. 9. ASSIGNMENT/SUBLEASE. Lessee shall not sell, transfer, assign, sublease, convey, encumber or pledge its interest in and to this Lease, any Schedule or the Equipment, and any such sale, transfer, assignment, sublease, conveyance, encumbrance or pledge, whether by operation of law or otherwise, without the prior written consent of Lessor, shall be void. Lessor, its successor and assigns, may sell or assign this Lease or any Lease Schedule and/or grant security interest therein or security interest in the Equipment, in whole or in part, with or without notice to Lessee. The provisions of this Lease shall be binding upon any successors and any permitted assigns of Lessor and Lessee. THIS LEASE IS NOT BINDING UNTIL ACCEPTED BY LESSOR LESSEE: LESSOR: NORSTAN FINANCIAL SERVICES INC. FULL LEGAL NAME OF LESSEE BY /s/ Emil Wang BY /s/ Jeff Matson -------------------------- ----------------------------- Signature Signature ITS President & CEO ITS VP/GM ------------------------- ---------------------------- Title Title DATE ACCEPTED 3/30/98 DATE ACCEPTED 7/2/98 - -------------------------------------------------------------------------------- 10. USE AND MAINTENANCE. Lessee, at Lessee's expense, agrees to use the Equipment in a careful and proper manner, and to comply with and conform to all federal, state, municipal, and other laws, ordinances and regulations applicable in any way to the inspection, possession, use or maintenance of the Equipment. Lessee agrees, at its expense, (1) to maintain the Equipment in top condition, ordinary wear and tear excepted, and (2) to timely repair and/or replace any failed or damaged part thereof so that the Equipment remains at all times in full repair, operating order, and safe working condition. 11. ALTERATIONS. Lessee shall, at its sole cost and expense, make all improvements, alteration, modifications, additions and attachments to the Equipment required or recommended by any Federal, State, or local governmental body or agency. Lessee shall not make any other alterations, additions, deletions or improvements to the Equipment without the prior written consent of Lessor. All such changes shall immediately be and become part of the Equipment and Collateral under this Lease. 12. LOSS/DAMAGE. Lessee shall assume and bear risk of loss and damage to the Equipment and all component parts thereof from any and every cause whatsoever, whether or not covered by insurance. No loss or damage to the Equipment or any component part thereof shall impair any obligation of Lessee under this Lease, which shall continue in full force and effect. In the event of any loss and/or damage of any kind to the Equipment, or any items(s) of Equipment, Lessee, at the option of Lessor, shall (a) place the same in first class condition and repair, or (b) replace the same with like Equipment in first class condition and repair. 13. INSURANCE. Lessee agrees to keep the Equipment insured to protect all interest of Lessor against all risks of loss and/or damage from any cause whatsoever until the earlier of (a) delivery by Lessee of possession of the Equipment to Lessor, or (b) payment by Lessee of all amounts due under the Lease. Lessee shall keep the Equipment insured in such amounts, in such forms and with such insurers satisfactory to Lessor, including, but not limited to, fire and extended coverage insurance, explosion and public liability and property damage liability. Said insurance shall cover the interest of both the Lessor and Lessee in the Equipment, and shall name Lessor as loss payee. The proceeds of said loss or damage insurance shall be payable to Lessor, but Lessor shall remit all such insurance proceeds to Lessee at such time as Lessee either (i) provides Lessor satisfactory proof that the damage has been repaired and the Equipment has been restored to good working order and condition, or (ii) the Equipment has been replaced with like Equipment in first class condition and repair. All such insurance shall provide for thirty (30) days prior written notice to Lessor of cancellation, restriction or reduction of coverage. Certificates, endorsements and copies of all policies of insurance shall be delivered to Lessor upon request. 14. NET LEASE/INDEMNITY/TAXES. This is a net lease, and Lessee hereby indemnifies Lessor against and holds Lessor harmless (on a net after tax basis) from any and all claims, (including tax claims) actions, suits, proceedings, costs, expenses, damages and liabilities, including reasonable attorney fees, arising out of or connected with the Equipment or the delivery, use, ownership, lesae or possession thereof, or arising out of any failure by Leasee to perform or comply with any of the terms and conditions of this Lease. Lessee should be responsible for the timely payment and discharge of all license and registration fees, personal property taxes and other taxes now or hereafter imposed by any federal, state, or local government upon the Equipment whether the same be assessed to Lessor or Lessee. The indemnities contained in this paragraph shall continue in full force and effect notwithstanding the termination of this Lease, whether by expiration of time, by operation of law, or otherwise. 15. SURRENDER/HOLDOVER. Upon default, or upon earlier termination of the Lease, Lessee at its expense, and with all shipping and handling costs prepaid, shall return the Equipment in first class condition and repair, ordinary wear and tear excepted, by delivering said Equipment to Lessor's corporate office or to such other place as Lessor may specify. Lessee shall, upon demand by Lessor, pay to Lessor all amounts expended by Lessor to bring the Equipment to first class condition and repair, ordinary wear and tear excepted. This obligation of Lessee shall survive the expiration or earlier termination of this Lease. In the event of holdover after expiration of the Basic Term, Lessee shall also pay to Lessor an amount equal to the daily equivalent of the Basic Rent until the Equipment is returned to Lessor; provided that nothing herein shall be deemed to prevent Lessor, by written release, from abandoning its interest in the Equipment in place to Lessee without liability therefor. 16. NOTICES. All notices shall be in writing and sent by first class mail and shall be deemed to have been given when deposited in the U.S. mail with postage prepaid and properly addressed. The addresses of the parties shall be as indicated on this Lease or changed in accordance herewith. 17. LESSOR'S PERFORMANCE OPTION. Should Lessee fail to make any payment or to do any act as provided by this Lease, then Lessor shall have the right (but not the obligation), with or without notice to Lessee of its intention to do so and without releasing Lessee from any obligation hereunder to make or to do the same, to pay, purchase, contest or compromise any insurance premium, encumbrance, charge, tax, lien or other sum which may affect the value of the Equipment and/or Collateral. All sums so incurred or expended by Lessor shall be due and payable by Lessee to Lessor within ten (10) days of notice thereof. 18. EVENTS OF DEFAULT. The occurrence of any of the following events shall, at the option of Lessor, constitute an event of default under this Lease and/or any Schedule: (a) the nonpayment by Lessee of any Basic Rent when due; or the nonpayment by Lessee of any other sum required hereunder which nonpayment continues for a period of ten (10) days following written notice thereof from Lessor; (b) the failure of Lessee to perform or observe any other term, convenant or condition of this Lease, any Schedule or any other document, agreement or instrument executed pursuant hereto or in connection herewith which is not cured within ten (10) days after written notice thereof from Lessor; (c) Lessee ceases doing business as a going concern or commences or has commenced against it any dissolution or liquidation proceeding, is insolvent, has a trustee, receiver or custodian appointed for it or for a substantial part of its assets, makes an assignment for the benefit of creditors, is generally not paying its debts as they become due, commences or has commenced against it, or suffers, approves, acquiesces in or consents to a bankruptcy proceeding or any proceeding seeking relief by way of reorganization, arrangement or composition under any present or future statute, law or regulation; (d) Lessee attempts, incurs or suffers a major rearrangement of its debt, (e) Lessee defaults or otherwise has accelerated against in any material obligation under any credit agreement, loan agreement, conditional sales contract, lease, indenture, debenture or other instrument, or Lessee defaults under any agreement or instrument now existing or hereafter made with Lessor or with any Lessor's affiliates; (f) the breach or repudiation by any party thereto of any guaranty, subordination agreement or other agreement or instrument running in favor or Lessor obtained in connection with this Lease, or such party's dissolution, death, insolvency, or bankruptcy. 19. REMEDIES. Should any event of default occur, Lessor may, with or without, notice or demand upon Lessee, pursue and enforce, successively and/or concurrently, any one or more of the following remedies: (a) pursue its remedies under Section 18: (b) WITH OR WITHOUT RETAKING POSSESSION OF THE EQUIPMENT, with or without judicial process and without liability to Lessee therefor which is hereby expressly waived, (1) terminate the Basic Term as to the equipment, (2) accelerate all Basic Rents and cause the then worth thereof to become immediately due and payable; (3) from time to time recover from Lessee any accrued and unpaid Basic Rents and other amount owing under the terms hereof, (4) sell the Equipment at public or private sale, and recover from Lessee the difference, if any, by which the net proceeds of sale shall be less than (i) the Lessor's then applicable net investment in the Equipment and the Lease, plus (ii) the then worth to Lessor of its anticipated remaining loss of bargain, (5) lease or rent the Equipment to a third party for the account of Lessee and recover from Lessee when becoming due any deficiency between the Basic Rents provided herein, and those amounts received and receivable from such third party over the remaining Basic Term; (c) pursue any other remedy Lessor may otherwise have hereunder, at law, in equity (including specific performance) or under any statute any recover such other actual damages as may be incurred by Lessor. Lessor's pursuit and enforcement of any one or more remedy shall not be deemed an election of, or waiver by, Lessor of any other or further remedy, provided, however, Lessor shall not be entitled to duplicate relief or recovery with respect to any specific element of Lessor's damages. In addition, Lessor shall attempt in good faith to mitigate its damages, but Lessor shall not be obligated to sell or lease the Equipment, but in the event of any such sale, Lessor and its affiliates may bid upon and purchase the Equipment. Any sale or lease may be held at such place or places as are selected by Lessor, with or without having the Equipment present. Lessee agrees, at Lessor's option, to permit Lessor to lease the Equipment in place without charge or liability to Lessor, and to permit Lessor to conduct a sale or lease therefrom, and in furtherance thereof, to permit appraisers, offerees and auctioneers reasonable and timely access to view, inspect, sell, purchase and remove the Equipment. Any such sale or lease may be at wholesale or retail, in bulk or in parcels. He further agrees, upon the sale or lease of the Equipment occasioned by Lessee's default hereunder, to pay Lessor an amount equal to any and all disassembly, transportation and reinstallation costs and expenses incurred by any party with respect to redeployment of the Equipment. Lessor may accept past due payments without modifying the terms of the Lease and without waiving any further rights of Lessor. 20. INTEREST/SERVICE CHARGE. Any amounts required to be paid by Lessee pursuant to the Lease, and not paid when due shall bear interest each day at the lessor of (18%) eighteen percent per annum or the highest legal contract rate from the date when such amount was due until paid. Lessee shall also pay, as indemnity, but not as interest, an additional service charge equal to the greater of $10.00 or an amount equal to 5% of any such unpaid amounts. Nothing herein shall be deemed to require the assessment or payment of any amounts not otherwise legally recoverable by Lessor. 21. COSTS/ATTORNEY'S FEES: In the event of any actions or suits by reason of Lessee's breach of this Lease, or in connection with the enforcement of any right or remedy hereunder, Lessor employs the services of any attorney to enforce, construe or defend any of the terms of this Lease. Lessee, in addition to all other sums which Lessee may be called upon to pay under the provisions of this Lease, will pay and/or reimburse Lessor for costs of collection, other identifiable or out-of-pocket costs and expenses and any attorney's fees on account thereof reasonably incurred by Lessor. 22. APPLICABLE LAW. This Lease, and all ancillary document issued or executed pursuant hereto and the rights and obligations of the parties hereunder and thereunder shall be governed by the laws of the State of Minnesota. In the event any provision hereof shall be deemed invalid or unenforceable, the remaining provisions hereof shall remain in full force and effect. Lessee hereby expressly and irrevocably agrees that Lessor may bring any action or claim to enforce the provisions of this Lease in the State of Minnesota and Lessee hereby irrevocably consents to personal jurisdiction in the appropriate State of Minnesota or Federal Court therein. Lessee hereby further irrevocably consents to service of process, in accordance with the provisions of the laws of the State of Minnesota. Nothing herein shall be deemed to preclude or prevent Lessor from bringing any action or claim to enforce the provisions of this Lease in any other appropriate place or forum. 23. WAIVER. No failure nor delay on the part of Lessor in the exercise of any power, right or privilege hereunder, or to object to the mode of any tendered performance shall operate as a waiver of the terms hereof, nor shall any single or partial waiver be construed to preclude future exercise by Lessor of its rights, powers and privileges. 24. MISCELLANEOUS. Time is of the essence of this Lease and each and all of its provisions. Section headings are used for convenience only and shall not otherwise affect the provisions of this Lease. THIS LEASE MAY ONLY BE AMENDED OR ALTERED BY AN INSTRUMENT IN WRITING SIGNED BY AN AUTHORIZED OFFICER OF LESSOR. ALL REPRESENTATIONS, AGREEMENTS, INDEMNITIES AND WARRANTIES OF LESSEE MADE HEREIN AND REMEDIES OF LESSOR SHALL SURVIVE TERMINATION OF THIS LEASE AND ANY SCHEDULE. EX-10.11 12 1999 EXECUTIVE INCENTIVE PLAN Exhibit 10.11 1999 Executive Incentive Robbie, I am pleased to announce your executive incentive compensation package that will be an integral part of your total compensation for 1999. Your targeted annualized incentive compensation for the year will be $40,000. This target amount will be paid out on a quarterly basis, with a target quarterly payout of $10,000. The incentive will be determined as follows. For 1999, the sole metric for determining the payout will be revenue. In future years, you should assume that additional metrics, such as profitability, will be added. The revenue target metric that will be used to determine your incentive payout will be the company's quarterly revenue target as determined by the 1999 plan adopted by the board of directors. If the company achieves 100% of its quarterly revenue target, you will be paid your targeted quarterly incentive of $10,000. If the company achieves 120% or more of its targeted quarterly revenue, you will receive 200% of your quarterly incentive target, or $20,000. If the company achieves 80% or less of its targeted quarterly revenue, you will not receive a quarterly incentive payout. Between 80% and 120% performance, your payout will be prorated accordingly between 0% and 200%. This calculation will be performed following the end of each quarter and paid in the next payroll cycle. As an additional part of your 1999 executive compensation package, you will be eligible to receive up to $1000 in reimbursed expenses. The expenses eligible for this reimbursement include income tax preparation costs, estate planning costs, and an annual physical examination. You are free to choose your own tax preparation, estate planning, or medical service. To receive your reimbursement, simply submit an expense report. Expenses exceeding $1000 will be your personal responsibility. 1999 Executive Incentive Ted, I am pleased to announce your executive incentive compensation package that will be an integral part of your total compensation for 1999. Your targeted annualized incentive compensation for the year will be $30,000. This target amount will be paid out on a quarterly basis, with a target quarterly payout of $7,500. The incentive will be determined as follows. For 1999, the sole metric for determining the payout will be revenue. In future years, you should assume that additional metrics, such as profitability, will be added. The revenue target metric that will be used to determine your incentive payout will be the company's quarterly revenue target as determined by the 1999 plan adopted by the board of directors. If the company achieves 100% of its quarterly revenue target, you will be paid your targeted quarterly incentive of $7,500. If the company achieves 120% or more of its targeted quarterly revenue, you will receive 200% of your quarterly incentive target, or $15,000. If the company achieves 80% or less of its targeted quarterly revenue, you will not receive a quarterly incentive payout. Between 80% and 120% performance, your payout will be prorated accordingly between 0% and 200%. This calculation will be performed following the end of each quarter and paid in the next payroll cycle. As an additional part of your 1999 executive compensation package, you will be eligible to receive up to $1000 in reimbursed expenses. The expenses eligible for this reimbursement include income tax preparation costs, estate planning costs, and an annual physical examination. You are free to choose your own tax preparation, estate planning, or medical service. To receive your reimbursement, simply submit an expense report. Expenses exceeding $1000 will be your personal responsibility. 1999 Executive Incentive Rick, I am pleased to announce your executive incentive compensation package that will be an integral part of your total compensation for 1999. Your targeted annualized incentive compensation for the year will be $40,000. This target amount will be paid out on a quarterly basis, with a target quarterly payout of $10,000. The incentive will be determined as follows. For 1999, the sole metric for determining the payout will be revenue. In future years, you should assume that additional metrics, such as profitability, will be added. The revenue target metric that will be used to determine your incentive payout will be the company's quarterly revenue target as determined by the 1999 plan adopted by the board of directors. If the company achieves 100% of its quarterly revenue target, you will be paid your targeted quarterly incentive of $10,000. If the company achieves 120% or more of its targeted quarterly revenue, you will receive 200% of your quarterly incentive target, or $20,000. If the company achieves 80% or less of its targeted quarterly revenue, you will not receive a quarterly incentive payout. Between 80% and 120% performance, your payout will be prorated accordingly between 0% and 200%. This calculation will be performed following the end of each quarter and paid in the next payroll cycle. As an additional part of your 1999 executive compensation package, you will be eligible to receive up to $1000 in reimbursed expenses. The expenses eligible for this reimbursement include income tax preparation costs, estate planning costs, and an annual physical examination. You are free to choose your own tax preparation, estate planning, or medical service. To receive your reimbursement, simply submit an expense report. Expenses exceeding $1000 will be your personal responsibility. 1999 Executive Incentive Glenn, I am pleased to announce your executive incentive compensation package that will be an integral part of your total compensation for 1999. Your targeted annualized incentive compensation for the year will be $20,000. This target amount will be paid out on a quarterly basis, with a target quarterly payout of $5,000. The incentive will be determined as follows. For 1999, the sole metric for determining the payout will be revenue. In future years, you should assume that additional metrics, such as profitability, will be added. The revenue target metric that will be used to determine your incentive payout will be the company's quarterly revenue target as determined by the 1999 plan adopted by the board of directors. If the company achieves 100% of its quarterly revenue target, you will be paid your targeted quarterly incentive of $5,000. If the company achieves 120% or more of its targeted quarterly revenue, you will receive 200% of your quarterly incentive target, or $10,000. If the company achieves 80% or less of its targeted quarterly revenue, you will not receive a quarterly incentive payout. Between 80% and 120% performance, your payout will be prorated accordingly between 0% and 200%. This calculation will be performed following the end of each quarter and paid in the next payroll cycle. As an additional part of your 1999 executive compensation package, you will be eligible to receive up to $1000 in reimbursed expenses. The expenses eligible for this reimbursement include income tax preparation costs, estate planning costs, and an annual physical examination. You are free to choose your own tax preparation, estate planning, or medical service. To receive your reimbursement, simply submit an expense report. Expenses exceeding $1000 will be your personal responsibility. 1999 Executive Incentive Emil, I am pleased to announce your executive incentive compensation package that will be an integral part of your total compensation for 1999. Your targeted annualized incentive compensation for the year will be $50,000. This target amount will be paid out on a quarterly basis, with a target quarterly payout of $12,500. The incentive will be determined as follows. For 1999, the sole metric for determining the payout will be revenue. In future years, you should assume that additional metrics, such as profitability, will be added. The revenue target metric that will be used to determine your incentive payout will be the company's quarterly revenue target as determined by the 1999 plan adopted by the board of directors. If the company achieves 100% of its quarterly revenue target, you will be paid your targeted quarterly incentive of $12,500. If the company achieves 120% or more of its targeted quarterly revenue, you will receive 200% of your quarterly incentive target, or $25,000. If the company achieves 80% or less of its targeted quarterly revenue, you will not receive a quarterly incentive payout. Between 80% and 120% performance, your payout will be prorated accordingly between 0% and 200%. This calculation will be performed following the end of each quarter and paid in the next payroll cycle. As an additional part of your 1999 executive compensation package, you will be eligible to receive up to $1000 in reimbursed expenses. The expenses eligible for this reimbursement include income tax preparation costs, estate planning costs, and an annual physical examination. You are free to choose your own tax preparation, estate planning, or medical service. To receive your reimbursement, simply submit an expense report. Expenses exceeding $1000 will be your personal responsibility. 1999 Executive Incentive Janet, I am pleased to announce your executive incentive compensation package that will be an integral part of your total compensation for 1999. Your targeted annualized incentive compensation for the year will be $20,000. This target amount will be paid out on a quarterly basis, with a target quarterly payout of $5,000. The incentive will be determined as follows. For 1999, the sole metric for determining the payout will be revenue. In future years, you should assume that additional metrics, such as profitability, will be added. The revenue target metric that will be used to determine your incentive payout will be the company's quarterly revenue target as determined by the 1999 plan adopted by the board of directors. If the company achieves 100% of its quarterly revenue target, you will be paid your targeted quarterly incentive of $5,000. If the company achieves 120% or more of its targeted quarterly revenue, you will receive 200% of your quarterly incentive target, or $10,000. If the company achieves 80% or less of its targeted quarterly revenue, you will not receive a quarterly incentive payout. Between 80% and 120% performance, your payout will be prorated accordingly between 0% and 200%. This calculation will be performed following the end of each quarter and paid in the next payroll cycle. As an additional part of your 1999 executive compensation package, you will be eligible to receive up to $1000 in reimbursed expenses. The expenses eligible for this reimbursement include income tax preparation costs, estate planning costs, and an annual physical examination. You are free to choose your own tax preparation, estate planning, or medical service. To receive your reimbursement, simply submit an expense report. Expenses exceeding $1000 will be your personal responsibility. EX-10.12 13 1999 EXECUTIVE BONUS PROGRAM EXHIBIT 10.12 1999 Executive Bonus Program Objective: To provide an incentive for key managers in the company to achieve targeted goals for the company. Specifically, the company desires to create a plan that emphasizes three key areas: financial performance customer satisfaction, and employee satisfaction. It is the company's belief that we must excel in each of the areas to maintain a healthy business. Eligible Employees: All company officers, as well as director level managers. Incentive Payout: In order to focus bonus plan participants on the long term creation of value for shareholders, the plan is based upon awarding stock bonuses rather than cash. Stock options will be granted on based on the plan at the then current option price. Options will have a standard vesting schedule. Target amounts: In 1999, the officer incentive is proposed as 5% assuming an average replacement grant of 70,000 shares. Thus the targeted incentive is 3,500 shares. For 7 officers, the total targeted pool for this incentive is 24,500 shares. In 1999, the director incentive is proposed as 10% assuming an average replacement grant of 10,000 shares. Thus the targeted incentive is 1,000 shares. For 12 directors, the total targeted pool for this incentive is 12,000 shares. New hires during the year will be added to the pool and share from the pool on a pro rata basis. Metrics: Financial performance: The company plans to use revenue as the key metric. Customer Satisfaction: The company has developed a series of metrics that it believes to be integral to delivering customer satisfaction. The proposal is to include 2 of these metrics in the bonus program. These 2 metrics would be ASAF for systems in the field and timely delivery of new product releases. Employee Satisfaction: The company plans to use the annual employee survey as the key metric. Program Structure: Financial performance: The 1999 plan would pay 100% of targeted incentive if the company reaches its targeted revenue plan. At 80% of plan, the bonus would be zero. At 120% of targeted revenue, the plan would pay 200% of targeted incentive. Actual performance between these amounts would be interpolated. Performance beyond this amount would be extrapolated with no cap to the bonus amount. Thus at 140% of revenue plan, the bonus plan would pay 300% of targeted amount. At 100% of revenue target, the plan would pay officers 2,750 shares and pay directors 700 shares. Customer Satisfaction: The 1999 plan would pay an MBO based on 2 metrics. The targeted amount for each metric is 500 for officers and 250 for directors. Thus the annual customer satisfaction bonus would 500 shares for an officer and the total annual amount for a director would be 200 shares. The bonus will be paid out on an annual basis. The first metric would be general availability of targeted releases in June of '99 and November of '99. The second metric would be achievement of system ASAF of .9999. Employee Satisfaction: The 1999 plan will pay on the basis of improvement in the annual employee satisfaction survey. If the survey profile taken in Q1 of 2000 improves over the profile taken in Q1 of 1999, the annual employee satisfaction bonus would be 250 shares for officers and 100 shares for a director. EX-21 14 SUBSIDIARIES Exhibit 21 List of Subsidiaries of Latitude Communications, Inc.
Name of Subsidiary Jurisdiction - ------------------ ------------ Latitude Communications United Kingdom Limited
EX-23.1 15 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 (File No. ) of our reports, dated February 24, 1999, on our audit of the financial statements and the financial statement schedule of Latitude Communications, Inc. We also consent to the references to our firm under the caption "Experts" and "Selected Consolidated Financial Data." /s/ PricewaterhouseCoopers LLP San Jose, California February 25, 1999 EX-27.1 16 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 3,982 0 5,862 235 688 10,717 3,344 2,327 11,870 6,247 0 0 12 4 4,769 11,870 21,051 21,051 15,094 15,094 14,316 88 183 737 34 0 0 0 0 703 .21 .05
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