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| For the quarter ended September 30, 1999 | Commission file number 000-25475 |
| Delaware | 94-3177392 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
2121 Tasman Drive, Santa Clara, CA 95054
(Address of principal executive offices, including zip code)
(408) 988-7200
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
As of November 5, 1999, there were 18,858,376 shares of the registrant’s Common Stock outstanding.
Condensed consolidated balance sheets at September 30, 1999 and December 31, 1998
Notes to condensed consolidated financial statements
| September 30, 1999 |
December 31, 1998 | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| (Unaudited) | |||||||||
| ASSETS | |||||||||
| Current assets: | |||||||||
| Cash and cash equivalents | $ 8,775 | $ 3,982 | |||||||
| Short-term marketable securities | 25,164 | – | |||||||
| Trade accounts receivable, net | 5,822 | 5,627 | |||||||
| Inventory | 749 | 688 | |||||||
| Prepaids and other assets | 1,196 | 420 | |||||||
| Total current assets | 41,706 | 10,717 | |||||||
| Property and equipment, net | 1,985 | 1,017 | |||||||
| Long-term marketable securities | 6,287 | – | |||||||
| Deposits and other long-term assets | 195 | 136 | |||||||
| Total assets | $ 50,173 | $ 11,870 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||
| Current liabilities: | |||||||||
| Accounts payable | $ 557 | $ 805 | |||||||
| Accrued expenses | 3,015 | 2,089 | |||||||
| Deferred revenue | 4,447 | 2,794 | |||||||
| Current portion of long-term debt | 514 | 559 | |||||||
| Total current liabilities | 8,533 | 6,247 | |||||||
| Long-term debt | 431 | 838 | |||||||
| Total liabilities | 8,964 | 7,085 | |||||||
| Stockholders’ equity: | |||||||||
| Preferred stock | – | 12 | |||||||
| Common stock | 19 | 4 | |||||||
| Additional paid-in capital | 55,721 | 21,362 | |||||||
| Notes receivable from common stockholders | (110 | ) | (165 | ) | |||||
| Deferred stock compensation | (2,076 | ) | (2,103 | ) | |||||
| Accumulated other comprehensive loss | (126 | ) | – | ||||||
| Accumulated deficit | (12,219 | ) | (14,325 | ) | |||||
| Total stockholders’ equity | 41,209 | 4,785 | |||||||
| Total liabilities and stockholders’ equity | $ 50,173 | $ 11,870 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| Three Months Ended September 30, |
Nine Months Ended September 30, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 1999 | 1998 | 1999 | 1998 | ||||||
| Revenue: | |||||||||
| Product | $ 6,312 | $ 4,270 | $ 16,515 | $ 11,825 | |||||
| Service | 2,400 | 1,282 | 6,351 | 2,989 | |||||
| Total revenue | 8,712 | 5,552 | 22,866 | 14,814 | |||||
| Cost of revenue: | |||||||||
| Product | 1,046 | 879 | 2,842 | 2,154 | |||||
| Service | 1,324 | 747 | 3,285 | 2,037 | |||||
| Total cost of revenue | 2,370 | 1,626 | 6,127 | 4,191 | |||||
| Gross profit | 6,342 | 3,926 | 16,739 | 10,623 | |||||
| Operating expenses: | |||||||||
| Research and development | 1,021 | 625 | 2,896 | 1,830 | |||||
| Marketing and sales | 3,811 | 2,564 | 10,138 | 6,916 | |||||
| General and administrative | 641 | 412 | 1,575 | 1,223 | |||||
| Amortization of deferred stock compensation | 183 | 66 | 600 | 165 | |||||
| Total operating expenses | 5,656 | 3,667 | 15,209 | 10,134 | |||||
| Income from operations | 686 | 259 | 1,530 | 489 | |||||
| Interest income (expense), net | 475 | (13 | ) | 713 | (34 | ) | |||
| Income before provision for income taxes | 1,161 | 246 | 2,243 | 455 | |||||
| Provision for income tax | (67 | ) | (10 | ) | (137 | ) | (20 | ) | |
| Net income | $ 1,094 | $ 236 | $ 2,106 | $ 435 | |||||
| Other comprehensive, net of tax | |||||||||
| Unrealized gain (loss) on securities | 25 | – | (126 | ) | – | ||||
| Comprehensive income | $ 1,119 | $ 236 | $ 1,980 | $ 435 | |||||
| Net income per share–basic | $ 0.06 | $ 0.07 | $ 0.18 | $ 0.13 | |||||
| Shares used in per share calculation–basic | 18,590 | 3,323 | 11,498 | 3,243 | |||||
| Net income per share–diluted | $ 0.05 | $ 0.01 | $ 0.11 | $ 0.03 | |||||
| Shares used in per share calculation–diluted | 20,051 | 16,251 | 18,382 | 16,103 | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| Nine Months Ended September 30, | |||||
|---|---|---|---|---|---|
| 1999 | 1998 | ||||
| Cash flows from operating activities: | |||||
| Net income | $ 2,106 | $ 435 | |||
| Adjustments to reconcile net income to net cash | |||||
| provided by operating activities: | |||||
| Depreciation and amortization | 589 | 475 | |||
| Provision for excess and obsolete inventory | 145 | 16 | |||
| Amortization of deferred stock compensation | 600 | 165 | |||
| Changes in operating assets and liabilities | 1,154 | (202 | ) | ||
| Net cash provided by operating activities | 4,594 | 889 | |||
| Cash flows from investing activities: | |||||
| Purchases of property and equipment | (1,557 | ) | (536 | ) | |
| Purchases of available for sale securities | (40,920 | ) | – | ||
| Maturities of available for sale securities | 9,343 | – | |||
| Other | (59 | ) | (58 | ) | |
| Net cash used in investing activities | (33,193 | ) | (594 | ) | |
| Cash flows from financing activities: | |||||
| Proceeds from issuance ofnotes payable | – | 349 | |||
| Payment of notes payable | (452 | ) | (381 | ) | |
| Proceeds from issuance of common stock – | |||||
| Initial Public Offering, net | 33,780 | – | |||
| Other | 64 | 21 | |||
| Net cash provided by (used in) financing activities | 33,392 | (11 | ) | ||
| Net increase in cash and cash equivalents | 4,793 | 284 | |||
| Cash and cash equivalents, beginning of period | 3,982 | 3,578 | |||
| Cash and cash equivalents, end of the period | $ 8,775 | $ 3,862 | |||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Latitude Communications, Inc. (the “Company”) is a leading provider of integrated voice and data conferencing solutions for geographically dispersed organizations. The Company develops, markets and supports its MeetingPlace system, which allows companies to conduct voice and data conferences which emulate face-to-face meetings, or what we call virtual meetings, and extend real-time decision making processes irrespective of the geographic location of participants. With MeetingPlace, participants can schedule and attend a meeting, share and edit documents, and capture and retrieve meeting content. MeetingPlace is designed to be an enterprise-wide resource and to leverage existing technologies such as telephones, cellular phones and personal computers.
The accompanying unaudited condensed consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the results for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. The balance sheet at December 31, 1998 was derived from audited financial statements, however, it does not include all disclosures required by generally accepted accounting principles. The financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, these financial statements should be read in conjunction with the audited financial statements and the related notes thereto contained in the Company's Prospectus dated May 6, 1999.
| September 30, 1999 |
December 31, 1998 | ||||
|---|---|---|---|---|---|
| (Unaudited) | |||||
| Raw materials | $589 | $359 | |||
| Work in process | – | 36 | |||
| Finished goods | 160 | 293 | |||
| $749 | $688 | ||||
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 is evaluating the requirements of SOP 98-9 and the effects, if any, on the Company's current revenue recognition policies.
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, or SFAS 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS 133 establishes new standards of accounting and reporting for derivative instruments and hedging activities. SFAS 133 requires that all derivatives be recognized at fair value in the statement of financial position, and that the corresponding gains or losses be reported either in the statement of operations or as a component of comprehensive income, depending on the type of hedging relationship that exists. In July 1999, the FASB issued SFAS 137 “Accounting for Derivative Instruments and Hedging Activities – Deferral of the Effective Date of SFAS 133.” SFAS 137 defers the effective date of SFAS 133 to fiscal quarters and years beginning after June 15, 2000. The Company does not currently hold derivative instruments or engage in hedging activities.
Basic net income per share is computed by dividing net income available to common stockholders by the weighted average number of vested common shares outstanding for the period. Diluted net income per share is computed giving effect to all dilutive potential common shares, including options, warrants and preferred stock.
A reconciliation of the numerator and denominator of basic and diluted EPS is provided as follows (in thousands, except per share amounts).
| Three Months Ended September 30, |
Nine Months Ended September 30, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 1999 | 1998 | 1999 | 1998 | ||||||
| (Unaudited) | |||||||||
| Net income per share, basic and diluted: | |||||||||
| Numerator for net income, basic and diluted | $ 1,094 | $ 236 | $ 2,106 | $ 435 | |||||
| Denominator for basic net income per share: | |||||||||
| Weighted average vested common shares outstanding | 18,590 | 3,323 | 11,498 | 3,243 | |||||
| Net income per share basic | $ 0.06 | $ 0.07 | $ 0.18 | $ 0.13 | |||||
| Denominator for diluted earnings per share: | |||||||||
| Weighted average vested common shares outstanding | 18,590 | 3,323 | 11,498 | 3,243 | |||||
| Effect of dilutive securities: | |||||||||
| Nonvested common shares | 205 | 422 | 251 | 521 | |||||
| Common stock options | 1,217 | 563 | 1,026 | 409 | |||||
| Warrants | 39 | 107 | 78 | 94 | |||||
| Convertible preferred stock | – | 11,836 | 5,529 | 11,836 | |||||
| Weighted average common and common equivalent shares | 20,051 | 16,251 | 18,382 | 16,103 | |||||
| Net income per share diluted | $ 0.05 | $ 0.01 | $ 0.11 | $ 0.03 | |||||
This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Form 10-Q contain forward-looking statements that involve risks and uncertainties. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and similar expressions identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed or forecasted. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled “Factors That May Affect Future Results” and those appearing elsewhere in this Form 10-Q. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. The Company assumes no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements.
We are a leading provider of integrated voice and data conferencing solutions for geographically dispersed organizations. We develop, market and support our MeetingPlace system, which allows companies to conduct virtual meetings and extend real-time decision making processes irrespective of the geographic location of participants. With MeetingPlace, participants can schedule and attend a meeting, view, share and edit documents, and capture and retrieve meeting content. MeetingPlace is designed to be an enterprise-wide resource and to leverage existing technologies such as telephones, cellular phones and personal computers.
We generate revenue from sales of our MeetingPlace products and from service revenue. Revenue derived from product sales constituted 84%, 82% and 78% of our total revenue in 1996, 1997 and 1998 and 72% in the first nine months of 1999. Product revenue is generally recognized upon shipment. We calculate an allowance for returns based on historical rates. During 1998, three systems totaling $386,000 were returned and charged to this allowance. There were no system returns in the first nine months of 1999. Service revenue includes revenue from implementation and integration services, system management services, warranty coverage and customer support. Revenue from implementation and system integration services is recognized as the services are performed, while revenue from system management services, warranty coverage and customer support is recognized ratably over the period of the contract.
We sell our MeetingPlace products primarily through our direct sales force and, to a lesser extent, through indirect distribution channels. The majority of our revenue is derived from Fortune 1000 companies, many of which initially purchase MeetingPlace servers and later expand deployment of our products as they require additional capacity for voice and data conferencing. In 1997, we expanded into international markets by opening a sales office in the United Kingdom and establishing distributor relationships in Hong Kong and Singapore, and in 1998, we established a distributor relationship in Australia. While we intend to increase sales through indirect channels and internationally, we cannot assure you that we will be successful. In 1998, we expanded the breadth of our support services by establishing a consulting services group to provide expanded implementation services, system management services and customized project consulting.
Total cost of revenue consists of component and materials costs, direct labor costs, warranty costs, royalties and overhead related to manufacturing of our products, as well as materials, travel 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 and other services to our customers.
The following table lists, for the periods indicated, the percentage of total revenue of each line item from our condensed consolidated statement of operations to total revenues:
| Three Months Ended September 30, |
Nine Months Ended September 30, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 1999 | 1998 | 1999 | 1998 | ||||||||
| Revenue: | |||||||||||
| Product | 72 | .5% | 76 | .9% | 72 | .2% | 79 | .8% | |||
| Service | 27 | .5% | 23 | .1% | 27 | .8% | 20 | .2% | |||
| Total revenue | 100 | .0% | 100 | .0% | 100 | .0% | 100 | .0% | |||
| Cost of revenue: | |||||||||||
| Product | 12 | .0% | 15 | .8% | 12 | .4% | 14 | .5% | |||
| Service | 15 | .2% | 13 | .5% | 14 | .4% | 13 | .8% | |||
| Total cost of revenue | 27 | .2% | 29 | .3% | 26 | .8% | 28 | .3% | |||
| Gross profit | 72 | .8% | 70 | .7% | 73 | .2% | 71 | .7% | |||
| Operating expenses: | |||||||||||
| Research and development | 11 | .7% | 11 | .2% | 12 | .7% | 12 | .4% | |||
| Marketing and sales | 43 | .7% | 46 | .2% | 44 | .3% | 46 | .7% | |||
| General and administrative | 7 | .4% | 7 | .4% | 6 | .9% | 8 | .2% | |||
| Amortization of deferred stock | |||||||||||
| compensation | 2 | .1% | 1 | .2% | 2 | .6% | 1 | .1% | |||
| Total operating expenses | 64 | .9% | 66 | .0% | 66 | .5% | 68 | .4% | |||
| Income from operations | 7 | .9% | 4 | .7% | 6 | .7% | 3 | .3% | |||
| Interest income (expense), net | 5 | .4% | (0 | .3)% | 3 | .1% | (0 | .2)% | |||
| Income before provision for income tax | 13 | .3% | 4 | .4% | 9 | .8% | 3 | .1% | |||
| Provision for income tax | 0 | .7% | 0 | .1% | 0 | .6% | 0 | .2% | |||
| Net income | 12 | .6% | 4 | .3% | 9 | .2% | 2 | .9% | |||
Product Revenue
Product revenue was $6.3 million and $16.5 million for the third quarter and first nine months of 1999, respectively, which represented increases of 48% and 40% when compared to corresponding periods of 1998. The increases 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 approximately 11% and 15% of product revenue in the three months ended September 30, 1999 and 1998 and approximately 8% and 9% of product revenue in the nine months ended September 30, 1999 and 1998.
Service Revenue
Service revenue was $2.4 million and $6.4 million for the third quarter and first nine months of 1999, respectively, which represented increases of 87% and 113% when compared to corresponding periods of 1998. The increases 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 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 $2.4 million and $6.1 million for the third quarter and first nine months of 1999, respectively, which represented increases of 46% and 46% when compared to corresponding periods of 1998. The increase in total cost of revenue was attributable primarily to increased sales of our MeetingPlace products and related services, as well as the increased size of our services staff and the costs of providing services to support an increasingly geographically dispersed customer base. Resulting gross profit was $6.3 million and $16.7 million for the third quarter and first nine months of 1999, respectively, as compared to $3.9 million and $10.6 million in corresponding periods of 1998. Gross margin was 73% as a percentage of revenue, for both the third quarter and first nine months of 1999, as compared to 71% and 72% for the corresponding periods of 1998.
Product gross margin increased slightly to 83% as a percentage of product revenue for both the third quarter and first nine months of 1999 as compared to 79% and 82% for the corresponding periods of 1998. We expect that product gross margin may decrease in the future due in part to potential pricing pressure and an expected increase in the proportion of revenue derived from indirect distribution channels.
Service gross margin was 45% and 48% as a percentage of revenue for the third quarter and first nine months of 1999, respectively, as compared to 42% and 32% for the corresponding periods of 1998. We expect that service gross margin may decline in the future as a result of the addition of support personnel, potential pricing pressure and an increase in the mix of lower margin service offerings.
Research and Development Expenses
Research and development expenses consist primarily of compensation and related costs for research and development personnel, facilities expenses for testing space and equipment and royalty payments. Research and development expenses were $1.0 million and $2.9 million for the third quarter and first nine months of 1999, respectively, which represented increases of 63% and 58% when compared to corresponding periods in 1998. As a percentage of total revenues, research and development expenses rose from 11% in the third quarter of 1998 to 12% in the third quarter of 1999 and from 12% to 13% in the first nine months of 1998 to the first nine months of 1999. The increase was attributable primarily to the addition of personnel in our research and development organization associated with product development. We expect to continue to make substantial investments in research and development and anticipate that research expenses will continue to increase in absolute dollars.
Marketing and Sales Expenses
Marketing and sales expenses consist primarily of promotional expenditures and compensation and related costs for marketing and sales personnel. Marketing and sales expenses were $3.8 million and $10.1 million for the third quarter and first nine months of 1999, respectively, which represented increases of 49% and 47% when compared to corresponding periods in 1998. As a percentage of total revenues, marketing and sales expenses declined from 46% in the third quarter of 1998 to 44% in the third quarter of 1999 and from 47% to 44% in the first nine months of 1998 to the first nine months of 1999. The decrease in marketing and sales expenses as a percentage of revenue was due primarily to increased revenue. The increases in absolute dollars of $1.2 million for the third quarter and $3.2 million for the first nine months, 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.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel expenses, legal and accounting expenses and other general corporate expenses. General and administrative expenses were $641,000 and $1.6 million for the third quarter and first nine months of 1999, respectively, which represented increases of 56% and 29% when compared to corresponding periods in 1998. As a percentage of total revenues, general and administrative expenses were constant at 7% in the third quarter of 1998 and 1999 and decreased from 8% to 7% in the first nine months of 1998 to the first nine months of 1999. The increase in absolute dollars was attributable primarily to the addition of personnel in our general and administrative organization and expenses in connection with being a public company. The decrease as a percentage of total revenues is due primarily to greater efficiencies of scale. We expect general and administrative expenses to increase in absolute dollars as we add personnel and incur additional costs related to the anticipated growth of our business and operation as a public company.
Amortization of Deferred Stock Compensation
In connection with the completion of our initial public offering in May 1999, options granted in the last quarter of 1997, 1998 and the first quarter of 1999 have been considered to be compensatory. Total deferred stock compensation associated with these options as of September 30, 1999 amounted to $3.0 million, of which $2,000, $299,000 and $600,000 had been amortized to expense in 1997, 1998 and the first nine months of 1999. These amounts are being amortized based on the vesting period of these options, most of which are over 48 months. Of the total deferred stock compensation, $183,000 was amortized in the third quarter of 1999. We expect amortization of approximately $781,000 in 1999, $726,000 in 2000, $724,000 in 2001 and $444,000 in 2002 related to the options presently outstanding.
Interest Income (Expense), Net
Interest income, net of interest expense, was $475,000 and $713,000 for the third quarter and first nine months of 1999, respectively, compared to interest expense, net of interest income, of $13,000 and $34,000 for the corresponding periods in 1998. Interest expense was related to obligations under capital leases and equipment loans. The increase in net interest income was attributable primarily to interest income earned on higher cash and marketable securities average balances in the third quarter of 1999, primarily from net proceeds from our initial public offering in May 1999.
Income Taxes
For the quarter ended September 30, 1999, the provision for income tax was $67,000, compared to $10,000 in the quarter ended September 30, 1998. For the first nine months of 1999, the provision for income tax was $137,000, compared to $20,000 in the first nine months of 1998. Our effective tax rate was approximately 6% for the third quarter and first nine months of 1999 and approximately 4% for the same periods in 1998. These rates were lower than the statutory U.S. federal rate due primarily to the utilization of net operating loss carryforwards.
During the quarter ended September 30, 1999 and since that time, we have had several changes in the executive officers of the corporation.
Effective July 1999, Stephen S. Pao was appointed to the newly created position of vice president, product management. Mr. Pao had previously served as our director of product marketing from April 1997 to July 1999 and as a product manager from November 1994 to April 1997. Before Latitude, Mr. Pao was a product manager at Visioneer, Inc. from September 1993 to October 1994 and Oracle Corporation from August 1990 to September 1993. Mr. Pao holds a B.S. degree in electrical sciences and engineering and a M.S. degree in electrical engineering and computer science from the Massachusetts Institute of Technology.
Effective September 1999, R. Dixon Speas, Jr. was appointed to the newly created position of vice president, worldwide sales and support. From March 1989 to September 1999, Mr. Speas served in various management positions with Aspect Telecommunications Corporation, a provider of call center systems, most recently vice president, Asia Pacific and Latin America. From November 1978 to March 1989, Mr. Speas was employed with ROLM Corporation in a series of positions in manufacturing and then customer support. Prior to ROLM, Mr. Speas was employed by Ernst & Ernst as an auditor and consultant. Mr. Speas holds a B.S. degree in industrial engineering, an M.S. degree in operations research from Stanford University and an M.B.A degree from the Stanford Graduate School of Business.
Effective October 1999, Glenn A. Eaton resigned as vice president, international to pursue other interests. Mr. Speas will serve as acting vice president, international until this position is filled permanently.
Effective October 1999, Roberta H. Gray resigned as vice president, marketing to pursue other interests. Also effective in October 1999, Robert D. Tate was appointed to the position of vice president, marketing. From August 1994 to May 1999, Mr. Tate served in various management positions with Vantive Corporation, a customer relationship management software company, including vice president, channel marketing from July 1998 to May 1999, vice president, field marketing from January 1997 to June 1998 and vice president, corporate marketing from April 1995 to May 1996. Prior to Vantive, Mr. Tate held various marketing management positions at Aspect from January 1989 to August 1994. Mr. Tate holds a B.S. degree from the University of Southern California and an M.B.A degree from the Fuqua School of Business, Duke University.
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 September 30, 1999, we had $40.2 million of cash, cash equivalents and investments, which represented 80.2% of total assets.
Cash provided by operating activities was $4.6 million in the first nine months of 1999, compared to $889,000 in the same period of 1998. Cash provided by operating activities in 1999 was due to net income plus adjustments for non-cash items and an increase in deferred revenue.
Cash used in investing activities in the first nine months of 1999 was $33.2 million, which consisted primarily of the purchase of marketable securities of $40.9 million and purchase of property and equipment of $1.6 million, partially offset by maturities of marketable securities. For the first nine months in 1998, cash used in investing activities of $594,000 consisted primarily of the purchase of property and equipment.
Cash provided by financing activities in the first nine months of 1999 of $33.4 million consisted primarily of proceeds from our initial public stock offering. For the first nine months of 1998, cash used by financing activities of $11,000 primarily consisted of payments on obligations under capital leases and notes payable of $381,000, partially offset by the proceeds from issuance of notes payable.
We believe that our current cash, cash equivalents and marketable securities will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months.
Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. As a result, software that records only the last two digits of the calendar year may not be able to distinguish between twentieth and twenty-first century dates. This may result in software failures or the creation of erroneous results.
We have conducted the first phases of a Year 2000 readiness review for the current versions of our products. The review includes assessment, implementation activities such as remediation, upgrading and replacement of product versions, validation testing, and contingency planning. We continue to respond to customer questions about prior versions of our products on a case-by-case basis.
We have completed all phases of this plan for the current versions of our products. As a result, all current versions of our products are "Year 2000 Compliant," as defined below, when configured and used in accordance with the related documentation, and provided that the underlying operating system of the host machine and any other software used with or in the host machine or our products are also Year 2000 Compliant. We have not tested our products on all platforms or all versions of operating systems that we currently support.
We have defined "Year 2000 Compliant" as the ability to:
We have tested software obtained from third parties, including licensed software, shareware, and freeware, that is incorporated into our products, and we are seeking assurances from our vendors that licensed software is Year 2000 Compliant. Despite testing by us and by current and potential clients, and assurances from developers of products incorporated into our products, our products may contain undetected errors or defects associated with Year 2000 date functions. Known or unknown errors or defects in our products could result in delay or loss of revenue, diversion of development resources, damage to our reputation, or increased service and warranty costs, any of which could materially adversely affect our business, operating results or financial condition. Some commentators have predicted significant litigation regarding Year 2000 compliance issues, and we are aware of these types of lawsuits against other software vendors. Because of the unprecedented nature of Year 2000 litigation, it is uncertain whether or to what extent we may be affected by it.
Our internal systems include both our information technology, or IT, and non-IT systems. We have completed assessment of our material internal IT and non-IT systems, including both our own software products and third-party software and hardware technology. To the extent that we are not able to test the technology provided by third-party vendors, we are seeking assurances from vendors that their systems are Year 2000 Compliant. We are not currently aware of any material operational issues or costs associated with preparing our internal IT and non-IT systems for the Year 2000. However, we may experience material unanticipated problems and costs caused by undetected errors or defects in the technology used in our internal IT and non-IT systems.
We currently have information concerning the Year 2000 compliance status of some but not all of our customers. If our current or future customers fail to achieve Year 2000 compliance or if they divert technology expenditures, especially technology expenditures that were reserved for conferencing products, to address Year 2000 compliance problems, our business could suffer.
To date, we have incurred expenses of approximately $65,000 for Year 2000 compliance activities. We will incur additional costs related to the Year 2000 plan for administrative personnel to manage the project, outside contractor assistance, technical support for our products, product engineering and customer satisfaction. We estimate that these additional costs will total less than $100,000. However, we may experience material problems and costs with Year 2000 compliance not currently identified in our Year 2000 plan that could adversely affect our business, results of operations, and financial condition. Finally, we are also subject to external forces that might generally affect industry and commerce, such as utility or transportation company Year 2000 compliance failures and related service interruptions.
In December 1998, AcSEC released Statement of Position 98-9, or SOP 98-9, Modification of SOP 97-2, "Software Revenue Recognition," with Respect to Certain Transactions. SOP 98-9 amends SOP 97-2 to require that an entity recognize revenue for multiple element arrangements by means of the "residual method" when (1) there is vendor-specific objective evidence of the fair values of all the undelivered elements that are not accounted for by means of long-term contract accounting, (2) vendor-specific objective evidence of fair value does not exist for one or more of the delivered elements, and (3) all revenue recognition criteria of SOP 97-2, other than the requirement for vendor-specific objective evidence of the fair value of each delivered element, are satisfied. The provisions of SOP 98-9 that extend the deferral of the second sentence of paragraphs 10, 37, 41 and 57 of SOP 97-2 became effective December 15, 1998. These paragraphs of SOP 97-2 and SOP 98-9 will be effective for transactions that are entered into in fiscal years beginning after March 15, 1999. Retroactive application is prohibited. We are evaluating the requirements of SOP 98-9 and the effects, if any, on our current revenue recognition policies.
In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, or SFAS 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133 establishes new standards of accounting and reporting for derivative instruments and hedging activities. SFAS 133 requires that all derivatives be recognized at fair value in the statement of financial position, and that the corresponding gains or losses be reported either in the statement of operations or as a component of comprehensive income, depending on the type of hedging relationship that exists. In July 1999, the FASB issued SFAS 137 “Accounting for Derivative Instruments and Hedging Activities – Deferral of the Effective Date of SFAS 133.” SFAS 137 defers the effective date of SFAS 133 to fiscal quarters and years beginning after June 15, 2000. We do not currently hold derivative instruments or engage in hedging activities.
In addition to the other information in this 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:
Orders at the beginning of each quarter typically do not equal expected revenue for that quarter. In addition, a significant portion of our orders is 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:
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:
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. In addition, general concerns regarding Year 2000 compliance may further delay purchase decisions by prospective customers.
If we fail to expand our sales and distribution channels, our business could suffer. If we are unable to expand our sales and distribution channels, we may not be able to increase revenue or achieve market acceptance of our MeetingPlace product. We have recently expanded our direct sales force and plan to recruit additional sales personnel. New sales personnel will require training and take time to achieve full productivity, and there is strong competition for qualified sales personnel in our business. In addition, we believe that our future success is dependent upon establishing successful relationships with a variety of distribution partners. To date, we have entered into agreements with only a small number of these distribution partners. We cannot be certain that we will be able to reach agreement with additional distribution partners on a timely basis or at all, or that these distribution partners will devote adequate resources to selling our products. Furthermore, if our distribution partners fail to adequately market or support our products, the reputation of our products in the market may suffer. In addition, we will need to manage potential conflicts between our direct sales force and third-party reselling efforts.
Our ability to expand into international markets is uncertain. We intend to continue to expand our operations into new international markets. In addition to general risks associated with international expansion, such as foreign currency fluctuations and political and economic instability, we face the following risks and uncertainties any of which could prevent us from selling our products in a particular country or harm our business operations once we have established operations in that country:
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. Recently, we have had three individuals join and two individuals leave the management team.
The loss of our right to use technology licensed to us by third parties could harm our business. We license technology that is incorporated into our products from third parties, including digital signal processing algorithms and the MeetingPlace server's operating system and relational database. Any interruption in the supply or support of any licensed software could disrupt our operations and delay our sales, unless and until we can replace the functionality provided by this licensed software. Because our products incorporate software developed and maintained by third parties, we depend on these third parties to deliver and support reliable products, enhance their current products, develop new products on a timely and cost-effective basis and respond to emerging industry standards and other technological changes.
Any interruption in supply of components from outside manufacturers and suppliers could hinder our ability to ship products in a timely manner. We rely on third parties to obtain most of the components of the MeetingPlace server and integrate them with other standard components, such as the central processing unit and disk drives. If these third parties are no longer able to supply and assemble these components or are unable to do so in a timely manner, we may experience delays in shipping our products and have to invest resources in finding an alternative manufacturer or manufacture our products internally.
In addition, we obtain key hardware components, including the processors and digital signal processing devices used in the MeetingPlace server, from sole source suppliers. In the past, we have experienced problems in obtaining some of these components in a timely manner from these sources, and we cannot be certain that we will be able to continue to obtain an adequate supply of these components in a timely manner or, if necessary, from alternative sources. If we are unable to obtain sufficient quantities of components or to locate alternative sources of supply, we may experience delays in shipping our products and incur additional costs to find an alternative manufacturer or manufacture our products internally.
Our products may suffer from defects, errors or breaches of security. Software and hardware products as complex as ours are likely to contain undetected errors or defects, especially when first introduced or when new versions are released. Any errors or defects that are discovered after commercial release could result in loss of revenue or delay in market acceptance, diversion of development resources, damage to our customer relationships or reputation or increased service and warranty cost. Our products may not be free from errors or defects after commercial shipments have begun, and we are aware of instances in which some of our customers have experienced product failures or errors.
Many of our customers conduct confidential conferences, and transmit confidential data, using MeetingPlace. Concerns over the security of information sent over the Internet and the privacy of its users may inhibit the market acceptance of our products. In addition, unauthorized users in the past have gained, and in the future may be able to gain, access to our customers' MeetingPlace systems. Any compromise of security could deter people from using MeetingPlace and could harm our reputation and business and result in claims against us.
We may be unable to adequately protect our proprietary rights, and we may be subject to infringement claims. Unauthorized parties may copy aspects of our products and obtain and use information that we regard as proprietary, which could cause our business to suffer. Furthermore, the laws of many foreign countries do not protect our intellectual property rights to the same extent as the laws of the United States.
In the future, we may be subject to legal proceedings and claims for alleged infringement of third party proprietary rights. Any of these claims, even if not meritorious, could result in costly litigation, divert management's attention and resources, or require us to enter into royalty or license agreements which are not advantageous to us. Parties making these claims may be able to obtain injunctive or other equitable relief, which could prevent us from selling our products.
Dell Computer Corporation has registered the "Latitude" mark for computers in the United States and in other countries. Dell's United States trademark registration and Canadian application have blocked our ability to register the "Latitude Communications" and "Latitude" with logo marks in the United States and the "Latitude Communications" mark in Canada. Since we believe that we have priority of trade name usage in the United States, we have petitioned to cancel Dell's United States registration and opposed its Canadian application. The outcome of these proceedings is uncertain. If Dell's registration for the "Latitude" mark is not canceled or if we are unable to obtain consent from Dell for our registration of our marks, we may not be able to register our marks and would have to rely solely on common law protection for these marks. We cannot assure you that we will be free from challenges of or obstacles to our use or registration of our marks.
We are subject to government regulation, and our failure to comply with these regulations could harm our business. Our products are subject to a wide variety of safety, emissions and compatibility regulations imposed by governmental authorities in the United States or in other countries in which we sell our products. If we are unable to obtain necessary approvals or maintain compliance with the regulations of any particular jurisdiction, we may be prohibited from selling our products in that territory. In addition, to sell our products in many international markets, we are required to obtain certifications that are specific to the local telephony infrastructure.
We may be subject to claims related to Year 2000 issues, and Year 2000 concerns could adversely affect our revenues. Many currently installed computer systems are not capable of distinguishing 21st century dates from 20th century dates. As a result, beginning on January 1, 2000, computer systems and software used by many companies and organizations in a wide variety of industries, including technology, transportation, utilities, finance and telecommunications, will produce erroneous results or fail unless they have been modified or upgraded to process date information correctly. Year 2000 compliance efforts may involve significant time and expense, and uncorrected problems could materially adversely affect our business, financial condition and operating results. We may face claims based on Year 2000 issues arising from the integration of multiple products within an overall system. We may also experience reduced sales of our products as potential customers reduce their budgets for voice and data conferencing products due to increased expenditures on their own Year 2000 compliance efforts. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000 Readiness Disclosure."
Our stock price may be volatile. We expect that the market price of our common stock will fluctuate as a result of variations in our quarterly operating results. These fluctuations may be exaggerated if the trading volume of our common stock is low. In addition, due to the technology-intensive and emerging nature of our business, the market price of our common stock may rise and fall in response to:
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. Our 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. Sales of a substantial number of shares of common stock in the public market could materially adversely affect the market price of our common stock. All of the 3,125,000 shares issued in the initial public offering in May 1999 are freely tradable. Upon the expiration on November 3, 1999 of arrangements between our stockholders and Latitude or the underwriters in which our stockholders have agreed not to sell or dispose of their Latitude common stock, the remaining 15,666,365 shares of common stock outstanding at September 30, 1999 became eligible for sale in the public market. Of these shares, 11,682,572 shares are subject to volume limitations under federal securities laws.
If our stockholders sell substantial amounts of common stock, including shares issued upon the exercise of outstanding options and warrants, in the public market, the market price of our common stock could fall.
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 marketable securities with maturities of three to 24 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.
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 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.
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. 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.
(a) Exhibits:
10.5* - 1999 Directors’ Stock Option Plan and form of stock option agreement
27.1 - Financial Data Schedule
(b) Reports on Form 8-K - None
* - Revised version correcting certain typographical errors in original filed version.
Pursuant to the requirements 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/ RICK M. MCCONNELL ________________________________________________ Rick M. McConnell Vice President of Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer) |
Date: November 12, 1999
10.5 - 1999 Directors’ Stock Option Plan and form of stock option agreement
27.1 - Financial Data Schedule
* - Revised version correcting certain typographical errors in original filed version.
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