-----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, M4Nd81F6UdPjkclLvYGz8TeyRyV3QxEZZu2x9jXjsEW3raMEjWJJkKdcwEwvPmny TIIZr20KAJ0INutZtmYAsw== 0001012870-99-001374.txt : 19990504 0001012870-99-001374.hdr.sgml : 19990504 ACCESSION NUMBER: 0001012870-99-001374 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 19990503 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LATITUDE COMMUNICATIONS INC CENTRAL INDEX KEY: 0001078425 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-COMPUTER & PERIPHERAL EQUIPMENT & SOFTWARE [5045] IRS NUMBER: 943177392 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-72935 FILM NUMBER: 99608312 BUSINESS ADDRESS: STREET 1: 2121 TASMAN DRIVE CITY: SANTA CLARA STATE: CA ZIP: 95054 S-1/A 1 AMENDMENT #3 TO FORM S-1 As filed with the Securities and Exchange Commission on May 3, 1999 Registration No. 333-72935 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- AMENDMENT NO. 3 TO 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. [_] ---------------- 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 MAY 3, 1999 3,000,000 Shares [LOGO] Latitude Communications, Inc. Common Stock -------- Before 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 $10.00 and $12.00 per share. Our common stock has been approved for listing on The Nasdaq Stock Market's National Market under the symbol "LATD." We have granted the underwriters an option to purchase a maximum of 450,000 additional shares to cover over-allotments of shares. Investing in the common stock involves risks. See "Risk Factors" starting on page 6.
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. 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 The date of this prospectus is , 1999. Description of Graphics for Inside Front Cover Pages of Prospectus [PHOTO DESCRIPTION: Three people standing, with their shadows forming puzzle pieces being placed together.] Latitude -- extending the workplace [PHOTO DESCRIPTION: Man with child in baseball uniform, with shadows on the wall of people at a conference table.] "Got paged about a production problem. Used MeetingPlace to resolve it with suppliers, and only missed one inning." THE VIRTUAL MEETING From voicemail, fax machines and cellular phones to e-mail, laptop computers and handheld devices, business have adopted communications technologies to extend the workplace beyond the physical office. No single, widely deployable technology, however, has successfully emulated the voice and data collaboration that occurs in a face-to-face meeting. We believe that enterprises today need a cost-effective and easy-to-use solution that enables simultaneous real-time voice communication and secure document collaboration. [PHOTO DESCRIPTION: Photo of a clock.] [PHOTO DESCRIPTION: Photo of people walking to work.] [PHOTO DESCRIPTION: A woman working on a laptop computer at a table, with a shadow on the wall of the person working at a personal computer along with others.] "I'll listen to the competitive [PHOTO DESCRIPTION: A man standing analysis presentation later on looking at his watch holding a MeetingPlace. Can't be late for my briefcase, with a shadow on the wall anniversary dinner." of the person listening to a presentation.] WELCOME TO MEETINGPLACE MeetingPlace AN ENTERPRISE SOLUTION Our objective is an integrated voice and data is to make MeetingPlace a standard conferencing solution that enables communications tool within an voice and data conferences which enterprise. MeetingPlace is a emulate face-to face meetings, or scalable solution that integrates what we call virtual meetings, among with an enterprise's existing an organization's employees, vendors telephone and data networks. In and customers, irrespective of their addition, MeetingPlace is designed geographic locations. With to integrate seamlessly into widely MeetingPlace, participants can deployed enterprise software schedule and attend a meeting, share applications, such as web browsers and edit documents, and record and and certain collaborative software access meeting content. MeetingPlace environments such as Microsoft extends the capabilities of the Outlook. As a result, an enterprise basic voice conference call through can provide employees with a a broad feature set designed to powerful productivity tool while enhance general conferencing lowering its overall cost of capabilities as well as to satisfy conferencing. specific business applications. Moreover, MeetingPlace offers users easy access to data conferencing, which we believe will become an important business application of the Internet. "Just used MeetingPlace to finalize the customer presentation with my field sales team. Wonder if this hotel has an exercise room."
TABLE OF CONTENTS
Page ---- Prospectus Summary....................................................... 4 Risk Factors............................................................. 6 Use of Proceeds.......................................................... 14 Dividend Policy.......................................................... 14 Additional Information About Latitude.......................................................... 14 Capitalization........................................................... 15 Dilution................................................................. 16 Selected Consolidated Financial Data.......................................................... 17 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 18
Page ---- Business................................................................... 31 Management................................................................. 44 Related Party Transactions................................................. 57 Principal Stockholders..................................................... 58 Description of Capital Stock............................................... 60 Shares Eligible for Future Sale............................................ 63 Where You Can Find More Information.......................................................... 64 Underwriting............................................................... 65 Notice to Canadian Residents............................................... 67 Legal Matters.............................................................. 68 Experts.................................................................... 68 Index to Financial Statements.............................................. F-1
3 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. 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 voice and data conferences which emulate face-to-face meetings, or what we call virtual meetings, and 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 that the dramatic growth in web browsers and collaborative software applications will 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. Furthermore, we expect to continue to provide our customers with a range of consulting services to promote broad deployment within their organizations. We began commercial shipment of MeetingPlace in December 1994 and, as of March 31, 1999, 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. MeetingPlace has been installed in some of the world's leading enterprises, including 3Com, Aetna, Cisco, Credit Suisse First Boston, Hewlett-Packard, Honeywell, Microsoft, Oracle, State Farm Insurance, Union Pacific Railroad and the U.S. Federal Reserve Bank. Our address is 2121 Tasman Drive, Santa Clara, California 95054, and our telephone number is (408) 988-7200. "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. 4 The Offering Common stock offered........................ 3,000,000 shares Common stock to be outstanding after this offering................................... 18,581,657 shares Use of proceeds............................. For general corporate purposes, including working capital, capital expenditures, geographic expansion and additional sales and marketing efforts. Nasdaq National Market symbol............... LATD
This table is based on shares outstanding as of March 31, 1999 and excludes shares that may be issued upon exercise of options or warrants. 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 before the effectiveness of this offering; (b) the conversion of each outstanding share of convertible preferred stock into one share of common stock immediately before the completion of this offering; (c) no exercise of the underwriters' over-allotment option; (d) our reincorporation in Delaware which was completed in April 1999; and (e) the filing of our amended and restated certificate of incorporation upon completion of this offering. Summary Consolidated Financial Data (In thousands, except per share data)
Years Ended Three Months April 7, 1993 (date December 31, Ended March 31, of inception) to ------------------------- ------------------- December 31, 1995 1996 1997 1998 1998 1999 ------------------- ------- ------- ------- ------- ------- Consolidated Statement of Operations Data: Revenue: Product ............... $ 1,477 $ 5,103 $10,620 $16,506 $ 3,688 $ 4,627 Service................ 148 943 2,312 4,545 673 1,801 ------- ------- ------- ------- ------- ------- Total revenue......... 1,625 6,046 12,932 21,051 4,361 6,428 Gross profit........... 683 3,877 8,969 15,094 3,116 4,708 Operating income (loss)................ (8,822) (4,390) (2,206) 778 85 316 Net income (loss)...... (8,547) (4,252) (2,229) 703 70 288 Net income (loss) per share--basic.......... $ (2.02) $ (0.78) $ 0.21 $ 0.02 $ 0.08 Shares used in per share calculation--basic.... 2,110 2,850 3,279 3,166 3,444 Net income (loss) per share--diluted........ $ (2.02) $ (0.78) $ 0.04 $ 0.00 $ 0.02 Shares used in per share calculation--diluted.. 2,110 2,850 16,422 15,949 16,767
March 31, 1999 ------------------- Actual As Adjusted ------- ----------- Consolidated Balance Sheet Data: Cash and cash equivalents.................................. $ 4,397 $34,087 Working capital............................................ 4,407 34,097 Total assets............................................... 12,379 42,069 Long-term obligations...................................... 695 695 Total stockholders' equity................................. 5,303 34,993
- -------- The as adjusted numbers in the table above are adjusted to give effect to receipt of the net proceeds from the sale of 3,000,000 shares of common stock offered by us at an assumed offering price of $11.00 per share after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. 5 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 intended to highlight risks that are specific to us and are not the only ones that we face. Additional risks and uncertainties, such as those that generally apply to business enterprises in our industry, also may impair our business operations. Our future profitability is uncertain due to our limited operating history. We have a limited operating history and cannot assure you that our revenue will continue to grow or that we will maintain profitability in the future. Our prospects must be considered in light of the risks and uncertainties encountered by companies in the early stages of development. We rely substantially on sales of our MeetingPlace products, which have limited market acceptance. In addition, we are unable to predict our future product development, sales and marketing, and administrative expenses. To the extent that these expenses increase, we will need to increase revenue to sustain profitability. Our ability to increase revenue and sustain profitability also depends on the other risk factors described in this section. Our operating results may fluctuate significantly. Our operating results are difficult to predict. Our future quarterly operating results may fluctuate and may not meet the expectations of securities analysts or investors. If this occurs, the price of our common stock would likely decline. The factors that may cause fluctuations of our operating results include the following: . 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. 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. 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. 6 Our market is highly competitive. Because of intense market competition, we may not be successful. 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 Systems, Inc. and 8x8, Inc.; and . smaller start-up companies that offer web-based voice and data conferencing products. 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. In addition, we expect competition to persist and intensify in the future which could adversely affect our ability to increase sales, penetrate new markets and maintain average selling prices. 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 enabling the transmission of voice over the Internet and that may offer voice and data conferencing functionality; and . collaborative software providers, such as Microsoft Corporation and Lotus Development Corporation, that are focusing on data conferencing products and that may in the future incorporate voice conferencing functionality into their products. Our market is in an early stage of development, and our products may not be adopted. If the market for our integrated voice and data conferencing products fails to grow or grows more slowly than we anticipate, we may not be able to increase revenues or remain profitable. The market for integrated real-time voice and data conferencing is relatively new and rapidly evolving. Our ability to remain profitable depends in large part on the widespread adoption by end users of real-time voice and data conferencing. 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. 7 Rapid technological changes could cause our products to become obsolete or require us to redesign our products. 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. This adaptation could be costly and time-consuming. 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 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 the transmission of voice over the Internet, 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 sales cycle is lengthy and unpredictable. Any delay in sales of our products could cause our quarterly revenue and operating results to fluctuate. The typical sales cycle of our products is lengthy, generally between six to nine months, unpredictable, and involves significant 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 these 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 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. If we fail to expand our sales and distribution channels, our business could suffer. If we are unable to expand our sales and distribution channels, we may not be able to increase revenue or achieve market acceptance of our MeetingPlace product. 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, and there is strong competition for qualified sales personnel in our business. 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 these distribution partners. We cannot be certain that 8 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, if 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. Our ability to expand into international markets is uncertain. We intend to continue to expand our operations into new international markets. In addition to general risks associated with international expansion, such as foreign currency fluctuations and political and economic instability, we face the following risks and uncertainties any of which could prevent us from selling our products in a particular country or harm our business operations once we have established operations in that country: . the difficulties and costs of localizing products for foreign markets, including the development of multilingual capabilities in our MeetingPlace system; . the need to modify our products to comply with local telecommunications certification requirements in each country; and . our lack of a direct sales presence in other countries, our need to establish relationships with distribution partners to sell our products in these markets and our reliance on the capabilities and performance of these distribution partners. If we fail to integrate our products with third-party technology, our sales could suffer. 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. If we are unable to integrate our products with these networks and systems, sales of our products could suffer. In addition, we may be required to engage in costly and time-consuming redesigns of our products because of technology enhancements or upgrades of these systems. We may not be able to redesign our products or be certain that any of these redesigns will 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 for these applications, and we cannot assure you that we will have access to necessary advanced programming interfaces in the future. We may experience difficulties managing our expected growth. Our recent growth has strained, and we expect that any future growth will continue to strain, our management systems and resources, which could hinder our ability to continue to grow in the future. We may also experience difficulties meeting the demand for our products and services. If we are unable to provide training and support for our products, the implementation process will be longer and customer satisfaction may be lower. 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 9 adequate to support our future operations. 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. Our business could suffer if we lose the services of our current management team. Our future success depends on the ability of our management to operate effectively, both individually and as a group. If we were to lose the services of any of these key employees we may encounter difficulties finding qualified personnel to replace them. 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. The loss of our right to use technology licensed to us by third parties could harm our business. We license technology that is incorporated into our products from third parties, including digital signal processing algorithms and the MeetingPlace server's operating system and relational database. Any interruption in the supply or support of any licensed software could disrupt our operations and delay 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 these 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. Any interruption in supply of components from outside manufacturers and suppliers could hinder our ability to ship products in a timely manner. 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. 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 delays in shipping our products and have to invest resources in finding an alternative manufacturer or manufacture our products internally. In addition, we obtain key hardware 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 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. Any errors or defects 10 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. 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. Many of our customers conduct confidential conferences, and transmit confidential data, 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 harm our reputation and business and result in claims against us. We may be unable to adequately protect our proprietary rights, and we may be subject to infringement claims. Unauthorized parties may copy aspects of our products and obtain and use information that we regard as proprietary, which could cause our business to suffer. 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. In the future, we may be subject to legal proceedings and claims for alleged infringement of third party proprietary rights. Any of these claims, 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 these claims may be able to obtain injunctive or other equitable relief, which could prevent us from selling our products. Dell Computer Corporation has registered the "Latitude" mark for computers in the United States and in 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 these 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, and our failure to comply with these regulations could harm our business. Our products are subject to a wide variety of safety, emissions and compatibility regulations imposed by governmental authorities in the United States or in other countries in which we sell our products. If we are unable to obtain necessary approvals or maintain compliance with the regulations of any particular jurisdiction, we may be prohibited from selling our products in that territory. In addition, to sell our products in many international markets, we are required to obtain certifications that are specific to the local telephony infrastructure. 11 We may be subject to claims related to Year 2000 issues, and Year 2000 concerns could adversely affect our revenues. 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. 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. We expect that the market price of our common stock will fluctuate as a result of variations in our quarterly operating results. These fluctuations may be exaggerated if the trading volume of our common stock is low. In addition, due to the technology-intensive and emerging nature of our business, the market price of our common stock may rise and fall in response to: . announcements of technological or competitive developments; . acquisitions or strategic alliances by us or our competitors; or . the gain or loss by us of significant orders. Our executive officers and directors and their affiliates own a large percentage of our voting stock and could control the voting power of the common stock. On completion of this offering, executive officers and directors and their affiliates will beneficially own, in the aggregate, approximately 58% 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. Future sales of our common stock may depress our stock price. After this offering, we will have outstanding 18,581,657 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 arrangements between our stockholders and Latitude or the underwriters in which our stockholders have agreed not to sell or dispose of their Latitude common stock, all of the remaining 15,581,657 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. 12 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." This prospectus contains forward-looking statements that involve risks and uncertainties. We have made forward-looking statements under the sections entitled "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." These statements involve risks and uncertainties that may cause our business or financial results to materially differ from those expressed by the forward-looking statements. We have identified forward-looking statements by using terms such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," or "continue" or the negative of these terms or other comparable terminology. We are under no duty to update any of the forward-looking statements after the date of this prospectus to conform these statements to actual results. 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. 13 USE OF PROCEEDS The net proceeds to us from the sale of the 3,000,000 shares of common stock offered by us are estimated to be approximately $29.7 million, or approximately $34.3 million if the underwriters' over-allotment option is exercised in full, at an assumed public offering price of $11.00 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 and use 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 future. In addition, the terms of our current credit facility prohibit us from paying dividends without our lender's consent. ADDITIONAL INFORMATION ABOUT LATITUDE 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. We reincorporated in Delaware in April 1999. Our web site is located at www.latitude.com. Information contained on our web site is not a part of this prospectus. 14 CAPITALIZATION The following table provides the following information: . the actual capitalization of Latitude as of March 31, 1999; . 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 3,000,000 shares of common stock at an assumed initial public offering price of $11.00 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 to these financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus.
As of March 31, 1999 ------------------------------- Actual Pro Forma As Adjusted --------- --------- ----------- (In thousands, except share data) Total long term debt........................... $ 695 $ 695 $ 695 Stockholders' equity: Preferred stock, $.001 par value per share, 12,211,366 shares authorized, 11,836,227 shares issued and outstanding, actual; 12,211,366 shares authorized, none issued or outstanding, pro forma; and 5,000,000 shares authorized, none issued or outstanding, as adjusted.................................... 12 -- -- Common stock, $.001 par value per share, 22,500,000 shares authorized, 3,745,430 shares issued and outstanding, actual; 22,500,000 shares authorized, 15,581,657 shares issued and outstanding, pro forma; and 75,000,000 shares authorized and 18,581,657 shares issued and outstanding, as adjusted.................................... 4 16 19 Additional paid-in capital................... 22,110 22,110 51,797 Notes receivable from common stockholders.... (144) (144) (144) Deferred stock compensation.................. (2,642) (2,642) (2,642) Accumulated deficit.......................... (14,037) (14,037) (14,037) --------- --------- -------- Total stockholders' equity................. 5,303 5,303 34,993 --------- --------- -------- Total capitalization..................... $ 5,998 $ 5,998 $ 35,688 ========= ========= ========
- -------- This table is based on shares outstanding as of March 31, 1999. This table excludes: (a) 1,494,624 shares subject to outstanding options at a weighted average exercise price of $2.63 as of March 31, 1999, and 84,938 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 March 31, 1999; (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 employee stock purchase plan. 15 DILUTION The pro forma net tangible book value of our common stock on March 31, 1999 was $5,303,000 million, or approximately $0.34 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 3,000,000 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 $34,993,000, or approximately $1.88 per share. This represents an immediate increase in net tangible book value of $1.54 per share to existing stockholders and an immediate dilution in net tangible book value of $9.12 per share to new investors. Assumed initial public offering price per share.................. $11.00 Pro forma net tangible book value per share as of March 31, 1999.......................................................... $0.34 Increase per share attributable to new investors............... 1.54 ----- Pro forma net tangible book value per share after this offering.. 1.88 ------ Dilution in pro forma net tangible book value per share to new investors....................................................... $ 9.12 ======
This table excludes 1,494,624 shares subject to outstanding options and 134,386 shares issuable upon exercise of outstanding warrants as of March 31, 1999. 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 lists, as of March 31, 1999, 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 $11.00 per share.
Shares Purchased Total Consideration --------------------- ---------------------- Average Price Number Percentage Amount Percentage Per Share ---------- ---------- ----------- ---------- ------------- Existing stockholders... 15,581,657 83.9% $19,024,762 36.6% $ 1.22 New investors........... 3,000,000 16.1 33,000,000 63.4 11.00 ---------- ----- ----------- ----- ------ Total................. 18,581,657 100.0% 52,024,762 100.0% ========== ===== =========== =====
- -------- 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 81.9% 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 3,450,000 or approximately 18.1% of the total number of shares of our common stock outstanding after this offering. 16 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 the Notes to these financial statements 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 consolidated statement of operations data for the three months ended March 31, 1998 and 1999 and the consolidated balance sheet data as of March 31, 1999 are derived from unaudited consolidated financial statements included elsewhere in this prospectus. In the opinion of management, the unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our results of operations for these periods and financial condition at these dates. 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."
Three Months Ended Years Ended December 31, March 31, ------------------------------------------- -------------- 1994 1995 1996 1997 1998 1998 1999 ------- ------- ------- ------- ------- ------ ------ (In thousands, except per share data) Consolidated Statement of Operations Data: Revenue: Product............... $ 85 $ 1,393 $ 5,103 $10,620 $16,506 $3,688 $4,627 Service............... 17 130 943 2,312 4,545 673 1,801 ------- ------- ------- ------- ------- ------ ------ Total revenue........ 102 1,523 6,046 12,932 21,051 4,361 6,428 ------- ------- ------- ------- ------- ------ ------ Cost of revenue: Product............... 33 454 1,146 2,158 3,182 644 817 Service............... 35 420 1,023 1,805 2,775 601 903 ------- ------- ------- ------- ------- ------ ------ Total cost of revenue............. 68 874 2,169 3,963 5,957 1,245 1,720 ------- ------- ------- ------- ------- ------ ------ Gross profit............ 34 649 3,877 8,969 15,094 3,116 4,708 ------- ------- ------- ------- ------- ------ ------ Operating expenses: Research and development.......... 2,057 2,071 2,466 2,213 2,607 605 903 Marketing and sales... 736 2,160 4,644 7,845 9,744 1,978 2,868 General and administrative....... 855 636 1,157 1,115 1,666 410 425 Amortization of deferred stock compensation......... -- -- -- 2 299 38 196 ------- ------- ------- ------- ------- ------ ------ Total operating expenses............ 3,648 4,867 8,267 11,175 14,316 3,031 4,392 ------- ------- ------- ------- ------- ------ ------ Income (loss) from operations............. (3,614) (4,218) (4,390) (2,206) 778 85 316 Interest income (expense), net......... 117 115 138 (23) (41) (11) (8) ------- ------- ------- ------- ------- ------ ------ Income (loss) before provision for income tax.................... (3,497) (4,103) (4,252) (2,229) 737 74 308 Provision for income tax.................... -- -- -- -- (34) (4) (20) ------- ------- ------- ------- ------- ------ ------ Net income (loss)....... $(3,497) $(4,103) $(4,252) $(2,229) $ 703 $ 70 $ 288 ======= ======= ======= ======= ======= ====== ====== Net income (loss) per share--basic........... $ (7.63) $ (3.10) $ (2.02) $ (0.78) $ 0.21 $ 0.02 $ 0.08 ======= ======= ======= ======= ======= ====== ====== Shares used in per share calculation--basic..... 459 1,325 2,110 2,850 3,279 3,166 3,444 ======= ======= ======= ======= ======= ====== ====== Net income (loss) per share--diluted......... $ (7.63) $ (3.10) $ (2.02) $ (0.78) $ 0.04 $ 0.00 $ 0.02 ======= ======= ======= ======= ======= ====== ====== Shares used in per share calculation--diluted... 459 1,325 2,110 2,850 16,422 15,949 16,767 ======= ======= ======= ======= ======= ====== ======
December 31, March 31, ----------------------------------- --------- 1994 1995 1996 1997 1998 1999 ------ ------ ------ ------ ------- --------- (In thousands) Consolidated Balance Sheet Data: Cash and cash equivalents.. $5,938 $1,751 $5,664 $3,578 $ 3,982 $ 4,397 Working capital............ 5,831 1,574 5,655 3,501 4,470 4,407 Total assets............... 6,820 3,501 8,680 7,715 11,870 12,379 Long-term obligations...... 368 308 760 757 838 695 Total stockholders' equity.................... 6,072 2,040 5,906 3,748 4,785 5,303
17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 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 basic start-up activities, such as research and development and recruiting personnel. 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 and $6.4 million in the quarter ended March 31, 1999. In addition, we incurred net losses of $4.3 million in 1996 and $2.2 million in 1997 and generated net income of approximately $703,000 in 1998 and $288,000 in the quarter ended March 31, 1999. As of March 31, 1999, we had an accumulated deficit of $14.0 million. We cannot assure you that our revenues will continue to grow or that we will maintain profitability in the future. 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 and 72% in the quarter ended March 31, 1999. Product revenue is generally recognized upon shipment. We calculate an allowance for returns based on historical rates. During 1998, three systems totaling $386,000 were returned and charged to this allowance. 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. While we intend to increase sales through indirect channels and internationally, we cannot assure you that we will be successful. 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 18 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. We record an allowance for excess and obsolete inventory by identifying inventory components either considered excess based on estimates of future usage or obsolete due to changes in our products. Due primarily to design changes in our products in 1998 and, to a lesser extent, increases in levels of demonstration inventory at customer locations, we increased our allowance for excess and obsolete inventory by $149,000. As a result of technological changes, our products may become obsolete or we could be required to redesign our products. Results of Operations The following table lists, for the periods indicated, the percentage of total revenue of each line item:
Three Months Ended March Years Ended December 31, 31, ------------------------------ ------------ 1996 1997 1998 1998 1999 -------- -------- -------- ----- ----- As a Percentage of Total Revenue: Revenue: Product........................ 84.4% 82.1% 78.4% 84.6% 72.0% Service........................ 15.6 17.9 21.6 15.4 28.0 -------- -------- -------- ----- ----- Total revenue................ 100.0 100.0 100.0 100.0 100.0 Cost of revenue: Product........................ 19.0 16.7 15.1 14.7 12.7 Service........................ 16.9 14.0 13.2 13.8 14.1 -------- -------- -------- ----- ----- Total cost of revenue........ 35.9 30.7 28.3 28.5 26.8 -------- -------- -------- ----- ----- Gross profit.................... 64.1 69.3 71.7 71.5 73.2 -------- -------- -------- ----- ----- Operating expenses: Research and development....... 40.8 17.1 12.4 13.8 14.0 Marketing and sales............ 76.8 60.6 46.3 45.4 44.6 General and administrative..... 19.1 8.6 7.9 9.4 6.6 Amortization of deferred stock compensation.................. -- -- 1.4 0.9 3.1 -------- -------- -------- ----- ----- Total operating expenses..... 136.7 86.3 68.0 69.5 68.3 Income (loss) from operations... (72.6) (17.0) 3.7 2.0 4.9 -------- -------- -------- ----- ----- Interest income (expense), net.. 2.3 (0.2) (0.2) (0.3) (0.1) -------- -------- -------- ----- ----- Income (loss) before provision for income tax................. (70.3) (17.2) 3.5 1.7 4.8 -------- -------- -------- ----- ----- Provision for income tax........ -- -- (0.2) (0.1) (0.3) -------- -------- -------- ----- ----- Net income (loss)............... (70.3)% (17.2)% 3.3% 1.6% 4.5% ======== ======== ======== ===== =====
19 Quarters Ended March 31, 1998 and 1999 Product Revenue Product revenue increased 25% from $3.7 million in the quarter ended March 31, 1998 to $4.6 million in the quarter ended March 31, 1999. The increase in product revenue was 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 less than 1% and 5% of product revenue in the quarters ended March 31, 1998 and 1999. Product revenue in the quarter ended March 31, 1999 included revenue derived from the delivery of two MeetingPlace systems in exchange for marketing services, licenses and related training and consulting and $45,000 in cash. Because of these transactions we recognized $609,000 of revenue, $404,000 of prepaid sales and marketing expenses and accounts receivable of $160,000. The accounts receivable will be satisfied through the provision of licenses, training and consulting to Latitude. The assets and services were transferred between the parties at their estimated fair value based on the sales prices of actual customer sales for similar MeetingPlace systems. We plan to utilize the marketing services over the next three quarters and expect to receive the licenses, training and consulting in the quarter ending June 30, 1999. Service Revenue Service revenue increased 168% from approximately $673,000 in the quarter ended March 31, 1998 to $1.8 million in the quarter ended March 31, 1999. The increase in service revenue was 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 42% from $1.2 million in the quarter ended March 31, 1998 to $1.7 million in the quarter ended March 31, 1999. The increase in total cost of revenue was 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 of providing services to support an increasingly geographically dispersed customer base. Gross margin increased from 71% in the quarter ended March 31, 1998 to 73% in the quarter ended March 31, 1999. The increase in gross margin is attributable primarily to increased economies of scale resulting from increased product and service revenue, as well as increased sales of MeetingPlace software and enhanced features to existing customers. On a forward-looking basis, we anticipate that gross margins may decline 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 decreased slightly from 83% in the quarter ended March 31, 1998 to 82% in the quarter ended March 31, 1999. We expect product gross margin to decrease in the future due in part to anticipated pricing pressure and an expected increase in the proportion of revenue derived from indirect distribution channels. Service gross margin increased from 11% in the quarter ended March 31, 1998 to 50% in the quarter ended March 31, 1999. The increase in service gross margin was attributable to increased 20 economies of scale. We expect service gross margin to decline in the future as a result of anticipated pricing pressure and the expected international expansion of our service operation. Research and Development Expenses 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. Research and development expenses increased 49% from $605,000 in the quarter ended March 31, 1998 to $903,000 in the quarter ended March 31, 1999. The increase was attributable primarily to the addition of personnel in our research and development organization associated with product development. We expect to continue to make substantial investments in research and development and anticipate that research expenses will continue to increase in absolute dollars. Research and development expenses represented 14% of total revenue in each of the quarters ended March 31, 1998 and 1999. Marketing and Sales Expenses Marketing and sales expenses consist primarily of promotional expenditures and compensation and related costs for marketing and sales personnel. Marketing and sales expenses increased 45% from $2.0 million in the quarter ended March 31, 1998 to $2.9 million in the quarter ended March 31, 1999. The increase 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 45% of total revenue for the quarters ended March 31, 1998 and 1999. General and Administrative Expenses General and administrative expenses consist primarily of personnel expenses, legal and accounting expenses and other general corporate expenses. General and administrative expenses increased 4% from $410,000 in the quarter ended March 31, 1998 to $426,000 in the quarter ended March 31, 1999, due primarily to the addition of personnel in our general and administrative organization. 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. General and administrative expenses were 9% and 7% of total revenue for the quarters ended March 31, 1998 and 1999. The decreases as a percentage of total revenue resulted primarily from increased total revenue during these periods. Amortization of Deferred Stock Compensation In connection with the completion of our initial public offering, options granted in the last quarter of 1997, 1998 and the first quarter of 1999 have been considered to be compensatory. Total deferred stock compensation associated with these options as of March 31, 1999 amounted to $3.1 million. These amounts are being amortized on a straightline basis over the 48-month vesting period of these options. Of the total deferred stock compensation, approximately $195,000 was amortized in the quarter ended March 31, 1999. We expect amortization of approximately $783,000 in 1999, $783,000 in 2000, $781,000 in 2001 and $489,000 in 2002 related to these options. 21 Interest Income (Expense), Net In the quarters ended March 31, 1998 and 1999, we incurred net interest expense of approximately $11,000 and $8,000. 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 slight decrease in net interest expense was due primarily to increased interest income earned on higher cash and cash equivalent balances. Income Taxes For the quarter ended March 31, 1999, the provision for income tax was approximately $20,000, compared to $4,000 in the quarter ended March 31, 1998. 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. An allowance for potential returns is recorded at the end of each period based on our product return experience, adjusted for changes in the range of per system sales prices of systems shipped. As a result of this analysis, we believe that our allowance for potential sales returns of $196,000 at December 31, 1997 and $325,000 at December 31, 1998, was adequate but not excessive based on the historical experience and increasing per system sales prices and increasing outstanding accounts receivable balances. In addition, at December 31, 1998, consideration was given to our historical experience with software upgrade sales returns. The increase in the allowance for potential returns at December 31, 1998 compared to the allowance for December 31, 1997 was due to the increase in returns, the increase in system sales prices and the increase in outstanding accounts receivable balances. Our sales returns to date have approximated our returns. 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 of providing services to support an increasingly 22 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 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%. 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. An allowance for excess and obsolete inventory is recorded at the end of each period based on an analysis of inventory on hand, considering forecasted usage and whether component parts are useable in our current product and whether finished goods are versions of our product for which demand is forecasted. As a result of this analysis, we believe that our allowance for excess and obsolete inventory of $146,000 at December 31, 1997 and $295,000 at December 31, 1998 was adequate but not excessive based on the specific identification of excess or obsolete inventory. The increase in the allowance for excess and obsolete inventory at December 31, 1998 was primarily due to a platform change in 1998 which caused some raw materials inventory to become obsolete. We anticipate the disposal and write-off of this inventory in 1999. Service gross margin in 1996, 1997 and 1998 was (9)%, 22% and 39%. 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 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 12% 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. The decreases as a percentage of total revenue resulted primarily from increased total revenue during these 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. 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 these periods. 23 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. The decreases as a percentage of total revenue resulted primarily from increased total revenue during these periods. We record an allowance for doubtful accounts for credit losses at the end of each period based on an analysis of individual aged accounts receivable balances. As a result of this analysis, we believe that our allowance for doubtful accounts of $147,000 at December 31, 1997 and $235,000 at December 31, 1998 was adequate but not excessive based on specific aged account balances identified with collection risk. The increase in the allowance for doubtful accounts as of December 31, 1998 compared with the allowance at December 31, 1997 was primarily due to the increase in the amount of specifically identified accounts receivable with probable collection risk. We have not experienced significant write-offs of accounts receivable to date. Amortization of Deferred Stock Compensation Total deferred stock compensation as of December 31, 1998 amounted to $3.1 million. Of the total deferred stock compensation, approximately $299,000 was amortized in 1998. 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. 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 these periods, as well as 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 this 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 where there is an ownership change. Under the Tax Reform Act of 1986, the determination of whether an ownership change occurs involves a highly complex calculation; however, an ownership change generally occurs when over 50% in value of a company's stock is transferred in transactions involving 5% stockholders during a given period. If we should have an ownership change, our utilization of these carryforwards could be restricted. 24 We have placed a valuation allowance against our deferred tax asset due to the uncertainty surrounding the realization of these assets. We evaluate on a quarterly basis the recoverability of the deferred tax asset and the level of the valuation allowance. When it is determined that it is more likely than not the deferred tax assets are realizable, the valuation allowance will be reduced. Quarterly Results of Operations The following table provides unaudited consolidated statement of operations data for the six quarters ended March 31, 1999, as well as this 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 normal recurring adjustments necessary for a fair presentation of this information when read in conjunction with our annual audited consolidated financial statements and notes to these financial statements. The operating results for any quarter are not necessarily indicative of results for any future period.
Quarters Ended ------------------------------------------------------ Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, 1997 1998 1998 1998 1998 1999 -------- -------- -------- --------- -------- -------- (In thousands, except per share data) Consolidated Statement of Operations Data: Revenue: Product............... $3,291 $3,688 $3,867 $4,270 $4,681 $4,627 Service............... 771 673 1,034 1,282 1,556 1,801 ------ ------ ------ ------ ------ ------ Total revenue....... 4,062 4,361 4,901 5,552 6,237 6,428 Cost of revenue: Product............... 623 644 631 879 1,028 817 Service............... 522 601 689 747 738 903 ------ ------ ------ ------ ------ ------ Total cost of revenue............ 1,145 1,245 1,320 1,626 1,766 1,720 ------ ------ ------ ------ ------ ------ Gross profit........... 2,917 3,116 3,581 3,926 4,471 4,708 ------ ------ ------ ------ ------ ------ Operating expenses: Research and development.......... 525 605 600 625 777 903 Marketing and sales... 2,099 1,978 2,374 2,564 2,828 2,868 General and administrative....... 274 410 401 412 443 425 Amortization of deferred stock compensation......... 2 38 61 66 134 196 ------ ------ ------ ------ ------ ------ Total operating expenses........... 2,900 3,031 3,436 3,667 4,182 4,392 ------ ------ ------ ------ ------ ------ Income (loss) from operations............ 17 85 145 259 289 316 Interest income (expense), net........ (16) (11) (10) (13) (7) (8) ------ ------ ------ ------ ------ ------ Income (loss) before provision for income tax................... 1 74 135 246 282 308 Provision for income tax .................. -- (4) (6) (10) (14) (20) ------ ------ ------ ------ ------ ------ Net income (loss)...... $ 1 $ 70 $ 129 $ 236 $ 268 $ 288 ====== ====== ====== ====== ====== ====== Net income (loss) per share--basic(1)....... $ 0.00 $ 0.02 $ 0.04 $ 0.07 $ 0.08 $ 0.08 ====== ====== ====== ====== ====== ====== Shares used in per share calculation-- basic(1).............. 3,053 3,166 3,243 3,323 3,385 3,444 ====== ====== ====== ====== ====== ====== Net income (loss) per share--diluted(1)..... $ 0.00 $ 0.00 $ 0.01 $ 0.01 $ 0.02 $ 0.02 ====== ====== ====== ====== ====== ====== Shares used in per share calculation-- diluted(1)............ 15,641 15,949 16,145 16,251 16,512 16,767 ====== ====== ====== ====== ====== ======
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Percentage of Total Revenue ------------------------------------------------------------- Quarters Ended ------------------------------------------------------------- Mar. Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, 31, 1997 1997 1998 1998 1998 1998 1999 --------- -------- -------- -------- --------- -------- ----- Consolidated Statement of Operations Data: Revenue: Product............... 82.6% 81.0% 84.6% 78.9% 76.9% 75.1% 72.0% Service............... 17.4 19.0 15.4 21.1 23.1 24.9 28.0 ----- ----- ----- ----- ----- ----- ----- Total revenue....... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Cost of revenue: Product............... 16.8 15.3 14.7 12.9 15.8 16.5 12.7 Service............... 13.3 12.9 13.8 14.1 13.5 11.8 14.1 ----- ----- ----- ----- ----- ----- ----- Total cost of revenue............ 30.1 28.2 28.5 27.0 29.3 28.3 26.8 ----- ----- ----- ----- ----- ----- ----- Gross profit........... 69.9 71.8 71.5 73.0 70.7 71.7 73.2 ----- ----- ----- ----- ----- ----- ----- Operating expenses: Research and development.......... 14.3 12.9 13.9 12.2 11.3 12.5 14.0 Marketing and sales... 59.7 51.7 45.4 48.4 46.2 45.4 44.6 General and administrative....... 6.6 6.8 9.4 8.2 7.3 7.1 6.6 Amortization of deferred stock compensation......... -- -- 0.9 1.2 1.2 2.1 3.1 ----- ----- ----- ----- ----- ----- ----- Total operating expenses........... 80.6 71.4 69.6 70.0 66.0 67.1 68.3 ----- ----- ----- ----- ----- ----- ----- Income (loss) from operations............ (10.7) 0.4 1.9 3.0 4.7 4.6 4.9 ----- ----- ----- ----- ----- ----- ----- Interest income (expense), net........ (0.5) (0.4) (0.3) (0.2) (0.2) (0.1) (0.1) ----- ----- ----- ----- ----- ----- ----- Income (loss) before provision for income tax................... (11.2) 0.0 1.6 2.8 4.5 4.5 4.8 Provision for income tax................... -- -- (0.1) (0.1) (0.2) (0.2) (0.3) ----- ----- ----- ----- ----- ----- ----- Net income (loss)...... (11.2)% 0.0% 1.5% 2.7% 4.3% 4.3% 4.5% ===== ===== ===== ===== ===== ===== =====
Quarterly product revenue increased in each of the five quarters ended December 31, 1998 shown above due to increased sales of MeetingPlace products, including increased follow-on sales of products to existing customers, and decreased slightly in the quarter ended March 31, 1999. Quarterly service revenue has increased in each of the four quarters ended March 31, 1999, 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 March 31, 1999. 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 this 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 26 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. Our revenue and operating results are difficult to forecast and will fluctuate, 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, which would likely cause the price of the common stock to 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 March 31, 1999. We have also financed our operations through equipment loans, which totaled $1.2 million in principal amount at March 31, 1999. As of March 31, 1999, we had $4.4 million of cash and cash equivalents and a $2.0 million line of credit, all of which was available at March 31, 1999. This line of credit expires in July 1999. At this time, we do not intend to borrow any amounts under this line of credit. Net cash used in operating activities was $4.0 million in 1996 and $1.6 million in 1996 and 1997 and net cash provided by operating activities was $1.0 million in 1998 and $1.1 million in the quarter ended March 31, 1999. 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. 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. These amounts were offset in part by an increase in trade accounts receivable of $3.1 million. This increase in trade accounts receivable was due in part to the shipment of a $1.3 million order to a customer in December 1998. Our sales cycle is lengthy and unpredictable, and could cause our quarterly revenue and operating results to fluctuate. Any change in our sales cycle could adversely affect our cash provided by operating activities. For the quarter ended March 31, 1999, cash provided by operating activities was attributable primarily to net income of $288,000 and a decrease in trade accounts receivable of $1.0 million, offset in part by an increase in prepaids and other assets of $335,000 and an increase in inventory of $243,000. Net cash used in investing activities was approximately $778,000, $597,000 and $780,000 in 1996, 1997 and 1998 and $610,000 in the quarter ended March 31, 1999. For 1996, 1997 and 1998, cash used in investing activities was attributable primarily to purchases of property and equipment in the quarter ended March 31, 1999, cash used in investing activity was also due to an increase in other assets. Net cash provided by financing activities was $8.5 million, approximately $287,000 and $143,000 in 1996, 1997 and 1998, and net cash used in financing activities was $114,000 in the quarter ended March 31, 1999. 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 27 attributable to proceeds from the issuance of notes payable, offset in part by repayment of notes payable and capital lease obligations. For the quarter ended March 31, 1999, cash used in financing activities was attributable primarily to repayments of notes payable and capital lease obligations. As of March 31, 1999, 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 have reviewed our short-term and long-term liquidity needs. Our liquidity needs for at least the next eighteen months will be met by the net proceeds from this offering, together with our current cash and cash equivalents. After this time, we cannot assure you that cash generated from operations will be sufficient to satisfy our liquidity requirements, and we may need to raise additional capital by selling additional equity or debt securities or by obtaining a credit facility. If additional funds are raised through the issuance of debt securities, these securities could have 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 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. 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 activities such as remediation, upgrading and replacement of 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; 28 . 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 disclosed, defined, and predetermined manner to unambiguously indicate the century referred to; . if the date elements in interfaces and data storage specify the century, store and provide output of unambiguous date information; and . recognize the year 2000 as a leap year. We have tested software obtained from third parties, including 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 these types of lawsuits against other software vendors. Because of the unprecedented nature of Year 2000 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. To date, we have incurred expenses of approximately $50,000 for Year 2000 compliance activities. 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. We estimate that these additional costs will total less than $100,000. However, we may experience material problems and costs with Year 2000 compliance not currently identified in our Year 2000 plan 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 29 implementing such a plan may itself be material. We intend to develop a contingency plan by the fourth quarter of 1999. 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 of the fair values of all the undelivered elements that are not accounted for by means of long- term contract accounting, (2) vendor-specific objective evidence 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 vendor- specific objective evidence of the fair value of each delivered element, are satisfied. The provisions of SOP 98-9 that extend the deferral of the second sentence of paragraphs 10, 37, 41 and 57 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. 30 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 voice and data conferences which emulate face-to-face meetings, or what we call virtual meetings, and 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 that the dramatic growth in web browsers and collaborative software applications will 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 March 31, 1999, 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, 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. 31 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. We believe that 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. 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 these technologies, including conferencing, fax, e-mail and collaborative software applications. While these technologies have been widely implemented, they do not allow an enterprise to create a comprehensive network for collaboration throughout the organization to promote information flow and effective decision making. We believe that 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 collaborative software environments such as Microsoft Outlook. 32 [Graphic depicting the Latitude MeetingPlace server and methods of access and use.] 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. . 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, we believe that 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 network security system, referred to in the software industry as a corporate firewall, consistent with its other information technology strategies. Additionally, MeetingPlace eliminates several 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 33 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 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. Our long-term strategy is comprised of the following elements, each of which we are pursuing on an ongoing basis: . 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 enterprise resource planning and customer relationship management applications. For example, MeetingPlace is already available to end users through browser interfaces as well as Microsoft Outlook, and we anticipate introducing at least one additional interface by mid-2000. We intend to leverage the large installed base of these 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. We are currently attempting to expand our presence in the areas of 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 the Internet and Internet video. In addition, our technology platform is designed to use open standards such as the specification for data conferencing referred to in the software and networking industries as the T.120 specification and the specification for Internet telephony referred to in the software and networking industries as the H.323 specification. . 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 34 channels such as third party distributors and system integration partners. We expect to focus our partnership efforts on expanding our geographic scope to reach customers in other countries and in regions of the United States we do not presently serve, 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. We expect that collaborative knowledge management 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 storage system based on the small computer systems interface, or SCSI, to manage internal database functions and conference recordings. In addition, the platform utilizes our advanced high-performance digital signal processing, 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. 35 MeetingPlace Software. The MeetingPlace conference server includes system software necessary to schedule, conduct and manage real-time voice and data conferences. This software includes an 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. . MeetingNotes. Software that facilitates management of meeting agendas, roll calls, attached electronic documents, related web hyperlinks, 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. 36 Our MeetingPlace system is designed for deployment in enterprise 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 . schedule via MeetingTime software, web browser, scheduling and telephone or Microsoft Outlook notification of . scheduling of recurring meetings 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 . participant exclusion and flow. . breakout sessions . lecture style, listen-only conferences . real-time speaker identification . interactive question and answer 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 . automatic posting for playback conferences. . password or profile controlled access . access through telephone, downloaded audio file or streaming audio using RealAudio over the web - ------------------------------------------------------------------------------------ System Administration. . remote administration via Internet protocol-based Tools for network (e.g., Internet) management of . help desk monitoring via standard simple network MeetingPlace by system management protocol, or SNMP, applications 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 third parties, including digital signal processing algorithms and the MeetingPlace server's operating system and relational database. See "Risk Factors--The loss of our right to use technology licensed to us by third parties could harm our business." 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." 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. 37 . 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 digital signal processing engine. To meet the needs of a highly scalable conferencing system, we designed our own general purpose digital signal processing card based on a reduced instruction set computing, or RISC, microprocessor and programmable Texas Instruments digital signal processing chips. MeetingPlace configurations can contain up to four digital signal processing cards to deliver up to five billion instructions per second, of processing power in a single server. Our software leverages the power of these digital signal processing cards to provide high quality conference bridging that integrates digital signal processing 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 identification numbers. The scheduling agent utilizes a structured query language, or 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. 38 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. . 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 the Internet, 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--Rapid technological changes could cause our products to become obsolete or require us to redesign our products," "--If we fail to integrate our products with third- party technology, our sales could suffer" and "--The loss of our right to use technology licensed to us by third parties could harm our business." Customers We began commercial shipment of our products in December 1994 and, as of March 31, 1999, 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 that have purchased MeetingPlace: - -------------------------------------------------------------------------------- High Technology - -------------------------------------------------------------------------------- Software Hardware Networking and America Online, Inc. Apple Computer, Inc. Telecommunications Cadence Design Fujitsu Limited 3Com Corporation Systems, Inc. Hewlett-Packard Aspect Telecommunications Clarify Inc. Company Corporation Edify Corporation Honeywell Inc. Bell Atlantic Enterprise Systems, Hutchinson Corporation Inc. Technology Ciena Corporation Great Plains Incorporated Cisco Systems, Inc. Software, Inc. Natural Microsystems Norstan Inc. Informix Corporation Corporation Tellabs, Inc. Microsoft Quantum Corporation Corporation Rockwell NetManage, Inc. International Network Associates, Corporation Inc. Seagate Technology, Oracle Corporation Inc. Qualcomm Incorporated - -------------------------------------------------------------------------------- 39
- -------------------------------------------------------------------------------- Financial Services - -------------------------------------------------------------------------------- Investment Banking Insurance Other Financial Services BancBoston Robertson Aetna Inc. Brown Brothers Harriman & Stephens Inc. American International Co. Credit Suisse First Group, Inc. Capital Group Companies Boston CNA Financial Inc. Corporation Corporation Conseco, Inc. J.C. Bradford & Co. CUNA Mutual Group Fidelity Investments Morgan Stanley Dean John Hancock Mutual Franklin Templeton Witter & Co. Life Insurance Instinet Corp. NationsBanc Montgomery Company Southwest Securities Securities LLC State Farm Insurance Group, Inc. Prudential Securities The Vanguard Group Incorporated Commercial Banking SG Cowen Securities ABN AMRO Bank NV Corporation BankBoston UBS AG Bank of America Compass Bank 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 The Boston Consulting Burlington Northern Santa Fe Weight Watchers International, 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 International Data Corporation Merck-Medco Managed Care, Rio Salado College META Group, Inc. L.L.C. 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 inclusion of the names of our customers in the table above and in the discussion below is not intended to imply that these customers are actively endorsing or promoting our products and services. 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 40 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. . 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. 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 March 31, 1999, our direct sales force consisted of 41 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 41 geographic regions and vertical markets, as well as usage-based resellers who offer access to MeetingPlace services on a per-minute basis. As of March 31, 1999, we had six domestic resellers and three international resellers. We intend to grow all of our reseller channels. See "Risk Factors--If we fail to expand our sales and distribution channels, our business could suffer" and "-- Our ability to expand into international markets is uncertain." Competition We compete in a market that is highly competitive and rapidly changing. We expect competition to persist and intensify in the future. 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. A description of our principal competitors and the risks associated with the competitive nature of our market are discussed in greater detail in "Risk Factors--Our market is highly competitive." 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 March 31, 1999, we had four issued U.S. patents relating to 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. A discussion of risks associated with the protection of our patents and intellectual property rights and potential infringement by us of the patents and intellectual property rights of others is presented in "Risk Factors--We may be unable to adequately protect our proprietary rights, and we may be subject to infringement claims." 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. Some of the 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 adversely affect our business. See "Risk 42 Factors--Any interruption in supply of components from outside manufacturers and suppliers could hinder our ability to ship products in a timely manner." Employees As of March 31, 1999, we had a total of 121 employees, of which 29 were in research and development, 79 were in sales, marketing and customer support, and 13 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 qualified personnel is intense and there can be no assurance that we will be successful in attracting or retaining employees 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 "--Our business could suffer if we lose the services of our current management team." 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, when 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. 43 MANAGEMENT Executive Officers and Directors The following table provides information with respect to our executive officers and directors as of March 31, 1999.
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. ... 57 Director James L. Patterson...... 61 Director
- -------- Mr. Wang, Latitude's founder, has served as our president and chief executive officer and as a director since our inception in April 1993. Before founding Latitude, Mr. Wang served in various management positions with Aspect Telecommunications Corporation, a provider of call center systems. Before Aspect, Mr. Wang was employed with ROLM Corporation, a manufacturer of PBX systems, 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. Before 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. Before 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. Before 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. 44 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, including director of marketing for voice information services, director of sales for voice information services and general manager for customer premises equipment sales. Before 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. Before 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, 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 March 1998 and previously served as our vice president, product development, from December 1996 to March 1998 and director of engineering from May 1993 to 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. Before 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, a global data networking company, where he 45 held various positions, most recently serving as president, 3Com Systems. Before his employment with 3Com, Mr. Finocchio held various executive positions in sales and service with ROLM, 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. 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--Anti-Takeover Effects of Delaware Law and Charter Provisions." Messrs. Bredt and Myers were elected to the board of directors under a voting agreement by and among Latitude and some of its principal stockholders. This voting agreement will terminate upon completion of this offering. 46 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 our 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 these 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. 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. 47 Executive Compensation Summary Compensation. The following table lists 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 $100,000 during the year ended December 31, 1998. Summary Compensation Table
Long-Term Compensation Annual Compensation Awards -------------------- ------------ Securities Underlying All Other Name and Principal Position Salary ($) Bonus ($) Options (#) Compensation($) --------------------------- ---------- --------- ------------ --------------- Emil C.W.Wang................ $152,696 $17,348 151,200 $1,242(1) President and chief executive officer Glenn A. Eaton............... 125,108 8,674 46,200 199(2) Vice president, international Janet A. Gregory............. 98,754 92,061 53,700 156(2) Vice president, North American sales Edward D. Tracy.............. 118,529 26,090 46,200 192(2) Vice president, product operations
- -------- (1) Consists of life insurance premiums paid by Latitude and reimbursement for tax preparation expenses. (2) Consists of life insurance premiums paid by Latitude. Under the terms of a bonus plan adopted by the board of directors, our executive officers will receive performance bonuses in 1999 based on Latitude's achievement of quarterly revenue targets set by the board of directors. Option Grants. The following table provides information with respect to stock options granted to each of the executive officers named in the summary compensation table in the year ended December 31, 1998. In accordance with the rules of the Securities and Exchange Commission, also shown below is the potential realizable value over the term of the option, the period from the grant date to the expiration date, based on assumed rates of stock appreciation of 5% and 10%, compounded annually. These amounts are based on assumed rates of appreciation and do not represent our estimate of future stock price. Actual gains, if any, on stock option exercises will depend on the future performance of our common stock. 48 Option Grants in Last Fiscal Year
% of Total Potential Realizable Value Number of Options at Assumed Annual Rates Securities Granted to of Stock Price Appreciation Underlying Employees Exercise for Option Term Options in Fiscal Price Expiration ---------------------------- Name Granted(#) Year ($/share) Date 5%($) 10%($) ---- ---------- ---------- --------- ---------- ------------- -------------- Emil C.W. Wang.......... 151,200 14.1% $1.00 1/16/08 $ 95,155 $ 241,179 Glenn A. Eaton.......... 46,200 4.3 1.00 1/16/08 29,075 73,693 Janet A. Gregory........ 53,700 5.0 1.00 1/16/08 33,795 85,657 Edward D. Tracy......... 46,200 4.3 1.00 1/16/08 29,075 73,693
These stock options, which were granted under the 1993 Stock 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 each month after the first anniversary, as long as the optionee remains an employee with, consultant to, or director of Latitude. On January 8, 1999, the following executive officers were granted options at an exercise price of $4.33 per share: Mr. Wang, 20,337 shares; Mr. Eaton, 5,337 shares; Ms. Gregory, 20,337 shares; and Mr. Tracy, 20,337 shares. The percentage of total options granted to employees in the fiscal year is based on an aggregate of 1,074,209 shares subject to options granted by Latitude during the year ended December 31, 1998 to employees of and consultants to Latitude, including the executive officers named in the summary compensation table. The exercise price per share of each option was equal to the fair market value of our common stock on the date of grant as determined in good faith by our board of directors on the grant date based upon such factors as the purchase price paid by investors for shares of Latitude's preferred stock, the absence of a trading market for Latitude's securities and Latitude's financial outlook and results of operations. The potential realizable value is based on the term of the option at its time of grant, which is ten years, and assumes that the fair market value of Latitude's common stock on the date of grant appreciates at the indicated annual rate compounded annually for the entire term of the option and that the option is exercised and sold on the last day of its term for the appreciated stock price. Aggregate Option Exercises and Option Values. The following table provides summary information concerning the shares of common stock represented by outstanding stock options held by each of the executive officers named in the summary compensation table as of December 31, 1998. No options were exercised by the executive officers named in the summary compensation table during the year ended December 31, 1998. 49 Fiscal Year-End Option Values
Number of Securities Underlying Unexercised Value of Unexercised Options at Fiscal Year- In-the-Money Options End(#) at Fiscal Year-End($) ------------------------- ------------------------- 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
These values are 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. 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 March 31, 1999, options to purchase 1,494,624 shares of common stock were outstanding at a weighted average exercise price of $2.63 per share, 1,975,438 shares had been issued upon exercise of outstanding options or under restricted stock purchase agreements, and 84,938 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 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 equal to at least 100% of the fair market value of the common stock on the date of grant and at least 110% of the fair market value in the case of options granted to an employee 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 and at least 110% of the fair market value of our common stock in the case of nonstatutory stock options granted to 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 other forms of consideration approved 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 the optionee. 50 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 the 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 on the first anniversary of the date of grant, and 1/48th of the total number of shares subject to the option each month after the first anniversary. 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 the 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 the recipient's relationship with us. If we merge with or into another corporation, each outstanding 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 assume or substitute an option or stock purchase right, then the unvested shares under the option will automatically be accelerated so that an additional 50% of the total number of unvested shares will automatically become vested, and any rights of repurchase with respect to a 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 the holder's employment is involuntarily terminated without cause at any time within 24 months following our merger with or into another corporation, then, under most circumstances, the unvested shares under the option will automatically be accelerated so that an additional 50% of the total number of unvested shares will automatically become vested, and any rights of repurchase with respect to a 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; however, the administrator may not take any action that impairs the rights of any holder of an outstanding option 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 and stock purchase rights. 1999 Stock Plan. Our 1999 Stock Plan was adopted by the board of directors in February 1999 and was approved by our stockholders in April 1999. A total of 2,700,000 shares of common stock has been reserved for issuance under the 1999 Stock Plan, all of which remain available for future option grants. The purposes of the 1999 Stock 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. 51 The 1999 Stock Plan provides for the grant of incentive stock options to employees, including officers and directors, and nonstatutory stock options and stock purchase rights to employees and consultants, including nonemployee directors. If not terminated earlier, the 1999 Stock Plan will terminate in February 2009. The 1999 Stock Plan may be administered by the board of directors or a committee of the board. The 1999 Plan is currently administered by the compensation committee. The administrator determines the terms of options granted under the 1999 Stock 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 or stock purchase rights for more than 2,700,000 shares under the 1999 Stock Plan in any fiscal year. The exercise price of all incentive stock options granted under the 1999 Stock 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 must equal at least 110% of the fair market value of the common stock on the date of grant. Generally, 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. However, the exercise price of a nonstatutory stock option granted to an individual who, on the last day of our most recently completed fiscal year, is our chief executive officer, or is acting in such capacity, or is one of our four highest compensated officers, other than our chief executive officer, whose total cash compensation exceeded $100,000 during the 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 or 5 years in the case of an incentive stock option granted to a 10% stockholder. Generally no option may be transferred by the optionee other than by will or the laws of descent or distribution. However, the administrator may in its discretion permit transferability of nonstatutory stock options granted under the 1999 Stock Plan. Each option may be exercised during the lifetime of the optionee only by the optionee or a permitted transferee. The administrator determines when options become exercisable. Options granted under the 1999 Stock Plan generally become exercisable at the rate of 1/4th of the total number of shares subject to the options on the first anniversary of the date of grant, and 1/48th of the total number of shares subject to the options each month after the first anniversary. In addition to stock options, the administrator may issue to 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. The period during which the stock purchase right is held open is determined by the administrator, but in no case shall this 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 the recipient's relationship with us. 52 If we sell all or substantially all of our assets or merge 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 assume or substitute an option or stock purchase right, then, the unvested shares under the option will automatically be accelerated so that an additional 50% of the total number of unvested shares will automatically become vested, and 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 the holder's employment is involuntarily terminated without cause at any time within 24 months following our merger with or into another corporation, then, under most circumstances, the unvested shares under the option will automatically be accelerated so that an additional 50% of the total number of unvested shares will automatically become vested and 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 Stock Plan as long as the amendment or termination does not adversely affect any outstanding option or stock purchase right and provided that stockholder approval shall be obtained to the extent it is required by applicable law. 1999 Directors' Stock Option Plan. The 1999 Directors' Stock Option Plan was adopted by the board of directors in February 1999 and was approved by our stockholders in April 1999. A total of 250,000 shares of common stock has been reserved for issuance under the 1999 Directors' Stock Option Plan, all of which remain available for future grants. The 1999 Directors' Stock Option Plan provides for the grant of nonstatutory stock options to nonemployee directors of Latitude. The 1999 Directors' Stock Option 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 the director has a personal interest. The 1999 Directors' Stock Option 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 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. In addition, 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 if, on that date, he or she has served on our board of directors for at least six months. The 1999 Directors' Stock Option 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 1999 Directors' Stock Option Plan is transferable by the optionee other than by will or the laws of descent or distribution or under a qualified domestic relations order. Each option is exercisable, during the lifetime of the optionee, only by the optionee. The 1999 Directors' Stock Option Plan provides that the first option granted to a director under this plan shall become exercisable in installments as to 25% of the total number of shares subject to 53 the first option on each of the first, second, third and fourth anniversaries of the date of grant of the 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 option. If a nonemployee director ceases to serve as a director of Latitude for any reason other than death or disability, the director may within 90 days after the date he ceases to be a director of Latitude, exercise options granted under the 1999 Directors' Stock Option Plan to the extent that he was entitled to exercise it at the date of termination. If the director was not entitled to exercise this option at the date of termination, or if the director does not exercise the option within the 90 day period, the option shall terminate. The exercise price of all stock options granted under the 1999 Directors' Stock Option 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 1999 Directors' Stock Option 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, before effectiveness of the dissolution, liquidation, sale, merger or reorganization, at the end of which time the option shall terminate, or (2) 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 the reorganization. The board of directors may amend or terminate the 1999 Directors' Stock Option Plan; provided, however, that no amendment or termination may adversely affect any outstanding option, and shareholder approval shall be obtained for any amendment as required by applicable law. If not terminated earlier, the 1999 Directors' Stock Option Plan will have a term of ten years. 1999 Employee Stock Purchase Plan. Our employee stock purchase plan was adopted by the board of directors in February 1999 and was approved by our stockholders in April 1999. A total of 500,000 shares of common stock has been reserved for issuance under the employee stock purchase plan. The number of shares reserved for issuance under the employee stock purchase plan will automatically increase on the first day of each of the 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 employee stock 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 employee stock 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 employee stock purchase plan if they are employed by Latitude or any subsidiary for at least 20 hours per week and more than five 54 months per year. The employee stock 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 employee stock purchase plan will have a term of 20 years. The employee stock purchase plan provides that if we merge with or into another corporation or sell all or substantially all of our assets, each right to purchase stock under the employee stock purchase plan will be assumed or an equivalent right substituted by the successor corporation. If the successor corporation refuses to assume or substitute equivalent rights, the board of directors may shorten the offering period so that employees' rights to purchase stock under the employee stock purchase plan are exercised before the merger or sale of assets. The board of directors has the power to amend or terminate the employee stock purchase plan as long as this action does not adversely affect any outstanding rights to purchase stock under this plan. However, the board of directors may amend or terminate the employee stock purchase plan or an offering period even if it adversely affects outstanding options to avoid our incurring adverse accounting charges. 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 their fiduciary duties as a director except for liability . for any breach of the 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 the party's status or service as a director, officer, employee or other agent of Latitude upon an undertaking by the indemnified party to repay these advances if it is ultimately determined that the 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 indemnify the director or officer against expenses, including attorney's fees, judgments, fines and settlements paid by the individual in connection with any action, suit or proceeding arising out of the individual's status or service as a director or officer of Latitude. 55 We are not required to indemnify the individual against liabilities arising from willful misconduct or conduct that is knowingly fraudulent or deliberately dishonest. In addition, the indemnification agreements require us to advance expenses incurred by the individual in connection with any proceeding against the individual with respect to which he 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 indemnification by these individuals. 56 RELATED PARTY TRANSACTIONS Stock option grants in the last fiscal year to directors and executive officers of Latitude are described in this prospectus 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 provided elsewhere in this prospectus 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 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 Stock Stock Stock -------- --------- --------- --------- Entities affiliated with Mayfield Fund (F. Gibson Myers, Jr.)............................. 2,625,000 1,590,909 843,749 Menlo Ventures IV, L.P. (Thomas H. Bredt)....... 1,875,000 1,136,364 1,406,250 James L. Patterson.............................. 109,500 27,000 18,750 Robert J. Finocchio, Jr. ....................... -- 37,500 -- Entities affiliated with Asset Management Associates..................................... -- 681,819 375,000 Entities affiliated with Canaan Partners........ -- 409,090 375,000
In the table above, shares held by affiliated persons and entities have been aggregated. See "Principal Stockholders." We entered into an affinity alliance agreement with Aspect Telecommunications Corporation under which we agreed to develop and market software applications which are compatible with Aspect's products. James L. Patterson, one of our directors, is a director of Aspect. We also entered into a co-marketing agreement with Spectralink Corporation under which Spectralink agreed to market Latitude products. F. Gibson Myers, Jr. is a director of Spectralink. These agreements are not expected to represent material strategic relationships. In April 1999, we granted a stock option to purchase 5,000 shares to the Entrepreneurs' Foundation, a nonprofit organization of which Mr. Myers is chairman, in connection with consulting services provided by the Entrepreneurs' Foundation. We have entered into indemnification agreements with our officers and directors which are described in "Management--Limitation of Liability and Indemnification Matters." 57 PRINCIPAL STOCKHOLDERS The following table summarizes information with respect to beneficial ownership of our common stock as of March 31, 1999, and as adjusted to reflect the sale of common stock in this offering, by (a) each person or group of affiliated persons known by us to own beneficially more than 5% of our outstanding common stock, (b) each of the executive officers named in the summary compensation table, (c) each of our directors and (d) all directors and executive officers of Latitude as a group. As of March 31, 1999, there were 15,581,657 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 them, have sole voting power and investment power with respect to these 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 Offering Offering ---------------- ---------- -------- -------- Entities affiliated with Mayfield Fund(1)........ 5,059,658 32.5% 25.2% 2800 Sand Hill Road Menlo Park, CA 94025 Menlo Ventures IV, L.P........................... 4,417,614 28.4 22.0 3000 Sand Hill Road, Bldg. 4, Ste. 100 Menlo Park, CA 94025 Entities affiliated with Asset Management 1,056,819 6.8 5.3 Associates(2)................................... 2275 E. Bayshore Road, Ste. 150 Palo Alto, CA 94303 Entities affiliated with Canaan Ventures(3)...... 784,090 5.0 3.9 2884 Sand Hill Road, Bldg. 1, Ste. 115 Menlo Park, CA 94025 Emil C.W. Wang(4)................................ 1,104,681 7.1 5.5 Glenn A. Eaton(5)................................ 357,180 2.3 1.8 Edward D. Tracy(6)............................... 285,930 1.8 1.4 Janet A. Gregory(7).............................. 200,680 1.3 1.0 F. Gibson Myers(1)............................... 5,059,658 32.5 25.2 Thomas H. Bredt(8)............................... 4,417,614 28.4 22.0 James L. Patterson(9)............................ 270,549 1.7 1.4 Robert J. Finocchio, Jr. ........................ 97,500 0.6 0.5 All directors and executive officers as a group (11 persons).................................... 11,793,793 75.2 58.4
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 March 31, 1999. The shares issuable under these options are deemed outstanding for computing the percentage ownership of the person holding these options but are not deemed outstanding for the purposes of computing the percentage ownership of each other person. The number of shares listed in the table above for all directors and executive officers as a group includes 111,221 shares that are currently exercisable within 60 days of March 31, 1999. 58 (1) 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 of each of Mayfield VII and Mayfield Associates Fund II. Mr. Myers disclaims beneficial ownership of these shares except to the extent of his pecuniary interest in these shares. (2) Includes 681,819 shares held by Asset Management Associates 1989, L.P. and 375,000 shares held by Asset Management Associates 1996, L.P. (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 50,931 shares held by Mr. Wang that are currently exercisable or exercisable within 60 days of March 31, 1999. (5) Includes 341,250 shares held by Mr. Eaton and options to purchase 15,930 shares held by Mr. Eaton that are currently exercisable or exercisable within 60 days of March 31, 1999. (6) Includes 270,000 shares held by Mr. Tracy and options to purchase 15,930 shares held by Mr. Tracy that are currently exercisable or exercisable within 60 days from March 31, 1999. (7) Includes 182,250 shares held by Ms. Gregory and options to purchase 18,430 shares held by Ms. Gregory that are currently exercisable or exercisable within 60 days of March 31, 1999. (8) Thomas H. Bredt is a director of Latitude and a general partner of MV Management IV, L.P., the general partner of Menlo Ventures IV, L.P. Mr. Bredt disclaims beneficial ownership of these shares except to the extent of his pecuniary interest in these shares. (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 9,999 shares that are currently exercisable or exercisable within 60 days of March 31, 1999. Does not include 504,546 shares held by Aspect Telecommunications Corporation, of which Mr. Patterson is a director. 59 DESCRIPTION OF CAPITAL STOCK Upon the completion of this offering, we will be authorized to issue 75,000,000 shares of common stock, and 5,000,000 shares of preferred stock. The following description is a summary of the material provisions of our capital stock. For additional information on our capital stock, you should refer to our certificate of incorporation and bylaws, which are included as exhibits to the registration statement of which this prospectus is a part. Common Stock As of March 31, 1999, there were 15,581,657 shares of common stock outstanding that were held of record by approximately 121 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. Assuming no exercise of the underwriters' over-allotment option and no exercise or conversion of outstanding convertible securities after March 31, 1999 and after giving effect to the sale of the shares of common stock in this offering, there will be 18,581,657 shares of common stock outstanding. 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 dividends, if any, as may be declared from time to time by the board of directors out of funds legally available for payment of dividends. 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 any preferred stock 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, without action by the stockholders, to issue the undesignated preferred stock in one or more series, to fix the number of shares constituting any series and to designate the rights, preferences and privileges of each series, any or all of which may be greater than the rights of the common stock. 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 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 rights with respect to the registration of these shares under the Securities Act. These rights are provided under the terms of an agreement between 60 Latitude and the holders of these registrable securities. Subject to the limitations described 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. We are obligated to register these shares only if the proposed aggregate offering price is at least $2,000,000. In addition, 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 the offering. All fees, costs and expenses of these registrations must be borne by Latitude and all selling expenses, including underwriting discounts, selling commissions and stock transfer taxes, relating to registrable securities must be borne by the holders of the securities being registered. Effects of Delaware Anti-Takeover Law and Charter Provisions We are subject to the provisions of Section 203 of the Delaware General Corporation 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 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 did own within the prior three years, 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, 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 these 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 optioned stock, including non-vested shares, or acceleration of vesting of shares issued under 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, and thus delay, defer or prevent a change in control of Latitude. Furthermore, the preferred stock may have other rights, including economic rights senior to the common stock, and, as a result, the issuance of the 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. 61 Commencing at the first annual meeting of stockholders following the 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 March 31, 1999, 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 these 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 before the completion of this offering. Transfer Agent and Registrar The transfer agent and registrar for our common stock is U.S. Stock Transfer Corporation. Listing Our common stock has been approved for listing on the Nasdaq National Market under the trading symbol "LATD." 62 SHARES ELIGIBLE FOR FUTURE SALE Before 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 these 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 18,581,657 shares of common stock. Of these shares, the 3,000,000 shares to be sold in this offering, or 3,450,000 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 these shares are held by our affiliates. As defined in Rule 144 under the Securities Act, an affiliate of an issuer is a person who, directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with the issuer. The remaining 15,581,657 shares outstanding upon completion of this offering were issued and sold in private transactions in reliance on exemptions from registration under the Securities Act. These 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. Under agreements between our stockholders and either Latitude or the underwriters, substantially all of the holders of these shares have agreed not to offer, sell, contract to sell or grant any option to purchase any of these 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 dispose of common stock for a period of 180 days from the date of this prospectus. On the date of the expiration of these agreements, all of these shares will be eligible for immediate sale, of which 11,682,572 shares held by our affiliates will be subject to volume and other limitations under Rule 144. Following the expiration of the 180-day term of these agreements, shares issued upon exercise of options we granted before the date of this prospectus will also be available for sale in the public market under Rule 701 of the Securities Act. Non-affiliates may resell shares under Rule 701 in reliance upon Rule 144 under the Securities Act but without compliance with the holding- period, public information, volume limitation or notice provisions of 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 who has beneficially owned these 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 this sale. Sales under Rule 144 are also subject to manner of sale and notice requirements and to the availability of current public information about Latitude. 63 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 these 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 5,029,562 shares of common stock reserved for issuance under the 1993 Stock Plan, the 1999 Stock Plan, the 1999 Directors' Stock Option Plan and our employee stock purchase plan. The registration statement will become effective automatically upon filing. After the filing of a registration statement on Form S-8, shares issued under these plans may be sold in the open market, subject to (1) the Rule 144 limitations applicable to affiliates, (2) vesting restrictions imposed by us and (3) the agreements described above under which our stockholders have agreed not to sell or dispose any shares of common stock for a period of 180 days from the date of this prospectus. 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 have rights to require us to register their shares for future sale. See "Description of Capital Stock--Registration Rights." WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act with respect to the common stock offered by this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all of the information included in the registration statement. Some information is included 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 by this prospectus, reference is made to the registration statement, including the exhibits to the registration statement, and the financial statements and notes filed as a part of the registration statement. Statements made in this prospectus concerning the contents of any document referred to in the prospectus are not necessarily complete. With respect to each 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 to the registration statement and the financial statements and notes filed as a part of the registration statement, as well as the 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 Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of all or any part of these documents may be obtained from the Commission upon payment of the fees prescribed by the Commission. These 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. 64 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.......................................................... 3,000,000 =========
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 450,000 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 our stockholders have agreed that we and they will not offer, sell, contract to sell, announce an intention to sell, pledge or directly or indirectly dispose of, 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 65 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 of common stock upon the exercise of employee stock options outstanding on the date of this prospectus. The underwriters have reserved for sale, at the initial public offering price, up to 150,000 shares of the common stock for employees, directors and 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 these persons purchase the reserved shares. Any reserved shares not purchased will be offered by the underwriters to the general public on the same terms as the other shares. We have agreed to indemnify the underwriters against liabilities under the Securities Act or contribute to payments which the underwriters may be required to make in that respect. The common stock has been approved for listing on The Nasdaq Stock Market's National Market under the symbol "LATD." Before 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 in this prospectus and 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 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 the syndicate member are purchased in a syndicate covering transaction to cover syndicate short positions. 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 these transactions. These transactions may be effected on The Nasdaq National Market and, if commenced, may be discontinued at any time. 66 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 Canadian purchaser who wishes to sell the common stock in Canada must do so satisfying applicable securities laws which will vary depending on the relevant jurisdiction, and the purchaser may be required to resell the common stock under available statutory exemptions or obtain a discretionary exemption from the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice before 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 (1) 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, (2) where required by law, that the purchaser is purchasing as principal and not as agent, and (3) the purchaser has reviewed the text above under "Resale Restrictions." Rights of Action Applicable to 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 Ontario securities law. 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 in this document 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 of 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 in 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. 67 LEGAL MATTERS The validity of the common stock offered by this prospectus 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. 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 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 in reliance on the report of PricewaterhouseCoopers, LLP, independent accountants, given on the authority of that firm as experts in accounting and auditing. 68 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, except for note 12, as to which the date is April 30, 1999 F-2 LATITUDE COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except per share data)
December 31, Pro Forma ------------------ March 31, March 31, 1997 1998 1999 1999 -------- -------- ----------- ------------- (See Note 11) (Unaudited) (Unaudited) ASSETS Current assets: Cash and cash equivalents...... $ 3,578 $ 3,982 $ 4,397 Trade accounts receivable, net of allowance for doubtful accounts of $147 in 1997, $235 in 1998, and $204 in 1999..... 2,519 5,627 4,642 Inventory...................... 475 688 994 Prepaids and other assets...... 139 420 755 -------- -------- ------- Total current assets......... 6,711 10,717 10,788 Property and equipment, net...... 933 1,017 1,091 Deposits and other long-term assets.......................... 71 136 500 -------- -------- ------- Total assets................. $ 7,715 $ 11,870 $12,379 ======== ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable............... $ 363 $ 805 $ 726 Accrued expenses............... 1,460 2,089 2,086 Deferred revenue............... 920 2,794 3,016 Current portion of long-term debt.......................... 467 559 553 -------- -------- ------- Total current liabilities.... 3,210 6,247 6,381 -------- -------- ------- Long-term debt................... 757 838 695 -------- -------- ------- Total liabilities............ 3,967 7,085 7,076 -------- -------- ------- Commitments (Note 6) Preferred stock, $0.001 par value: Authorized: 12,211 shares Issued and outstanding: 11,836 shares in 1997, 1998 and 1999 and no pro forma shares (Liq- uidation value of $18,680 at December 31, 1998 and March 31, 1999) .................... 12 12 12 -- Common stock, $0.001 par value: Authorized: 27,500 shares Issued and outstanding: 3,755 shares in 1997, 3,739 shares in 1998, 3,745 shares in 1999 and 15,582 pro forma shares... 4 4 4 $ 16 Additional paid-in capital....... 19,021 21,362 22,110 22,110 Notes receivable from common stockholders.................... (187) (165) (144) (144) Deferred stock compensation...... (74) (2,103) (2,642) (2,642) Accumulated deficit.............. (15,028) (14,325) (14,037) (14,037) -------- -------- ------- -------- Total stockholders' equity... 3,748 4,785 5,303 $ 5,303 -------- -------- ------- ======== Total liabilities and stockholders' equity........ $ 7,715 $ 11,870 $12,379 ======== ======== =======
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)
For the Years Ended December Three Months 31, Ended March 31, ------------------------- ------------------- 1996 1997 1998 1998 1999 ------- ------- ------- ------ ------ (Unaudited) Revenue: Product...................... $ 5,103 $10,620 $16,506 $3,688 $4,627 Service...................... 943 2,312 4,545 673 1,801 ------- ------- ------- ------ ------ Total revenue.............. 6,046 12,932 21,051 4,361 6,428 Cost of revenue: Product...................... 1,146 2,158 3,182 644 817 Service...................... 1,023 1,805 2,775 601 903 ------- ------- ------- ------ ------ Total cost of revenue...... 2,169 3,963 5,957 1,245 1,720 ------- ------- ------- ------ ------ Gross profit................... 3,877 8,969 15,094 3,116 4,708 ------- ------- ------- ------ ------ Operating expenses: Research and development..... 2,466 2,213 2,607 605 903 Marketing and sales.......... 4,644 7,845 9,744 1,978 2,868 General and administrative... 1,157 1,115 1,666 410 426 Amortization of deferred stock compensation.......... -- 2 299 38 195 ------- ------- ------- ------ ------ Total operating expenses... 8,267 11,175 14,316 3,031 4,392 ------- ------- ------- ------ ------ Income (loss) from operations.. (4,390) (2,206) 778 85 316 Interest income................ 276 177 142 36 43 Interest expense............... (138) (200) (183) (47) (51) ------- ------- ------- ------ ------ Income (loss) before provision for income tax................ (4,252) (2,229) 737 74 308 Provision for income tax....... -- -- (34) (4) (20) ------- ------- ------- ------ ------ Net income (loss).............. $(4,252) $(2,229) $ 703 $ 70 $ 288 ======= ======= ======= ====== ====== Net income (loss) per share-- basic......................... $ (2.02) $ (0.78) $ 0.21 $ 0.02 $ 0.08 ======= ======= ======= ====== ====== Shares used in per share calculation--basic............ 2,110 2,850 3,279 3,166 3,444 ======= ======= ======= ====== ====== Net income (loss) per share-- diluted....................... $ (2.02) $ (0.78) $ 0.04 $ 0.00 $ 0.02 ======= ======= ======= ====== ====== Shares used in per share calculation--diluted.......... 2,110 2,850 16,422 15,949 16,767 ======= ======= ======= ====== ====== Pro forma net income per share--basic.................. $ 0.05 $ 0.02 ======= ====== Shares used in pro forma per share calculation--basic...... 15,115 15,280 ======= ====== Pro forma net income per share--diluted................ $ 0.04 $ 0.02 ======= ====== Shares used in pro forma per share calculation--diluted.... 16,422 16,767 ======= ======
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 in the period 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,.................. 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.................. -- -- -- -- 2,328 -- (2,328) -- -- Amortization of deferred stock compensation..... -- -- -- -- -- -- 299 -- 299 Net income............. -- -- -- -- -- -- 703 703 ------ ---- ----- ---- ------- ----- ------- -------- ------- Balances, December 31, 1998................... 11,836 12 3,739 4 21,362 (165) (2,103) (14,325) 4,785 Issuance of common stock.................. -- -- 7 -- 14 -- -- -- 14 Repurchase of common stock.................. -- -- -- -- -- -- -- -- Payment of notes receivable from common stockholders........... -- -- -- -- -- 21 -- -- 21 Deferred stock compensation related to grants of stock options and issuance of common stock.................. -- -- -- -- 734 -- (734) -- Amortization of deferred stock compensation..... -- -- -- -- -- -- 195 -- 195 Net income.............. -- -- -- -- -- -- -- 288 288 ------ ---- ----- ---- ------- ----- ------- -------- ------- Balances, March 31, 1999................... 11,836 $ 12 3,746 $ 4 $22,110 $(144) $(2,642) $(14,037) $ 5,303 ====== ==== ===== ==== ======= ===== ======= ======== =======
The accompanying notes are an integral part of these financial statements. F-5 LATITUDE COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
For the Three Months Years Ended December Ended March 31, 31, ------------------------- -------------- 1996 1997 1998 1998 1999 ------- ------- ------- ------ ------ Cash flows from operating activities: Net income (loss).................. $(4,252) $(2,229) $ 703 $ 70 $ 288 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization..... 528 619 696 145 172 Provision for excess and obsolete inventory........................ 55 66 149 16 63 Provision for doubtful accounts... 59 56 88 -- -- Amortization of deferred stock compensation..................... -- 2 299 41 195 Changes in operating assets and liabilities: Trade accounts receivable........ (1,038) (1,069) (3,062) (957) 985 Inventory........................ (104) (173) (496) (4) (243) Prepaids and other assets........ (1) (8) (281) 5 (335) Accounts payable................. (113) 133 442 465 (79) Accrued expenses................. 583 471 629 93 (3) Deferred revenue................. 319 506 1,874 487 222 ------- ------- ------- ------ ------ Net cash provided by (used in) operating activities........... (3,964) (1,626) 1,041 361 1,139 ------- ------- ------- ------ ------ Cash flows from investing activities: Purchases of property and equipment......................... (778) (597) (743) (138) (246) Other.............................. -- -- (37) (52) (364) ------- ------- ------- ------ ------ Net cash used in investing activities..................... (778) (597) (780) (190) (610) ------- ------- ------- ------ ------ 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 1 14 Proceeds from payment of notes receivable from common stockholders...................... -- 43 17 -- 21 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) (109) (149) ------- ------- ------- ------ ------ Net cash provided by financing activities..................... 8,505 287 143 (108) (114) ------- ------- ------- ------ ------ Net increase (decrease) in cash and cash equivalents................... 3,763 (1,936) 404 63 415 Cash and cash equivalents, beginning of period.......................... 1,751 5,514 3,578 3,578 3,982 ------- ------- ------- ------ ------ Cash and cash equivalents, end of period............................. $ 5,514 $ 3,578 $ 3,982 $3,641 $4,397 ======= ======= ======= ====== ====== Supplemental disclosure of cash flow information: Cash payments for interest......... $ 139 $ 193 $ 183 $ 47 $ 51 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: UNAUDITED INTERIM FINANCIAL INFORMATION The accompanying consolidated financial statements at March 31, 1999 and for the three months ended March 31, 1998 and 1999, together with the related notes, are unaudited but include all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation, in all material respects, of the financial position and the operating results and cash flows for the interim date and periods presented. Results for the interim period ended March 31, 1999 are not necessarily indicative of results for the entire fiscal year or future periods. 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, F-7 LATITUDE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. The Company generally does not allow product returns; however, in the past, upon request by a customer and approval of management, certain returns have been allowed. Therefore, provision 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. 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. In the three months ended March 31, 1999, the Company exchanged two systems for certain marketing services, licenses and related training and consulting and $45,000 in cash which resulted in recognition of $609,000 of revenue, $404,000 of prepaid sales and marketing expenses and accounts receivable of $160,000 which will be satisfied through the provision of licenses, training and consulting to the Company. 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 totaling $2,183,000 and $1,846,000 at December 31, 1997 and 1998, respectively, is included in cash equivalents and is classified as available-for-sale. The commercial F-8 LATITUDE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) paper generally matures in one day and is carried at cost, which equals fair market value. Realized gains or losses are determined using the specific identification method. There are no realized gains or losses on the sale of commercial paper and no unrealized gross holding gains or losses in 1996, 1997 or 1998. There were no sales of commercial paper in 1996, 1997 or 1998. 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. The Company records an allowance for doubtful accounts for credit losses at the end of each period based on an analysis of individual aged accounts receivable balances. As a result of this analysis, the Company believes that its allowance for doubtful accounts is adequate but not excessive at December 31, 1997 and 1998 based on specific account balances identified with probable collection risk. An allowance for potential returns is recorded at the end of each period based on product return experience adjusted for changes in the range of per system sales prices of systems shipped. As a result of this analysis, the Company believes that its allowance for potential sales returns is adequate but not excessive at December 31, 1997 and 1998 based on experience and increasing system sales prices and increasing outstanding accounts receivable balances. In addition, at December 31, 1998 consideration was given to the Company's experience with software upgrade sales returns. 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 F-9 LATITUDE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. 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. An allowance for excess and obsolete inventory is recorded at the end of each period based on an analysis of inventory on hand considering forecasted usage and whether component parts are useable in the Company's current product and whether finished goods are versions of the Company's product for which demand is forecasted. As a result of this analysis, the Company believes that its allowance for excess and obsolete inventory is adequate but not excessive at December 31, 1997 and 1998 based on the specific identification of primarily excess or obsolete raw materials inventory. 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. F-10 LATITUDE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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"). 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. F-11 LATITUDE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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):
For the Three Month Period Year Ended December 31, Ended March 31, ------------------------- --------------- 1996 1997 1998 1998 1999 ------- ------- ------- ------- ------- (unaudited) Historical net loss per share, basic and diluted: Numerator for net income (loss), basic and diluted................. $(4,252) $(2,229) $703 $ 70 $ 288 ------- ------- ------- ------- ------- Denominator for basic earnings per share: Weighted average vested common shares outstanding............... 2,110 2,850 3,279 3,166 3,444 ------- ------- ------- ------- ------- Net income (loss) per share basic.. $ (2.02) $ (0.78) $ 0.21 $ 0.02 $ 0.08 ======= ======= ======= ======= ======= Denominator for diluted earnings per share: Weighted average vested common shares outstanding............... 2,110 2,850 3,279 3,166 3,444 Effect of dilutive securities: Nonvested common shares......... 478 611 294 Common stock options............ 727 254 1,073 Warrants........................ 102 87 120 Convertible preferred stock..... 11,836 11,836 11,836 ------- ------- ------- ------- ------- Weighted average common and common equivalent shares................ 2,110 2,850 16,422 15,949 16,767 ------- ------- ------- ------- ------- Net income (loss) per share diluted........................... $ (2.02) $ (0.78) $0.04 $ 0.00 $ 0.02 ======= ======= ======= ======= ======= Antidilutive securities not included in diluted net income (loss) per share calculation for the entire year: Nonvested common shares........... 1,082 647 Common stock options.............. 75 Warrants.......................... 134 134 Convertible preferred stock....... 11,836 11,836 ------- ------- ------- ------- ------- 13,052 12,692 -- -- -- ======= ======= ======= ======= =======
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 F-12 LATITUDE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. 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. NOTE 3--BALANCE SHEET ACCOUNTS (IN THOUSANDS): Inventory:
December 31, March 31, --------- --------------- 1997 1998 1999 ---- ---- ----------- (unaudited) Raw materials......................................... $355 $359 $608 Work in process....................................... 3 36 18 Finished goods........................................ 117 293 368 ---- ---- ---- $475 $688 $994 ==== ==== ====
F-13 LATITUDE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Property and equipment, net:
December 31, March 31, ---------------- --------------- 1997 1998 1999 ------- ------- ----------- (unaudited) Leasehold improvements...................... $ 150 $ 165 $ 166 Computer equipment.......................... 1,943 2,544 2,700 Office equipment............................ 508 635 724 ------- ------- ------- 2,601 3,344 3,590 ------- ------- ------- Less accumulated depreciation and amortization............................... (1,668) (2,327) (2,499) ------- ------- ------- $ 933 $ 1,017 $ 1,091 ======= ======= ======= Accrued expenses: December 31, March 31, ---------------- --------------- 1997 1998 1999 ------- ------- ----------- (unaudited) Accrued commission expense.................. $ 550 $ 544 $ 279 Accrued sales incentives.................... 176 143 84 Accrued vacation............................ 136 227 273 Other....................................... 598 1,175 1,450 ------- ------- ------- $ 1,460 $ 2,089 $ 2,086 ======= ======= =======
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. 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 ======
F-14 LATITUDE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. On April 1, 1999, the Company leased additional office space under an amendment to the above operating lease. Future annual minimum lease payments under this amendment are increased to a total of $614,000 and $645,000 in 1999 and 2000, respectively. At December 31, 1998, the Company has committed to purchase approximately $701,000 of raw materials inventory under noncancellable purchase orders. 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, F-15 LATITUDE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. 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 F-16 LATITUDE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 $2,404,000, of which $2,000, and $299,000 had been amortized to expense during 1997 and 1998. In the three months ended March 31, 1999, additional deferred compensation of $734,000 and amortization of $195,000 was recorded. Future compensation expense from options granted through March 31, 1999 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-17 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 Shares purchased........ (1) 1 10 8 -- -- -- Shares repurchased...... -- -- -- -- -- -- Options granted......... (174) -- -- -- 174 $5.61 979 Options exercised....... -- -- -- -- (6) $0.91 (6) Options cancelled....... 27 -- -- -- (27) $2.89 (76) ------ ----- ----- ---- ----- ----- ------ Balances, March 31, 1999................... 86 3,740 $0.09 $339 1,493 $2.63 $3,921 ====== ===== ===== ==== ===== ===== ======
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. Pro Forma 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
F-18 LATITUDE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. 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 27,000 and 35,000 shares of the Company's common stock, with weighted-average exercise prices of $0.40 and $0.79 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 71,000 and 1,315,000 shares of the Company's common stock, with weighted-average exercise prices of $0.41 and $2.32 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 ==== ==== ===
F-19 LATITUDE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. 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 for tax purposes... 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 $337,000 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. F-20 LATITUDE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. NOTE 10--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. F-21 LATITUDE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 11--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). 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):
Three Months Year Ended Ended December 31, March 31, 1999 1999 ------------ ------------ Pro forma net income per share, basic and diluted: Net income......................................... $ 703 $ 288 ------- ------- Shares used in computing net income per share, basic............................................. 3,279 3,444 Adjustment to reflect the effect of the assumed conversion of convertible preferred stock ....... 11,836 11,836 ------- ------- Shares used in computing pro forma net income per share, basic...................................... 15,115 15,280 ------- ------- Pro forma net income per share, basic.............. $ 0.05 $ 0.02 ------- ------- Shares used in computing net income per share, diluted........................................... 16,422 16,767 Adjustment to reflect the effect of the assumed conversion of convertible preferred stock ....... -- -- ------- ------- Shares used in computing pro forma net income per share, diluted.................................... 16,422 16,767 ------- ------- Pro forma net income per share, diluted............ $ 0.04 $ 0.02 ======= =======
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 March 31, 1999. Unaudited pro forma stockholders' equity at March 31, 1999, as adjusted for the conversion of preferred stock, is disclosed on the balance sheet. NOTE 12--SUBSEQUENT EVENTS: On April 6, 1999, the Company 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 and re-incorporation of the Company in Delaware, both of which were completed in April 1999. In addition, the Company 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, on April 6, 1999, the Company 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"). F-22 LATITUDE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. 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 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 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-23 Description of Graphics for Inside Back Cover Pages of Prospectus [Graphic of screen capture showing [Graphic showing photo of MeetingPlace MeetingPlace scheduling menu on Microsoft server.] Internet Explorer.] One or more MeetingPlace servers, in combination with client software, provide a complete conferencing solution for the enterprise. With MeetingPlace, employees have access to a [Graphic of screen capture showing virtual meeting through the interface of MeetingTime client software.] their choice. Simple telephone access for voice conferencing is available through any touch tone telephone, while data conferencing capabilities can be utilized through a network-connected computer. In addition, users can schedule and set up meetings on MeetingPlace through their corporate intranet site, Latitude's MeetingTime client or their personal Microsoft Outlook calendar. [Graphic of screen capture showing MeetingPlace meeting setup menu.]
[LOGO OF LATITUDE] 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. 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.................................. 95,000 Printing and engraving expenses..................................... 200,000 Legal fees and expenses............................................. 350,000 Accounting fees and expenses........................................ 275,000 Blue Sky qualification fees and expenses............................ 2,000 Transfer Agent and Registrar fees................................... 15,000 Miscellaneous fees and expenses..................................... 46,850 ---------- Total............................................................. $1,000,000 ==========
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: II-1 (1) In April 1999, the Registrant completed a three-for-two stock split of its outstanding common stock in which every two outstanding shares of common stock were 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. (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* Warrant To Purchase Series B Preferred Stock.
II-2 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 and form of amendment thereto. 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. 27.1* Financial Data Schedule.
- -------- *Previously filed. (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 Amendment to 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 May 3, 1999. Latitude Communications, Inc. /s/ Emil C.W. Wang By: _________________________________ Emil C.W. Wang, President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment to 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 May 3, 1999 ______________________________________ Officer and Director (Emil C.W. Wang) (Principal Executive Officer) /s/ Rick M. McConnell Vice President of Finance May 3, 1999 ______________________________________ and Administration and (Rick M. McConnell) Chief Financial Officer (Principal Financial and Accounting Officer) * Director May 3, 1999 ______________________________________ (Thomas H. Bredt) * Director May 3, 1999 ______________________________________ (Robert J. Finocchio, Jr.) * Director May 3, 1999 ______________________________________ (F. Gibson Myers, Jr.) * Director May 3, 1999 ______________________________________ (James L. Patterson) /s/ Rick M. McConnell *By: _________________________________ Rick M. McConnell Attorney in fact
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 (337) -- 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* 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* 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 and Form of amendment thereto. 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. 27.1* Financial Data Schedule.
- -------- *Previously filed. EX-23.1 2 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. 333-72935) of our reports, dated February 24, 1999 except for note 12, as to which the date is April 30, 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 May 2, 1999 -----END PRIVACY-ENHANCED MESSAGE-----