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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM_________ TO _________
COMMISSION FILE NUMBER: 000-25475
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LATITUDE COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3177392
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2121 TASMAN DRIVE, SANTA CLARA, CA 95054
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (408) 988-7200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period than the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $252,754,000 as of February 29, 2000, based
upon the closing sale price on the Nasdaq National Market reported for such
date. Shares of Common Stock held by each officer and director and by each
person who owns 5% of more of the outstanding Common Stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
There were 18,987,095 shares of the registrant's Common Stock issued and
outstanding as of March 21, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive proxy
statement for the Annual Meeting of Stockholders to be held on June 1, 2000.
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PART I
ITEM 1. BUSINESS.
OVERVIEW
We are a leading provider of enterprise e-conferencing solutions that
enable geographically dispersed organizations to collaborate in real time. The
company's award-winning MeetingPlace system is designed for enterprise-wide
deployment to improve the ability of employees, partners, and customers to meet
and work. 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 e-conferencing as an important
business application of the Internet.
MeetingPlace consists of three components: (a) the MeetingPlace conference
server; (b) MeetingPlace software; and (c) system integration options.
MeetingPlace incorporates many easy-to-use features that allow participants to
emulate the voice and data collaboration that occurs in a face-to-face meeting,
such as breakout sessions, roll calls and meeting handouts. MeetingPlace
provides simultaneous voice and data conferencing and the ability to record and
access meeting content while lowering the enterprise's overall conferencing
costs.
We began commercial shipment of MeetingPlace in December 1994 and, as of
December 31, 1999, had over 270 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, Charles Schwab & Co., Credit Suisse
First Boston, Hewlett-Packard, Honeywell, Intuit, Inc., Microsoft, Oracle, State
Farm Insurance, Union Pacific Railroad and the U.S. Federal Reserve Bank.
INDUSTRY BACKGROUND
The proliferation of communications technologies is revolutionizing the way
people conduct business. Today, businesses of all sizes are empowering their
employees with a diverse array of communications tools to facilitate information
flow and improve productivity. From voicemail, fax machines and cellular phones
to e-mail, laptop computers and handheld devices, businesses have demonstrated
their continued willingness to adopt technologies that enable their employees,
vendors and customers to communicate more efficiently across disparate
geographies and time zones.
An enterprise's willingness to adopt a new communications technology
depends largely on the technology's ability to efficiently replace or enhance an
existing business practice. Voicemail is a more convenient and cost effective
substitute for the traditional pad-and-paper answering service. E-mail provides
a similar improvement over traditional inter-office mail. Cellular phones and
laptop computers provide added flexibility for mobile workers over the
traditional telephone and desktop computer. In addition, enterprises have sought
to enhance their competitive advantage by creating a virtual presence with their
customers and vendors through such means as e-commerce and extranets. Each of
these technologies has increased productivity by extending the workplace beyond
the physical office.
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.
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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.
THE LATITUDE SOLUTION
We have developed a solution, MeetingPlace, that allows companies to
conduct 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.
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 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.
3
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.
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.
4
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.
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:
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CAPABILITY FEATURES FEATURES
- --------------------------------------------------------------------------------------------------------------------
MEETING SET-UP. Automated o ability to schedule in advance or real-time
scheduling and notification of o schedule via MeetingTime software, web browser, telephone or
meetings. Microsoft Outlook
o scheduling of recurring meetings
o password and profile restrictions
o notification through e-mail, Microsoft Outlook, fax or pager
o automatic dial-out to participants
- --------------------------------------------------------------------------------------------------------------------
IN-SESSION CAPABILITIES. Management o roll calls
and control of meeting attendance and o announced and screened entries
flow. o participant exclusion
o breakout sessions
o lecture style, listen-only conferences
o real-time speaker identification
o interactive question and answer format
o participant muting
o automated dial-out to late participants
- --------------------------------------------------------------------------------------------------------------------
ATTACHMENTS. Distribution of o distribution and notification of meeting materials, including
electronic meeting materials. electronic documents, prerecorded voice or video and Internet
hyperlinks
o access before, during or after meeting
o automatic forwarding by e-mail or fax
o access to materials via the web, by e-mail or by fax
- --------------------------------------------------------------------------------------------------------------------
RECORDING. Recording, storage and o on/off control during conference
playback of conferences. o automatic posting for playback
o password or profile controlled access
o access through telephone, downloaded audio file or streaming
o audio using RealAudio over the web
- --------------------------------------------------------------------------------------------------------------------
SYSTEM ADMINISTRATION. Tools for o remote administration via Internet protocol-based network (e.g.,
management of MeetingPlace by system Internet)
administrators. o help desk monitoring via standard simple network management
protocol, or SNMP, applications
o configuration, user profile management, capacity planning,
internal billback and automated backups through MeetingTime
software
o 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 "Factors Affecting Future
Operating Results--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 "Factors
Affecting Future Operating Results--Our products may suffer from defects, errors
or breaches of security."
5
CONSULTING AND SUPPORT SERVICES
In addition to our MeetingPlace hardware and software offerings, we provide
extensive follow-on consulting and support services to our customers to ensure
successful deployment of MeetingPlace in their organizations. We offer
implementation and integration services on an individual engagement basis, and
full care support and managed services on an ongoing recurring basis.
IMPLEMENTATION SERVICES. Implementation services include turnkey project
management, database design, specific business application development, training
and on-site installation. These services target seamless integration with a wide
variety of telephone systems, local area network configurations, web servers and
messaging systems.
INTEGRATION SERVICES. Integration services include customization of web
interfaces to MeetingPlace, custom programming of telephone access menus through
the MeetingPlace Flex Menu Option, custom reporting and billing, integration of
MeetingPlace into non-standard voice or data networking infrastructures and
advanced application support and training. These services are designed for
customers with special application or integration needs.
FULL CARE SUPPORT. Full care support is an annual or multi-year service
plan that provides telephone-based technical support to system managers. In
addition, participating customers receive a software subscription service for
new releases, access to a standby conference server and onsite hardware
maintenance.
MANAGED SERVICES. Managed services are designed for customers that desire
on-site MeetingPlace systems but wish to outsource MeetingPlace's administration
and management. Managed services include all user profile management, help desk
support, rollout, capacity planning, technical support and monthly usage
reporting.
TECHNOLOGY
MeetingPlace incorporates a wide variety of internally developed and third
party licensed technologies. Key aspects of our technology platform include:
HIGH-PERFORMANCE 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.
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.
6
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 "Factors Affecting Future
Operating Results--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
December 31, 1999, had over 270 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
Adobe Systems, Inc. Advanced Micro Devices, Inc. TELECOMMUNICATIONS
America Online, Inc. Apple Computer, Inc. 3Com Corporation
Cadence Design Systems, Inc. Fujitsu Limited Aspect Telecommunications Corporation
Clarify Inc. Hewlett-Packard Company Bell Atlantic Corporation
Edify Corporation Honeywell Inc. CellularOne
Enterprise Systems, Inc. Hutchinson Technology Inc. Ciena Corporation
Great Plains Software, Inc. Motorola, Inc. Cisco Systems, Inc.
Informix Corporation Natural Microsystems Corporation Norstan Inc.
Intuit, Inc. Quantum Corporation PSINet
Microsoft Corporation Rockwell International Corporation Tellabs, Inc.
NetManage, Inc. Seagate Technology, Inc.
Network Associates, Inc.
Oracle Corporation
PeopleSoft, Inc.
Qualcomm Inc.
SAP America, Inc.
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES
- --------------------------------------------------------------------------------------------------------------------
INVESTMENT BANKING INSURANCE OTHER FINANCIAL SERVICES
BancBoston Robertson. Aetna Inc. Brown Brothers Harriman & Co.
Stephens Inc American International Group, Inc. Capital Group Companies Inc.
Charles Schwab & Company CNA Financial Corporation Conseco, Inc.
Credit Suisse First Boston CUNA Mutual Group Fidelity Investments
Corporation John Hancock Mutual Life Insurance Franklin Templeton
Dain Rauscher Wessels Company Instinet Corp.
J.C. Bradford & Co. State Farm Insurance Southwest Securities Group, Inc.
Morgan Stanley Dean Witter The Vanguard Group
& Co. COMMERCIAL BANKING
NationsBanc Montgomery ABN AMRO Bank NV
Securities LLC BankBoston
Prudential Securities Bank of America
Incorporated Compass Bank
SG Cowen Securities Life Savings Bank
Corporation KeyCorp
UBS AG Northern Trust Bank
STAR Financial Bank
- --------------------------------------------------------------------------------------------------------------------
7
- --------------------------------------------------------------------------------------------------------------------
OTHER INDUSTRY SECTORS
- --------------------------------------------------------------------------------------------------------------------
PROFESSIONAL SERVICES TRANSPORTATION RETAIL
Andersen Consulting Air Canada Best Buy Co., Inc.
Automatic Data Processing, Inc. CSX Corp. Kinko's, Inc..
A.T. Kearney, Inc. Budget Rent a Car Corporation Pier 1 Imports, Inc
The Boston Consulting Group, Inc. Burlington Northern Santa Fe Corp. Rite Aid Corporation
Cambridge Technology Partners, Inc. Union Pacific Corp. Weight Watchers International, Inc.
Deloitte & Touche, LLP Webvan Group, Inc.
Electronic Data Systems, Corp.
Gartner Group, Inc.
International Data Corporation
META Group, Inc.
GOVERNMENT HEALTHCARE EDUCATION
U.S. Federal Reserve Bank Blue Shield of California California State University
NASA Cardinal Health, Inc. The Ohio State University
U.S. Court of Appeals Kaiser Permanente Rio Salado College
State of Alaska Merck-Medco Managed Care, LLC University of Illinois
State of New Mexico University of Texas
- --------------------------------------------------------------------------------------------------------------------
No single customer accounted for more than 10% of our total revenues in
1999 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.
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 public
relations activities with trade and business press, exhibiting products and
applications at industry trade shows and on our web site, direct marketing,
advertising in selected publications aimed at targeted markets 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
December 31, 1999, our direct sales force consisted of 47 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
"Factors Affecting Future Operating Results--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. Traditionally,
our indirect channels have included resellers that target specific geographic
regions and vertical markets, as well as usage-based resellers who offer access
to MeetingPlace services on a per-minute basis. During 1999, we also increased
our reseller focus on global strategic accounts, small to mid-sized companies
through the application service provider channel, and the federal government. As
of December 31, 1999, we had seven domestic resellers and four international
resellers. We intend to continue to grow our reseller channels. See "Factors
Affecting Future Operating Results--If we fail to expand our sales and
distribution channels, our business could suffer" and "--Our ability to expand
into international markets is uncertain."
8
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 "Factors Affecting Future Operating
Results--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 December 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 "Factors
Affecting Future Operating Results--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 "Factors Affecting Future Operating
Results--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 December 31, 1999, we had a total of 147 employees, of which 26
were in research and development, 101 were in sales, marketing and customer
support, and 20 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 "Factors Affecting Future Operating Results--We may experience
difficulties managing our expected growth" and "--Our business could suffer if
we lose the services of our current management team."
ITEM 2. PROPERTIES.
We lease approximately 51,000 square feet for our headquarters facility
in Santa Clara, California. 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.
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ITEM 3. LEGAL PROCEEDINGS.
We are not currently a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Latitude Communications made its initial public offering on May 6, 1999.
Our common stock is traded on the Nasdaq National Market under the symbol LATD.
The following table sets forth for the fiscal periods indicated the high and low
sales prices per share of our common stock as reported on the Nasdaq National
Market.
FISCAL 1999 HIGH LOW
----------- -------- --------
Second Quarter............................ $19.50 $10.44
Third Quarter............................. $36.13 $11.50
Fourth Quarter............................ $34.63 $21.75
As of March 21, 2000, there were approximately 140 holders of record of
our common stock. We believe that a significant number of beneficial owners of
our common stock hold shares in street name.
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
for the foreseeable future.
On May 6, 1999, in connection with the Company's initial public offering,
a Registration Statement on Form S-1 (No. 333-72935) was declared effective by
the Securities and Exchange Commission, pursuant to which 3,125,000 shares of
the Company's Common Stock were offered and sold for the account of the Company
at a price of $12.00 per share, generating gross offering proceeds of $37.5
million. The managing underwriters were Credit Suisse First Boston Corporation,
Hambrecht & Quist LLC and Dain Rauscher Wessels. After deducting approximately
$2.6 million in underwriting discounts and $1.1 million in other related
expenses, the net proceeds of the offering were approximately $33.8 million. No
direct or indirect payments were made to officers or directors or holders of ten
percent or more of any class of equity securities of the Company or any of their
affiliates. The Company has not yet used any of the funds from the initial
public offering, and the $33.8 million has been invested in investment grade,
interest bearing securities. The Company intends to use such remaining proceeds
for capital expenditures, including the acquisition of redundant computer and
communication systems, and for general corporate purposes, including working
capital to fund increased accounts receivable and inventory levels.
10
ITEM 6. 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 annual report on Form 10-K. The historical results presented below are not
necessarily indicative of the results to be expected for any future fiscal year.
FIVE-YEAR SUMMARY
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Product................................................................ $ 23,765 $ 16,506 $ 10,620 $ 5,103 $ 1,393
Service................................................................ 9,277 4,545 2,312 943 130
--------- --------- --------- --------- --------
Total revenue..................................................... 33,042 21,051 12,932 6,046 1,523
--------- --------- --------- --------- --------
Cost of revenue:
Product................................................................ 4,036 3,182 2,158 1,146 454
Service................................................................ 4,807 2,775 1,805 1,023 420
--------- --------- --------- --------- --------
Total cost of revenue............................................. 8,843 5,957 3,963 2,169 874
--------- --------- --------- --------- --------
Gross profit................................................................ 24,199 15,094 8,969 3,877 649
--------- --------- --------- --------- --------
Operating expenses:
Research and development............................................ 4,053 2,607 2,213 2,466 2,071
Marketing and sales................................................. 14,720 9,744 7,845 4,644 2,160
General and administrative.......................................... 2,244 1,666 1,115 1,157 636
Amortization of deferred stock compensation ........................ 752 299 2 -- --
--------- --------- --------- --------- --------
Total operating expenses.......................................... 21,769 14,316 11,175 8,267 4,867
--------- --------- --------- --------- --------
Income (loss) from operations............................................... 2,430 778 (2,206) (4,390) (4,218)
Interest income (expense), net.............................................. 1,218 (41) (23) 138 115
--------- --------- --------- --------- --------
Income (loss) before benefit from (provision for) income tax................ 3,648 737 (2,229) (4,252) (4,103)
Benefit from (provision for) income tax..................................... 3,724 (34) -- -- --
--------- --------- --------- --------- --------
Net income (loss)........................................................... $ 7,372 $ 703 $ (2,229) $(4,252) $(4,103)
========= ========= ========= ========= ========
Net income (loss) per share--basic........................................... $ 0.56 $ 0.21 $ (0.78) $ (2.02) $ (3.10)
========= ========= ========= ========= ========
Shares used in per share calculation--basic.................................. 13,164 3,279 2,850 2,110 1,325
========= ========= ========= ========= ========
Net income (loss) per share--diluted......................................... $ 0.39 $ 0.04 $ (0.78) $ (2.02) $ (3.10)
========= ========= ========= ========= ========
Shares used in per share calculation--diluted................................ 18,783 16,422 2,850 2,110 1,325
========= ========= ========= ========= ========
DECEMBER 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- -------- -------- --------- ---------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................................ $10,847 $ 3,982 $ 3,578 $ 5,664 $ 1,751
Working capital.......................................................... 44,771 4,470 3,501 5,655 1,574
Total assets............................................................. 60,054 11,870 7,715 8,680 3,501
Long-term obligations.................................................... 453 838 757 760 308
Total stockholders' equity............................................... 48,111 4,785 3,748 5,906 2,040
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CERTAIN FORWARD-LOOKING INFORMATION
This section of this Annual Report on Form 10-K includes a number of
forward-looking statements that reflect our current views with respect to future
events and financial performance. We use words such as "anticipates,"
"believes," "expects," "future," and "intends," and similar expressions to
identify forward-looking statements. You should not place undue reliance on
these forward-looking statements, which apply only as of the date of this Annual
Report on Form 10-K. These forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from
historical results or our predictions. These risks are described in " Factors
Affecting Future Operating Results " and elsewhere in this Annual Report on Form
10-K.
11
OVERVIEW
We are a leading provider of enterprise e-conferencing solutions that
enable geographically dispersed organizations to collaborate in real time. The
company's award-winning MeetingPlace system is designed for enterprise-wide
deployment to improve the ability of employees, partners, and customers to meet
and work. 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 $33.0 million,
$21.1 million, and $12.9 million in 1999, 1998 and 1997. We generated net income
of $7.4 million in 1999, including the effect of a one-time deferred tax benefit
of $3.7 million due to the recognition of our deferred tax asset. We generated
net income of $703,000 in 1998 and incurred a net loss of $2.2 million in 1997.
As of December 31, 1999, we had an accumulated deficit since inception of $7.0
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 72%, 78% and 82% of our total revenue in 1999, 1998 and 1997.
Product revenue is generally recognized upon shipment. We calculate an allowance
for returns based on historical rates. 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. In 1999, we increased our distribution partners
to include global partnerships, application service providers and partners
focused on the U.S. federal government
Total cost of revenue consists of component and materials costs, direct
labor costs, warranty costs, royalties and overhead related to manufacturing of
our products, as well as materials, travel and labor costs related to personnel
engaged in our service operations. Product gross margin is impacted by the
proportion of product revenue derived from software sales, which typically carry
higher margins than hardware sales, and from indirect distribution channels,
which typically carry lower margins than direct sales. Service gross margin is
impacted by the mix of services we provide, which have different levels of
profitability, and the efficiency with which we provide full care support to our
customers. 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. As a result of
technological changes, our products may become obsolete or we could be required
to redesign our products.
12
RESULTS OF OPERATIONS
The following table lists, for the periods indicated, the percentage of
total revenue of each line item:
YEARS ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
-------- -------- --------
AS A PERCENTAGE OF TOTAL REVENUE:
Revenue:
Product................................................................ 71.9% 78.4% 82.1%
Service................................................................ 28.1 21.6 17.9
-------- -------- --------
Total revenue..................................................... 100.0 100.0 100.0
Cost of revenue:
Product................................................................ 12.2 15.1 16.7
Service................................................................ 14.5 13.2 14.0
-------- -------- --------
Total cost of revenue............................................. 26.7 28.3 30.7
-------- -------- --------
Gross profit............................................................. 73.3 71.7 69.3
-------- -------- --------
Operating expenses:
Research and development............................................... 12.3 12.4 17.1
Marketing and sales.................................................... 44.6 46.3 60.6
General and administrative............................................. 6.8 7.9 8.6
Amortization of deferred stock compensation............................ 2.3 1.4 --
-------- -------- --------
Total operating expenses.......................................... 66.0 68.0 86.3
Income (loss) from operations............................................ 7.3 3.7 (17.0)
Interest income (expense), net........................................... 3.7 (0.2) (0.2)
-------- -------- --------
Income (loss) before benefit from (provision for) income tax............. 11.0 3.5 (17.2)
Benefit from (provision for) income tax 11.3 (0.2) --
-------- -------- --------
Net income (loss)........................................................ 22.3% 3.3% (17.2)%
======== ======== ========
PRODUCT REVENUE
Product revenue was $23.8 million in 1999, $16.5 million in 1998 and
$10.6 million in 1997. Product revenue increased 44% from 1998 to 1999 and 55%
from 1997 to 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 8%, 7% and 4% of product revenue in 1999, 1998 and 1997.
An allowance for potential sales returns is recorded upon shipment. At
the end of each period, the allowance is adjusted based on our product return
experience and 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 $313,000 at December 31, 1999 and $325,000 at
December 31, 1998, was adequate but not excessive based on the historical
experience and per system sales prices, software upgrade sales returns and
outstanding accounts receivable balances. Our sales returns to date have
approximated our estimated allowance for returns.
SERVICE REVENUE
Service revenue was $9.3 million in 1999, $4.5 million in 1998 and $2.3
million in 1997. Service revenue increased 104% from 1998 to 1999 and 97% from
1997 to 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 was $8.8 million in 1999, $6.0 million in 1998 and
$4.0 million in 1997. Total cost of revenue increased 48% from 1998 to 1999 and
50% from 1997 to 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 geographically dispersed
13
customer base. Gross margin increased to 73% in 1999, from 72% in 1998 and 69%
in 1997. 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 are expected to increase as percentages of total revenue.
Product gross margin in 1999, 1998 and 1997 was 83%, 81% and 80%. 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 $353,000 at December 31, 1999 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, 1999 was primarily due to an increase in the number of
trial systems installed at customers included in our excess inventory estimates.
We anticipate the disposal and write-off of approximately $100,000 of obsolete
inventory in 2000.
Service gross margin in 1999, 1998 and 1997 was 48%, 39% and 22%. The
growth in service gross margin was attributable to a slower growth rate in
support cost of sales, primarily personnel costs, than support revenue. 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 were $4.1 million in 1999, $2.6
million in 1998 and $2.2 million in 1997. Research and development expenses
increased 55% from 1998 to 1999 and 18% from 1997 to 1998. The increases are
attributable primarily to the addition of personnel in our research and
development organization associated with product development. Research and
development expenses represented 12%, 12% and 17% of total revenue for 1999,
1998 and 1997. The decrease from 1997 to 1998 as a percentage of total revenue
resulted primarily from increased total revenue during these periods.
MARKETING AND SALES EXPENSES
Marketing and sales expenses were $14.7 million in 1999, $9.7 million in
1998 and $7.8 million in 1997. Marketing and sales expenses increased 51% from
1998 to 1999 and 24% from 1997 to 1998. The increases 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%, 46% and 61% of total revenue
for 1999, 1998 and 1997. The decreases in marketing and sales expenses as a
percentage of revenue are attributable primarily to increased productivity of
our sales personnel and increased total revenue in these periods.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $2.2 million in 1999, $1.7
million in 1998 and $1.1 million in 1997. General and administrative expenses
increased 35% from 1998 to 1999 and 49% from 1997 to 1998. General and
administrative expenses increased primarily due to the addition of personnel
performing general and administrative functions as a public company. General and
administrative expenses were 7%, 8% and 9% of total revenue for 1999, 1998 and
1997. 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 $238,000 at December 31, 1999 and $235,000 at December 31,
1998 was adequate but not excessive based on specific aged account balances
identified with collection risk. We have not experienced significant write-offs
of accounts receivable to date.
14
AMORTIZATION OF DEFERRED STOCK COMPENSATION
Total deferred stock compensation related to grants of stock options was
$90,000 in 1999 and $2.3 million in 1998. Of the total deferred stock
compensation, approximately $752,000 was amortized in 1999 and $299,000 was
amortized in 1998.
INTEREST INCOME (EXPENSE), NET
In 1999, we had net interest income of approximately $1.2 million, while
in 1998 and 1997, we incurred net interest expense of approximately $41,000 and
$23,000. The increase in net interest income from 1998 to 1999 is due to the
interest earned on our portfolio of marketable securities and our cash and cash
equivalents balances which have increased due to the proceeds from our initial
public offering in May 1999 as well as cash generated from operations.
INCOME TAXES
For the year ended December 31, 1999, we had a net benefit for income
taxes of $3.7 million. The benefit was due primarily to the recognition of our
deferred tax assets of $4.4 million, offset by income tax expense of
approximately $700,000. In 1998, the provision for income tax was approximately
$34,000 and in 1997 was insignificant. In 1998 and 1997, we provided a valuation
allowance against our deferred tax asset due to the uncertainty surrounding the
realization of these assets. During the fourth quarter of 1999, the Company
recognized its deferred tax assets as it determined that it is more likely than
not that the deferred tax assets were realizable based primarily on its
operating results in 1999 and 1998.
From inception through 1997, we incurred net losses for federal and state
tax purposes and did not recognize any tax provision or benefit during this
period. As of December 31, 1999, we had $5.8 million of federal and $2.6 million
of state net operating loss carryforwards to offset future taxable income. These
carryforwards, if not utilized, expire in 2001 through 2019. As of December 31,
1999, we had approximately $714,000 of federal and $353,000 of state
carryforwards for research and development and other credits. These
carryforwards, if not utilized, expire in 2002 through 2019. 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.
LIQUIDITY AND CAPITAL RESOURCES
In May 1999, we completed an initial public offering of common stock,
resulting in net proceeds to us of approximately $33.8 million. As of December
31, 1999, we had $42.5 million of cash, cash equivalents and short-term
investments, which represented 70.7% of total assets.
Cash provided by operating activities was $6.3 million in 1999, compared
to $1.0 million in 1998. Cash provided by operating activities in 1999 was due
to net income partially offset by non-cash items and an increase in deferred
revenue.
Cash used in investing activities in 1999 was $34.4 million, which
consisted primarily of the net purchase of available for sale securities of
$31.7 million and purchase of property and equipment of $2.6 million. In 1998,
cash used in investing activities of $780,000 consisted primarily of the
purchase of property and equipment.
Cash provided by financing activities in 1999 of $34.9 million consisted
primarily of proceeds from our initial public stock offering of $33.8 million.
In 1998, cash provided by financing activities of $143,000 primarily consisted
of proceeds from issuance of notes payable of $678,000, partially offset by
payments on obligations under capital leases and notes payable.
We believe that our current cash, cash equivalents and short-term
investments will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next 12 months.
15
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.
To date, we have not experienced any material interruptions in our
operations related to the Year 2000 issue. We have not experienced, and our
customers have not reported to our customer support center, any significant Year
2000 incidents related to our MeetingPlace system. We have not experienced any
significant interruptions in services or supplies from our third-party vendors.
To date, we have incurred expenses of approximately $75,000 for Year 2000
compliance activities. We do not expect to incur material additional costs
related to our Year 2000 compliance efforts. However, if we, or third-party
providers of hardware, software and communications services fail to remedy any
latent Year 2000 related issues, the result could be lost revenues, increased
operating expenses, the loss of users, claims against us for misrepresentation
or breach of contract and related litigation and other business interruptions,
any of which could harm our business. The failure to adequately address year
2000 compliance issues in the delivery of products and services to our users
could result in claims against us of misrepresentation or breach of contract and
related litigation, any of which could be costly and time consuming to defend.
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. The Company believes the adoption of SOP
98-9 will not have a material effect 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 and will be adopted by the Company
in the year 2001. 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.
The Company does not currently hold derivative instruments or engage in hedging
activities. The Company is currently evaluating the impact SFAS 133 will have on
its financial position and results of operations.
In November, 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 100, or SAB 100, which clarifies the SEC's views on
accounting for and disclosing certain expenses incurred in connection with exit
activities and business combinations. The Company does not expect SAB 100 to
have a material effect on its financial position, results of operations or cash
flow. In December, 1999, SAB 101 was issued which summarizes the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. SAB 101 is effective beginning in the second quarter of
2000. The Company is currently evaluating the impact SAB 101 will have on its
financial position and results of operations.
16
FACTORS AFFECTING FUTURE OPERATING RESULTS
In addition to the other information in this Annual Report, the following
factors should be considered carefully in evaluating the Company's business and
prospects:
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 financial statements 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:
o changes in our mix of revenues generated from product sales and
services;
o changes by existing customers in their levels of purchases of our
products and services;
o changes in our mix of sales channels through which our products
and services are sold; and
o 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.
OUR MARKET IS HIGHLY COMPETITIVE.
Because of intense market competition, we may not be successful.
Currently, our principal competitors include:
o major telecommunications carriers that operate service bureaus for
voice conferencing, such as AT&T Corp., MCI Worldcom, Inc. and
Sprint Corporation;
o private branch exchange, or PBX, vendors that sell systems with
voice conferencing capabilities, such as Lucent Technologies Inc.
and Nortel Networks; and
o smaller 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:
o 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
17
o 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.
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. 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.
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 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.
18
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:
o the difficulties and costs of localizing products for foreign
markets, including the development of multilingual capabilities in
our MeetingPlace system;
o the need to modify our products to comply with local
telecommunications certification requirements in each country; and
o 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 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.
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
19
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 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.
20
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.
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:
o announcements of technological or competitive developments;
o acquisitions or strategic alliances by us or our competitors; or
o 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.
Executive officers and directors and their affiliates beneficially own,
in the aggregate, a large percentage of our outstanding common stock. As a
result, these stockholders are 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.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our exposure to market risk for changes in interest rates relates
primarily to our investment portfolio. We do not use derivative financial
instruments in our investment portfolio. We place our investments with high
credit quality issuers and, by policy, limit the amount of credit exposure to
any one issuer. The portfolio includes only securities with maturities of three
to 12 months and with active secondary or resale markets to ensure portfolio
liquidity. We have no investments denominated in foreign country currencies and
therefore are not subject to foreign currency risk on such investments.
The table below presents principal amounts and related weighted average
interest rates for our investment portfolio. All securities at December 31, 1999
are due within 12 months and are classified as short-term.
SHORT-TERM INVESTMENTS:
FAIR AVERAGE
VALUE INTEREST RATE
---------- --------------
Mutual funds.................... $ 2,006 5.65%
Auction rate securities......... 1,000 6.76%
Corporate notes and bonds....... 28,605 5.48%
------------
$ 31,611
============
Currently, the majority of our sales and expenses are denominated in U.S.
dollars and, as a result, we have not experienced significant foreign exchange
gains and losses to date. While we do expect to effect some transactions in
21
foreign currencies in the next 12 months, we do not anticipate that
foreign exchange gains and losses will be significant. We have not
engaged in foreign currency hedging activities to date.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated financial statements and the report of
independent accountants appear on pages F-1 through F-17 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
22
PART III
Certain information required by Part III is omitted from this report
because the Company will file a definitive proxy statement within 120 days after
the end of its fiscal year pursuant to Regulation 14A (the "PROXY STATEMENT")
for its annual meeting of stockholders to be held June 1, 2000, and the
information included in the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements and Report of Independent
Accountants
(2) Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
(3) Exhibits
1.1(1) Form of Underwriting Agreement.
3.1(1) Amended and Restated Certificate of Incorporation of the
Company.
3.3(1) Bylaws of the Company.
4.1(1) Form of common stock certificate.
5.1(1) Opinion of Venture Law Group, a Professional Corporation.
10.1(1) Form of Indemnification Agreement.
10.2(1) 1993 Stock Plan, as amended, and forms of stock
option agreement and restricted stock purchase agreement.
10.3(1) 1999 Stock Plan and forms of stock option agreement and
restricted stock purchase agreement.
10.4(1) 1999 Employee Stock Purchase Plan and form of
subscription agreement.
10.5(2) 1999 Directors' Stock Option Plan and form of stock
option agreement.
10.6(1) Warrant To Purchase Series B Preferred Stock.
10.7(1) Amended and Restated Registration Rights Agreement dated
March 26, 1996.
10.8(1) Lease Agreement dated July 31, 1995 between the
Company 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(1) Senior Loan and Security Agreement dated September
15, 1994 between the Company and Phoenix Leasing
Incorporated and amendments thereto.
10.10(1) Master Equipment Lease dated July 2, 1998 between the
Company and Norstan Financial Services, Inc.
10.11(1) 1999 Executive Incentive Plan between the Company and
certain executive officers of the Company.
10.12(1) 1999 Executive Bonus Program.
21(1) Subsidiaries.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney. Reference is made to page 25 of this
Annual Report on Form 10-K.
27.1 Financial Data Schedule.
-----------------
(1) Incorporated by reference to exhibits filed with
Registrant's Registration Statement on Form S-1 (Reg. No.
333-72935) as declared effective by the Securities and
Exchange Commission on May 6, 1999.
23
(2) Incorporated by reference to exhibits filed with
Registrant's Quarterly Report on Form 10-Q for the three
months ended September 30, 1999.
(b) Reports on Form 8-K
None.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LATITUDE COMMUNICATIONS, INC.
By: /s/ Emil C. W. Wang
-------------------------------------
Emil C. W. Wang
PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR
Date: March 29, 2000
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Emil C. W. Wang and Rick M. McConnell,
jointly and severally, his or her attorneys-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Annual Report on Form 10-K, and to file the same, with exhibits thereto
and other documents in connection therewith with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ EMIL C. W. WANG President, Chief Executive Officer and Director March 29, 2000
- ----------------------------------(Principal Executive Officer)
Emil C. W. Wang)
/s/ RICK M. MCCONNELL Vice President of Finance and Administration and Chief March 29, 2000
- -----------------------------------Financial Officer (Principal Financial and Accounting
(Rick M. McConnell) Officer)
/s/ THOMAS H. BREDT Director March 29, 2000
- ----------------------------------
Thomas H. Bredt
/s/ ROBERT J. FINOCCHIO, JR. Director March 29, 2000
- ----------------------------------
Robert J. Finocchio, Jr.
/s/ KLAUS-DIETER LAIDIG Director March 29, 2000
- ----------------------------------
Klaus-Dieter Laidig
/s/ F. GIBSON MEYERS Director March 29, 2000
- ----------------------------------
F. Gibson Meyers
/s/ JAMES PATTERSON Director March 29, 2000
- ----------------------------------
James Patterson
25
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants..................................................................... F-2
Consolidated Balance Sheets........................................................................... F-3
Consolidated Statements of Operations and Comprehensive Income (Loss)................................. 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 consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Latitude Communications, Inc. and its subsidiary at December 31,
1999 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. In addition, in
our opinion, the financial statement schedule listed in the index appearing
under item 14(a)(2) on page 23 present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and the financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and the
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States, 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.
PricewaterhouseCoopers LLP
San Jose, California
January 25, 2000
F-2
LATITUDE COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31,
---------------------
1999 1998
---------- ---------
ASSETS
Current assets:
Cash and cash equivalents............................................................. $ 10,847 $ 3,982
Short-term investments................................................................ 31,611 --
Accounts receivable, net.............................................................. 8,006 5,627
Inventory............................................................................. 832 688
Prepaids and other assets............................................................. 1,508 420
Deferred tax asset.................................................................... 3,457 --
---------- ---------
Total current assets................................................................ 56,261 10,717
Property and equipment, net.............................................................. 2,655 1,017
Deferred tax asset....................................................................... 939 --
Deposits and other long-term assets...................................................... 199 136
---------- ---------
Total assets........................................................................ $ 60,054 $ 11,870
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................................... $ 650 $ 805
Accrued liabilities................................................................... 4,181 2,089
Deferred revenue...................................................................... 6,083 2,794
Current portion of long-term debt..................................................... 576 559
---------- ---------
Total current liabilities........................................................... 11,490 6,247
Long-term debt........................................................................ 453 838
---------- ---------
Total liabilities................................................................... 11,943 7,085
---------- ---------
Commitments (Note 5)
Preferred stock, $0.001 par value:
Authorized: 5,000 shares in 1999 and 12,211 shares in 1998
Issued and outstanding: no shares in 1999 and 11,836 shares in 1998.................. -- 12
Common stock, $0.001 par value:
Authorized: 75,000 shares in 1999 and 27,500 shares in 1998
Issued and outstanding: 18,950 shares in 1999 and 3,739 shares in 1998................ 19 4
Additional paid-in capital............................................................ 56,624 21,362
Notes receivable from common stockholders............................................. (61) (165)
Deferred stock compensation........................................................... (1,441) (2,103)
Accumulated other comprehensive loss.................................................. (77) --
Accumulated deficit................................................................... (6,953) (14,325)
---------- ---------
Total stockholders' equity.......................................................... 48,111 4,785
---------- ---------
Total liabilities and stockholders' equity.......................................... $ 60,054 $ 11,870
========== =========
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
LATITUDE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
---------- --------- ----------
Revenue:
Product.................................................................. $ 23,765 $ 16,506 $ 10,620
Service.................................................................. 9,277 4,545 2,312
---------- --------- ----------
Total revenue.......................................................... 33,042 21,051 12,932
Cost of revenue:
Product.................................................................. 4,036 3,182 2,158
Service (exclusive of non-cash compensation expenses of $83, $47 and $0 4,807 2,775 1,805
in 1999, 1998 and 1997, respectively).................................. ---------- --------- ----------
Total cost of revenue.................................................. 8,843 5,957 3,963
---------- --------- ----------
Gross profit................................................................ 24,199 15,094 8,969
---------- --------- ----------
Operating expenses:
Research and development (exclusive of non-cash compensation expenses 4,053 2,607 2,213
of $78, $31 and $0 in 1999, 1998 and 1997, respectively)...............
Marketing and sales (exclusive of non-cash compensation expenses of 14,720 9,744 7,845
$272, $115 and $0 in 1999, 1998 and 1997, respectively)................
General and administrative (exclusive of non-cash compensation expenses 2,244 1,666 1,115
of $319, $106 and $2 in 1999, 1998 and 1997, respectively).............
Amortization of deferred stock compensation.............................. 752 299 2
---------- --------- ----------
Total operating expenses............................................... 21,769 14,316 11,175
---------- --------- ----------
Income (loss) from operations............................................... 2,430 778 (2,206)
Interest income............................................................. 1,382 142 177
Interest expense............................................................ (164) (183) (200)
---------- --------- ----------
Income (loss) before benefit from (provision for) income taxes.............. 3,648 737 (2,229)
Benefit from (provision for) income tax..................................... 3,724 (34) --
---------- --------- ----------
Net income (loss)........................................................... $ 7,372 $ 703 $ (2,229)
========== ========= ==========
Other comprehensive income (loss), net of tax--
Unrealized loss on securities.......................................... (77) -- --
---------- --------- ----------
Comprehensive income (loss)................................................. $ 7,295 $ 703 $ (2,229)
========== ========= ==========
Net income (loss) per share--basic........................................... $ 0.56 $ 0.21 $ (0.78)
========== ========= ==========
Shares used in per share calculation--basic.................................. 13,164 3,279 2,850
========== ========= ==========
Net income (loss) per share--diluted......................................... $ 0.39 $ 0.04 $ (0.78)
========== ========= ==========
Shares used in per share calculation--diluted................................ 18,783 16,422 2,850
========== ========= ==========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
LATITUDE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
PREFERRED STOCK COMMON STOCK Additional
------------------------ ----------------------- Paid-In
Shares Amount Shares Amount Capital
------------ ---------- ---------- ---------- --------------
Balances, December 31, 1996... 11,836 $ 12 3,599 $ 4 $ 18,898
Issuance of common stock...... -- -- 308 -- 86
Repurchase of common stock.... -- -- (152) -- (39)
Payment of notes receivable
from common stockholders... -- -- -- -- --
Deferred stock compensation
related to grants of
stock options and
issuance of common stock... -- -- -- -- 76
Amortization of deferred
stock compensation......... -- -- -- -- --
Net loss...................... -- -- -- -- --
------------ ---------- ---------- ---------- --------------
Balances, December 31, 1997... 11,836 12 3,755 4 19,021
Issuance of common stock...... -- -- 35 -- 28
Repurchase of common stock.... -- -- (51) -- (15)
Payment of notes receivable
from common stockholders... -- -- -- -- --
Deferred stock compensation
related to grants of
stock options and
issuance of common stock... -- -- -- -- 2,328
Amortization of deferred
stock compensation......... -- -- -- -- --
Net income.................... -- -- -- -- --
------------ ---------- ---------- ---------- --------------
Balances, December 31, 1998... 11,836 12 3,739 4 21,362
Issuance of common stock...... -- 3,388 3 35,175
Conversion of preferred
stock to common stock...... (11,836) (12) 11,836 12 --
Repurchase of common stock.... -- -- (13) -- (3)
Payment of notes receivable
from common stockholders... -- -- -- -- --
Deferred stock compensation
related to grants of
stock options.............. -- -- -- -- 90
Amortization of deferred
stock compensation......... -- -- -- -- --
Unrealized loss on securities,
net of tax................. -- -- -- -- --
Net income.................... -- -- -- -- --
------------ ---------- ---------- ---------- --------------
Balances, December 31, 1999... -- $ -- 18,950 $ 19 $ 56,624
============ ========== ========== ========== ==============
NOTES ACCUMULATED
RECEIVABLE DEFERRED OTHER
FROM COMMON STOCK COMPREHENSIVE ACCUMULATED
STOCKHOLDERS COMPENSATION LOSS DEFICIT TOTAL
-------------- ------------- ------------- ----------- ---------
Balances, December 31, 1996... $ (209) $ -- $ -- $ (12,799) $ 5,906
Issuance of common stock...... (48) -- -- -- 38
Repurchase of common stock.... 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) -- -- --
Amortization of deferred
stock compensation......... -- 2 -- -- 2
Net loss...................... -- -- -- (2,229) (2,229)
-------------- ------------- ------------- ----------- ---------
Balances, December 31, 1997... (187) (74) -- (15,028) 3,748
Issuance of common stock...... (4) -- -- -- 24
Repurchase of common stock.... 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) -- -- --
Amortization of deferred
stock compensation......... -- 299 -- -- 299
Net income.................... -- -- -- 703 703
-------------- ------------- ------------- ----------- ---------
Balances, December 31, 1998... (165) (2,103) -- (14,325) 4,785
Issuance of common stock...... -- -- -- -- 35,178
Conversion of preferred
stock to common stock...... -- -- -- -- --
Repurchase of common stock.... -- -- -- -- (3)
Payment of notes receivable
from common stockholders... 104 -- -- -- 104
Deferred stock compensation
related to grants of
stock options.............. -- (90) -- -- --
Amortization of deferred
stock compensation......... -- 752 -- -- 752
Unrealized loss on securities,
net of tax................. -- -- (77) -- (77)
Net income.................... -- -- 7,372 7,372
-------------- ------------- ------------- ----------- ---------
Balances, December 31, 1999... $ (61) $ (1,441) $ (77) $ (6,953) $ 48,111
============== ============= ============= =========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
LATITUDE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
---------- ---------- ---------
Cash flows from operating activities:
Net income (loss).......................................................... $ 7,372 $ 703 $ (2,229)
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization............................................ 926 696 619
Provision for excess and obsolete inventory.............................. 166 149 66
Provision for doubtful accounts.......................................... 11 88 56
Amortization of deferred stock compensation.............................. 752 299 2
Deferred tax asset....................................................... (4,346) -- --
Changes in operating assets and liabilities:
Accounts receivable.................................................... (2,390) (3,062) (1,069)
Inventory.............................................................. (310) (496) (173)
Prepaids and other assets.............................................. (1,088) (281) (8)
Accounts payable....................................................... (155) 442 133
Accrued liabilities.................................................... 2,092 629 471
Deferred revenue....................................................... 3,289 1,874 506
---------- ---------- ---------
Net cash provided by (used in) operating activities.................. 6,319 1,041 (1,626)
---------- ---------- ---------
Cash flows from investing activities:
Purchases of property and equipment........................................ (2,564) (743) (597)
Purchases of available for sale securities................................. (41,081) -- --
Maturities of available for sale securities................................ 9,343 -- --
Other...................................................................... (63) (37) --
---------- ---------- ---------
Net cash used in investing activities.................................... (34,365) (780) (597)
---------- ---------- ---------
Cash flows from financing activities:
Proceeds from issuance of notes payable.................................... 197 678 527
Repayment of notes payable and capital lease obligations................... (565) (505) (444)
Proceeds from issuance of common stock..................................... 35,178 24 38
Other...................................................................... 101 (54) 166
---------- ---------- ---------
Net cash provided by financing activities................................ 34,911 143 287
---------- ---------- ---------
Net increase (decrease) in cash and cash equivalents..................... 6,865 404 (1,936)
Cash and cash equivalents, beginning of year.................................. 3,982 3,578 5,514
---------- ---------- ---------
Cash and cash equivalents, end of the year.................................... $ 10,847 $ 3,982 $ 3,578
========== ========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for interest................................................. $ 164 $ 183 $ 193
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Issuance of common stock for notes receivable from stockholder............. $ -- $ 4 $ 48
Conversion of preferred stock to common stock.............................. $ 12 $ -- $ --
Deferred stock compensation................................................ $ 90 $ 2,328 $ 76
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
LATITUDE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS
Latitude Communications, Inc. (the "Company"), is a leading provider of
enterprise e-conferencing solutions. 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.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Latitude
Communications, Inc. and its wholly owned subsidiary. 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 accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company adopted the provisions of Statement of Position 97-2, or SOP
97-2, Software Revenue Recognition, as amended by Statement of Position 98-4,
Deferral of the Effective Date of Certain Provisions of SOP 97-2, effective
January 1, 1998. SOP 97-2 supersedes Statement of Position 91-1, Software
Revenue Recognition, and delineates the accounting for software product,
products including software that is not incidental to the product, and
maintenance revenues. Under SOP 97-2, the Company recognizes product revenues
upon shipment if a signed contract exists, the fee is fixed and determinable,
collection of resulting receivables is probable and product returns are
reasonably estimable. 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 the price sold
separately, 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, and consulting services sold separately, 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.
F-7
In 1999, the Company exchanged two systems for certain marketing
services, licenses and related training and consulting and $205,000 in cash
which resulted in recognition of $609,000 of revenue and $404,000 of sales and
marketing expenses. In 1998, 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 and $416,000 of sales and marketing
expense. In 1997, 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 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.
The Company's investments comprise commercial paper and corporate debt
obligations and are accounted for as available for sale. Investments with
maturities of less than one year are classified as short-term investments and
investments with maturities greater than one year are classified as long-term
investments. Realized gains and losses are calculated using the specific
identification method. There were no realized gains and losses in 1997, 1998 or
1999. Unrealized gains and losses are included as a separate component of other
comprehensive loss and stockholders' equity. See Note 3 for the fair value of
the Company's investments.
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, 1999 and 1998
are on deposit with two U.S. financial institutions.
The Company performs ongoing credit evaluations of its customers, and
collateral is not required. The Company maintains allowances for potential
returns and credit losses, and such returns and losses have generally been
insignificant.
At December 31, 1999, no customers accounted for more than 10% of
accounts receivable. At December 31, 1998, one customer accounted for 23% of
accounts receivable.
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
algorithms and the MeetingPlace server's operating system and relational
databases. Any significant interruption in the supply or support of any licensed
software could adversely affect the Company's sales, unless and until the
Company can replace the functionality provided by this licensed software.
Because the Company's products incorporate software developed and
maintained by third parties, the Company depends on such third parties to
deliver and support reliable products, enhance their current products, develop
new products on a timely and cost-effective basis and respond to emerging
industry standards and other technological changes. The failure of these third
parties to meet these criteria could harm the Company's business.
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.
F-8
In addition, although the Company generally uses standard parts and
components in its products, the Company obtains certain components, including
the processors and digital signal processing devices used in the MeetingPlace
server, from sole source suppliers. In the past, the Company has experienced
problems in obtaining some of these components in a timely manner from these
sources, and it may be unable to continue to obtain an adequate supply of these
components in a timely manner or, if necessary, from alternative sources. If the
Company is unable to obtain sufficient quantities of components or to locate
alternative sources of supply, the Company may experience substantial delays in
shipping its products and incur additional costs to find an alternative
manufacturer or manufacture its products internally.
INVENTORIES
Inventory is stated at the lower of cost or market. Cost is determined on
a standard cost basis which approximates the first in, first out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated on a
straight-line basis over the shorter of the estimated useful life of three years
or the length of the capital lease for assets acquired under capital leases.
Gains and losses from the disposal of property and equipment are taken into
income in the year of disposition. Repairs and maintenance costs are expensed as
incurred.
Depreciation expense for 1999, 1998 and 1997 was $772,000, $607,000 and
$537,000, respectively.
RESEARCH AND DEVELOPMENT COSTS
Costs related to research, design and development of products are charged
to research and development expenses as incurred. Software development costs are
capitalized beginning when a product's technological feasibility has been
established and ending when a product is available for general release to
customers provided research and development activities for the related hardware
portion of the product have been completed. Generally, the Company's products
include hardware and software components that are developed concurrently.
Amortization of capitalized research and development costs is computed at the
greater of the amount computed using the ratio of current revenues to the total
current and anticipated revenues or by the straight-line method over the
remaining life of the product. The Company evaluates the estimated net
realizable value of each software product at each balance sheet date and records
write-downs to net realizable value for any product for which the net book value
is in excess of the net realizable value. Capitalized software development
costs, net at December 31, 1999 were $52,000 and there were no capitalized
software development costs at December 31, 1998.
INCOME TAXES
The Company's benefit from (provision for) income taxes is comprised of
its current tax liability and the changes in its deferred tax assets and
liabilities. 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 1999, 1998, and 1997 was $787,000, $115,000 and $19,000,
respectively.
STOCK-BASED COMPENSATION
The Company accounts for its stock based compensation in accordance with
the provisions of Accounting Principles Board Opinion No. 25 ("APB No. 25"),
"Accounting for Stock Issued to Employees" and presents disclosure required by
Statement of Financial Accounting Standard No. 123 ("SFAS No. 123").
F-9
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 1997
because the effect would be antidilutive.
A reconciliation of the numerator and denominator used in the calculation
of historical basic and diluted net income (loss) per share follows (in
thousands, except per share data):
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
--------- --------- ---------
Net income (loss) per share, basic and diluted:
Numerator for basic and diluted net income (loss) per share................. $ 7,372 $ 703 $ (2,229)
--------- --------- ---------
Denominator for basic net income (loss) per share:
Weighted average vested common shares outstanding......................... 13,164 3,279 2,850
--------- --------- ---------
Net income (loss) per share - basic......................................... $ 0.56 $ 0.21 $ (0.78
========= ========= =========
Denominator for diluted earnings per share:
Weighted average vested common shares outstanding......................... 13,164 3,279 2,850
Effect of dilutive securities:
Nonvested common shares................................................. 252 478 --
Common stock options.................................................... 1,147 727 --
Warrants................................................................ 69 102 --
Convertible preferred stock............................................. 4,151 11,836 --
--------- --------- ---------
Weighted average common and common equivalent shares........................ 18,783 16,422 2,850
--------- --------- ---------
Net income (loss) per share - diluted....................................... $ 0.39 $ 0.04 $ (0.78)
========= ========= =========
Antidilutive securities not included in diluted net loss per share calculation
the entire year:
Nonvested common shares................................................... -- -- 647
Common stock options...................................................... -- -- 75
Warrants.................................................................. -- -- 134
Convertible preferred stock............................................... -- -- 11,836
--------- --------- ---------
-- -- 12,692
========= ========= =========
COMPREHENSIVE INCOME
The sole difference in 1999 between the Company's net income and its total
comprehensive income was unrealized loss on securities of $127,000, net of tax
of $50,000. There was no difference between the Company's net income (loss) and
its total comprehensive income (loss) for 1998 and 1997.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1998, AcSEC released Statement of Position 98-9, or SOP 98-9,
Modification of SOP 97-2, "Software Revenue Recognition," with Respect to
Certain Transactions. SOP 98-9 amends SOP 97-2 to require that an entity
recognize revenue for multiple element arrangements by means of the "residual
method" when (1) there is vendor-specific objective evidence ("VSOE") of the
fair values of all the undelivered elements that are not accounted for by means
of long-term contract accounting, (2) VSOE of fair value does not exist for one
or more of the delivered elements, and (3) all revenue recognition criteria of
SOP 97-2 (other than the requirement for VSOE of the fair value of each
delivered element) are satisfied. The provisions of SOP 98-9 that extend the
deferral of certain paragraphs of SOP 97-2 became effective December 15, 1998.
These paragraphs of SOP 97-2 and SOP 98-9 will be effective for transactions
that are entered into in fiscal years beginning after March 15, 1999.
Retroactive application is prohibited. The Company believes the adoption of SOP
98-9 will not have a material effect on its results of operations.
F-10
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 and will be adopted by the Company
in the third quarter of 2001. 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. The Company does not currently hold derivative
instruments or engage in hedging activities. The Company is currently evaluating
the impact SFAS 133 will have on its financial position and results of
operations.
In November, 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 100, or SAB 100, which clarifies the SEC's views on
accounting for and disclosing certain expenses incurred in connection with exit
activities and business combinations. The Company does not expect SAB 100 to
have a material effect on its financial position, results of operations or cash
flow. In December, 1999, SAB 101 was issued which summarizes the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. SAB 101 is effective in the second quarter of 2000. The
Company is currently evaluating the impact SAB 101 will have on its financial
position and results of operations.
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 income (loss).
NOTE 3--BALANCE SHEET ACCOUNTS (IN THOUSANDS):
FINANCIAL INSTRUMENTS
DECEMBER 31,
-----------------------------------------------
1999 1998
----------------------- -----------------------
CASH AND CASH EQUIVALENTS: COST FAIR VALUE COST FAIR VALUE
---------- ----------- ----------- -----------
Cash........................................... $ 1,280 $ 1,280 $ 506 $ 506
Time deposits.................................. -- -- 1,846 1,846
Money market................................... 4,667 4,667 1,630 1,630
Auction rate securities........................ 4,900 4,900 -- --
---------- ----------- ----------- ----------
$ 10,847 $ 10,847 $ 3,982 $ 3,982
========== =========== =========== ==========
SHORT-TERM INVESTMENTS: DECEMBER 31, 1999
------------------------------------
GROSS
AMORTIZED UNREALIZED FAIR
COST LOSS VALUE
----------- ----------- ----------
Mutual funds................................... $ 2,006 $ -- $ 2,006
Auction rate securities........................ 1,000 -- 1,000
Corporate notes and bonds...................... 28,732 (127) 28,605
----------- ----------- ----------
$ 31,738 $ (127) $ 31,611
=========== =========== ==========
ACCOUNTS RECEIVABLE:
DECEMBER 31,
----------------------
1999 1998
---------- ----------
Accounts receivable........................................................ $ 8,244 $ 5,862
Allowance for doubtful accounts............................................ (238) (235)
---------- ----------
$ 8,006 $ 5,627
========== ==========
F-11
INVENTORY:
DECEMBER 31,
----------------------
1999 1998
---------- ----------
Raw materials............. .............................................. $ 240 $ 359
Work in process.......................................................... -- 36
Finished goods............................................................. 592 293
---------- ---------
$ 832 $ 688
========== =========
PROPERTY AND EQUIPMENT, NET:
DECEMBER 31,
----------------------
1999 1998
---------- ----------
Leasehold improvements..................................................... $ 305 $ 165
Computer equipment......................................................... 4,592 2,544
Office equipment........................................................... 1,011 635
---------- ----------
5,908 3,344
Less accumulated depreciation and amortization............................. (3,253) (2,327)
---------- ----------
$ 2,655 $ 1,017
========== ==========
ACCRUED LIABILITIES:
DECEMBER 31,
----------------------
1999 1998
---------- ----------
Accrued commission expense................................................. $ 567 $ 544
Accrued sales incentives................................................... 8 143
Accrued vacation........................................................... 299 227
Other...................................................................... 3,307 1,175
---------- ----------
$ 4,181 $ 2,089
========== ==========
NOTE 4--LONG-TERM DEBT:
The long-term debt consists of notes payable for the purchase of equipment
and software, bear interest from 7.0% to 16.27%, and are collateralized by the
underlying equipment and software.
Future minimum payments under the notes payable are as follows (in
thousands):
Years Ending December 31,
2000................................................................. $ 665
2001................................................................. 386
2002................................................................. 110
------------
1,161
Less amount representing interest....................................... (132)
------------
1,029
Less current portion.................................................... (576)
------------
$ 453
============
NOTE 5--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 $645,000 in 2000. Rent expense was $1,041,000, $759,000 and
$639,000 in 1999, 1998, and 1997, respectively.
At December 31, 1999, the Company has committed to purchase approximately
$1,194,000 of raw materials inventory under noncancellable purchase orders.
F-12
NOTE 6--STOCKHOLDERS' EQUITY:
INITIAL PUBLIC OFFERING
In May, 1999, the Company completed an initial public offering and issued
3,125,000 shares of common stock to the public at a price of $12.00 per share.
As a result of the offering, the Company received $33,780,000, net of
underwriting discounts, commissions, offering costs and expenses payable by the
Company. Simultaneously, all outstanding preferred shares were automatically
converted into common stock.
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of preferred stock,
none of which is issued or outstanding. The Board of Directors has the authority
to issue the stock in one or more series and to fix rights, preferences,
priveledges and restrictions, and the number of shares constituting any series
and the designation of such series, without any further vote or action by the
stockholders.
COMMON STOCK WARRANTS
The Company has issued fully exercisable warrants to purchase 44,000
shares of common stock at a price of $1.83 per share, which expire in September
2004. The Company has reserved 44,000 shares of common 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.
STOCK PLANS
The Company's Board of Directors has adopted the 1993 Plan and the 1999
Plan (the "Plans") and through December 31, 1999 has authorized 6,255,000 shares
of common stock for issuance under the Plans. The Plans consist of Stock
Purchase Rights and an Option Grant Program.
Stock Purchase Rights provide for issuance of common stock at not less
than 85% of the fair market value of the stock to employees and consultants. The
Plan provides that the Administrator of the Plan shall advise the offeree in
writing of the terms, conditions and restrictions related to the offer.
Restricted stock purchases are subject to the company's right of repurchase at
the employee purchase price upon termination of employment. The right to
repurchase generally lapses 25% one year from the date of purchase and 1/48 each
month thereafter. In addition, the Company has a right of first refusal similar
to that for the founders' common stock.
The Option Grant Program provides for grants of incentive stock options
to employees and nonstatutory stock options to employees and consultants. The
exercise price of incentive stock options and nonstatutory stock options granted
under the Plan must be at least 100% and 85%, respectively, of the fair market
value of the shares on the date of grant. Options generally expire ten years
from the date of the grant or such shorter term as may be provided in the option
agreement. Options granted under the Plan typically become exercisable over a
four year period at a rate of 25% after the first year and 1/48 each month
thereafter.
In April 1999, the Company's Board of Directors adopted the 1999
Directors' Plan (the "Directors' Plan") and the 1999 Employee Stock Purchase
Plan (the "Purchase Plan.")
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 date on which the optionee first
becomes a nonemployee director of Latitude at an exercise price equal to its
fair market value on the date of the grant. 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 at an
exercise price equal to its fair market value on the date of the grant 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, of which 230,000 shares 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
F-13
stock has been reserved for issuance under the Purchase Plan. During 1999,
51,650 shares were issued under the purchase plan and at December 31, 1999,
448,350 shares remain available for future purchases.
DEFERRED STOCK COMPENSATION
During 1997, 1998 and 1999, the Company issued stock purchase rights and
options to certain employees under the Plans 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, 1999, the Company had
recorded deferred compensation related to these options in the total amount of
$2,494,000, of which $752,000, $299,000 and $2,000 had been amortized to expense
during 1999, 1998 and 1997, respectively. Future compensation expense from
options granted through December 31, 1999 is estimated to be $557,000, $556,000
and $328,000 for the years ending December 31, 2000, 2001 and 2002,
respectively.
STOCK PLAN ACTIVITY
The activity for the stock purchase rights and stock options under the
1993 Plan, the 1999 Plan and the Directors' Plan are as follows (in thousands
except per share amounts):
RESTRICTED STOCK PLAN STOCK OPTION PLAN
-------------------------------- --------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
PURCHASE PURCHASE
SHARES NUMBER PRICE PER NUMBER PRICE PER
AVAILABLE OF SHARES SHARE AMOUNT OF SHARES SHARE AMOUNT
----------- --------- ----------- --------- --------- ---------- ----------
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
Additional shares reserved........ 2,950 -- -- -- -- --
Shares purchased.................. (1) 1 10.00 8 -- -- --
Shares repurchased................ 16 (16) 0.26 (4) -- -- --
Options granted................... (800) -- -- -- 800 15.32 12,187
Options exercised................. -- -- -- -- (129) 2.33 (300)
Options cancelled................. 317 -- -- -- (317) 3.45 (1,094)
----------- --------- --------- --------- ----------
Balances, December 31, 1999....... 2,716 3,724 $0.09 $335 1,706 $8.12 $13,817
=========== ========= ========= ========= ==========
At December 31, 1999, 1998 and 1997, 124,000, 325,000 and 647,000 shares of
outstanding common stock, respectively, were subject to the Company's right
of repurchase at weighted average purchase prices per share of $0.29, $0.27
and $0.24, respectively. At December 31, 1999 and 1998 options for the
purchase of 363,000 and 17,000 shares, respectively, were exercisable at
weighted average purchase prices per share of $0.52 and $0.30, respectively.
F-14
PRO FORMA STOCK COMPENSATION
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Had compensation cost been determined based on the fair value at the grant date
for the awards in 1999, 1998 and 1997 consistent with the provisions of SFAS No.
123 for the Plans, Directors' Plan and Purchase Plan, the Company's net income
(loss) for 1999, 1998 and 1997 would have been as follows (in thousands):
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998 1997
-------- ------- ---------
Net income (loss)--as reported...................................................... $ 7,372 $ 703 $(2,229)
Net income (loss)--pro forma........................................................ $ 6,055 $ 618 $(2,238)
Net income (loss) per share--basic as reported...................................... $ 0.56 $0.21 $ (0.78)
Net income (loss) per share--basic pro forma........................................ $ 0.46 $0.19 $ (0.79)
Net income (loss) per share--diluted as reported.................................... $ 0.39 $0.04 $ (0.78)
Net income (loss) per share--diluted pro forma...................................... $ 0.32 $0.04 $ (0.79)
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,
$10.15, $6.96 and $2.13 for 1999, 1998 and 1997, 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 1999, 1998 and 1997; dividend yield of 0%, volatility of 0% pre-initial
public offering and 75% post-initial public offering , risk-free interest rates
of between 4.50% to 7.80% at the date of grant and an expected term of five
years.
During 1999, no stock purchase rights were granted, however, in 1998 and
1997, stock purchase rights for 35,000 and 27,000 shares of the Company's common
stock, with weighted-average exercise prices of $0.79 and $0.40 per share and
weighted-average fair values of $3.85 and $1.66 per share, were granted with
exercise prices below the estimated market value at the date of grant.
During 1999, 1998 and 1997, options to purchase 114,000, 1,315,000 and
71,000 shares of the Company's common stock, with weighted-average exercise
prices of $6.50, $2.32 and $0.41 per share and weighted-average fair values of
$13.50, $6.19 and $2.10 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, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ------------------------------
WEIGHTED-AVERAGE
NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ---------------- ----------- ----------------- ---------------- ----------- -----------------
$0.27-1.00 371,000 8.02 $ 0.92 174,000 $ 0.91
$1.17-2.80 267,000 8.30 1.98 99,000 1.97
$3.27-10.63 533,000 8.98 5.04 90,000 3.76
$12.07-31.69 535,000 9.71 19.20 -- --
----------- -----------
$0.27-31.69 1,706,000 8.90 $ 8.10 363,000 $ 0.52
=========== ===========
F-15
NOTE 7--INCOME TAXES:
The provision for (benefit from) income taxes consists of the following:
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS)
Current:
Federal, net of the benefit of net operating loss
carryforwards of $595,000 in 1999 and $246,000 in
1998................................................. $ 522 $ 17 $ --
State, net of the benefit of net operating loss
carryforwards of $63,000 in 1999 and $23,000 in 1998 128 17 --
Foreign................................................. 22 -- --
---------- ---------- ----------
672 34 --
---------- ---------- ----------
Deferred:
Federal................................................. 328 -- --
State................................................... 40 -- --
Foreign................................................. 22 -- --
Change in valuation allowance........................... (4,786)
---------- ---------- ----------
(4,396) -- --
---------- ---------- ----------
$ (3,724) $ 34 $ --
========== ========== ==========
In 1999, income before benefit from income taxes consisted of $3,807,000 of
income from U.S. operations and $159,000 of loss from foreign operations. In
1998, income before provision for income taxes consisted of $1,121,000 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.
The Company's effective tax rate differs from the statutory federal income
tax rate as follows:
1999 1998 1997
---------- ---------- -----------
Statutory federal income tax (benefit) rate............... 34.0% 34.0% (34.0)%
State taxes net of federal benefits....................... 9.4 4.0 --
Stock compensation........................................ 8.4 -- --
Research and development credit........................... (3.8) -- --
Net operating losses not benefited........................ -- -- 34.0
Change in valuation allowance............................. (116.3) -- --
Benefit of net operating loss carryforwards............... (38.8) (39.0) --
Alternative minimum tax................................... 0.8 5.0 --
Other..................................................... 4.3 1.0 --
---------- ---------- -----------
Effective tax rate........................................ (102.0)% 5.0% 0.0%
========== ========== ===========
The significant components of the net deferred tax asset are as follows:
DECEMBER 31,
----------------------
1999 1998
--------- ----------
(IN THOUSANDS)
Net operating loss carryforwards........................................ $ 2,402 $ 2,728
Research and development credit......................................... 824 781
Property and equipment.................................................. 318 279
Capitalized research and development for tax purposes................... 648 1,366
Other................................................................... 204 806
---------- ----------
4,396 5,960
Less valuation allowance................................................ -- (5,960)
---------- ----------
Net deferred tax asset.................................................. $ 4,396 $ --
========== ==========
The valuation allowance was decreased by $6.0 million and $337,000 in 1999
and 1998, respectively.
F-16
The Company had placed a valuation allowance against its deferred tax
assets due to the uncertainty surrounding the realization of such assets.
Management evaluated on a quarterly basis the recoverability of the deferred tax
asset and the level of the valuation allowance. During the fourth quarter of
1999, the Company recognized its deferred tax assets as it determined that it is
more likely than not that the deferred tax assets were realizable based
primarily on its operating results in 1999 and 1998.
At December 31, 1999, the Company had federal and state net operating loss
carryforwards of approximately $5,781,000 and $2,620,000, respectively,
available to offset future regular and alternative minimum taxable income. The
Company's federal and state net operating loss carryforwards expire in 2001
through 2019, if not utilized.
At December 31, 1999, the Company had federal and state research and
development and other credits of approximately $714,000 and $353,000,
respectively. The research and development credit carryforwards expire in 2002
through 2019, if not utilized.
The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforwards in certain situations where changes occur in the stock
ownership of a company. If the Company should have an ownership change, as
defined, utilization of the carryforwards could be restricted.
NOTE 8--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 9--SIGNIFICANT CUSTOMER AND GEOGRAPHIC 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 property and equipment information by geographic area as of and
for the year ended:
PROPERTY
AND
REVENUES EQUIPMENT
--------- -----------
(IN THOUSANDS)
December 31, 1999:
United States.................................................. $ 30,361 $ 2,613
International.................................................. 2,681 42
--------- --------
Total........................................................ $ 33,042 $ 2,655
========= ========
December 31, 1998:
United States.................................................. $ 19,549 $ 979
International.................................................. 1,502 38
--------- --------
Total........................................................ $ 21,051 $ 1,017
========= ========
December 31, 1997:
United States.................................................. $ 12,493 $ 896
International.................................................. 439 37
--------- --------
Total........................................................ $ 12,932 $ 933
========= ========
In 1999, 1998 and 1997, no customer accounted for more than 10% of total
revenue.
F-17
NOTE 10--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1999:
Total revenue................................................. $ 6,428 $ 7,726 $ 8,712 $10,176
Gross profit.................................................. 4,708 5,689 6,342 7,460
Net income.................................................... 288 724 1,094 5,266
Net income per share - basic.................................. $ 0.08 $ 0.06 $ 0.06 $ 0.28
Net income per share - diluted................................ $ 0.02 $ 0.04 $ 0.05 $ 0.26
1998:
Total revenue................................................. $ 4,361 $ 4,901 $ 5,552 $ 6,237
Gross profit.................................................. 3,116 3,581 3,926 4,471
Net income.................................................... 70 129 236 268
Net income per share - basic.................................. $ 0.02 $ 0.04 $ 0.07 $ 0.08
Net income per share - diluted................................ $ 0.00 $ 0.01 $ 0.01 $ 0.02
F-18
SCHEDULE II
LATITUDE COMMUNICATIONS, INC.
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT
BEGINNING OF ADDITIONS (REDUCTIONS) BALANCE AT
PERIOD TO COSTS AND EXPENSES WRITE-OFFS END OF PERIOD
------------ ---------------------- ---------- -------------
(IN THOUSANDS)
Allowance for doubtful accounts:
Year ended December 31, 1997 ........... $ 91 $ 56 $ -- $ 147
Year ended December 31, 1998 ........... 147 88 -- 235
Year ended December 31, 1999 ........... 235 11 (8) 238
Allowance for excess and obsolete inventory:
Year ended December 31, 1997 ........... 80 66 -- 146
Year ended December 31, 1998 ........... 146 149 -- 295
Year ended December 31, 1999 ........... 295 166 (107) 353
Deferred tax asset valuation allowance:
Year ended December 31, 1997 ........... 5,407 890 -- 6,297
Year ended December 31, 1998 ........... 6,297 (337) -- 5,960
Year ended December 31, 1999 ........... 5,960 (5,960) -- --
Allowance for returns:
Year ended December 31, 1997 ........... 213 122 (139) 196
Year ended December 31, 1998 ........... 196 515 (386) 325
Year ended December 31, 1999 ........... 325 (12) 313