** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

** **

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** **

**FORM 10-Q**

** **

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarter ended March 31, 2002**

 

**Commission filenumber 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                              |   | (I.R.S. Employer    |
| incorporation or organization)                               |   | 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

 

As of April 30, 2002, there were 19,398,000 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 March 31, 2002 and December 31, 2001 |
|          |                      |   |
|          |                      | Condensed  consolidated statements of operations and comprehensive loss for the three  months ended March 31, 2002 and 2001 |
|          |                      |   |
|          |                      | Condensed  consolidated statements of cash flows for the three months ended March 31,  2002 and 2001 |
|          |                      |   |
|          |                      | 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** |
|          |                      |   |
| **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.**

** **

**LATITUDECOMMUNICATIONS, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(in thousands)**

** **

**(Unaudited)**

 
|                                                                                                                                                                                                        |   | **March 31,  2002** |   | **December  31,  2001** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|-------------------------|--------|
| **ASSETS**                                                                                                                                                                                                  |   |                |   |                    |   |
| Current assets:                                                                                                                                                                                             |   |                |   |                    |   |
| Cash and cash  equivalents                                                                                                                                                                                  |   | $                   | 11,706 |                    | $      | 15,370 |   |
| Short-term  investments                                                                                                                                                                                     |   | 14,324              |   | 9,352                   |   |
| Accounts  receivable, net                                                                                                                                                                                   |   | 6,494               |   | 5,732                   |   |
| Inventory                                                                                                                                                                                                   |   | 1,539               |   | 1,724                   |   |
| Prepaids and  other assets                                                                                                                                                                                  |   | 1,893               |   | 2,074                   |   |
| Deferred tax  assets                                                                                                                                                                                        |   | 1,240               |   | 1,240                   |   |
| Total current  assets                                                                                                                                                                                       |   | 37,196              |   | 35,492                  |   |
| Property and  equipment, net                                                                                                                                                                                |   | 4,082               |   | 4,548                   |   |
| Long-term  investments                                                                                                                                                                                      |   | 5,117               |   | 7,607                   |   |
| Deferred tax  assets                                                                                                                                                                                        |   | 7,064               |   | 6,257                   |   |
| Deposits and  other long-term assets                                                                                                                                                                        |   | 1,013               |   | 988                     |   |
| Total assets                                                                                                                                                                                                |   | $                   | 54,472 |                    | $      | 54,892 |   |
|                                                                                                                                                                                                        |   |                |   |                    |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                              |   |                |   |                    |   |
| Current  liabilities:                                                                                                                                                                                       |   |                |   |                    |   |
| Accounts payable                                                                                                                                                                                            |   | $                   | 2,547  |                    | $      | 887 |   |
| Accrued  liabilities                                                                                                                                                                                        |   | 4,416               |   | 5,028                   |   |
| Deferred revenue                                                                                                                                                                                            |   | 3,786               |   | 3,825                   |   |
| Current portion  of long-term debt                                                                                                                                                                          |   | 94                  |   | 110                     |   |
| Total current  liabilities                                                                                                                                                                                  |   | 10,843              |   | 9,850                   |   |
| Other  non-current liabilities                                                                                                                                                                              |   | 217                 |   | 189                     |   |
| Total  liabilities                                                                                                                                                                                          |   | 11,060              |   | 10,039                  |   |
| Stockholders’  equity:                                                                                                                                                                                 |   |                |   |                    |   |
| Preferred stock,  $0.001 par value  Authorized: 5,000 shares at March 31, 2002 and December 31, 2001  Issued and outstanding: No shares at March 31, 2002 and December 31, 2001                             |   | —              |   | —                  |   |
| Common stock,  $0.001 par value  Authorized: 75,000 shares at March 31, 2002 and December 31, 2001  Issued and outstanding: 19,296 and 19,290 shares at March 31, 2002 and  December 31, 2001, respectively |   | 19                  |   | 19                      |   |
| Additional  paid-in capital                                                                                                                                                                                 |   | 57,652              |   | 57,641                  |   |
| Deferred stock  compensation                                                                                                                                                                                |   | (143                | )      | (212                    | )      |
| Accumulated  other comprehensive income                                                                                                                                                                     |   | 53                  |   | 93                      |   |
| Accumulated  deficit                                                                                                                                                                                        |   | (14,169             | )      | (12,688                 | )      |
| Total  stockholders’ equity                                                                                                                                                                            |   | 43,412              |   | 44,853                  |   |
| Total  liabilities and stockholders’ equity                                                                                                                                                            |   | $                   | 54,472 |                    | $      | 54,892 |   |

* *

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

* *

*3*

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* *

**LATITUDECOMMUNICATIONS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**AND COMPREHENSIVELOSS**

**(in thousands,except per share amounts)**

**(Unaudited)**

 
|                                                                                                              |   | **Three Months  Ended March 31,** |   |
|-------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                              |   | **2002**                          |   | **2001** |   |
|                                                                                                              |   |                              |   |   |   |
| Revenue:                                                                                                          |   |                              |   |   |   |
| Product                                                                                                           |   | $                                 | 3,426  |   | $ | 6,156 |   |
| Service                                                                                                           |   | 6,046                             |   | 4,060 |   |
| Total revenue                                                                                                     |   | 9,472                             |   | 10,216 |   |
|                                                                                                              |   |                              |   |   |   |
| Cost of revenue:                                                                                                  |   |                              |   |   |   |
| Product                                                                                                           |   | 1,052                             |   | 1,016 |   |
| Service  (includes non-cash stock compensation of $1 and $2 in 2002 and 2001,  respectively)                      |   | 3,428                             |   | 2,512 |   |
| Total cost of  revenue                                                                                            |   | 4,480                             |   | 3,528 |   |
|                                                                                                              |   |                              |   |   |   |
| Gross profit                                                                                                      |   | 4,992                             |   | 6,688 |   |
|                                                                                                              |   |                              |   |   |   |
| Operating  expenses:                                                                                              |   |                              |   |   |   |
| Research and  development (includes non-cash stock compensation of $12 and $18 in 2002 and  2001, respectively)   |   | 1,420                             |   | 1,758 |   |
| Marketing and  sales (includes non-cash stock compensation of $11 and $10 in 2002 and 2001,  respectively)        |   | 4,910                             |   | 5,616 |   |
| General and  administrative (includes non-cash stock compensation of $46 and $65 in 2002  and 2001, respectively) |   | 1,204                             |   | 1,246 |   |
| Total operating  expenses                                                                                         |   | 7,534                             |   | 8,620 |   |
|                                                                                                              |   |                              |   |   |   |
| Loss from  operations                                                                                             |   | (2,542                            | )      | (1,932 | ) |
|                                                                                                              |   |                              |   |   |   |
| Interest income,  net                                                                                             |   | 267                               |   | 565 |   |
|                                                                                                              |   |                              |   |   |   |
| Loss before  benefit from income taxes                                                                            |   | (2,275                            | )      | (1,367 | ) |
|                                                                                                              |   |                              |   |   |   |
| Benefit from  income taxes                                                                                        |   | 794                               |   | 492 |   |
|                                                                                                              |   |                              |   |   |   |
| Net loss                                                                                                          |   | $                                 | (1,481 | ) | $ | (875 | ) |
|                                                                                                              |   |                              |   |   |   |
| Other  comprehensive income (loss), net of tax—                                                              |   |                              |   |   |   |
| Unrealized gain  (loss) on securities                                                                             |   | (53                               | )      | 24 |   |
| Cumulative  translation adjustment                                                                                |   | 13                                |   | (15 | ) |
|                                                                                                              |   |                              |   |   |   |
| Comprehensive  loss                                                                                               |   | $                                 | (1,521 | ) | $ | (866 | ) |
|                                                                                                              |   |                              |   |   |   |
| Net loss per  share—basic                                                                                    |   | $                                 | (0.08  | ) | $ | (0.05 | ) |
| Shares used in  per share calculation—basic                                                                  |   | 19,294                            |   | 18,746 |   |
| Net loss per  share—diluted                                                                                  |   | $                                 | (0.08  | ) | $ | (0.05 | ) |
| Shares used in  per share calculation—diluted                                                                |   | 19,294                            |   | 18,746 |   |

* *

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

* *

*4*

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* *

**LATITUDECOMMUNICATIONS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Amounts inthousands, except per share amounts)**

**(Unaudited)**

 
|                                                                         |   | **Three  Months Ended  March 31,** |   |
|------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                         |   | **2002**                           |   | **2001** |   |
| Cash flows from  operating activities:                                       |   |                               |   |   |   |
| Net loss                                                                     |   | $                                  | (1,481 | ) | $ | (875 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                               |   |   |   |
| Depreciation and  amortization                                               |   | 701                                |   | 554 |   |
| Amortization of  capitalized software                                        |   | 121                                |   | 97 |   |
| Write down of  excess and obsolete inventory                                 |   | 150                                |   | — |   |
| Provision for  doubtful accounts                                             |   | 3                                  |   | — |   |
| Amortization of  deferred stock compensation                                 |   | 69                                 |   | 96 |   |
| Changes in  assets and liabilities:                                          |   |                               |   |   |   |
| Accounts  receivable                                                         |   | (752                               | )      | (2,987 | ) |
| Inventory                                                                    |   | 35                                 |   | 156 |   |
| Prepaids and  other assets                                                   |   | 60                                 |   | 143 |   |
| Deferred income  taxes                                                       |   | (807                               | )      | (493 | ) |
| Accounts payable                                                             |   | 1,660                              |   | (244 | ) |
| Accrued  liabilities                                                         |   | (584                               | )      | 413 |   |
| Deferred revenue                                                             |   | (39                                | )      | 989 |   |
| Net cash used in  operating activities                                       |   | (864                               | )      | (2,151 | ) |
|                                                                         |   |                               |   |   |   |
| Cash flows from  investing activities:                                       |   |                               |   |   |   |
| Purchases of  property and equipment                                         |   | (235                               | )      | (742 | ) |
| Purchases of  available for sale securities                                  |   | (6,635                             | )      | (16,461 | ) |
| Maturities of  available for sale securities                                 |   | 4,100                              |   | 14,200 |   |
| Increase in  deposits and other long-term assets                             |   | (25                                | )      | (7 | ) |
| Net cash used in  investing activities                                       |   | (2,795                             | )      | (3,010 | ) |
|                                                                         |   |                               |   |   |   |
| Cash flows from  financing activities:                                       |   |                               |   |   |   |
| Proceeds from  issuance of common stock                                      |   | 11                                 |   | 38 |   |
| Repayment of  notes payable and capital lease obligations                    |   | (16                                | )      | (94 | ) |
| Other                                                                        |   | —                             |   | (15 | ) |
| Net cash used in  financing activities                                       |   | (5                                 | )      | (71 | ) |
|                                                                         |   |                               |   |   |   |
| Net decrease in  cash and cash equivalents                                   |   | (3,664                             | )      | (5,232 | ) |
| Cash and cash  equivalents, beginning of period                              |   | 15,370                             |   | 23,993 |   |
| Cash and cash  equivalents, end of period                                    |   | $                                  | 11,706 |   | $ | 18,761 |   |

* *

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

* *

*5*

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* *

**LATITUDECOMMUNICATIONS, INC.**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

** **

**(Unaudited)**

** **

**Note 1—The Companyand Basis of Presentation**

** **

Latitude Communications, Inc. (the “Company”) is aleading provider of enterprise e-conferencing solutions. The Company develops,markets and supports its MeetingPlace system and services, which enablesreal-time collaboration through meetings via Web browsers, groupwareapplications such as Outlook and Notes, and PSTN and IP phones. MeetingPlacealso allows users to share and edit live documents, record, and access meetingcontent. Highly scalable and designed to be deployed as part of a company’s standardcommunications infrastructure, MeetingPlace can support tens of thousands ofusers. The Company distributes its product and services through distributorsand a direct sales force to companies across many industries in the UnitedStates, Europe and Asia.

 

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 of operations for such periods are not necessarilyindicative of the results expected for the full fiscal year or for any futureperiod. The balance sheet at December 31, 2001 was derived from auditedfinancial statements, however, it does not include all disclosures required bygenerally accepted accounting principles in the United States of America. Thefinancial statements and related disclosures have been prepared with thepresumption that users of the interim financial information have read or haveaccess to the audited 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, 2001.

 

**Note 2—RecentAccounting Pronouncements**

** **

In October 2001, the FASB issued Statement ofFinancial Accounting Standards No. 144 (“SFAS 144”), “Accounting for theImpairment or Disposal of Long-Lived Assets”. SFAS 144 supercedes Statement ofFinancial Accounting Standards No. 121, “Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to Be Disposed Of.” SFAS 144applies to all long-lived assets, including discontinued operations, andconsequently amends Accounting Principles Board Opinion No. 30, “ReportingResults of Operations Reporting the Effects of Disposal of a Segment of aBusiness”. SFAS 144 develops one accounting model for long-lived assets thatare to be disposed of by sale. SFAS 144 requires that long-lived assets thatare to be disposed of by sale be measured at the lower of book value or fairvalue less selling costs. Additionally, SFAS 144 expands the scope ofdiscontinued operations to include all components of an entity with operationsthat (1) can be distinguished from the rest of the entity and (2) will beeliminated from the ongoing operations of the entity in a disposaltransaction.  The adoption of SFAS 144did not have a significant impact on our financial position or results ofoperations.

 

6

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In November 2001, the Emerging Issues Task Force(“EITF”) issued EITF Issue No. 01-14, “Income Statement Characterization ofReimbursements Received for ‘Out of Pocket’ Expenses Incurred.” This guidancerequires companies to recognize the recovery of reimbursable expenses such astravel costs on services contracts as revenue. These costs are not to be nettedas a reduction of cost. This guidance was effective January 1, 2002.  This guidance did not have a material effecton the financial statements.

 

**Note 3—Inventory**

** **

|           |   | **March 31,  2002** |   | **December  31,  2001** |   |
|----------------|--------|---------------------|--------|-------------------------|--------|
|           |   | **(Unaudited)**     |   |
| Raw materials  |   | $                   | 1,078  |                    | $      | 1,113 |   |
| Finished goods |   | 461                 |   | 611                     |   |
|           |   | $                   | 1,539  |                    | $      | 1,724 |   |

** **

**Note 4—Net LossPer Share**

** **

Basic net loss per share is computed by dividing netloss by the weighted average number of vested common shares outstanding for theperiod. Diluted net loss per share is computed giving effect to all dilutivepotential common shares.  Diluted netloss per share is the same as basic net loss per share for the periodspresented because the inclusion of potentially dilutive common shares, whichconsisted of common shares issuable upon the exercise of stock options, wouldresult in an antidilutive per share amount.

 

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  March 31,** |   |
|-------------------------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                                                  |   | **2002**                           |   | **2001** |   |
|                                                                                                  |   | **(Unaudited)**                    |   |
| Net loss per  share, basic and diluted:                                                               |   |                               |   |   |   |
| Numerator for  net loss, basic and diluted                                                            |   | $                                  | (1,481 | ) | $ | (875 | ) |
| Denominator for  basic net loss per share:                                                            |   |                               |   |   |   |
| Weighted average  vested common shares outstanding                                                    |   | 19,294                             |   | 18,746 |   |
| Net loss per  share basic                                                                             |   | $                                  | (0.08  | ) | $ | (0.05 | ) |
|                                                                                                  |   |                               |   |   |   |
| Denominator for  diluted net loss per share:                                                          |   |                               |   |   |   |
| Weighted average  vested common shares outstanding                                                    |   | 19,294                             |   | 18,746 |   |
| Effect of  dilutive securities:                                                                       |   |                               |   |   |   |
| Common stock  options                                                                                 |   | —                             |   | — |   |
| Weighted average  common and common equivalent shares                                                 |   | 19,294                             |   | 18,746 |   |
|                                                                                                  |   |                               |   |   |   |
| Net loss per  share diluted                                                                           |   | $                                  | (0.08  | ) | $ | (0.05 | ) |
|                                                                                                  |   |                               |   |   |   |
| Antidilutive  securities not included in diluted net loss per share calculation for the  entire year: |   |                               |   |   |   |
|                                                                                                  |   |                               |   |   |   |
| Common stock  options                                                                                 |   | 4,509                              |   | 3,505 |   |

** **

**7**

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** **

**Note5—Restructuring**

** **

During the quarter endedJune 30, 2001, the Company initiated a restructuring program. As a part of thisrestructuring program, the Company recorded costs and other charges of $870,000classified as operating expenses.  Ofthis amount, $442,000 related to a reduction in the workforce by approximately40 regular employees across all functional areas of the Company, $228,000related primarily to non-cancelable lease costs arising from the consolidationof excess facilities and $200,000 related to asset write-offs.

 

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                                | )      | —                |   | (326      | )      |
| Non-cash charges                                    |   | (31                          | )      | —                             |   | (200                  | )      | (231      | )      |
| Adjusted provision                                  |   | (189                         | )      | 189                                |   | —                |   | —    |   |
| Restructuring reserve  balance at December 31, 2001 |   | $                            | — |                               | $      | 347                   |   | $         | — |   | $ | 347 |   |
| Cash paid                                           |   | —                       |   | (34                                | )      | —                |   | (34       | )      |
| Restructuring reserve  balance at March 31, 2002    |   | $                            | — |                               | $      | 313                   |   | $         | — |   | $ | 313 |   |

 

The amounts related tonon-cancelable lease costs will be paid over the respective lease terms throughfiscal 2003.

 

**Note 6 — 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.  Therewere no shares purchased during the three months ended March 31, 2002.  As of March 31, 2002, the Company has purchased240,400 shares under this program at a weighted average cost of $1.44 pershare.

 

**Note7 — Contingencies**

 

In November 2001, aseries of securities class actions were filed in United States District Courtfor the Southern District of New York against certain underwriters forLatitude's initial public offering ("IPO"), Latitude, and certainofficers of Latitude.  The complaintalleges undisclosed and improper practices by the underwriters concerning theallocation of Latitude's IPO shares, in violation of the federal securitieslaws, and seeks unspecified damages on behalf of persons who purchasedLatitude's stock during the period from May 6, 1999 to December 6, 2000.  Latitude believes it has meritoriousdefenses to the claims against it and will defend itself vigorously.  In the opinion of management, afterconsultation with legal counsel and based on currently available information,the ultimate disposition of these matters is not expected to have a materialadverse effect on our business, financial condition or results of operations,and hence no amounts have been accrued for these cases.

 

**Item 2.            Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

** **

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 similarexpressions to identify forward-looking statements. You should not place unduereliance on these forward-looking statements, which apply only as of the dateof this Quarterly Report on Form 10-Q. These forward-looking statements aresubject to risks and uncertainties that could cause actual results to differmaterially from historical results or our predictions. These risks aredescribed in “ Factors Affecting Future Operating Results “ and elsewhere inthis Form 10–Q.  The Companyassumes no obligation to update these forward–looking statements to reflectactual results or changes in factors or assumptions affecting such forward–lookingstatements.

** **

**Overview**

 

We are a leading provider of integrated, secure voiceand web conferencing solutions that enable geographically dispersedorganizations to work better through real-time collaboration. The company’saward-winning MeetingPlace system integrates with standard communicationsinfrastructures enabling people to share and edit live documents to worktogether productively from any location. With MeetingPlace, participants canschedule and attend a meeting, view, share and edit documents, and capture andretrieve meeting content. MeetingPlace is designed to be an enterprise-wideresource and to leverage existing technologies such as telephones, cellular phonesand personal computers.

 

We generate revenue from sales of our MeetingPlaceproducts and services, and from related customer support and consultingservices. Revenue derived from product sales constituted 36% of total revenuein the first quarter of 2002 and 60% during the corresponding period of 2001.Product revenue is generally recognized upon shipment if a signed contractexists, the fee is fixed or determinable, collection of the resultingreceivable is probable, product returns are reasonably estimable and, ifapplicable, acceptance has been obtained. We calculate an allowance for returnsbased on historical rates. Service revenue includes revenue from our usage andsubscription based managed and hosted MeetingPlace services, implementation andintegration services, system management services, warranty coverage andcustomer support. Revenue from managed, hosted, implementation and systemintegration services is recognized as the services are performed, while revenuefrom warranty coverage and customer support is recognized ratably over theperiod of the contract.

 

8

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We sell our MeetingPlace products primarily throughour direct sales force and, to a lesser extent, through indirect distributionchannels. The majority of our revenue is derived from Fortune 1000 companies,many of which initially purchase MeetingPlace servers and later expanddeployment of our products as they require additional capacity for voice andweb conferencing.

 

Total cost of revenueconsists of component and materials costs, direct labor costs, warranty costs,royalties and overhead related to manufacturing of our products, as well asmaterials, travel and labor costs related to personnel engaged in our serviceoperations. Product gross margin is impacted by the proportion of productrevenue derived from software sales, which typically carry higher margins thanhardware sales, and from indirect distribution channels, which typically carrylower margins than direct sales. Service gross margin is impacted by the mix ofservices we provide, which have different levels of profitability, usage levelsby our customers and the efficiency with which we provide support to ourcustomers. We reduce the carrying value of excess and obsolete inventory byidentifying inventory components either considered excess based on estimates offuture usage or obsolete due to changes in our products. As a result oftechnological changes, our products may become obsolete or we could be requiredto redesign our products.

 

During 2001, we recorded significant accruals inconnection with our restructuring program. These accruals include estimatespertaining to employee separation costs and the settlements of contractualobligations related to excess leased facilities and other contracts. Althoughwe do not currently anticipate significant changes, the actual costs may differfrom these estimates, particularly the costs surrounding the excess leasedfacilities. If we are unable to negotiate affordable termination fees, ifrental rates continue to decrease in the markets we are located, or if it takesus longer than expected to find a suitable sublease tenant, the actual costscould exceed our estimates.

 

9

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**Results OfOperations**

** **

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  March 31,** |   |
|---------------------------------------|--------|-----------------------------------|--------|
|                                  |   | **2002**                          |   | **2001** |   |
| Revenue:                              |   |                              |   |   |   |
| Product                               |   | 36.2                              | %      | 60.3 | % |
| Service                               |   | 63.8                              | %      | 39.7 | % |
| Total revenue                         |   | 100.0                             | %      | 100.0 | % |
| Cost of revenue:                      |   |                              |   |   |   |
| Product                               |   | 11.1                              | %      | 9.9 | % |
| Service                               |   | 36.2                              | %      | 24.6 | % |
| Total cost of revenue                 |   | 47.3                              | %      | 34.5 | % |
| Gross profit                          |   | 52.7                              | %      | 65.5 | % |
|                                  |   |                              |   |   |   |
| Operating expenses:                   |   |                              |   |   |   |
| Research and development              |   | 15.0                              | %      | 17.2 | % |
| Marketing and sales                   |   | 51.9                              | %      | 55.0 | % |
| General and administrative            |   | 12.7                              | %      | 12.2 | % |
| Total operating expenses              |   | 79.6                              | %      | 84.4 | % |
| Loss from operations                  |   | (26.9                             | )%     | (18.9 | )% |
| Interest income, net                  |   | 2.8                               | %      | 5.5 | % |
| Loss before benefit from income taxes |   | (24.1                             | )%     | (13.4 | )% |
| Benefit from income taxes             |   | 8.4                               | %      | 4.8 | % |
| Net loss                              |   | (15.6                             | )%     | (8.6 | )% |

* *

*Product Revenue*

* *

Product revenue was $3.4 million for the first quarterof 2002, which represented a decrease of 44% when compared to the correspondingperiod of 2001. The decrease was due to fewer MeetingPlace system sales in anenvironment of reduced capital spending by our existing and target customers.International sales represented approximately 12% and 17% of product revenue inthe three months ended March 31, 2002 and 2001, respectively.  While we expect both the number of systemsshipped and the average selling price per system to increase each quarterduring 2002, the capital spending environment continues to be uncertain and wemay experience quarter-to-quarter variability in product revenue in absolutedollars.

* *

*Service Revenue*

* *

Service revenue was $6.1 million for the first quarterof 2002, which represented an increase of 49% when compared to thecorresponding period of 2001. The increase was attributable primarily to theintroduction of new usage based managed and hosted services.  We expect that service revenues willcontinue to grow in absolute dollars as we add new customers using these services.

* *

*Total Cost ofRevenue*

* *

Total cost of revenue was $4.5 million for the firstquarter of 2002, which represented an increase of 27% when compared to thecorresponding period of 2001. The increase in total cost of revenue wasattributable to a change in the mix of revenues from higher margin productrevenue to lower margin service revenue, and we expect this trend to continue.

 

Gross profit was $5.0 million for the first quarter of2002, as compared to $6.7 million in the corresponding period of 2001. Grossmargin was 53% as a percentage of revenue, for the first quarter of 2002, ascompared to 66% for the corresponding period of 2001.

 

Product gross margin decreased to 69% as a percentageof product revenue for the first quarter of 2002 as compared to 84% for thecorresponding period of 2001. We expect that product gross margin may decreasein the 

 

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future due in part topotential pricing pressure and an expected increase in the proportion ofrevenue derived from indirect distribution channels.

 

Service gross margin was 43% as a percentage ofservice revenue for the first quarter of 2002 as compared to 38% for thecorresponding period in 2001.  Theincrease in service revenue margin is due to the addition of higher marginmanaged and hosted services to our traditional maintenance and installationservice revenue streams.   We expectthat service gross margin to generally range from 40% to 50% of servicerevenue.

* *

*Research andDevelopment Expenses*

* *

Research and development expenses consist primarily 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 first quarter of2002, which represented a decrease of 19% when compared to corresponding periodin 2001. As a percentage of total revenues, research and development expensesdeclined from 17% in the first quarter of 2001 to 15% in the first quarter of2002.  The decrease in expenses isprimarily due to a decrease in purchased software during the quarter.  We expect to continue to make investments inresearch and development and expect that research and development expenses willincrease in absolute dollars in future quarters.

* *

*Marketing andSales Expenses*

 

Marketing and sales expenses consist primarily ofpromotional expenditures and compensation and related costs for marketing andsales personnel. Marketing and sales expenses were $4.9 million for the firstquarter of 2002, which represented a decrease of 13% when compared tocorresponding period in 2001. As a percentage of total revenues, marketing andsales expenses declined from 55% in the first quarter of 2001 to 52% in thefirst quarter of 2002.  The decrease inexpenses is primarily due to a decrease in the effective commission rate as apercentage of revenues.

 

*General andAdministrative Expenses*

* *

General and administrative expenses consist primarilyof personnel expenses, legal and accounting expenses and other generalcorporate expenses. General and administrative expenses were $1.2 million forthe first quarter of 2002, which represented a decline of 3% when compared tothe corresponding period in 2001. As a percentage of total revenues, generaland administrative expenses increased from 12% in the first quarter of 2001 to13% in the first quarter of 2002.

 

*Amortization ofDeferred Stock Compensation*

* *

In connection with the completion of our initialpublic offering in May 1999, options granted in the last quarter of 1997, 1998and the first quarter of 1999 have been considered to be compensatory. Totalremaining deferred stock compensation associated with these options as of March31, 2002 amounted to $143,000. This amount is being amortized based on theremaining vesting period of these options, and we expect the balance to beamortized over the remainder of 2002.

* *

*Interest Income,Net*

 

Interest income, net of interest expense, was $267,000for the first quarter of 2002, compared to interest income, net of interestexpense of $565,000 for the corresponding period in 2001. The decrease in netinterest income was attributable primarily to lower market interest rates.

* *

*Benefit from(Provision for) Income Taxes*

 

For the quarter ended March 31, 2002, the benefit fromincome tax was $794,000, compared to a benefit of $492,000 in the quarter endedMarch 31, 2001. Our effective tax rate was approximately 35% for the firstquarter of 2002 and approximately 36% for the same period in 2001.

 

**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 March 31, 2002, we had $31.1 million of cash, cash equivalentsand investments, which represented 57% of total assets.

 

Cash used in operating activities was $864,000 duringthe first three months of 2002, compared to cash used in operating activitiesof $2.2 million in the same period of 2001. Cash used in operatingactivities in 2002 was primarily due to a net loss and an increase in accountsreceivable, partially offset by an increase in accounts payable.

 

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Cash used in investing activities in the first threemonths of 2002 was $2.8 million, which consisted primarily of the purchase ofmarketable securities of $6.6 million and purchase of property and equipment of$235,000, partially offset by maturities of marketable securities. For thefirst three months in 2001, cash used in investing activities of $3.0 millionconsisted primarily of the purchase of marketable securities of $16.5 millionand purchase of property and equipment of $742,000, partially offset bymaturities of marketable securities.

 

Cash used in financing activities in the first threemonths of 2002 of $5,000 consisted primarily of payments on obligations undercapital leases and notes payable of $16,000 partially offset by the proceedsfrom issuance of common stock under employee benefit plans. For the first threemonths of 2001, cash used in financing activities of $71,000 primarilyconsisted of payments on obligations under capital leases and notes payable of$94,000, partially offset by the proceeds from issuance of common stock underemployee benefit plans.

 

Latitude has incurred losses of $7.4 million and $1.5million and negative cash flows from operations of $8.6 million and $864,000during the year ended December 31, 2001 and the three months ended March 31,2002, respectively.  As of March 31,2002, Latitude had an accumulated deficit of approximately $14.2 million.  Latitude expects to incur operating lossesand negative cash flows through at least the fourth quarter of 2002.

 

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 12months.  Our future capital requirementswill depend upon many factors, including revenue growth, management of workingcapital, the timing of research and product development efforts and theexpansion of our marketing and sales efforts. 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.  The issuance ofadditional equity securities may dilute our existing stockholders.

 

**Impact of RecentlyIssued Accounting Standards**

** **

In October 2001, the FASB issued Statement ofFinancial Accounting Standards No. 144 (“SFAS 144”), “Accounting for theImpairment or Disposal of Long-Lived Assets”. SFAS 144 supercedes Statement ofFinancial Accounting Standards No. 121, “Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to Be Disposed Of.” SFAS 144 appliesto all long-lived assets, including discontinued operations, and consequentlyamends Accounting Principles Board Opinion No. 30, “Reporting Results ofOperations Reporting the Effects of Disposal of a Segment of a Business”. SFAS144 develops one accounting model for long-lived assets that are to be disposedof by sale. SFAS 144 requires that long-lived assets that are to be disposed ofby sale be measured at the lower of book value or fair value less sellingcosts. Additionally, SFAS 144 expands the scope of discontinued operations toinclude all components of an entity with operations that (1) can bedistinguished from the rest of the entity and (2) will be eliminated from theongoing operations of the entity in a disposal transaction.  The adoption of SFAS 144 did not have asignificant impact on our financial position or results of operations.

 

In November 2001, the Emerging Issues Task Force(“EITF”) issued EITF Issue No. 01-14, “Income Statement Characterization ofReimbursements Received for ‘Out of Pocket’ Expenses Incurred.” This guidancerequires companies to recognize the recovery of reimbursable expenses such astravel costs on services contracts as revenue. These costs are not to be nettedas a reduction of cost. This guidance was effective January 1, 2002.  This guidance did not have a material effecton the financial statements.

** **

**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 our limited operating history.*Wehave a limited operating history and cannot assure you that our revenue willgrow or that we will return to profitability in the future. Our financial 

 

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statements must beconsidered in light of the risks and uncertainties encountered by companies inthe early stages of development. We rely substantially on sales of ourMeetingPlace products and services, which have limited market acceptance.

 

Recent economic developments have caused manycompanies to reduce headcount and overhead expenses and to reconsider or delaycapital expenditures. This has had, and may continue to have, an adverse effecton our ability to grow revenue.

 

In addition, we are unable to predict our futureproduct development, sales and marketing, and administrative expenses. To theextent that these expenses increase, we will need to increase revenue toachieve profitability. Our ability to increase revenue and achieveprofitability also depends on the other risk factors described 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 ourmix of revenues generated 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 at the beginning of each quarter typically donot equal expected revenue for that quarter. In addition, a significant portionof our orders is received in the last month of each fiscal quarter. If we failto ship products by the end of a quarter in which the order is received, or ifour prospective customers delay their orders or delivery schedules until thefollowing quarter, we may fail to meet our revenue objectives.

 

Additionally, we expanded our service offerings byproviding hosted services to our customers. Accordingly, future revenue fromthis new service offering will increase the proportion of total revenue derivedfrom services. To the extent that prospective customers elect to purchase thehosted service rather than an on-premises MeetingPlace system, our productrevenue could be adversely affected.

* *

*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 use ourservices.  As a result, the failure ofrepeat 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.

 

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*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.  For example, for the year ended December 31,2001, our largest customer, Hewlett-Packard Company, accounted forapproximately 14% of our total revenues.

* *

*Ourmarket is highly competitive.*Because of intense marketcompetition, we may not be successful. Currently, our principal competitorsinclude:

 

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

 

•                  private branch exchange, or PBX,vendors that sell systems with voice conferencing capabilities, such as LucentTechnologies Inc. and Nortel Networks; and

 

•                  companies that offer web–basedvoice and web conferencing products and services such as Webex, Placeware andRaindance.

 

Many of these companies have longer operatinghistories, stronger brand names and significantly greater financial, technical,marketing and other resources than we do. These companies also may haveexisting relationships with many of our prospective customers. In addition,these companies may be able to respond more quickly than we can to new oremerging technologies and changes in customer requirements.

 

In addition, we expectcompetition to persist and intensify in the future, which could adverselyaffect our ability to increase sales, penetrate new markets and maintainaverage selling prices. In the future, we may experience competition frompotential competitors that include:

 

•                  networking companies, such as CiscoSystems, Inc., 3Com Corporation, Lucent Technologies Inc. and Nortel Networksthat are focusing on enabling the transmission of voice over the Internet andthat may offer voice and web conferencing functionality; and

 

•                  collaborative software providers,such as Microsoft Corporation and Lotus Development Corporation, that arefocusing on web conferencing products and that may in the future incorporatevoice conferencing functionality into their products.

* *

*Ourmarket is in an early stage of development, and our products and services maynot be adopted.*If the market for our integrated voice andweb conferencing products and services fails to grow or grows more slowly thanwe anticipate, we may not be able to increase revenues or return toprofitability. The market for integrated real–time voice and web conferencingis relatively new and rapidly evolving. Our ability to be profitable depends inlarge part on the widespread adoption by end users of real–time voice andweb 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.*The market in whichwe compete is characterized by rapid technological change, frequent new productintroductions, changes in customer requirements and emerging industrystandards. In particular, we expect that the growth of the Internet andInternet–based telephony applications, as well as general technologytrends such as migrations to new operating systems, will require us to adaptour product and services to remain competitive. This adaptation could be costlyand time–consuming. Our products and services could become obsolete andunmarketable if products and services using new technologies are introduced andnew industry standards emerge. For example, the widespread acceptance ofcompeting technologies, such as video conferencing and the transmission of voiceover the Internet, could diminish demand for our current products and services.As a result, the life cycle of our products and services is difficult toestimate.

 

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To be successful, we will need to develop andintroduce new products, product enhancements and services that respond totechnological changes or evolving industry standards, such as the transmissionof voice over the Internet, in a timely manner and on a cost effective basis.We cannot assure you that we will successfully develop these types of productsand product enhancements or that our products and services will achieve broadmarket acceptance.

* *

*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 expensesfor voice and web conferencing systems nor have personnel specificallydedicated to procurement and implementation of these conferencing systems. As aresult, our customers spend a substantial amount of time before purchasing ourproducts in performing internal reviews and obtaining capital expenditureapprovals. Our sales cycle lengthened in 2001 and we cannot be certain thatthis cycle will not lengthen in the future. The emerging and evolving nature ofthe real–time voice and web conferencing market may lead to confusion inthe market, which may cause prospective customers to postpone their purchasedecisions.

* *

*Ifwe fail to expand our sales and distribution channels, our business couldsuffer.*If we are unable to expand our sales and distributionchannels, we may not be able to increase revenue or achieve market acceptanceof our MeetingPlace product and services. We plan to recruit additional salespersonnel who will require training and take time to achieve full productivity,and there is strong competition for qualified sales personnel in our business.In addition, we believe that our future success is dependent upon establishingsuccessful relationships with a variety of distribution partners. To date, wehave entered into agreements with only a small number of these distributionpartners. We cannot be certain that we will be able to reach agreement withadditional distribution partners on a timely basis or at all, or that thesedistribution partners will devote adequate resources to selling our products.Furthermore, if our distribution partners fail to adequately market or supportour products, the reputation of our products in the market may suffer. Inaddition, we will need to manage potential conflicts between our direct salesforce 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 assure you that we will have access to necessary advanced programminginterfaces in the future.

 

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*Wemay experience difficulties managing our future growth.*Weexpect that any future growth may strain our management systems and resources,which could hinder our ability to continue to grow in the future. We may alsoexperience difficulties meeting the demand for our products and services. If weare unable to provide training and support for our products, the implementationprocess will be longer and customer satisfaction may be lower.

 

We may not be able to install management informationand control systems in an efficient and timely manner, and our current orplanned personnel, systems, procedures and controls may not be adequate tosupport our future operations.

* *

*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 the functionality provided by this licensed software. Because ourproducts incorporate software developed and maintained by third parties, wedepend on these third parties to deliver and support reliable products, enhancetheir current products, develop new products on a timely and cost–effectivebasis and respond to emerging industry standards and other technologicalchanges.

 

We recently announced a strategic partnership with acompany based in Israel to integrate video conferencing functionality into ourproducts. Political instability in this region of the world may limit ouraccess to this technology 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 customerrelationships or reputation and increased service and warranty cost. Ourproducts and services may not be free from errors or defects after commercialshipments have begun, and we are aware of instances in which some of ourcustomers have experienced product failures or errors.

 

Many of our customers conduct confidential conferences,and transmit confidential data, using MeetingPlace. Concerns over the securityof information sent over the Internet and the privacy of its users may inhibitthe market acceptance of our products. In addition, unauthorized users in thepast have gained, and in the future may be able to gain, access to ourcustomers’ MeetingPlace systems or our hosted services. Any compromise ofsecurity could deter people from using MeetingPlace and could harm ourreputation and business and result in claims against us.

 

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In 2001, we expanded our service offerings to includehosted services for our customers. The success of our hosted services willdepend on the efficient and uninterrupted operation of our computer andcommunication hardware and software systems. In addition, some of ourcommunications hardware and software for our services businesses are hosted atthird party co-location facilities. These systems and operations are vulnerable to damage or interruption asa result of human error, telecommunications failures, break-ins, acts ofvandalism, computer viruses and natural disasters. Systems failure or damagecould cause an interruption of our services and result in loss of customers,difficulties in attracting new customers and could adversely impact ouroperating results.  In addition, if thenumber of customers who purchase our hosted services increases over time, oursystems must be able to accommodate increased usage. If we are unable toincrease our capacity to accommodate growth in usage, we could encounter systemperformance issues, which could harm our relationships with customers and ourreputation.

* *

*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 the “Latitude Communications” and “Latitude”with logo marks in the United States and the “Latitude Communications” mark inCanada.  While we believe that we havepriority of trade name usage in the United States, our United States trademarkapplications are still under appeal.  Our opposition against Dell’sCanadian application was successful; however, Dell has filed an appeal of thisdecision.  The outcome of these proceedings is uncertain. Consequently, wemay not be able to register these marks and would have to rely solely on commonlaw protection for these marks.  Wecannot assure you that we will be free from challenges of or obstacles to ouruse or registration of our marks.

* *

*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 and compatibility regulations imposed bygovernmental authorities in the United States or in other countries in which wesell our products and services. If we are unable to obtain necessary approvalsor maintain compliance with the regulations of any particular jurisdiction, wemay be prohibited from selling our products in that territory. In addition, tosell our products and services in many international markets, we are requiredto obtain certifications that are specific to the local telephonyinfrastructure.

* *

*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 if the trading volumeof our common stock is low. In addition, due to the technology–intensiveand emerging nature of our business, the market price of our common stock mayrise 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.

 

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*We mayneed to raise additional capital in the future, and if we are unable to secureadequate funds on terms acceptable to us, we may be unable to execute ourbusiness plan. *If our existingcash balances and cash flows expected from future operations are not sufficientto meet our liquidity needs, we will need to raise additional funds.  If adequate funds are not available onacceptable terms or at all, we may not be able to take advantage of marketopportunities, develop or enhance new products, pursue acquisitions that wouldcomplement our existing product offerings or enhance our technicalcapabilities, execute our business plan or otherwise respond to competitivepressures or unanticipated requirements.

* *

*Future sales 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.

 

**Item3.            Quantitative and QualitativeDisclosures About Market Risk.**

** **

Our exposure to market risk for changes in interestrates relates primarily to our investment portfolio. We do not use derivativefinancial instruments in our investment portfolio. We place our investmentswith high credit quality issuers and, by policy, limit the amount of creditexposure to any one issuer. The portfolio includes only marketable securitieswith maturities of three to 24 months and with active secondary or resalemarkets to ensure portfolio liquidity. We have no investments denominated inforeign country currencies and therefore are not subject to foreign currencyrisk on such investments.

 

The table below presentsprincipal amounts and related weighted average interest rates by year ofmaturity for our investment portfolio at March 31, 2002 (in thousands).

 
|                       |   | **2002** |   | **2003** |   | **Total** |   |
|----------------------------|--------|----------|--------|----------|--------|-----------|--------|
|                       |   |     |   |     |   |      |   |
| Corporate notes and  bonds |   | $        | 7,264  |     | $      | 9,133     |   | $ | 16,397 |   |
| Average interest rate      |   | 5.05     | %      | 4.30     | %      | 4.63      | %      |
| Federal agencies           |   | $        | — |     | $      | 3,043     |   | $ | 3,043 |   |
| Average interest rate      |   | —   |   | 4.28     | %      | 4.28      | %      |

 

Currently, the majority of our sales and expenses aredenominated in U.S. dollars and, as a result, we have not experiencedsignificant foreign exchange gains and losses to date. While we do expect toeffect some transactions in foreign currencies in the next 12 months, we do notanticipate that foreign exchange gains and losses will be significant. We havenot engaged in foreign currency hedging activities to date.

 

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**PART II.        OTHER INFORMATION**

** **

**Item 1.            Legal Proceedings**.

** **

In November 2001, a series of securities class actionswere filed in United States District Court for the Southern District of NewYork against certain underwriters for Latitude’s initial public offering(“IPO”), Latitude, and certain officers of Latitude. The complaint allegesundisclosed and improper practices by the underwriters concerning theallocation of Latitude’s IPO shares, in violation of the federal securitieslaws, and seeks unspecified damages on behalf of persons who purchasedLatitude’s stock during the period from May 6, 1999 to December 6, 2000.Latitude believes it has meritorious defenses to the claims against it and willdefend itself vigorously. In the opinion of management, after consultation withlegal counsel and based on currently available information, the ultimatedisposition of these matters is not expected to have a material adverse effecton our business, financial condition or results of operations, and hence noamounts have been accrued for these cases.

** **

**Item 2.            Not Applicable.**

 

**Item 3.            Defaults Upon Senior Securities**—NotApplicable.

** **

**Item 4.            Submission of Matters to a Vote ofSecurity Holders**—Not Applicable.

** **

**Item 5.            Other Information—Not Applicable.**

** **

**Item 6.**            Exhibits and Reports on Form 8–K.

 

(a)     Reportson Form 8–K—None

 

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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/  JOSEPH J. COONEY** |   |
|   |                               | Joseph J. Cooney |
|   |                               | Vice President, Finance |
|   |                               | (Principal Financial and Accounting Officer) |

**Date:  May 15, 2002**

 

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