**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

Washington, D.C. 20549

 

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**FORM 10-Q**

 

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF**

**THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarter ended June 30, 2003**

 

**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 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)       |

 

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Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

 

Yes ý       No o

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Yes o      No ý

 

As of July 31, 2003, there were 19,501,356 shares ofthe registrant’s Common Stock outstanding.

 

 

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INDEX

 
| **PART I.**   | **FINANCIAL INFORMATION** |
|---------------|---------------------------|
|          |                      |   |
|          | **Item 1.**               | **Financial Statements (Unaudited)** |
|          |                      |   |
|          |                      | Condensed  consolidated balance sheets at June 30, 2003 and December 31, 2002 |
|          |                      |   |
|          |                      | Condensed  consolidated statements of operations and comprehensive loss for the three  months ended June 30, 2003 and 2002; and for the six months ended June 30,  2003 and 2002 |
|          |                      |   |
|          |                      | Condensed  consolidated statements of cash flows for the six months ended June 30, 2003  and 2002 |
|          |                      |   |
|          |                      | Notes  to condensed consolidated financial statements |
|          |                      |   |
|          | **Item 2.**               | **Management’s Discussion and  Analysis of Financial Condition And Results of Operations** |
|          |                      |   |
|          | **Item 3.**               | **Quantitative and Qualitative  Disclosures About Market Risk** |
|          |                      |   |
|          | **Item 4.**               | **Controls and Procedures** |
|          |                      |   |
| **PART II.**  | **OTHER INFORMATION**     |
|          |                      |   |
|          | **Item 1.**               | **Legal  Proceedings** |
|          |                      |   |
|          | **Item 2.**               | **Changes in  Securities and Use of Proceeds** |
|          |                      |   |
|          | **Item 3.**               | **Defaults Upon Senior  Securities** |
|          |                      |   |
|          | **Item 4.**               | **Submission of Matters to a  Vote of Security Holders** |
|          |                      |   |
|          | **Item 5.**               | **Other  Information** |
|          |                      |   |
|          | **Item  6.**              | **Exhibits  and Reports on Form 8-K** |
|          |                      |   |
| **SIGNATURE** |                      |

 

2

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**PART I.**         FINANCIAL INFORMATION

**Item 1.**            Financial Statements.

** **

**LATITUDE COMMUNICATIONS,INC.CONDENSED CONSOLIDATED BALANCESHEETS(in thousands, except per share amounts)**

**(Unaudited)**

 
|                                                                                                                                                                                             |   | **June 30,  2003** |   | **December  31,  2002** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|-------------------------|--------|
|                                                                                                                                                                                             |   |               |   |                    |   |
| **ASSETS**                                                                                                                                                                                       |   |               |   |                    |   |
| Current assets:                                                                                                                                                                                  |   |               |   |                    |   |
| Cash and cash  equivalents                                                                                                                                                                       |   | $                  | 22,621 |                    | $      | 13,119 |   |
| Short-term  investments                                                                                                                                                                          |   | —             |   | 12,066                  |   |
| Accounts  receivable, net                                                                                                                                                                        |   | 6,070              |   | 7,035                   |   |
| Inventory                                                                                                                                                                                        |   | 1,349              |   | 952                     |   |
| Prepaids and  other assets                                                                                                                                                                       |   | 1,817              |   | 2,135                   |   |
| Total current  assets                                                                                                                                                                            |   | 31,857             |   | 35,307                  |   |
| Property and  equipment, net                                                                                                                                                                     |   | 3,605              |   | 3,915                   |   |
| Goodwill                                                                                                                                                                                         |   | 888                |   | —                  |   |
| Deposits and  other long-term assets                                                                                                                                                             |   | 1,024              |   | 1,060                   |   |
| Total assets                                                                                                                                                                                     |   | $                  | 37,374 |                    | $      | 40,282 |   |
|                                                                                                                                                                                             |   |               |   |                    |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                   |   |               |   |                    |   |
| Current  liabilities:                                                                                                                                                                            |   |               |   |                    |   |
| Accounts payable                                                                                                                                                                                 |   | $                  | 707    |                    | $      | 744 |   |
| Accrued  liabilities                                                                                                                                                                             |   | 4,384              |   | 5,274                   |   |
| Deferred revenue                                                                                                                                                                                 |   | 5,376              |   | 5,054                   |   |
| Total current  liabilities                                                                                                                                                                       |   | 10,467             |   | 11,072                  |   |
| Other  non-current liabilities                                                                                                                                                                   |   | 2,027              |   | 2,605                   |   |
| Total  liabilities                                                                                                                                                                               |   | 12,494             |   | 13,677                  |   |
| Stockholders’  equity:                                                                                                                                                                      |   |               |   |                    |   |
| Preferred stock,  $0.001 par value  Authorized: 5,000 shares at June 30, 2003 and December 31, 2002 Issued and  outstanding: No shares at June 30, 2003 and December 31, 2002                    |   | —             |   | —                  |   |
| Common stock,  $0.001 par value Authorized: 75,000 shares at June 30, 2003 and December 31,  2002 Issued and outstanding: 19,457 shares at June 30, 2003 and 19,390 shares  at December 31, 2002 |   | 19                 |   | 19                      |   |
| Additional  paid-in capital                                                                                                                                                                      |   | 57,850             |   | 57,757                  |   |
| Accumulated  other comprehensive income (loss)                                                                                                                                                   |   | (58                | )      | 49                      |   |
| Accumulated  deficit                                                                                                                                                                             |   | (32,931            | )      | (31,220                 | )      |
| Total  stockholders’ equity                                                                                                                                                                 |   | 24,880             |   | 26,605                  |   |
| Total  liabilities and stockholders’ equity                                                                                                                                                 |   | $                  | 37,374 |                    | $      | 40,282 |   |

 

*The accompanying notes are an integral partof these condensed consolidated financial statements.*

 

3

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**LATITUDE COMMUNICATIONS, INC.CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS AND COMPREHENSIVE LOSS(in thousands, except per share amounts)(Unaudited)**

 
|                                                                                                     |   | **Three Months  Ended  June 30,** |      | **Six Months  Ended  June 30,** |   |
|----------------------------------------------------------------------------------------------------------|--------|-----------------------------------|-----------|---------------------------------|--------|
|                                                                                                     |   | **2003**                          |      | **2002**                        |   | **2003** |   | **2002** |   |
| Revenue:                                                                                                 |   |                              |      |                            |   |   |   |   |   |
| **Product**                                                                                              |   | **$**                             | **1,953** | ** **                      | **$**  | **3,498** | ** ** | **$** | **3,926** | ** ** | **$** | **6,924** | ** ** |
| Service                                                                                                  |   | 6,350                             |      | 6,517                           |   | 13,812 |   | 12,563 |   |
| Total revenue                                                                                            |   | 8,303                             |      | 10,015                          |   | 17,738 |   | 19,487 |   |
| Cost of revenue:                                                                                         |   |                              |      |                            |   |   |   |   |   |
| Product                                                                                                  |   | 826                               |      | 1,356                           |   | 1,510 |   | 2,408 |   |
| Service  (includes non-cash stock compensation of $0, $0, $0 and $1, respectively)                       |   | 3,438                             |      | 3,335                           |   | 6,822 |   | 6,763 |   |
| Total cost of  revenue                                                                                   |   | 4,264                             |      | 4,691                           |   | 8,332 |   | 9,171 |   |
| Gross profit                                                                                             |   | 4,039                             |      | 5,324                           |   | 9,406 |   | 10,316 |   |
|                                                                                                     |   |                              |      |                            |   |   |   |   |   |
| Operating  expenses:                                                                                     |   |                              |      |                            |   |   |   |   |   |
| Research and  development (includes non-cash stock compensation of $0, $10, $0 and $22,  respectively)   |   | 1,388                             |      | 1,510                           |   | 2,520 |   | 2,930 |   |
| Marketing and  sales (includes non-cash stock compensation of $0, $8, $0 and $18,  respectively)         |   | 3,317                             |      | 4,800                           |   | 6,502 |   | 9,710 |   |
| General and  administrative (includes non-cash stock compensation of $0, $39, $0 and $85,  respectively) |   | 1,101                             |      | 1,150                           |   | 2,249 |   | 2,354 |   |
| Purchased  in-process technology                                                                         |   | 70                                |      | —                          |   | 70 |   | — |   |
| Total operating  expenses                                                                                |   | 5,876                             |      | 7,460                           |   | 11,341 |   | 14,994 |   |
| Loss from  operations                                                                                    |   | (1,837                            | )         | (2,136                          | )      | (1,935 | ) | (4,678 | ) |
| Interest income,  net                                                                                    |   | 114                               |      | 250                             |   | 272 |   | 517 |   |
| Loss before  benefit from (provision for) income tax                                                     |   | (1,723                            | )         | (1,886                          | )      | (1,663 | ) | (4,161 | ) |
| Benefit from  (provision for) income tax                                                                 |   | (24                               | )         | 673                             |   | (48 | ) | 1,467 |   |
|                                                                                                     |   |                              |      |                            |   |   |   |   |   |
| Net loss                                                                                                 |   | $                                 | (1,747    | )                               | $      | (1,213 | ) | $ | (1,711 | ) | $ | (2,694 | ) |
|                                                                                                     |   |                              |      |                            |   |   |   |   |   |
| Other  comprehensive income (loss), net of tax—  Unrealized gain (loss) on securities               |   | (32                               | )         | (28                             | )      | (98 | ) | 26 |   |
|                                                                                                     |   |                              |      |                            |   |   |   |   |   |
| Cumulative  translation adjustment                                                                       |   | (8                                | )         | 48                              |   | (8 | ) | 35 |   |
|                                                                                                     |   |                              |      |                            |   |   |   |   |   |
| Comprehensive  loss                                                                                      |   | $                                 | (1,787    | )                               | $      | (1,193 | ) | $ | (1,817 | ) | $ | (2,633 | ) |
|                                                                                                     |   |                              |      |                            |   |   |   |   |   |
| Net loss per  share—basic and diluted                                                               |   | $                                 | (0.09     | )                               | $      | (0.06 | ) | $ | (0.09 | ) | $ | (0.14 | ) |
|                                                                                                     |   |                              |      |                            |   |   |   |   |   |
| Shares used in  per share calculation—basic and diluted                                             |   | 19,457                            |      | 19,361                          |   | 19,424 |   | 19,328 |   |

 

*The accompanyingnotes are an integral part of these condensed consolidated financialstatements.*

 

4

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**LATITUDE COMMUNICATIONS, INC.CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS(Amounts in thousands, except per share amounts)(Unaudited)**

 
|                                                                         |   | **Six Months  Ended  June 30,** |   |
|------------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                         |   | **2003**                        |   | **2002** |   |
| Cash flows from  operating activities:                                       |   |                            |   |   |   |
| Net loss                                                                     |   | $                               | (1,711 | ) | $ | (2,694 | ) |
|                                                                         |   |                            |   |   |   |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                            |   |   |   |
| Depreciation and  amortization                                               |   | 1,211                           |   | 1,412 |   |
| Amortization of  capitalized software                                        |   | 148                             |   | 274 |   |
| Write down of  excess and obsolete inventory                                 |   | —                          |   | 250 |   |
| Provision for doubtful  accounts                                             |   | —                          |   | 3 |   |
| In-process  research and technology                                          |   | 70                              |   | — |   |
| Amortization of  deferred stock compensation                                 |   | —                          |   | 126 |   |
| Changes in  assets and liabilities, net of effect of acquisitions:           |   |                            |   |   |   |
| Accounts  receivable                                                         |   | 965                             |   | (3,294 | ) |
| Inventory                                                                    |   | (445                            | )      | 413 |   |
| Prepaids and  other assets                                                   |   | 419                             |   | (725 | ) |
| Deferred income  taxes                                                       |   | —                          |   | (1,482 | ) |
| Accounts payable                                                             |   | (37                             | )      | 1,274 |   |
| Accrued  liabilities                                                         |   | (1,470                          | )      | (895 | ) |
| Deferred revenue                                                             |   | 305                             |   | 1,309 |   |
| Net cash used in  operating activities                                       |   | (545                            | )      | (4,029 | ) |
|                                                                         |   |                            |   |   |   |
| Cash flows from  investing activities:                                       |   |                            |   |   |   |
| Purchases of  property and equipment                                         |   | (834                            | )      | (937 | ) |
| Additions to  software production costs                                      |   | (219                            | )      | — |   |
| Purchases of  available for sale securities                                  |   | —                          |   | (9,624 | ) |
| Maturities of  available for sale securities                                 |   | 11,968                          |   | 7,605 |   |
| Net cash paid in  purchase acquisition                                       |   | (988                            | )      | — |   |
| Increase in  deposits and other long-term assets                             |   | 36                              |   | (68 | ) |
| Net cash  provided by (used in) investing activities                         |   | 9,963                           |   | (3,024 | ) |
|                                                                         |   |                            |   |   |   |
| Cash flows from  financing activities:                                       |   |                            |   |   |   |
| Proceeds from  issuance of common stock, net                                 |   | 93                              |   | 123 |   |
| Repayment of  notes payable and capital lease obligations                    |   | —                          |   | (48 | ) |
| Net cash  provided by financing activities                                   |   | 93                              |   | 75 |   |
|                                                                         |   |                            |   |   |   |
| Effect of  exchange rate changes on cash                                     |   | (9                              | )      | — |   |
| Net increase  (decrease) in cash and cash equivalents                        |   | 9,502                           |   | (6,978 | ) |
| Cash and cash  equivalents, beginning of period                              |   | 13,119                          |   | 15,370 |   |
| Cash and cash  equivalents, end of period                                    |   | $                               | 22,621 |   | $ | 8,392 |   |

 

*The accompanyingnotes are an integral part of these condensed consolidated financialstatements.*

 

5

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**LATITUDE COMMUNICATIONS, INC.NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 1—The Company and Basis of Presentation**

** **

Latitude Communications, Inc. (the “Company”) is aleading provider of enterprise voice and web conferencing solutions.  The Company develops, markets and supportsits MeetingPlace system and related services, which enable real-timecollaboration through meetings via Web browsers, groupware applications such asOutlook and Notes, and PSTN and IP phones. MeetingPlace also allows users to share and edit live documents andrecord and access meeting content.  The Companydistributes its product and services through distributors and a direct salesforce to companies across many industries in the United States, Europe andAsia.

 

The accompanying unaudited condensed consolidatedfinancial statements reflect all adjustments, which, in the opinion ofmanagement, are necessary for a fair presentation of the results for theperiods shown.  The results ofoperations for such periods are not necessarily indicative of the resultsexpected for the full fiscal year or for any future period.  The balance sheet at December 31, 2002 wasderived from audited financial statements; however, it does not include alldisclosures required by generally accepted accounting principles in the UnitedStates of America.  The financialstatements and related disclosures have been prepared with the presumption thatusers of the interim financial information have read or have access to theaudited financial statements for the preceding fiscal year.  Accordingly, these financial statementsshould be read in conjunction with the audited financial statements and therelated notes thereto contained in the Company’s Annual Report on Form 10-K forthe year ended December 31, 2002.

 

**Note 2—Recent Accounting Pronouncements**

** **

In June 2002, the Financial Accounting Standards Board(“FASB”) issued Statement of Financial Accounting Standards No. 146,“Accounting for Exit or Disposal Activities” (“SFAS 146”). SFAS 146addresses significant issues regarding the recognition, measurement, andreporting of costs that are associated with exit and disposal activities,including restructuring activities that are currently accounted for under theEmerging Issues Task Force (“EITF”) No. 94-3, “Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring)”.  The scope of SFAS 146 also includescosts related to terminating a contract that is not a capital lease andtermination benefits that employees who are involuntarily terminated receiveunder the terms of a one-time benefit arrangement that is not an ongoing benefitarrangement or an individual deferred-compensation contract. SFAS 146 iseffective for exit or disposal activities that are initiated after December 31,2002.  The provisions of EITF No. 94-3shall continue to apply for an exit activity initiated under an exit plan thatmeets the criteria of EITF No. 94-3 prior to the adoption of SFAS 146.  The effect on adoption of SFAS 146 changedon a prospective basis the timing of when restructuring charges are recorded froma commitment date approach to when the liability is incurred. SFAS 146 wasadopted in the first quarter of 2003 and did not have a significant impact onthe Company’s financial position, results of operations or cash flows.

 

In November 2002, the EITF reached a consensus onIssue No. 00-21 “Accounting for Revenue Arrangements With MultipleDeliverables” which provides guidance on how to account for arrangements thatinvolve the delivery or performance of multiple products, services and/orrights to use assets.  The provisions ofEITF No. 00-21 will apply to revenue arrangements entered into in fiscalperiods beginning after June 15, 2003. EITF No. 00-21 was adopted in the second quarter of 2003 and did nothave an impact on the Company’s financial position, results of operations orcash flows.

 

In January 2003, the FASB issued Interpretation No. 46(“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation ofARB No. 51”. FIN 46 requires certain variable interest entities to beconsolidated by the primary beneficiary of the entity if the equity investorsin the entity do not have the characteristics of a controlling financialinterest or do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from other parties.FIN 46 is effective immediately for all new variable interest entities createdor acquired after January 31, 2003. For variable interest entities created oracquired prior to February 1, 2003, the provisions of FIN 46 must be appliedfor the first interim or annual period beginning after June 15, 2003. TheCompany does not have any variable interest entities.  FIN 46 was adopted in the second quarter of 2003 and did not havean impact on the Company’s financial position, results of operations or cash flows.

 

6

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In May 2003, the FASB issued SFAS No. 150, “Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity.”  This Statement establishesstandards for how an issuer classifies and measures in its statement offinancial position certain financial instruments with characteristics of bothliabilities and equity.  It requiresthat an issuer classify a financial instrument that is within its scope as aliability (or an asset in some circumstances) because that financial instrumentembodies an obligation of the issuer. This Statement is effective for financial instruments entered into ormodified after May 31, 2003 and otherwise is effective at the beginning of thefirst interim period beginning after June 15, 2003, except for mandatorilyredeemable financial instruments of nonpublic entities.  For nonpublic entities, mandatorilyredeemable financial instruments are subject to the provisions of thisStatement for the first period beginning after December 15, 2003.  It is to be implemented by reporting thecumulative effect of a change in an accounting principle for financialinstruments created before the issuance date of the statement and stillexisting at the beginning of the interim period of adoption.  SFAS No. 150 was adopted in the secondquarter of 2003 and did not have an impact on the Company’s financial position,results of operations or cash flows.

 

**Note 3—Inventory**

** **

**Inventoryconsists of the following (in thousands):**

** **
|           |   | **June 30,  2003** |   | **December  31,  2002** |   |
|----------------|--------|--------------------|--------|-------------------------|--------|
|           |   | **(Unaudited)**    |   |
| Raw materials  |   | $                  | 1,121  |                    | $      | 628 |   |
| Finished goods |   | 228                |   | 324                     |   |
|           |   | $                  | 1,349  |                    | $      | 952 |   |

** **

**Note 4—Pro Forma Stock Compensation**

** **

Latitude has adopted thedisclosure-only provisions of SFAS 123. Had compensation cost beendetermined based on the fair value at the grant date for the awards grantedsince 1994, consistent with the provisions of SFAS 123 for the 1993 Stock Plan,the 1999 Stock Plan, the 2001 Employee Stock Option Plan, the 1999 Directors’Stock Option Plan and the 1999 Employee Stock Purchase Plan, Latitude’s netloss for the three and six months ended June 30, 2003 and 2002 would have beenas follows (in thousands, except per share data):

 
|                                                                            |   | **Three Months ended June 30,** |   | **Six Months ended June 30,** |   |
|---------------------------------------------------------------------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                                                                            |   | **2003**                        |   | **2002**                      |   | **2003** |   | **2002** |   |
| Net loss—as  reported                                                      |   | $                               | (1,747 | )                             | $      | (1,213 | ) | $ | (1,711 | ) | $ | (2,694 | ) |
| Add stock based  compensation expense – as reported                        |   | —                          |   | 57                            |   | — |   | 126 |   |
| Less stock based  compensation expense determined under fair value based method |   | (4,254                          | )      | (5,446                        | )      | (4,274 | ) | (5,482 | ) |
| Net loss—pro  forma                                                        |   | $                               | (6,001 | )                             | $      | (6,602 | ) | $ | (5,985 | ) | $ | (8,050 | ) |
| Net loss per  share—basic and diluted as reported                          |   | $                               | (0.09  | )                             | $      | (0.06 | ) | $ | (0.09 | ) | $ | (0.14 | ) |
| Net loss per  share—basic and diluted pro forma                            |   | $                               | (0.31  | )                             | $      | (0.34 | ) | $ | (0.31 | ) | $ | (0.42 | ) |

 

Such pro forma disclosures may not be representativeof future compensation cost because options vest over several years andadditional grants are made each year.

 

In accordance with the provisions of SFAS 123, thefollowing assumptions for option grants during the three and six months endedJune 30, 2003 and 2002 are included to estimate the fair value of each stockoption and purchase right:

 

7

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|                              |   | **Three Months ended June 30,** |   | **Six Months ended June 30,** |   |
|-----------------------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                              |   | **2003**                        |   | **2002**                      |   | **2003** |   | **2002** |   |
| **Stock Options:**                |   |                            |   |                          |   |   |   |   |   |
| Expected  dividend yield          |   | 0                               | %      | 0                             | %      | 0 | % | 0 | % |
| Expected stock  price volatility  |   | 105                             | %      | 105                           | %      | 105 | % | 105 | % |
| Risk-free  interest rate          |   | 1.95-2.80                       | %      | 3.85-4.8                      | %      | 1.95-2.95 | % | 3.85-4.8 | % |
| Expected life  (years)            |   | 5                               |   | 4                             |   | 5 |   | 4 |   |
|                              |   |                            |   |                          |   |   |   |   |   |
| **Employee Stock Purchase Plan:** |   |                            |   |                          |   |   |   |   |   |
| Expected  dividend yield          |   | 0                               | %      | 0                             | %      | 0 | % | 0 | % |
| Expected stock  price volatility  |   | 105                             | %      | 105                           | %      | 105 | % | 105 | % |
| Risk-free  interest rate          |   | 2.7                             | %      | 3.8                           | %      | 2.7 | % | 3.8 | % |
| Expected life  (years)            |   | 0.5                             |   | 0.5                           |   | 0.5 |   | 0.5 |   |

 

**Note 5—Net Loss Per Share**

 

Basic net loss per share is computed by dividing netloss available to common stockholders by the weighted average number of vestedcommon shares outstanding for the period. Diluted net loss per share is computed by giving effect to all dilutivepotential common stock options.  Dilutednet loss per share is the same as basic net loss per share for the three andsix months ended June 30, 2003 because of the inclusion of potentially dilutivecommon shares, which consisted of common shares issuable upon the exercise ofstock options, would result in an anti-dilutive per share effect.

 

A reconciliation of the numerator and denominator ofbasic and diluted net loss per share is provided as follows (in thousands,except per share amounts):

 

|                                                                                                              |   | **Three Months Ended  June 30,** |   | **Six Months Ended  June 30,** |   |
|-------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                                                                                              |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
|                                                                                                              |   | **(Unaudited)**                  |   | **(Unaudited)**                |   |
| Net loss per share, basic and diluted:                                                                            |   |                             |   |                           |   |   |   |   |   |
| Numerator for net loss, basic and diluted                                                                         |   | $                                | (1,747 | )                              | $      | (1,213 | ) | $ | (1,711 | ) | $ | (2,694 | ) |
| Denominator for basic and diluted net loss per  share:                                                            |   |                             |   |                           |   |   |   |   |   |
| Weighted average vested common shares outstanding                                                                 |   | 19,457                           |   | 19,361                         |   | 19,424 |   | 19,328 |   |
| Net loss per share basic and diluted                                                                              |   | $                                | (0.09  | )                              | $      | (0.06 | ) | $ | (0.09 | ) | $ | (0.14 | ) |
|                                                                                                              |   |                             |   |                           |   |   |   |   |   |
| Anti-dilutive securities not included in the  calculation of diluted EPS because the Company incurred a net loss: |   |                             |   |                           |   |   |   |   |   |
| Common stock options                                                                                              |   | 5,032                            |   | 4,533                          |   | 5,032 |   | 4,533 |   |

 

8

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**Note 6—Restructuring**

 

During the quarter ended June 30, 2001, the Companyinitiated a restructuring program.  As apart of this restructuring program, the Company recorded costs and othercharges of $870,000 classified as operating expenses.  Of this amount, $442,000 related to a reduction in the workforceby approximately 40 regular employees across all functional areas of theCompany, $228,000 related to non-cancelable lease costs arising from theconsolidation of excess facilities and $200,000 related to discontinued assetswritten-off.

 

During the quarter ended September 30, 2002, theCompany initiated another restructuring program.  As a part of this restructuring program, the Company recordedcosts and other charges of $5,400,000 classified as operating expenses.  Of this amount, $900,000 related to areduction in the workforce by approximately 45 fulltime employees across allfunctional areas of the Company, including three members of executive management;$3,900,000 related to non-cancelable lease costs arising from the consolidationof excess facilities; and $600,000 related to discontinued assets written-off.

 

A summary of the restructuring costs is as follows (inthousands):

 
|                                                |   | **Severance  and  Benefits** |   | **Facilities  and Other  Charges** |   | **Asset  Write-Offs** |   | **Total** |   |
|-----------------------------------------------------|--------|------------------------------|--------|------------------------------------|--------|-----------------------|--------|-----------|--------|
| Provisions for fiscal  2001                         |   | $                            | 442    |                               | $      | 228                   |   | $         | 200    |   | $ | 870 |   |
| Cash paid                                           |   | (222                         | )      | (70                                | )      | —                |   | (292      | )      |
| Non-cash charges                                    |   | (31                          | )      | —                             |   | (200                  | )      | (231      | )      |
| Adjusted provision                                  |   | (189                         | )      | 189                                |   | —                |   | —    |   |
| Restructuring reserve  balance at December 31, 2001 |   | —                       |   | 347                                |   | —                |   | 347       |   |
| Provisions for fiscal  2002                         |   | 900                          |   | 3,900                              |   | 600                   |   | 5,400     |   |
| Cash paid                                           |   | (877                         | )      | (346                               | )      | —                |   | (1,223    | )      |
| Non-cash charges                                    |   | —                       |   | —                             |   | (600                  | )      | (600      | )      |
| Restructuring reserve  balance at December 31, 2002 |   | 23                           |   | 3,901                              |   | —                |   | 3,924     |   |
| Cash paid                                           |   | (4                           | )      | (754                               | )      | —                |   | (758      | )      |
| Non-cash charges                                    |   | —                       |   | —                             |   | —                |   | —    |   |
| Restructuring reserve  balance at June 30, 2003     |   | $                            | 19     |                               | $      | 3,147                 |   | $         | — |   | $ | 3,166 |   |

 

The amounts related to severance and benefits costsare expected to be paid during fiscal 2003. The amounts related to non-cancelable lease costs are expected to bepaid over the respective lease terms through fiscal 2005.

 

**Note 7 — Share Repurchase Program**

 

On July 24, 2001 theCompany’s Board of Directors approved a Share Repurchase Program of up to1,000,000 shares of common stock. During the three and six months ended June 30, 2003, no shares wererepurchased.  As of June 30, 2003, theCompany has purchased 339,200 shares under this program at a weighted averagecost of $1.35 per share.

 

**Note 8 — Contingencies &Commitments**

 

**Litigation:**

 

In November 2001, a seriesof securities class actions were filed in the United States District Court forthe Southern District of New York against certain underwriters for Latitude’sinitial public offering (“IPO”), Latitude Communications Inc., and Emil C. Wangand Rick M. McConnell, who were officers of Latitude at the time of the IPO.The complaints were consolidated into a single action, and a consolidatedamended complaint against Latitude was filed in April 2002. The amendedcomplaint alleges, among other things, that the underwriter defendants violatedthe securities laws by failing to disclose alleged compensation arrangements inthe initial public offering’s registration statement and by engaging inmanipulative practices to artificially inflate the price of the Company’scommon stock after the initial public offering. The amended complaint alsoalleges, among other things, that Latitude and the named officers violatedsection 11 of the Securities Act of 1933 and section 10(b) of the Exchange Actof 1934 on the basis of an alleged failure to disclose the underwriters’alleged compensation arrangements and manipulative practices. No specificamount of damages has been claimed. Similar complaints have been filed

 

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against more than 300 other issuers that have hadinitial public offerings since 1998, and all of these actions have beenincluded in a single coordinated proceeding.

 

Mr. McConnell and Mr. Wanghave subsequently been dismissed from the action without prejudice pursuant toa tolling agreement. Furthermore, in July 2002, Latitude and the other issuersin the consolidated cases filed motions to dismiss the amended complaint forfailure to state a claim. The motion to dismiss claims under section 11 wasdenied as to virtually all the defendants in the consolidated actions,including Latitude. However, the claims against Latitude under section 10(b)were dismissed.

 

On June 20, 2003, acommittee of the Company’s Board of Directors conditionally approved a proposedpartial settlement with the plaintiffs in this matter.  The settlement would provide, among otherthings, a release of the Company and of the individual defendants for theconduct alleged in the action to be wrongful in the amended complaint.  The Company would agree to undertake otherresponsibilities under the partial settlement, including agreeing to assignaway, not assert, or release certain potential claims the Company may haveagainst its underwriters.  Any directfinancial impact of the proposed settlement is expected to be borne by theCompany’s insurers.   The committeeagreed to approve the settlement subject to a number of conditions, includingthe participation of a substantial number of other issuer defendants in theproposed settlement, the consent of the Company’s insurers to the settlement,and the completion of acceptable final settlement documentation.  Furthermore, the settlement is subject to ahearing on fairness and approval by the Court overseeing the litigation. Due to the inherent uncertainties of litigation and because the litigation andsettlement process is still at a preliminary stage, the ultimate outcome of thematter cannot be predicted.

 

**Guarantees:**

 

InNovember 2002, the FASB issued FASB Interpretation No. 45 (“FIN 45”),“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingGuarantees of Indebtedness of Others.” FIN 45 requires that upon issuance of certain guarantees, a guarantor mustrecognize a liability for the fair value of an obligation assumed under theguarantee.  FIN 45 also requiressignificant new disclosures, in both interim and annual financial statements,by a guarantor, about obligations associated with guarantees issued.

 

Latitudepurchases long distance capacity from third parties.  These purchase agreements require a minimum commitment at a fixedrate for a specified period.  TheCompany incorporates long distance services into fixed rate conferencingservices contracts to some of its customers. The terms of the purchase agreements and conferencing services contractsdo not necessarily coincide, and as a result, increases in long distance ratescould expose the Company to potential losses.

 

Latitude also, as permitted under Delaware law and inaccordance with our Bylaws, indemnifies its officers and directors for certainevents or occurrences, subject to certain limits, while the officer or directoris or was serving at the Company’s request in such capacity. Theindemnification obligation is for the officer’s or director’s lifetime.  The maximum amount of potential futureindemnification is unlimited; however, Latitude does have a Director andOfficer Insurance Policy that limits its exposure and enables the Company torecover a portion of any future amounts paid.

 

In the Company’s salesagreements, Latitude typically agrees to indemnify its customers for expensesor liability resulting from claimed infringements of patents, trademarks,copyrights or other intellectual property rights of third parties. The terms ofthese indemnification agreements may be perpetual after execution of theagreement. The maximum amount of potential future indemnification may beunlimited. To date the Company has not paid any amounts to settle claims ordefend lawsuits related to such indemnification agreements.

 

**Note 9 — Deferred Tax Valuation Allowance**

 

At December 31, 2001, the Company had total gross U.S.deferred tax assets of $7.5 million. These assets included temporary differences related principally to netoperating losses that carry forward and research and development credits.  During the third quarter ended September 30,2002, the Company concluded that a deferred tax asset valuation allowanceshould be established due to the uncertainty of realizing the tax loss carry-forwardsand other deferred tax assets in accordance with Statement of FinancialAccounting Standards No. 109 (“SFAS 109”), “Accounting for Income Taxes”.  Accordingly, in the third quarter of 2002,the Company recorded a full valuation allowance for its deferred taxassets.  The Company’s assessment inrecording the valuation allowance was

 

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based principally on itshistorical operating losses; the loss of a major customer and restructuringefforts announced in the third quarter of 2002; and unfavorable macro-economicconditions.

 

SFAS No. 109, “Accounting for Income Taxes,” requiresthe establishment of a valuation allowance for deferred tax assets when it isdeemed more likely than not that these assets will not be realized.  The deferred tax assets will be recognizedin future periods to the extent that the Company can reasonably expect suchassets to be realized.  The Company willevaluate the probability of realizing its deferred tax assets on a quarterlybasis.  If the Company determines that aportion or all of the deferred tax assets are realizable, then the valuationallowance will be reduced accordingly.

 

**Note 10 — Wanadu Acquisition**

 

**On April16, 2003 Latitude announced it had entered into an agreement to acquire theassets of Wanadu Incorporated (“Wanadu”), a privately held developer ofFlash-based content creation, management and delivery products.  The acquisition is a key step in theCompany’s strategy to build and offer rich-media conferencing solutions thatintegrate voice, web, video and instant messaging technologies.  In the transaction, which closed on April30, 2003, Latitude acquired Wanadu’s net assets in exchange for $900,000 incash and a percentage of future revenue from sales of Wanadu products.  The acquisition was accounted for using thepurchase method, and accordingly, the purchase price was allocated to theassets acquired and liabilities assumed based on their estimated fair values onthe acquisition date.  The followingtable summarizes the Company’s purchase price allocation for this transaction:**

 
| Acquisition Cost                                                           |   | $       | 987,713 |   |
|----------------------------------------------------------------------------|--------|---------|---------|--------|
| Less: FMV of acquired assets, intangible  assets, and assumed liabilities: |   |    |    |
| Intangible Assets                                                          |   | 30,000  |    |
| IP R&D                                                                 |   | 70,000  |    |
| PP&E                                                                   |   | 18,952  |    |
| Deferred Revenue                                                           |   | (17,355 | )       |
| Goodwill generated from Acquisition                                        |   | $       | 886,116 |   |

 

**Theamount allocated to purchased in-process technology was determined bymanagement, after considering among other factors, the results of anindependent appraisal based on established valuation techniques in thehigh-technology communications industry and was expensed upon acquisitionbecause technological feasibility had not been established and no futurealternative uses existed for this in-process technology.  The cost approach, which uses the conceptthat replacement cost is an indicator of fair value, was the primary techniqueutilized in valuing the in-process technology acquired in the Wanadutransaction.  The cost approach is basedon the premise that a prudent investor would pay no more for an asset than thecost to replace that asset with a new one. Four projects containing in-process technology in development wereidentified, varying from 60-75% completion as of the valuation date. Replacementcost was based on total costs, net of the unrealized income tax deductionbenefit, spent developing the in-process technology from Wanadu’s inceptionthrough the date the valuation was performed.**

 

**Item 2.**            Management’s Discussion and Analysis of FinancialCondition and Results of Operations.

 

**Certain Forward-Looking Information**

 

This Management’s Discussion and Analysis of FinancialCondition and Results of Operations and other parts of this Form 10-Qinclude a number of forward-looking statements that reflect our current viewswith respect to future events and financial performance.  We use words such as “anticipates,”“believes,” “expects,” “future,” and “intends,” and similar expressions toidentify forward-looking statements. You should not place undue reliance onthese forward-looking statements, which apply only as of the date of thisQuarterly Report on Form 10-Q.  Theseforward-looking statements are subject to risks and uncertainties that couldcause actual results to differ materially from historical results or ourpredictions.  These risks are describedin “ Factors That May Affect Future Results “ and elsewhere in this Form 10-Q.  The Company assumes no obligation to updatethese forward-looking statements to reflect actual results or changes infactors or assumptions affecting such forward-looking statements.

 

While we believe that the discussion and analysis inthis report is adequate for a fair presentation of the information, werecommend that you read this discussion and analysis with Management’sDiscussion and Analysis

 

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included in our AnnualReport on Form 10-K for the year ended December 31, 2002, as filed with theSecurities and Exchange Commission (“SEC”).

 

**Overview**

 

We are a leading provider of integrated, secure voice andweb conferencing solutions that enable geographically dispersed organizationsto work better through real-time collaboration.  Our MeetingPlace system integrates with standard communicationsinfrastructures enabling people to share and edit live documents to worktogether productively from any location. 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 anenterprise-wide resource and to leverage existing technologies such astelephones, cellular phones and personal computers.

 

We generate revenue from sales of our MeetingPlaceproducts and services, and from related customer support and consultingservices.  Revenue derived from servicesconstituted 76% of total revenue in the second quarter of 2003 and 65% duringthe corresponding period of 2002. Service revenue includes revenue from our usage and subscription basedmanaged and hosted MeetingPlace services, implementation and customizationservices, consulting services, warranty coverage and customer support. Revenuefrom managed, hosted, and implementation services is recognized as the servicesare performed, revenue from customization services is recognized upon projectcompletion, and revenue from warranty coverage and customer support isrecognized ratably over the period of the underlying contract.  An exception is start-up customization andimplementation services for hosted and managed services, which are recognizedover the anticipated life of the services arrangement, commencing with theproject completion.  Our MeetingPlaceservices offerings allow companies to acquire MeetingPlace on a usage-basedpricing model and have Latitude manage their MeetingPlace capacity.  Revenue from this service offering hasincreased the proportion of total revenue derived from services.

 

Revenue derived from product sales constituted 24% oftotal revenue in the second quarter of 2003 and 35% during the correspondingperiod of 2002.  Product revenue isgenerally recognized upon shipment if a signed contract exists, the fee isfixed or determinable, collection of the resulting receivable is probable,product returns are reasonably estimable and, if applicable, acceptance hasbeen obtained.

 

We sell our MeetingPlace products primarily throughour direct sales force and, to a lesser extent, through indirect distributionchannels.  The majority of our revenueis derived from large enterprises and organizations, many of which initiallypurchase MeetingPlace servers and later expand deployment of our products asthey require additional capacity for voice and web conferencing.

 

Total cost of revenue consists of component andmaterials costs, direct labor costs, amortization of capitalized software,warranty costs, royalties and overhead related to manufacturing of ourproducts, long distance services incorporated into fixed rate conferencingservices contracts, and materials, travel and labor costs related to personnelengaged in our service operations.  Productgross margin is impacted by the proportion of product revenue derived fromsoftware sales, which typically carry higher margins than hardware sales, andfrom indirect distribution channels, which typically carry lower margins thandirect sales.  Service gross margin isimpacted by the mix of services we provide, which have different levels ofprofitability, usage levels by our customers and the efficiency with which weprovide support to our customers.  Wereduce the carrying value of excess and obsolete inventory by identifyinginventory components either considered excess based on estimates of futureusage or obsolete due to changes in our product offerings.  As a result of technological changes, ourproducts may become obsolete or we could be required to redesign our products.

 

During 2002 and 2001, we recorded significant accrualsin connection with restructuring programs. These accruals included estimates pertaining to employee separationcosts and the settlements of contractual obligations related to excess leasedfacilities and other contracts. Although we do not currently anticipate significant changes, actualcosts may differ from these estimates.

 

 On April 16,2003 we entered into an agreement to acquire the assets of Wanadu Incorporated,a privately held developer of Flash-based content creation, management anddelivery products.  In the transaction,which closed on April 30, 2003, we acquired Wanadu’s net assets in exchange forcash and a percentage of future revenue from sales of Wanadu products.  The acquisition is a key step in ourstrategy to build and offer rich-media conferencing solutions that integratevoice, web, video and instant messaging technologies.

 

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**Results Of Operations**

 

The following tablelists, for the periods indicated, the percentage of total revenue of each lineitem from our condensed consolidated statement of operations to total revenues:

 

 
|                                                   |   | **Three Months Ended  June 30,** |   | **Six Months Ended  June 30,** |   |
|--------------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                                   |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
| Revenue:                                               |   |                             |   |                           |   |   |   |   |   |
| Product                                                |   | 23.5                             | %      | 34.9                           | %      | 22.1 | % | 35.5 | % |
| Service                                                |   | 76.5                             |   | 65.1                           |   | 77.9 |   | 64.5 |   |
| Total revenue                                          |   | 100.0                            |   | 100.0                          |   | 100.0 |   | 100.0 |   |
| Cost of revenue:                                       |   |                             |   |                           |   |   |   |   |   |
| Product                                                |   | 9.9                              |   | 13.5                           |   | 8.5 |   | 12.4 |   |
| Service                                                |   | 41.4                             |   | 33.3                           |   | 38.5 |   | 34.7 |   |
| Total cost of revenue                                  |   | 51.3                             |   | 46.8                           |   | 47.0 |   | 47.1 |   |
| Gross profit                                           |   | 48.7                             |   | 53.2                           |   | 53.0 |   | 52.9 |   |
|                                                   |   |                             |   |                           |   |   |   |   |   |
| Operating expenses:                                    |   |                             |   |                           |   |   |   |   |   |
| Research and development                               |   | 16.7                             |   | 15.1                           |   | 14.2 |   | 15.0 |   |
| Marketing and sales                                    |   | 39.9                             |   | 47.9                           |   | 36.6 |   | 49.8 |   |
| General and administrative                             |   | 13.3                             |   | 11.5                           |   | 12.7 |   | 12.1 |   |
| Purchased in-process technology                        |   | 0.9                              |   | —                         |   | 0.4 |   | — |   |
| Total operating expenses                               |   | 70.8                             |   | 74.5                           |   | 63.9 |   | 76.9 |   |
| Loss from operations                                   |   | (22.1                            | )      | (21.3                          | )      | (10.9 | ) | (24.0 | ) |
| Interest income, net                                   |   | 1.4                              |   | 2.5                            |   | 1.5 |   | 2.7 |   |
| Loss before benefit from (provision for) income  taxes |   | (20.7                            | )      | (18.8                          | )      | (9.4 | ) | (21.3 | ) |
| Benefit from (provision for) income taxes              |   | (0.3                             | )      | 6.7                            |   | (0.2 | ) | 7.5 |   |
| Net loss                                               |   | (21.0                            | )%     | (12.1                          | )%     | (9.6 | )% | (13.8 | )% |

 

*Product Revenue*

 

Product revenue was $2.0 million for the secondquarter of 2003, a decrease of 44% compared to the corresponding period in2002.  Product revenue decreased $3.0million, or 43%, to $3.9 million for the six months ended June 30, 2003 from $6.9million for the six months ended June 30, 2002.  The decreases from the three and six months ended June 30, 2002to 2003 were due to fewer MeetingPlace system sales in a continuing uncertaineconomic and geopolitical environment, in which our existing and targetcustomers have reduced their capital spending. Additionally, the decrease in product revenue was a result of growth ofour service offerings, including our managed and hosted deployment options,which allows companies to acquire MeetingPlace on a usage-based pricingmodel.   The combination of these twofactors resulted in product revenue moving from 36% to 22% of total revenue forthe six months ended June 30, 2003.

 

*Service Revenue*

 

Service revenue decreased $167,000, or 3%, to $6.3million for the three months ended June 30, 2003 from $6.5 million for thethree months ended June 30, 2002. Service revenue increased $1.2 million, or 10%, to $13.8 million for thesix months ended June 30, 2003 from $12.6 million for the six months ended June30, 2002.  Service revenue is comprisedof two parts, product support revenue and MeetingPlace services revenue, whichincludes managed and hosted services. Excluding revenue from Hewlett-Packard, MeetingPlace services revenueincreased to $2.6 million in the second quarter of 2003 from $1.3 million inthe corresponding period in 2002, a 100% increase, and increased $2.9 million,or 126%, to $5.1 million for the six months ended June 30, 2003 from $2.3million for the six months ended June 30, 2002.  The increase was attributable primarily to the sale ofusage-based managed and hosted services to both new and existing customers aswell as increased minutes of usage from existing customers.  The foregoing calculation of servicesrevenue, which excludes revenue from Hewlett-Packard,

 

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is a non-GAAP financialmeasure within the meaning of Regulation G. This adjustment to our GAAP results is made with the intent of providingboth management and investors a supplemental understanding of our underlying operationalresults and trends.

 

In August 2002, we announced that Hewlett-PackardCompany (“Hewlett-Packard”), our then largest customer, had decided to pursuealternative vendor solutions for its voice conferencing needs.  Service revenue from Hewlett-Packardconsisted of $635,000 and $2.2 million for the three months ended June 30, 2003and 2002, and $2.1 million and $4.2 million for the six months ended June 30,2003 and 2002, respectively.  For thethree months ended June 30, 2003, Hewlett—Packard accounted for less than 10%of our total revenue.  Hewlett-Packardwas the only customer that accounted for more than 10% of our total revenue forthe six months ended June 30, 2003, and for the three and six months ended June30, 2002.  We expect that service revenuefor the three months ending September 30, 2003 will be relatively flat from thethree months ended June 30, 2003 due to the expected ramp-down ofHewlett-Packard service revenues, offset by the continued growth of ournon-Hewlett-Packard business.

 

*Total Cost ofRevenue*

 

Total cost of revenue decreased  $427,000, or 9%, to $4.3 million for thesecond quarter of 2003, from $4.7 million for the corresponding period of2002.  Total cost of revenue decreased$838,000, or 9%, to $8.3 million for the six months ended June 30, 2003 from$9.2 million for the six months ended June 30, 2002.  The decreases in total cost of revenue were due to lower productsales, as well as lower expenses incurred in the first half of 2003 resultingfrom the implementation of a cost reduction program in the third quarter of2002.

 

Gross profit was $4.0 million for the second quarterof 2003, as compared to $5.3 million in the corresponding period of 2002.  Gross profit was $9.4 million for the sixmonths ended June 30, 2003, as compared to $10.3 million for the six monthsended June 30, 2002.  Gross margin was49% as a percentage of revenue for the second quarter of 2003, as compared to53% for the corresponding period of 2002, and was 53%, respectively, for thesix months ended June 30, 2003 and 2002. The decrease in gross margin from 2002 to 2003 was due to lower overallsales combined with the significant fixed cost component of our cost ofrevenue.

 

Product gross margin decreased to 58% as a percentageof product revenue for the second quarter of 2003 as compared to 61% for thecorresponding period of 2002.  Productgross margin decreased to 62% as a percentage of product revenue for the sixmonths ended June 30, 2003 as compared to 65% for the six months ended June 30,2002. This decrease was due to the impact of fixed manufacturing and royaltycosts on lower product revenue, as well as reduced selling prices.

 

Service gross margin decreased to 46% as a percentageof service revenue for the second quarter of 2003 as compared to 49% for thecorresponding period in 2002.  Servicegross margin increased to 51% as a percentage of service revenue for the sixmonths ended June 30, 2003 as compared to 46% for the six months ended June 30,2002.  The decrease from second quarter2002 to 2003 was due to the decrease in higher margin revenue attributable toHewlett-Packard and to product support revenue, while service cost of sales,essentially fixed in the short term, remained unchanged. The increase from thesix months ended June 30, 2002 to 2003 was due to overall increased servicesrevenue from higher usage volumes, offset by the aforementioned Hewlett-Packardand support revenue declines.  As longdistance services that are incorporated into fixed rate conferencing servicescontracts increase, the result will be an increase to both services revenue andcost of revenue, however, this will also cause a negative impact to the overallservices gross margin percentage.

 

*Research andDevelopment Expenses*

 

Research and development expenses consist ofcompensation and related costs for research and development personnel,facilities expenses for testing space, and equipment and purchased software.Research and development expenses were $1.4 million for the second quarter of2003, which represented a decrease of 8% when compared to the correspondingperiod in 2002.  Research anddevelopment expenses decreased $410,000, or 14%, to $2.5 million for the sixmonths ended June 30, 2003 from $2.9 million for the six months ended June 30,2002.  The decrease from second quarter2002 to 2003 was due to a decrease of $189,000 in compensation, and a decreasein capitalized software of $62,000.  Thedecrease in expenses from the six months ended June 30, 2002 to 2003 was due todecreases in compensation of $327,000, temporary help of $73,000 anddepreciation of $84,000, offset by an increase in expensed equipment of$62,000.  As a percentage of totalrevenues, research and development expenses were 17% and 15%, respectively, forthe three months ended June 30, 2003 and 2002, and were 14% and 15% for the sixmonths ended June 30, 2003 and 2002.

 

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*Marketing andSales Expenses*

 

Marketing and sales expenses consist of promotionalexpenditures and compensation and related costs for marketing and salespersonnel. Marketing and sales expenses were $3.3 million for the secondquarter of 2003, which represented a decrease of 31% when compared to thecorresponding period in 2002.  Marketingand sales expenses decreased $3.2 million, or 33%, to $6.5 million for the sixmonths ended June 30, 2003 from $9.7 million for the six months ended June 30,2002.  These decreases in 2003 were aresult of a cost reduction program implemented in the third quarter of 2002, aswell as lower product revenue in 2003, resulting in lower commissionexpenses.  The decrease from secondquarter 2002 to 2003 was due to decreases in compensation of $828,000, $108,000in advertising, $169,000 in travel, $205,000 in occupancy, $52,000 in publicrelations, and $40,000 in depreciation expenses.  The decrease in expenses from the six months ended June 30, 2002to 2003 was due to decreases in compensation of $1.5 million, $215,000 inadvertising, $269,000 in travel, $565,000 in occupancy, $306,000 in consulting,and $77,000 in depreciation expenses. As a percentage of total revenues, marketing and sales expenses were 40%and 48% for the three months ended June 30, 2003 and 2002, and were 37% and 50%for the six months ended June 30, 2003 and 2002.

 

*General andAdministrative Expenses*

 

General and administrative expenses consist ofpersonnel expenses, legal and accounting expenses and other general corporateexpenses.  General and administrativeexpenses were $1.1 million for the three months ended June 30, 2003 and2002.  General and administrativeexpenses decreased $20,000, or 1%, to $2.2 million for the six months endedJune 30, 2003 from $2.3 million for the six months ended June 30, 2002.  As a percentage of total revenues, generaland administrative expenses were 13% and 11% for the three months ended June30, 2003 and 2002, and were 13% and 12% for the six months ended June 30, 2003and 2002

 

*PurchasedIn-Process Technology*

 

*In thethree months ended June 30, 2003, we incurred a $70,000 charge for purchasedin-process technology.  This technologywas acquired in April 2003 as part of the acquisition of WanaduIncorporated.  The amount allocated topurchased in-process technology was determined by management, after consideringamong other factors, the results of an independent appraisal based onestablished valuation techniques in the high-technology communications industryand was expensed upon acquisition because technological feasibility had notbeen established and no future alternative uses existed for this in-processtechnology.  The cost approach, whichuses the concept that replacement cost is an indicator of fair value, was theprimary technique utilized in valuing the in-process technology acquired in theWanadu transaction.  The cost approach isbased on the premise that a prudent investor would pay no more for an assetthan the cost to replace that asset with a new one.  Four projects containing in-process technology in developmentwere identified, varying from 60-75% completion as of the valuation date.Replacement cost was based on total costs, net of the unrealized income taxdeduction benefit, spent developing the in-process technology from Wanadu’sinception through the date the valuation was performed.*

 

*Amortization ofDeferred Stock Compensation*

 

In connection with the completion of our initialpublic offering in May 1999, options granted in the last quarter of 1997,during the year 1998 and the first quarter of 1999 have been considered to becompensatory.  We amortized the deferredstock compensation associated with these options over the vesting periods ofthe applicable options, resulting in amortization expense of $57,000 and$126,000 in the three and six months ended June 30, 2002.  The amortization of deferred stockcompensation was completed in the fourth quarter of 2002, with no additionalamortization expense in 2003.

 

*Interest Income,Net*

 

Interest income, net of interest expense, was $114,000for the second quarter of 2003, compared to interest income, net of interestexpense of $250,000 for the corresponding period in 2002.  Interest income, net of interest expense,was $272,000 for the six months ended June 30, 2003, compared to $517,000 forthe corresponding period in 2002.  Thedecrease in net interest income was due to lower investment funds caused by ouruse of cash in operations, and decreasing market interest rates.

 

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*Benefit from(Provision for) Income Taxes*

* *

For the quarter ended June 30, 2003, the provision forincome taxes was $24,000, compared to a benefit of $673,000 in the quarterended June 30, 2002.  For the six monthsended June 30, 2003, the provision for income taxes was $48,000, compared to abenefit of $1.5 million for the six months ended June 30, 2002.  The provision for income taxes in the threeand six months ended June 30, 2003 includes state and foreign income taxes thatwe expect to pay in 2003.  The effectivetax rate was approximately 36% and 35% for the three and six months ended June30, 2002.

 

As described in Note 9 of the “Notes to CondensedConsolidated Financial Statements”, we recorded a valuation allowance equal toour deferred tax asset in the third quarter ended September 30, 2002.  We concluded that a deferred tax assetvaluation allowance should be established due to the uncertainty of realizingthe tax loss carryforwards and other deferred tax assets in accordance withStatement of Financial Accounting Standards No. 109 (“SFAS 109”), “Accountingfor Income Taxes”.

 

**Liquidity andCapital Resources**

 

In May 1999, we completed an initial public offeringof common stock, resulting in net proceeds to us of approximately $33.8million. As of June 30, 2003, we had $22.6 million of cash, cash equivalentsand investments, which represented 61% of total assets.

 

Cash used in operating activities was $545,000 for thesix months ended June 30, 2003, compared to $4.0 million for the same period in2002.  Principal uses of cash inoperating activities in 2003 were a net loss, a decrease in accrued liabilitiesof $1.5 million and an increase in inventory of $445,000, partially offset by adecrease in prepaids of $419,000, an increase in deferred revenue of $305,000,a decrease in accounts receivable of $1.0 million and depreciation andamortization of $1.2 million.

 

Cash provided by investing activities for the sixmonths ended June 30, 2003 was $9.9 million, which consisted primarily ofmaturities of marketable securities of $12.0 million, offset by acquisitioncosts for Wanadu of $988,000, additions to software production costs of$219,000 and by purchases of property and equipment of $834,000.  Cash used in investing activities in thefirst six months of 2002 was $3.0 million, which consisted primarily of thepurchase of marketable securities of $9.6 million and the purchase of propertyand equipment of $937,000, partially offset by maturities of marketablesecurities of $7.6 million.

 

Cash provided by financing activities in the first sixmonths of 2003 was $93,000, which consisted of the proceeds from issuance ofcommon stock under employee benefit plans. For the first six months of 2002, cash provided by financing activitieswas $75,000, which consisted of the proceeds from issuance of common stockunder employee benefit plans, partially offset by payments on obligations undercapital leases and notes payable.

 

We have nomaterial commitments for capital expenditures. We may use cash to further acquire or license technology, products orbusinesses related to our current business. In addition, we anticipate that we will use cash for operatingexpenses.  We lease office facilitiesunder various leases that expire through 2005.

 

We incurred aloss of $1.7 million and negative cash flows from operations of $545,000 duringthe six months ended June 30, 2003.  As of June 30, 2003, we had anaccumulated deficit of approximately $32.9 million.  We expect to incuroperating losses and negative cash flows through at least the fourth quarter of2003.

 

We purchase long distancecapacity from third parties.  Thesepurchase agreements require a minimum commitment at a fixed rate for aspecified period.  We incorporate longdistance services into fixed rate conferencing services contracts to some ofour customers.  The terms of thepurchase agreements and conferencing services contracts do not necessarilycoincide, and as a result, increases in long distance rates could expose us topotential losses.

 

As permitted under Delaware law and in accordance withour Bylaws, we indemnify our officers and directors for certain events oroccurrences, subject to certain limits, while the officer or director is or wasserving at our request in such capacity. The indemnification obligation is forthe officer’s or director’s lifetime. The maximum amount of potential futureindemnification is unlimited; however, we do have a Director and OfficerInsurance Policy that limits our exposure and enables us to recover a portionof any future amounts paid.

 

In our sales agreements, we typically agree toindemnify our customers for expenses or liability resulting from claimedinfringements of patents, trademarks, copyrights or other intellectual propertyrights of third parties. The

 

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terms of theseindemnification agreements may be perpetual after execution of the agreement.The maximum amount of potential future indemnification may be unlimited. Todate we have not paid any amounts to settle claims or defend lawsuits relatedto such indemnification agreements.

 

We believe that our current cash, cash equivalents andshort-term investments will be sufficient to meet our anticipated cash needsfor working capital and capital expenditures for at least the next 12 months.Our future capital requirements will depend upon many factors, includingrevenue growth, management of working capital, the timing of research andproduct development efforts and the expansion of our marketing and salesefforts.  If our existing cash balancesand cash flows expected from future operations are not sufficient to meet our liquidityneeds, we will need to raise additional funds. If adequate funds are not available on acceptable terms, or at all, wemay not be able to take advantage of market opportunities, develop or enhancenew products, pursue acquisitions that would complement our existing productofferings or enhance our technical capabilities, execute our business plan orotherwise respond to competitive pressures. The issuance of additional equity securities may dilute our existingstockholders.

 

**Impact of RecentlyIssued Accounting Standards**

 

In June 2002, the Financial Accounting Standards Board(“FASB”) issued Statement of Financial Accounting Standards No. 146,“Accounting for Exit or Disposal Activities” (“SFAS 146”). SFAS 146addresses significant issues regarding the recognition, measurement, andreporting of costs that are associated with exit and disposal activities,including restructuring activities that are currently accounted for under theEmerging Issues Task Force (“EITF”) No. 94-3, “Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring)”.  The scope of SFAS 146 also includescosts related to terminating a contract that is not a capital lease andtermination benefits that employees who are involuntarily terminated receiveunder the terms of a one-time benefit arrangement that is not an ongoingbenefit arrangement or an individual deferred-compensation contract. SFAS 146is effective for exit or disposal activities that are initiated after December31, 2002.  The provisions of EITF No.94-3 shall continue to apply for an exit activity initiated under an exit planthat meets the criteria of EITF No. 94-3 prior to the adoption of SFAS146.  The effect on adoption of SFAS 146changed on a prospective basis the timing of when restructuring charges arerecorded from a commitment date approach to when the liability is incurred.SFAS 146 was adopted in the first quarter of 2003 and did not have asignificant impact on our financial position, results of operations or cashflows.

 

In November 2002, the EITF reached a consensus onIssue No. 00-21 “Accounting for Revenue Arrangements With MultipleDeliverables” which provides guidance on how to account for arrangements that involvethe delivery or performance of multiple products, services and/or rights to useassets.  The provisions of EITF No.00-21 will apply to revenue arrangements entered into in fiscal periodsbeginning after June 15, 2003.  EITF No.00-21 was adopted in the second quarter of 2003 and did not have an impact onour financial position, results of operations or cash flows.

 

In January 2003, the FASB issued Interpretation No. 46(“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation ofARB No. 51”. FIN 46 requires certain variable interest entities to beconsolidated by the primary beneficiary of the entity if the equity investorsin the entity do not have the characteristics of a controlling financialinterest or do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from otherparties. FIN 46 is effective immediately for all new variable interest entitiescreated or acquired after January 31, 2003. For variable interest entitiescreated or acquired prior to February 1, 2003, the provisions of FIN 46 must beapplied for the first interim or annual period beginning after June 15,2003.  We do not have any variableinterest entities.  FIN 46 was adoptedin the second quarter of 2003 and did not have an impact on our financialposition, results of operations or cash flows.

 

In May 2003, the FASB issued SFAS No. 150, “Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity.”  This Statement establishesstandards for how an issuer classifies and measures in its statement offinancial position certain financial instruments with characteristics of bothliabilities and equity.  It requiresthat an issuer classify a financial instrument that is within its scope as aliability (or an asset in some circumstances) because that financial instrumentembodies an obligation of the issuer. This Statement is effective for financial instruments entered into ormodified after May 31, 2003 and otherwise is effective at the beginning of thefirst interim period beginning after June 15, 2003, except for mandatorilyredeemable financial instruments of nonpublic entities.  For nonpublic entities, mandatorily redeemablefinancial instruments are subject to the provisions of this Statement for thefirst period beginning after December 15, 2003.  It is to be implemented by reporting the cumulative effect of achange in an accounting principle for financial instruments created before theissuance date of the statement and still existing at the beginning of theinterim period of adoption.  SFAS No.150

 

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was adopted in the secondquarter of 2003 and did not have an impact on our financial position, resultsof operations or cash flows.

 

**Factors That MayAffect Future Results**

 

In addition to the other information in this report,the following factors should be considered carefully in evaluating theCompany’s business and prospects:

 

*Ourfuture profitability is uncertain due to recent economic developments that mayaffect our customers’ ability to purchase our products.*  Recent economic developments have causedmany companies to reduce headcount and overhead expenses and to reconsider ordelay capital expenditures. This has had, and may continue to have, an adverseeffect on our ability to grow revenue. Our financial statements must be considered in light of the risks anduncertainties encountered by companies that sell to corporate informationtechnology departments.  We relysubstantially on sales of our MeetingPlace products and services, which havelimited market acceptance.  We cannot beassured that our revenue will grow or that we will return to and/or maintainprofitability in the future.

 

 In addition,we are unable to predict our future product development, sales and marketing,and administrative expenses. To the extent that these expenses increase, wewill need to increase revenue to achieve profitability. Our ability to increaserevenue and achieve profitability also depends on the other risk factorsdescribed in this section.

 

*Ouroperating results may fluctuate significantly.*Our operatingresults are difficult to predict. Our future quarterly operating results mayfluctuate and may not meet the expectations of securities analysts orinvestors. If this occurs, the price of our common stock would likely decline.The factors that may cause fluctuations of our operating results include thefollowing:

 

•                  changes in our mix of revenuesgenerated from product sales and services;

 

•                  changes by existing customers intheir levels of purchases of our products and services;

 

•                  changes in our mix of sales channelsthrough which our products and services are sold; and

 

•                  changes in our mix of domestic andinternational sales.

 

Orders on hand at the beginning of each quartertypically do not equal expected revenue for that quarter. In addition, asignificant portion of our orders is received in the last month of each fiscalquarter. If we fail to ship products by the end of a quarter in which the orderis received, or if our prospective customers delay their orders or deliveryschedules until the following quarter, we may fail to meet our revenueobjectives.

 

Additionally, we have continued to expand our serviceofferings by providing hosted and managed services to our customers.Accordingly, future revenue from this new service offering may increase theproportion of total revenue derived from services. To the extent thatprospective customers elect to purchase the hosted or managed services ratherthan an on-premises MeetingPlace system, our product revenue could be adverselyaffected.

 

*Ourcustomers do not have long-term obligations to purchase our products andservices; therefore our revenue and operating results could decline if ourcustomers do not continue to purchase our products or use our services.*Ourcustomers are not obligated to continue to purchase our products or**useour services.  As a result, the failureof repeat customer usage, or our inability to retain existing customers andsustain or increase their usage of our services, could result in lower thanexpected revenue, and therefore, harm our ability to become profitable andcause our stock price to decline.  Inaddition, because our customers have no continuing obligations with us, we mayface increased downward pricing pressure that could cause a decrease in ourgross margins.  Our customers depend onthe reliability of our services and we may lose a customer if we fail toprovide reliable services for even a single communication event.

 

*Weexpect to depend on sales of our MeetingPlace solution for substantially all ofour revenue for the foreseeable future.* We anticipate that revenues from ourMeetingPlace product and related services will continue to constitutesubstantially all of our revenues for the foreseeable future.  Consequently, any decline in the demand forMeetingPlace or its failure to achieve broad market acceptance, would seriouslyharm our business.

 

*Ourrevenues could be significantly reduced by the loss of a major customer.*Wederive a significant portion of our revenues from a limited number ofcustomers.  The loss of any of thesemajor customers, if not replaced, could dramatically reduce our revenues.  During the quarter ended September 30, 2002,we announced that our then largest customer, Hewlett-Packard Company(“Hewlett-Packard”), had decided to pursue alternative vendor solutions for itsvoice conferencing needs.  For the threemonths ended June 30, 2003, Hewlett-Packard accounted

 

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for less than 10% of ourtotal revenue.  Hewlett-Packard was theonly customer that accounted for more than 10% of our total revenue for the sixmonths ended June 30, 2003.

 

*Our market is highly competitive.*We expect competition to persist and intensify in the future, which couldadversely affect our ability to increase sales, penetrate new markets andmaintain average selling prices.**Because of this competition, we may notbe successful. Currently, our principal competitors include:

 

•                  major telecommunications carriersthat operate service bureaus for voice conferencing, such as AT&TCorporation, MCI Worldcom, Inc. and Sprint Corporation;

 

•                  collaborative software and othercompanies that offer voice and/or web conferencing products and services suchas Lotus Software, Microsoft Corporation, Raindance Communications, Inc.,Spectel and WebEx Communications, Inc.; and

 

•                  private branch exchange, or PBX,providers that sell systems with voice conferencing capabilities, such asAvaya, Inc., Cisco Systems, Inc. and Nortel Networks Corporation.

 

Many of these companies have longer operatinghistories, stronger brand names, larger market share and significantly greaterfinancial, technical, marketing and other resources than do we. These companiesmay have existing relationships with many of our prospective customers. Largetelecommunications carriers may also bundle conferencing with other services,such as long distance, in order to increase sales in other areas. In effect,these service providers can subsidize their conferencing offering, enablingthem to offer it to customers at very low rates.  In addition, these companies may be able to respond more quicklythan we can to new or emerging technologies and changes in customerrequirements.

 

*Weincorporate long distance services into fixed rate conferencing servicescontracts to some of our customers, and as a result increases in long distancerates would negatively affect our margins. *We purchase long distance capacity from third partieswho may be our competitors.  Thesepurchase agreements require a minimum commitment at a fixed rate for aspecified period.  We incorporate longdistance services into fixed rate conferencing services contracts to some ofour customers.  The terms of thepurchase agreements and conferencing services contracts do not necessarilycoincide, and as a result, increases in long distance rates could expose us topotential losses.

 

*Themarket for rich-media conferencing is in an early stage of development, and ourproducts and services may not be adopted.*If the market forour integrated voice and web conferencing products and services fails to growor grows more slowly than we anticipate, we may not be able to increaserevenues or return to and/or maintain profitability. The market for integratedreal-time voice and web conferencing is relatively new and rapidly evolving.Our ability to be profitable depends in large part on the widespread adoptionby end users of real-time voice and web conferencing.

 

We will have to devote substantial resources toeducate prospective customers about the uses and benefits of our products andservices. In addition, businesses that have invested substantial resources inother conferencing products may be reluctant or slow to adopt our products,which might replace or compete with their existing systems. Our efforts toeducate potential customers may not result in our products and servicesachieving market acceptance.

 

*Rapidtechnological changes could cause our products and services to become obsoleteor require us to redesign our products or integrate with our competitors.*Themarket in which we compete is characterized by rapid technological change,frequent new product introductions, changes in customer requirements andemerging industry standards. In particular, we expect that the growth of theInternet and Internet-based telephony applications, as well as generaltechnology trends such as migrations to new operating systems, will require usto adapt our product and services to remain competitive. This adaptation couldbe costly and time-consuming. Our products and services could become obsoleteand unmarketable if products and services using new technologies are introducedand new industry standards emerge. For example, the widespread acceptance ofcompeting technologies, such as video conferencing, could diminish demand forour current products and services. As a result, the life cycle of our productsand services is difficult to estimate.

 

Many of our competitors have substantially greaterresources than we do and we may not be able to match their rate of productenhancement and innovation.  Inparticular, if we cannot maintain a competitive web conferencing product, wemay be forced to integrate our voice conferencing with competitors who offermore advanced web conferencing products.

 

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To be successful, we will need to develop andintroduce new products, product enhancements and services that respond to technologicalchanges or evolving industry standards, such as the transmission of voice overthe Internet, in a timely manner and on a cost effective basis. We cannotassure successful development of these types of products and productenhancements or that our products and services will achieve broad marketacceptance.

 

*Oursales cycle is lengthy and unpredictable.*Any delay in salesof our products and services could cause our quarterly revenue and operatingresults to fluctuate. The typical sales cycle of our products is lengthy,generally between six to twelve months, unpredictable, and involves significantinvestment decisions by prospective customers, as well as our education ofpotential customers regarding the use and benefits of our products. Furthermore,many of our prospective customers have neither budgeted expenses for voice andweb conferencing systems nor have personnel specifically dedicated toprocurement and implementation of these conferencing systems. As a result, ourcustomers spend a substantial amount of time before purchasing our products inperforming internal reviews and obtaining capital expenditure approvals.  The emerging and evolving nature of the real-timevoice and web conferencing market may lead to confusion in the market, whichmay cause prospective customers to postpone their purchase decisions.

 

*Ifwe fail to expand and develop our distribution channels, our business couldsuffer.*If we are unable to expand and develop ourdistribution channels, we may not be able to increase revenue or achieve marketacceptance of our MeetingPlace product and services.  We believe that our future success is dependent upon establishingsuccessful relationships with a variety of distribution partners. We cannot becertain that we will be able to reach agreement with the required distributionpartners, or that these distribution partners will devote adequate resources toselling our products. Furthermore, if our distribution partners fail toadequately market or support our products, the reputation of our products inthe market may suffer. In addition, we will need to manage potential conflictsbetween our direct sales force and third-party reselling efforts.

 

*Ourability to expand into international markets is uncertain.*Weintend to continue to expand our operations into new international markets. Inaddition to general risks associated with international expansion, such asforeign currency fluctuations and political and economic instability, we facethe following risks and uncertainties, any of which could prevent us fromselling our products and services in a particular country or harm our businessoperations once we have established operations in that country:

 

•                  the difficulties and costs oflocalizing products and services for foreign markets, including the developmentof multilingual capabilities in our MeetingPlace system;

 

•                  the need to modify our products tocomply with local telecommunications certification requirements in eachcountry; and

 

•                  our lack of a direct sales presencein other countries, our need to establish relationships with distributionpartners to sell our products and services in these markets and our reliance onthe capabilities and performance of these distribution partners.

 

*Ifwe fail to integrate our products with third-party technology, our salescould suffer.*Our products and services are designed tointegrate with our customers’ data and voice networks, as well as withenterprise applications such as browsers and collaborative softwareapplications. If we are unable to integrate our products and services withthese networks and systems, sales of our products and services could suffer.

 

In addition, we may be required to engage in costlyand time-consuming redesigns of our products because of technologyenhancements or upgrades of these systems. We may not be able to redesign ourproducts or be certain that any of these redesigns will achieve marketacceptance. In addition, we will need to continually modify our products asnewer versions of the enterprise applications with which our products integrateare introduced. Our ability to do so largely depends on our ability to gainaccess to the advanced programming interfaces for these applications, and wecannot make assurances that we will have access to necessary advancedprogramming interfaces in the future.

 

*Ourbusiness could suffer if we lose the services of our current management team.*Ourfuture 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 ofthese key employees, we may encounter difficulties finding qualified personnelto replace them.

 

*Theloss of our right to use technology licensed to us by third parties could harmour business.*We license technology that is incorporated intoour products and services from third parties, including digital signalprocessing algorithms and the MeetingPlace server’s operating system andrelational database. Any interruption in the supply or support of any licensedsoftware could disrupt our operations and delay our sales, unless and until wecan replace

 

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the functionalityprovided by this licensed software. Because our products incorporate softwaredeveloped and maintained by third parties, we depend on these third parties todeliver and support reliable products, enhance their current products, developnew products on a timely and cost-effective basis and respond to emergingindustry standards and other technological changes.

 

We have a strategic partnership with a company basedin Israel to integrate video conferencing functionality into our products.Political instability in this region of the world may limit our access to thistechnology or delay introduction of new products.

 

*Anyinterruption in supply of components from outside manufacturers and supplierscould hinder our ability to ship products in a timely manner*.We rely on third parties to obtain most of the components of the MeetingPlaceserver and integrate them with other standard components, such as the centralprocessing unit and disk drives. If these third parties are no longer able tosupply 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 resourcesin 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 theMeetingPlace server, from sole source suppliers. In the past, we haveexperienced problems in obtaining some of these components in a timely mannerfrom these sources, and we cannot be certain that we will be able to continueto obtain an adequate supply of these components in a timely manner or, ifnecessary, from alternative sources. If we are unable to obtain sufficientquantities of components or to locate alternative sources of supply, we mayexperience delays in shipping our products and incur additional costs to findan alternative manufacturer or manufacture our products internally.

 

*Ourproducts and services may suffer from defects, errors or breaches of security*.Software and hardware products and services as complex as ours are likely tocontain undetected errors or defects, especially when first introduced or whennew versions are released. Any errors or defects that are discovered aftercommercial release could result in loss of revenue or delay in marketacceptance, diversion of development resources, damage to our customer relationshipsor reputation and increased service and warranty cost. Our products andservices may not be free from errors or defects after commercial shipments havebegun, and we are aware of instances in which some of our customers haveexperienced product failures or errors. Many of our customers conductconfidential conferences, and transmit confidential data, using MeetingPlace.Concerns over the security of information sent over the Internet and theprivacy of its users may inhibit the market acceptance of our products. Inaddition, unauthorized users in the past have gained, and in the future may beable to gain, access to our customers’ MeetingPlace systems or our hostedservices. Any compromise of security could deter people from using MeetingPlaceand could harm our reputation and business and result in claims against us.

 

*The success of our hosted serviceswill depend on the efficient and uninterrupted operation of our computer andcommunication hardware and software systems.* In addition,some of our communications hardware and software for our services businessesare hosted at third party co-location facilities.  These systems and operations are vulnerable to damage orinterruption as a result of human error, telecommunications failures,break-ins, acts of vandalism, computer viruses and natural disasters. Systemsfailure or damage could cause an interruption of our services and result inloss of customers, difficulties in attracting new customers and could adverselyimpact our operating results.  In addition,if the number of customers who purchase our hosted services increases overtime, our systems must be able to accommodate increased usage. If we are unableto increase our capacity to accommodate growth in usage, we could encountersystem performance issues, which could harm our relationships with customersand our reputation.

 

*Wemay be unable to adequately protect our proprietary rights, and we may besubject to infringement claims.*Unauthorized parties may copyaspects of our products and obtain and use information that we regard asproprietary, which could cause our business to suffer. Furthermore, the laws ofmany foreign countries do not protect our intellectual property rights to thesame extent as the laws of the United States.

 

In the future, we may be subject to legal proceedingsand claims for alleged infringement of third party proprietary rights. Any ofthese claims, even if not meritorious, could result in costly litigation,divert management’s attention and resources, or require us to enter intoroyalty or license agreements which are not advantageous to us. Parties makingthese claims may be able to obtain injunctive or other equitable relief, whichcould 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

 

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the “Latitude Communications”and “Latitude” with logo marks in the United States and the “LatitudeCommunications” mark in Canada as well as other jurisdictions.   Consequently, we have at present terminatedour efforts to register these trademarks, and we will have to rely solely oncommon law protection for these marks. We cannot make assurances that we will be free from challenges of orobstacles to our use or registration of our marks.

 

*Wemay encounter difficulties in integrating future acquisitions and that couldadversely affect our business. *We have recently acquired the assets ofWanadu Incorporated and may in the future acquire technology, products orbusinesses related to our current or future business.  We have limited experience in acquisition activities and may haveto devote substantial time and resources in order to completeacquisitions.  There may also be risksin entering markets where we have no or limited prior experience.  Further, these potential acquisitions entailrisks, uncertainties and potential disruptions to our business.  For example, we may not be able tosuccessfully integrate a company’s operations, technologies, products andservices, information systems and personnel into our business.  An acquisition may further strain ourexisting financial and managerial controls, and divert management’s attentionaway from our other business concerns. In connection with the Wanadu asset acquisition, we assumed certaincontractual liabilities and hired certain employees of Wanadu, which isexpected to result in an increase in research and development expenses.  There may also be unanticipated costs andliabilities associated with an acquisition that could adversely affect ouroperating results.

 

*Asset impairment can negativelyaffect our results of operations. *Ouracquisition of Wanadu Incorporated on April 30, 2003 resulted in goodwillvalued at approximately $886,000 as of June 30, 2003. Generally acceptedaccounting principles related to goodwill and other intangibles changed withthe issuance of Statement of Financial Accounting Standards No. 142, or SFAS142, “Goodwill and Other Intangible Assets”. Under SFAS 142, goodwill andindefinite lived intangible assets are no longer amortized, but must bereviewed for impairment at least annually or sooner under certaincircumstances. Other intangible assets that are deemed to have finite usefullives will continue to be amortized over their useful lives, but must bereviewed for impairment when events or changes in circumstances indicate thatthe carrying amount of these assets may not be recoverable. Screening for andassessing whether impairment indicators exist, or if events or changes incircumstances have occurred, including changes in market conditions, operatingfundamentals, competition and general economic conditions, requires significantjudgment. Additionally, changes in the high-technology industry occurfrequently and quickly. Therefore, we cannot assure you that a charge tooperations will not occur as a result of future goodwill impairment tests. Ifimpairment is deemed to exist, we would write down the recorded value of theseassets to their fair value, which could result in a full write-off of theirbook value. If these write-downs occur, they could harm our business andresults of operations.

 

*Weare subject to government regulation, and our failure to comply with theseregulations could harm our business.*Our products are subjectto a wide variety of safety, emissions, export and compatibility regulationsimposed by governmental authorities in the United States or in other countriesin which we sell our products and services. If we are unable to obtainnecessary approvals or maintain compliance with the regulations of anyparticular jurisdiction, we may be prohibited from selling our products in thatterritory. In addition, to sell our products and services in many internationalmarkets, we are required to obtain certifications that are specific to thelocal telephony infrastructure.

 

*Ourstock price may be volatile.*We expect that the market priceof our common stock will fluctuate as a result of variations in our quarterlyoperating results. These fluctuations may be exaggerated by the very lowtrading volume of our common stock at the present time. In addition, due to thetechnology-intensive and emerging nature of our business, the marketprice of our common stock may rise and fall in response to:

 

•                  announcements of technological orcompetitive developments;

 

•                  acquisitions or strategic alliancesby us or our competitors; or

 

•                  the gain or loss by us of significantorders.

 

We may need to raise additional capital in the future,and if we are unable to secure adequate funds on terms acceptable to us, we maybe unable to execute our business plan. If our existing cash balances and cash flows expected from futureoperations are not sufficient to meet our liquidity needs, we will need toraise additional funds.  If adequatefunds are not available on acceptable terms or at all, we may not be able totake advantage of market opportunities, develop or enhance new products, pursueacquisitions that would complement our existing product offerings or enhanceour technical capabilities, execute our business plan or otherwise respond tocompetitive pressures or unanticipated requirements.

 

*Futuresales of our common stock may depress our stock price*.  If our stockholders sell substantial amountsof common stock, including shares issued upon the exercise of outstandingoptions and warrants, in the public market, the market price of our commonstock could fall.

 

**We may be delistedfrom the Nasdaq National Market**.  On October 7, 2002, we were notified byNasdaq that Friday, October 4, 2002 represented the 30th consecutive tradingday in which the closing bid price was less than the minimum $1 per sharerequirement for listing on the Nasdaq National Market. On November 26, 2002 thecompany was notified that the closing bid price had exceeded $1 per share for10 consecutive trading days and that the company had regained compliance withNASDAQ’s listing requirements.  Wecannot make assurances that we will maintain compliance with all NASDAQ listingrequirements in the future.  If ourefforts to maintain compliance are unsuccessful, we may seek to list our shareson the Nasdaq SmallCap Market, which is generally considered to be not as broadand efficient a market as the Nasdaq National Market.  This lack of liquidity and visibility could further decrease theprice of our common stock.  In addition,delisting from the Nasdaq National Market could negatively impact ourreputation and customer relationships.

 

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**Item 3.**            Quantitative and Qualitative Disclosures About MarketRisk

 

Our exposure to marketrisk for changes in interest rates relates primarily to our investmentportfolio. We do not use derivative financial instruments in our investmentportfolio. We place our investments with high credit quality issuers and, bypolicy, limit the amount of credit exposure to any one issuer. The portfolioincludes only securities with maturities of one to twelve months and withactive secondary or resale markets to ensure portfolio liquidity. We have noinvestments denominated in foreign currencies and therefore are not subject toforeign currency risk.

 

Currently, the majorityof our sales and expenses are denominated in U.S. dollars and, as a result, wehave not experienced significant foreign exchange gains and losses. While we doexpect to effect some transactions in foreign currencies in the next 12 months,we do not anticipate that foreign exchange gains and losses will besignificant. We have not engaged in foreign currency hedging activities.

 

**Item 4.**            Controls and Procedures

 

We have evaluated the design and operation of ourdisclosure controls and procedures to determine whether they are effective inensuring that the disclosure of required information is timely made inaccordance with the Exchange Act and the rules and regulations of theSecurities and Exchange Commission. This evaluation was made under thesupervision and with the participation of management, including our principalexecutive officer and principal financial officer within the 90-day periodprior to the filing of this Quarterly Report on Form 10-Q. The principalexecutive officer and principal financial officer have concluded, based ontheir review, that our disclosure controls and procedures, as defined atExchange Act Rules 13a-14(c) and 15d-14(c), are effective to ensure thatinformation required to be disclosed by us in reports that we file under the ExchangeAct is recorded, processed, summarized and reported within the time periodsspecified in Securities and Exchange Commission rules and forms. No significantchanges were made to our internal controls or other factors that couldsignificantly affect these controls subsequent to the date of their evaluation.

 

**PART II.**        OTHER INFORMATION

 

**Item 1.            LegalProceedings**

 

In November 2001, a seriesof securities class actions were filed in the United States District Court forthe Southern District of New York against certain underwriters for Latitude’sinitial public offering (“IPO”), Latitude Communications Inc., and Emil C. Wangand Rick M. McConnell, who were officers of Latitude at the time of the IPO.The complaints were consolidated into a single action, and a consolidatedamended complaint against Latitude was filed in April 2002. The amendedcomplaint alleges, among other things, that the underwriter defendants violatedthe securities laws by failing to disclose alleged compensation arrangements inthe initial public offering’s registration statement and by engaging inmanipulative practices to artificially inflate the price of the Company’scommon stock after the initial public offering. The amended complaint alsoalleges, among other things, that Latitude and the named officers violatedsection 11 of the Securities Act of 1933 and section 10(b) of the Exchange Actof 1934 on the basis of an alleged failure to disclose the underwriters’alleged compensation arrangements and manipulative practices. No specificamount of damages has been claimed. Similar complaints have been filed againstmore than 300 other issuers that have had initial public offerings since 1998,and all of these actions have been included in a single coordinated proceeding.

 

Mr. McConnell and Mr. Wanghave subsequently been dismissed from the action without prejudice pursuant toa tolling agreement. Furthermore, in July 2002, Latitude and the other issuersin the consolidated cases filed motions to dismiss the amended complaint forfailure to state a claim. The motion to dismiss claims under section 11 wasdenied as to virtually all the defendants in the consolidated actions,including Latitude. However, the claims against Latitude under section 10(b)were dismissed.

 

On June 20, 2003, a committeeof the Company’s Board of Directors conditionally approved a proposed partialsettlement with the plaintiffs in this matter. The settlement would provide, among other things, a release of theCompany and of the individual defendants for the conduct alleged in the actionto be wrongful in the amended complaint. The Company would agree to undertake other responsibilities under thepartial settlement, including agreeing to assign away, not assert, or releasecertain potential claims the Company may have against its underwriters.  Any direct financial impact of the proposedsettlement is expected to be borne by the Company’s

 

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insurers.  The committee agreed to approve the settlement subject to a number ofconditions, including the participation of a substantial number of other issuerdefendants in the proposed settlement, the consent of the Company’s insurers tothe settlement, and the completion of acceptable final settlementdocumentation.  Furthermore, thesettlement is subject to a hearing on fairness and approval by the Courtoverseeing the litigation.  Due to the inherent uncertainties oflitigation and because the litigation and settlement process is still at apreliminary stage, the ultimate outcome of the matter cannot be predicted.

 

**Item 2.            Changes in Securities and Use ofProceeds**

 

On May 6, 1999, in connection with the Company’sinitial public offering, a Registration Statement on Form S-1 (No. 333-72935)was declared effective by the Securities and Exchange Commission, pursuant towhich 3,125,000 shares of the Company’s Common Stock were offered and sold forthe account of the Company at a price of $12.00 per share, generating grossoffering proceeds of $37.5 million. The managing underwriters were CreditSuisse First Boston Corporation, Hambrecht & Quist LLC and Dain RauscherWessels. After deducting approximately $2.6 million in underwriting discountsand $1.1 million in other related expenses, the net proceeds of the offeringwere approximately $33.8 million. No direct or indirect payments were made toofficers or directors or holders of ten percent or more of any class of equitysecurities of Latitude or any of their affiliates.  Latitude has invested such proceeds in investment grade, interest-bearingsecurities.  As of June 30, 2003, $22.6million of the net proceeds were invested in cash and cash equivalents andshort-term investments and approximately $11.2 million had been used forworking capital.  Latitude intends touse the remaining proceeds for capital expenditures, including the acquisitionof computer and communication systems, and for general corporate purposes,including working capital to fund increased accounts receivable and inventorylevels.

 

**Item 3.            DefaultsUpon Senior Securities—Not Applicable**

 

**Item 4.            Submissionof Matters to a Vote of Security Holders**

 

On June 5, 2003, the Company held its 2003annual meeting of stockholders.  Thefollowing summarizes the matters submitted to a vote of the stockholders:

 

1. The election of the following nominees to serve as members of theBoard of Directors:

 
| **NOMINEE**         |   | **IN FAVOR** |   | **WITHHELD** |   |
|---------------------|--------|--------------|--------|--------------|--------|
|                |   |         |   |         |   |
| Klaus-Dieter Laidig |   | 15,394,801   |   | 573,156      |   |
|                |   |         |   |         |   |
| Emil C. W. Wang     |   | 12,716,100   |   | 3,251,857    |   |

 

2. The ratification ofthe appointment of PricewaterhouseCoopers LLP as the Company’s independentaccountants for the fiscal year ending December 31, 2003:

 
| **IN FAVOR** |   | **WITHHELD** |   | **ABSTAIN** |   |
|--------------|--------|--------------|--------|-------------|--------|
|         |   |         |   |        |   |
| 15,693,425   |   | 268,857      |   | 5,665       |   |

 

**Item 5.            OtherInformation – None**

 

**Item 6.            Exhibitsand Reports on Form 8-K**

 
| (a)    | Exhibits |
|--------|----------|
|   |     |   |
| 31.1   |     | Certification of Rick McConnell, Chief Executive Officer of Latitude,  required by Rule 13a-14(a). |
|   |     |   |
| 31.2   |     | Certification of Luis Buhler, Chief Financial Officer of Latitude,  required by Rule 13a-14(a). |

 

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| 32.1   |                | Certification of Rick McConnell, Chief Executive Officer of Latitude,  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |
|--------|---------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                |                                                                                                                                                                             |
| 32.2   |                | Certification of Luis Buhler, Chief Financial Officer of Latitude,  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.    |
|   |                |                                                                                                                                                                             |
| (b)    | Reports on Form 8-K |
|   |                |                                                                                                                                                                             |
|   |                | On April 17, 2003, the Registrant filed an 8-K to accompany its press  release announcing certain financial results for the first quarter ending  April 30, 2003.                |
|   |                |                                                                                                                                                                             |
|   |                | On July 17, 2003, the Registrant filed an 8-K to accompany its press  release announcing certain financial results for the second quarter ending  June 30, 2003.                 |

 

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**SIGNATURE**

** **

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

** **
|                        | **Latitude  Communications, Inc.**         |
|-----------------------------|--------------------------------------------|
|                        |                                       |
|                        |                                       |
|                        | **By:**                                    | **/s/  LUIS BUHLER** |   |
|                        | Luis Buhler                 |
|                        | Chief Financial Officer                    |
|                        | Principal Financial and Accounting Officer |
|                        |                                       |
|                        |                                       |
| Date:  August 13, 2003 |                                       |

 

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