**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

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** **

**FORM 10-Q**

 

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

** **

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

** **

**Commission file number 000-25475**

 

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**LATITUDE COMMUNICATIONS, INC.**

**(Exact name ofregistrant 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 bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

Yes  **ý     **No  **o**

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).

 

Yes  **o**     No  **ý**

 

As of October31, 2003, there were 19,684,021 shares of the registrant’s Common Stockoutstanding.

 

 

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**INDEX**

 
| **PART I.**   | **FINANCIAL  INFORMATION** |
|---------------|----------------------------|
|          |                       |   |   |
|          | **Item 1.**                | **Financial Statements (Unaudited)** |
|          |                       |   |   |
|          |                       | Condensed consolidated balance sheets at  September 30, 2003 and December 31, 2002 |
|          |                       |   |   |
|          |                       | Condensed consolidated statements of  operations and comprehensive loss for the three months ended September 30,  2003 and 2002; and for the nine months ended September 30, 2003 and 2002 |
|          |                       |   |   |
|          |                       | Condensed consolidated statements of cash  flows for the nine months ended September 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.** |

 

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

**(Unaudited)**

 
|                                                                                                                                                                           |   | **September  30,  2003** |       | **December  31,  2002** |       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|------------|-------------------------|------------|
| **ASSETS**                                                                                                                                                                     |   |                     | ** ** |                    | ** ** |
| Current assets:                                                                                                                                                                |   |                     |       |                    |       |
| Cash and cash equivalents                                                                                                                                                      |   | $                        | 18,159     |                    | $          | 13,119 |   |
|                                                                                                                                                                           |   |                     |       |                    |       |
| Short-term investments                                                                                                                                                         |   | 3,013                    |       | 12,066                  |       |
| Accounts receivable, net                                                                                                                                                       |   | 5,344                    |       | 7,035                   |       |
| Inventory                                                                                                                                                                      |   | 1,291                    |       | 952                     |       |
| Prepaids and other assets                                                                                                                                                      |   | 1,902                    |       | 2,135                   |       |
| Total current assets                                                                                                                                                           |   | 29,709                   |       | 35,307                  |       |
| Property and equipment, net                                                                                                                                                    |   | 3,339                    |       | 3,915                   |       |
| Goodwill                                                                                                                                                                       |   | 914                      |       | —                  |       |
| Deposits and other long-term assets                                                                                                                                            |   | 961                      |       | 1,060                   |       |
| Total assets                                                                                                                                                                   |   | $                        | 34,923     |                    | $          | 40,282 |   |
|                                                                                                                                                                           |   |                     |       |                    |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                  |   |                     | ** ** |                    | ** ** |
| Current liabilities:                                                                                                                                                           |   |                     |       |                    |       |
| Accounts payable                                                                                                                                                               |   | $                        | 519        |                    | $          | 744 |   |
| Accrued liabilities                                                                                                                                                            |   | 4,528                    |       | 5,274                   |       |
| Deferred revenue                                                                                                                                                               |   | 4,777                    |       | 5,054                   |       |
| Total current liabilities                                                                                                                                                      |   | 9,824                    |       | 11,072                  |       |
| Other non-current liabilities                                                                                                                                                  |   | 1,611                    |       | 2,605                   |       |
| Total liabilities                                                                                                                                                              |   | 11,435                   |       | 13,677                  |       |
| Stockholders’ equity:                                                                                                                                                     |   |                     |       |                    |       |
| Preferred stock, $0.001 par value                                                                                                                                              |   |                     |       |                    |       |
| Authorized: 5,000 shares at September 30, 2003 and December 31, 2002 Issued and outstanding: No shares at  September 30, 2003 and December 31, 2002                       |   | —                   |       | —                  |       |
| Common stock, $0.001 par value                                                                                                                                                 |   |                     |       |                    |       |
| Authorized: 75,000 shares at September 30, 2003 and December 31, 2002 Issued and outstanding: 19,517 shares  at September 30, 2003 and 19,390 shares at December 31, 2002 |   | 19                       |       | 19                      |       |
| Additional paid-in capital                                                                                                                                                     |   | 57,987                   |       | 57,757                  |       |
| Accumulated other comprehensive income  (loss)                                                                                                                                 |   | (65                      | )          | 49                      |       |
| Accumulated deficit                                                                                                                                                            |   | (34,453                  | )          | (31,220                 | )          |
| Total stockholders’ equity                                                                                                                                                |   | 23,488                   |       | 26,605                  |       |
| Total liabilities and stockholders’ equity                                                                                                                                |   | $                        | 34,923     |                    | $          | 40,282 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

3

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**LATITUDE COMMUNICATIONS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS AND COMPREHENSIVE LOSS**

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

**(Unaudited)**

 
|                                                                                                     |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|----------------------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                                                                                     |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** |   |
| Revenue:                                                                                                 |   |                                   |   |                                  |   |   |   |   |   |
| Product                                                                                                  |   | $                                      | 1,846  |                                  | $      | 3,211 |   | $ | 5,772 |   | $ | 10,135 |   |
| Service                                                                                                  |   | 6,757                                  |   | 7,557                                 |   | 20,569 |   | 20,120 |   |
| Total revenue                                                                                            |   | 8,603                                  |   | 10,768                                |   | 26,341 |   | 30,255 |   |
| Cost of revenue:                                                                                         |   |                                   |   |                                  |   |   |   |   |   |
| Product                                                                                                  |   | 750                                    |   | 1,311                                 |   | 2,260 |   | 3,719 |   |
| Service (includes non-cash stock  compensation of $0, $0, $0 and $1, respectively)                       |   | 3,898                                  |   | 3,632                                 |   | 10,720 |   | 10,395 |   |
| Total cost of revenue                                                                                    |   | 4,648                                  |   | 4,943                                 |   | 12,980 |   | 14,114 |   |
| Gross profit                                                                                             |   | 3,955                                  |   | 5,825                                 |   | 13,361 |   | 16,141 |   |
|                                                                                                     |   |                                   |   |                                  |   |   |   |   |   |
| Operating expenses:                                                                                      |   |                                   |   |                                  |   |   |   |   |   |
| Research and development (includes non-cash  stock compensation of $0, $10, $0 and $32, respectively)    |   | 1,451                                  |   | 1,712                                 |   | 3,971 |   | 4,642 |   |
| Marketing and sales (includes non-cash  stock compensation of $0, $6, $0 and $24, respectively)          |   | 2,966                                  |   | 4,620                                 |   | 9,468 |   | 14,330 |   |
| General and administrative (includes  non-cash stock compensation of $0, $39, $0 and $124, respectively) |   | 1,099                                  |   | 1,288                                 |   | 3,348 |   | 3,642 |   |
| Purchased in-process technology                                                                          |   | —                                 |   | —                                |   | 70 |   | — |   |
| Restructuring charge                                                                                     |   | —                                 |   | 5,400                                 |   | — |   | 5,400 |   |
| Total operating expenses                                                                                 |   | 5,516                                  |   | 13,020                                |   | 16,857 |   | 28,014 |   |
| Loss from operations                                                                                     |   | (1,561                                 | )      | (7,195                                | )      | (3,496 | ) | (11,873 | ) |
| Interest income, net                                                                                     |   | 64                                     |   | 212                                   |   | 336 |   | 729 |   |
| Loss before provision for income tax                                                                     |   | (1,497                                 | )      | (6,983                                | )      | (3,160 | ) | (11,144 | ) |
| Provision for income tax                                                                                 |   | 24                                     |   | 8,965                                 |   | 72 |   | 7,498 |   |
|                                                                                                     |   |                                   |   |                                  |   |   |   |   |   |
| Net loss                                                                                                 |   | $                                      | (1,521 | )                                     | $      | (15,948 | ) | $ | (3,232 | ) | $ | (18,642 | ) |
|                                                                                                     |   |                                   |   |                                  |   |   |   |   |   |
| Other comprehensive income (loss), net of  tax— Unrealized gain (loss) on securities                |   | (3                                     | )      | 95                                    |   | (101 | ) | 70 |   |
|                                                                                                     |   |                                   |   |                                  |   |   |   |   |   |
| Cumulative translation adjustment                                                                        |   | (5                                     | )      | (18                                   | )      | (13 | ) | (54 | ) |
|                                                                                                     |   |                                   |   |                                  |   |   |   |   |   |
| Comprehensive loss                                                                                       |   | $                                      | (1,529 | )                                     | $      | (15,871 | ) | $ | (3,346 | ) | $ | (18,626 | ) |
|                                                                                                     |   |                                   |   |                                  |   |   |   |   |   |
| Net loss per share-basic and diluted                                                                     |   | $                                      | (0.08  | )                                     | $      | (0.82 | ) | $ | (0.17 | ) | $ | (0.96 | ) |
|                                                                                                     |   |                                   |   |                                  |   |   |   |   |   |
| Shares used in per share calculation-basic  and diluted                                                  |   | 19,517                                 |   | 19,375                                |   | 19,456 |   | 19,345 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

4

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**LATITUDE COMMUNICATIONS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(Amounts in thousands, except per shareamounts)**

**(Unaudited)**

 
|                                                                          |   | **Nine  Months Ended  September 30,** |   |
|-------------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                          |   | **2003**                              |   | **2002** |   |
| Cash flows from operating activities:                                         |   |                                  |   |   |   |
| Net loss                                                                      |   | $                                     | (3,232 | ) | $ | (18,642 | ) |
|                                                                          |   |                                  |   |   |   |
| Adjustments to reconcile net loss to net  cash  used in operating activities: |   |                                  |   |   |   |
| Depreciation and amortization                                                 |   | 1,739                                 |   | 2,098 |   |
| Disposal of discontinued property and  equipment                              |   | —                                |   | 601 |   |
| Amortization of capitalized software                                          |   | 262                                   |   | 424 |   |
| Write down of excess and obsolete inventory                                   |   | 25                                    |   | 570 |   |
| In-process research and technology                                            |   | 70                                    |   | — |   |
| Amortization of deferred stock compensation                                   |   | —                                |   | 181 |   |
| Changes in assets and liabilities, net of  effect of acquisitions:            |   |                                  |   |   |   |
| Accounts receivable                                                           |   | 1,691                                 |   | (3,146 | ) |
| Inventory                                                                     |   | (387                                  | )      | 401 |   |
| Prepaids and other assets                                                     |   | 312                                   |   | (891 | ) |
| Deferred income taxes                                                         |   | —                                |   | 7,497 |   |
| Accounts payable                                                              |   | (224                                  | )      | 1,102 |   |
| Accrued liabilities                                                           |   | (1,757                                | )      | 2,992 |   |
| Deferred revenue                                                              |   | (296                                  | )      | 2,027 |   |
| Net cash used in operating activities                                         |   | (1,797                                | )      | (4,786 | ) |
|                                                                          |   |                                  |   |   |   |
| Cash flows from investing activities:                                         |   |                                  |   |   |   |
| Purchases of property and equipment                                           |   | (1,121                                | )      | (1,843 | ) |
| Additions to software production costs                                        |   | (313                                  | )      | — |   |
| Purchases of available for sale securities                                    |   | (3,013                                | )      | (9,549 | ) |
| Maturities of available for sale securities                                   |   | 11,965                                |   | 11,897 |   |
| Net cash paid in purchase acquisition                                         |   | (996                                  | )      | — |   |
| Deposits and other long-term assets                                           |   | 99                                    |   | (40 | ) |
| Net cash provided by investing activities                                     |   | 6,621                                 |   | 465 |   |
|                                                                          |   |                                  |   |   |   |
| Cash flows from financing activities:                                         |   |                                  |   |   |   |
| Proceeds from issuance of common stock, net                                   |   | 230                                   |   | 114 |   |
| Repayment of notes payable and capital  lease obligations                     |   | —                                |   | (80 | ) |
| Net cash provided by financing activities                                     |   | 230                                   |   | 34 |   |
|                                                                          |   |                                  |   |   |   |
| Effect of exchange rate changes on cash                                       |   | (14                                   | )      | — |   |
| Net increase (decrease) in cash and cash  equivalents                         |   | 5,040                                 |   | (4,287 | ) |
| Cash and cash equivalents, beginning of  period                               |   | 13,119                                |   | 15,370 |   |
| Cash and cash equivalents, end of period                                      |   | $                                     | 18,159 |   | $ | 11,083 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

5

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**LATITUDE COMMUNICATIONS, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

 

**Note1—The Company and Basis of Presentation**

 

Latitude (the“Company”) is a leading provider of fully integrated, “on-network” rich-mediaconferencing solutions, including web and voice conferencing applications.  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. The Company distributes its solutions through a network of worldwidedistributors and sales professionals.

 

Theaccompanying unaudited condensed consolidated financial statements reflect alladjustments, which, in the opinion of management, are necessary for a fairpresentation of the results for the periods 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 December31, 2002 was derived from audited financial statements; however, it does notinclude all disclosures required by generally accepted accounting principles inthe 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, 2002.

** **

**Note2—Recent Accounting Pronouncements**

 

In June 2002,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No. 146, “Accounting for Exit or Disposal Activities”(“SFAS 146”). SFAS 146 addresses significant issues regarding therecognition, measurement, and reporting of costs that are associated with exitand disposal activities, including restructuring activities that are currentlyaccounted for under the Emerging Issues Task Force (“EITF”) No. 94-3,“Liability Recognition for Certain Employee Termination Benefits and OtherCosts to Exit an Activity (including Certain Costs Incurred in aRestructuring)”.  The scope ofSFAS 146 also includes costs 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. SFAS146 is effective for exit or disposal activities that are initiated afterDecember 31, 2002.  The provisions of EITF No. 94-3 shall continue to apply foran exit activity initiated under an exit plan that meets the criteria of EITFNo. 94-3 prior to the adoption of SFAS 146. The effect on adoption of SFAS 146 changed on aprospective basis the timing of when restructuring charges are recorded from acommitment 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 November2002, the EITF reached a consensus on Issue No. 00-21 “Accounting for RevenueArrangements With Multiple Deliverables” which provides guidance on how toaccount for arrangements that involve the delivery or performance of multipleproducts, services and/or rights to use assets.  The provisions of EITF No. 00-21 will apply to revenuearrangements entered into in fiscal periods beginning after June 15, 2003.  EITF No. 00-21 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.

 

In January2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation ofVariable Interest Entities, an Interpretation of ARB No. 51”. FIN 46 requirescertain variable interest entities to be consolidated by the primarybeneficiary of the entity if the equity investors in the entity do not have thecharacteristics of a controlling financial interest or do not have sufficientequity at risk for the entity to finance its activities without additionalsubordinated financial support from other parties. FIN 46 is effectiveimmediately for all new variable interest entities created or acquired afterJanuary 31, 2003. For variable interest entities created or acquired prior toFebruary 1, 2003, the provisions of FIN 46 must be applied for the firstinterim or annual period ending after December 15, 2003. The Company does nothave any variable interest entities. FIN 46 was adopted in the second quarter of 2003 and did not have animpact on the Company’s financial position, results of operations or cashflows.

 

In May 2003,the FASB issued SFAS No. 150, “Accounting for Certain Financial Instrumentswith Characteristics of both Liabilities and Equity.”  This Statement establishes standards for how an issuer classifiesand

 

6

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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.

 

**Note3—Inventory**

** **

Inventoryconsists of the following (in thousands):

** **

|           |   | **September  30,  2003** |       | **December  31,  2002** |   |
|----------------|--------|--------------------------|------------|-------------------------|--------|
|           |   | **(Unaudited  )**        | ** ** |
| Raw materials  |   | $                        | 1,011      |                    | $      | 628 |   |
| Finished goods |   | 280                      |       | 324                     |   |
|           |   | $                        | 1,291      |                    | $      | 952 |   |

 

**Note4—Pro Forma Stock Compensation**

 

Latitude hasadopted the disclosure -only provisions of Statement of Financial AccountingStandards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”).Had compensation cost been determined based on the fair value at the grant datefor the awards granted since 1994, consistent with the provisions of SFAS 123for the 1993 Stock Plan, the 1999 Stock Plan, the 2001 Employee Stock OptionPlan, the 1999 Directors’ Stock Option Plan and the 1999 Employee StockPurchase Plan, Latitude’s net loss for the three and nine months endedSeptember 30, 2003 and 2002 would have been as follows (in thousands, exceptper share data):

 
|                                                                            |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|---------------------------------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                                                            |   | **2003**                              |   | **2002**                             |   | **2003** |   | **2002** |   |
| Net loss—as reported                                                       |   | $                                     | (1,521 | )                                    | $      | (15,948 | ) | $ | (3,232 | ) | $ | (18,642 | ) |
| Add stock based compensation expense — as  reported                        |   | —                                |   | 55                                   |   | — |   | 181 |   |
| Less stock based compensation expense  determined under fair value based method |   | (4,254                                | )      | (5,410                               | )      | (4,281 | ) | (5,410 | ) |
| Net loss—pro forma                                                         |   | $                                     | (5,775 | )                                    | $      | (21,303 | ) | $ | (7,513 | ) | $ | (23,871 | ) |
| Net loss per share—basic and diluted as  reported                          |   | $                                     | (0.08  | )                                    | $      | (0.82 | ) | $ | (0.17 | ) | $ | (0.96 | ) |
| Net loss per share—basic and diluted pro  forma                            |   | $                                     | (0.30  | )                                    | $      | (1.10 | ) | $ | (0.39 | ) | $ | (1.23 | ) |

 

Such pro formadisclosures may not be representative of future compensation cost becauseoptions vest over several years and additional grants are made each year.

 

In accordancewith the provisions of SFAS 123, the following assumptions for option grantsduring the three and nine months ended September 30, 2003 and 2002 are includedto estimate the fair value of each stock option and purchase right:

 

7

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|                              |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|-----------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                              |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** |   |
| **Stock Options:**                |   |                                   |   |                                  |   |   |   |   |   |
| Expected dividend yield           |   | 0                                      | %      | 0                                     | %      | 0 | % | 0 | % |
| Expected stock price volatility   |   | 83                                     | %      | 107                                   | %      | 104 | % | 109 | % |
| Risk-free interest rate           |   | 2.45-3.60                              | %      | 2.3-3.8                               | %      | 2.05-3.6 | % | 2.3-4.8 | % |
| Expected life (years)             |   | 5                                      |   | 4                                     |   | 5 |   | 4 |   |
|                              |   |                                   |   |                                  |   |   |   |   |   |
| **Employee Stock Purchase Plan:** |   |                                   |   |                                  |   |   |   |   |   |
| Expected dividend yield           |   | 0                                      | %      | 0                                     | %      | 0 | % | 0 | % |
| Expected stock price volatility   |   | 83                                     | %      | 107                                   | %      | 104 | % | 109 | % |
| Risk-free interest rate           |   | 2.7                                    | %      | 3.8                                   | %      | 2.7 | % | 3.8 | % |
| Expected life (years)             |   | 0.5                                    |   | 0.5                                   |   | 0.5 |   | 0.5 |   |

 

**Note5—Net Loss Per Share**

 

Basic net lossper share is computed by dividing net loss available to common stockholders bythe weighted average number of vested common shares outstanding for theperiod.  Diluted net loss per share iscomputed by giving effect to all dilutive potential common stock options.  Diluted net loss per share is the same asbasic net loss per share for the three and nine months ended September 30, 2003because the inclusion of potentially dilutive common shares, which consisted ofcommon shares issuable upon the exercise of stock options, would result in ananti-dilutive per share effect. 

 

Areconciliation of the numerator and denominator of basic and diluted net lossper share is provided as follows (in thousands, except per share amounts):

 
|                                                                      |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|---------------------------------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                                                      |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** |   |
|                                                                      |   | **(Unaudited)**                        |   | **(Unaudited)**                       |   |
| Net loss per share, basic and diluted:                                    |   |                                   |   |                                  |   |   |   |   |   |
| Numerator for net loss, basic and diluted                                 |   | $                                      | (1,521 | )                                     | $      | (15,948 | ) | $ | (3,232 | ) | $ | (18,642 | ) |
| Denominator for basic and diluted net loss  per share:                    |   |                                   |   |                                  |   |   |   |   |   |
| Weighted average vested common shares  outstanding                        |   | 19,517                                 |   | 19,375                                |   | 19,456 |   | 19,345 |   |
| Net loss per share basic and diluted                                      |   | $                                      | (0.08  | )                                     | $      | (0.82 | ) | $ | (0.17 | ) | $ | (0.96 | ) |
|                                                                      |   |                                   |   |                                  |   |   |   |   |   |
| Anti-dilutive securities not included in  the calculation of diluted EPS: |   |                                   |   |                                  |   |   |   |   |   |
| Common stock options                                                      |   | 4,957                                  |   | 4,860                                 |   | 4,957 |   | 4,860 |   |

 

8

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**Note6—Restructuring**

 

During thequarter ended June 30, 2001, the Company initiated a restructuringprogram.  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 to non-cancelable lease costs arising from the consolidation of excessfacilities and $200,000 related to discontinued assets written-off.

 

During thequarter ended September 30, 2002, the Company initiated another restructuringprogram.  As a part of thisrestructuring program, the Company recorded costs and other charges of$5,400,000 classified as operating expenses. Of this amount, $900,000 related to a reduction in the workforce byapproximately 45 fulltime employees across all functional areas of the Company,including three members of executive management; $3,900,000 related to non-cancelablelease costs arising from the consolidation of excess facilities; and $600,000related to discontinued assets written-off. 

 

A summary ofthe restructuring costs is as follows (in thousands):

 

|                                                 |   | **Severance  and  Benefits** |   | **Facilities  and Other  Charges** |   | **Asset  Write-Offs** |   | **Total** |   |
|------------------------------------------------------|--------|------------------------------|--------|------------------------------------|--------|-----------------------|--------|-----------|--------|
| 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                                            |   | (13                          | )      | (1,087                             | )      | —                |   | (1,100    | )      |
| Restructuring reserve balance at September  30, 2003 |   | $                            | 10     |                               | $      | 2,814                 |   | $         | — |   | $ | 2,824 |   |

 

The amountsrelated to severance and benefits costs are expected to be paid during fiscal2003.  The amounts related tonon-cancelable lease costs are expected to be paid over the respective leaseterms through fiscal 2005.

** **

**Note 7 – Share Repurchase Program**

 

On July 24,2001 the Company’s Board of Directors approved a Share Repurchase Program of upto 1,000,000 shares of common stock. During the three and nine months ended September 30, 2003, no shareswere repurchased.  As of September 30,2003, the Company has purchased 339,200 shares under this program at a weightedaverage cost of $1.35 per share.

** **

**Note 8 – Contingencies & Commitments**

 

**Litigation:**

** **

In November2001, a series of securities class actions were filed in the United StatesDistrict Court for the Southern District of New York against certain underwritersfor Latitude’s initial public offering (“IPO”), Latitude Communications Inc.,and Emil C. Wang and Rick M. McConnell, who were officers of Latitude at thetime of the IPO. The complaints were consolidated into a single action, and aconsolidated amended complaint against Latitude was filed in April 2002. Theamended complaint alleges, among other things, that the underwriter defendantsviolated the securities laws by failing to disclose alleged compensationarrangements in the initial public offering’s registration statement and byengaging in manipulative practices to artificially inflate the price of theCompany’s common stock after the initial public offering. The amended complaintalso alleges, 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. McConnelland Mr. Wang have subsequently been dismissed from the action without prejudicepursuant to a tolling agreement. Furthermore, in July 2002, Latitude and theother issuers in the consolidated cases filed motions to dismiss the amendedcomplaint for failure to state a claim. The motion to dismiss claims undersection 11

 

9

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was denied as to virtually allthe defendants in the consolidated actions, including Latitude. However, theclaims against Latitude under section 10(b) were dismissed.

 

On June 20,2003, a committee of the Company’s Board of Directors conditionally approved aproposed partial 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 assign away,not assert, or release certain potential claims the Company may have againstits underwriters.  Any direct financialimpact of the proposed settlement is expected to be borne by the Company’sinsurers.   The committee agreed toapprove the settlement subject to a number of conditions, including theparticipation 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.  No amounthas been accrued related to this matter and legal costs incurred in the defenseof the matter are being expensed as incurred.

 

**Guarantees:**

 

In November2002, the FASB issued FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accountingand Disclosure Requirements for Guarantees, Including Guarantees ofIndebtedness of Others.”  FIN 45requires that upon issuance of certain guarantees, a guarantor must recognize aliability for the fair value of an obligation assumed under the guarantee.  FIN 45 also requires significant newdisclosures, 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 negatively impact service margins. 

 

Latitude also, as permittedunder Delaware law and in accordance with our Bylaws, indemnifies its officersand directors for certain events or occurrences, subject to certain limits,while the officer or director is or was serving at the Company’s request insuch capacity. The indemnification obligation is for the officer’s ordirector’s lifetime.  The maximum amountof potential future indemnification is unlimited; however, Latitude does have aDirector and Officer Insurance Policy that limits its exposure and enables theCompany to recover a portion of any future amounts paid. 

 

In theCompany’s sales agreements, Latitude typically agrees to indemnify itscustomers for expenses or liability resulting from claimed infringements ofpatents, trademarks, copyrights or other intellectual property rights of thirdparties. The terms of these indemnification agreements may be perpetual afterexecution of the agreement. The maximum amount of potential futureindemnification may be unlimited. To date the Company has not paid any amountsto settle claims or defend lawsuits related to such indemnification agreements.

** **

**Note 9 – Deferred Tax Valuation Allowance**

 

At December31, 2002, the Company had total gross U.S. deferred tax assets of $7.5million.  These assets includedtemporary differences related principally to net operating losses that carryforward and research and development credits. During the third quarter ended September 30, 2002, the Company concludedthat a deferred tax asset valuation allowance should be established due to theuncertainty of realizing the tax loss carry-forwards and other deferred taxassets in accordance with Statement of Financial Accounting Standards No. 109(“SFAS 109”), “Accounting for Income Taxes”. Accordingly, in the third quarter of 2002, the Company recorded a fullvaluation allowance for its deferred tax assets.  The Company’s assessment in recording the valuation allowance wasbased principally on its historical operating losses; the loss of a majorcustomer and restructuring efforts announced in the third quarter of 2002; andunfavorable macro-economic conditions.  

 

SFAS No. 109,“Accounting for Income Taxes,” requires the establishment of a valuationallowance for deferred tax assets when it is deemed more likely than not thatthese assets will not be realized.  Thedeferred tax assets will be recognized in future periods to the extent that theCompany can reasonably expect such assets to be

 

10

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realized.  The Company will evaluate the probability ofrealizing its deferred tax assets on a quarterly basis.  If the Company determines that a portion orall of the deferred tax assets are realizable, then the valuation allowancewill be reduced accordingly.

** **

**Note 10 – Wanadu Acquisition**

** **

On April 16,2003 Latitude announced it had entered into an agreement to acquire the assetsof Wanadu Incorporated (“Wanadu”), a privately held developer of Flash-basedcontent creation, management and delivery products.  The acquisition is a key step in the Company’s strategy to buildand offer rich-media conferencing solutions that integrate voice, web, videoand instant messaging technologies.  Inthe transaction, which closed on April 30, 2003, Latitude acquired Wanadu’s netassets in exchange for $900,000 in cash and a percentage of future revenue fromsales of Wanadu products.  Theacquisition was accounted for using the purchase method, and accordingly, thepurchase price was allocated to the assets acquired and liabilities assumedbased on their estimated fair values on the acquisition date.  The following table summarizes the Company’spurchase price allocation for this transaction (unaudited):

** **
| Acquisition Cost                                                           |   | $       | 1,016,114 |   |
|----------------------------------------------------------------------------|--------|---------|-----------|--------|
| 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                                        |   | $       | 914,517   |   |

** **

The amountallocated to purchased in-process technology was determined by management,after considering among other factors, the results of an independent appraisalbased on established valuation techniques in the high-technology communicationsindustry and was expensed upon acquisition because technological feasibilityhad not been established and no future alternative uses existed for thisin-process technology.  The cost approach,which uses the concept that replacement cost is an indicator of fair value, wasthe primary technique utilized in valuing the in-process technology acquired inthe Wanadu transaction.  The costapproach is based on the premise that a prudent investor would pay no more foran asset than the cost to replace that asset with a new one.  Four projects containing in-processtechnology in development were identified, varying from 60-75% completion as ofthe valuation date, and all completed by September 30, 2003.  Replacement cost was based on total costs,net of the unrealized income tax deduction benefit, spent developing thein-process technology from Wanadu’s inception through the date the valuationwas performed.

** **

**Note 11 – Subsequent Event**

** **

Pursuant to anAgreement and Plan of Merger and Reorganization dated as of November 11, 2003(the “Merger Agreement”) by and among Cisco Systems, Inc. (“Cisco”), Latitudeand a wholly-owned subsidiary of Cisco (“Merger Sub”), Merger Sub will merge(the “Merger”) with and into Latitude, with the separate corporate existence ofMerger Sub ceasing and Latitude continuing as the surviving corporation and awholly-owned subsidiary of Cisco. At the effective time of the Merger (the“Effective Time”), each share of Latitude’s common stock issued and outstandingimmediately prior to the Effective Time will be converted automatically intothe right to receive $3.95 in cash. The consummation of the Merger is subjectto various conditions precedent, including (i) approval of the Merger Agreementby the stockholders of Latitude and (ii) expiration or early termination of thewaiting period required under the Hart-Scott-Rodino Antitrust Improvements Actof 1976, as amended.

 
| **Item 2****.** | **Management’s Discussion and Analysis of Financial Condition and  Results of Operations.** |
|-----------------|--------------------------------------------------------------------------------------------------|

** **

**CertainForward-Looking Information**

 

ThisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations and other parts of this Form 10 -Q include a number offorward-looking statements that reflect our current views with respect to futureevents and financial performance.  Weuse words such as “anticipates,” “believes,” “expects,” “future,” and“intends,” and similar expressions to identify forward-looking statements. Youshould not place undue reliance on these forward-looking statements, whichapply only as of the date of this Quarterly Report on Form 10-Q.  These forward-looking statements are subjectto risks and uncertainties that could cause actual results to differ materially

 

11

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from historical results or ourpredictions.  These risks are describedin “ -Factors That May Affect Future Results- “ and elsewhere in this Form10-Q.  The Company assumes no obligationto update these forward -looking statements to reflect actual results orchanges in factors or assumptions affecting such forward -looking statements.

 

While webelieve that the discussion and analysis in this report is adequate for a fairpresentation of the information, we recommend that you read this discussion andanalysis with Management’s Discussion and Analysis 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 aleading provider of fully integrated, “on-network” rich-media conferencingsolutions, including web and voice conferencing applications that make remotemeetings as natural and productive as in-person meetings.  Unlike many other conferencing solutions,MeetingPlace is deployed directly on a company’s private voice and datanetworks, regardless of whether the system is hosted or in-house.  Through this “on-network” deployment andseamless integration with enterprise applications like Outlook, Notes andcorporate directories, as well as IP backbones, platforms and endpoints, webelieve that MeetingPlace provides enterprises with unparalleled cost savings,security and customer satisfaction.

 

We generaterevenue from sales of our MeetingPlace products and services, and from relatedcustomer support and consulting services. Revenue derived from services constituted 79% of total revenue in thethird quarter of 2003 and 70% during the corresponding period of 2002.  Service revenue includes revenue from ourusage and subscription-based managed and hosted MeetingPlace services,implementation and customization services, consulting services, warrantycoverage and customer support. Revenue from managed, hosted, and implementationservices is recognized as the services are performed, revenue fromcustomization services is recognized upon project completion, and revenue fromwarranty coverage and customer support is recognized ratably over the period ofthe underlying contract.  An exceptionis start-up customization and implementation services for hosted and managedservices, which are recognized over the anticipated life of the servicesarrangement, commencing with the project completion.  Our MeetingPlace services offerings allow companies to acquireMeetingPlace on a usage-based pricing model, obtaining all the benefits of adedicated system – security, customization, and integration – with Latitudemanaging the system for the customers, providing training and support along theway.  Revenue from this service offeringhas increased the proportion of total revenue derived from services.  

 

Revenuederived from product sales constituted 21% of total revenue in the thirdquarter of 2003 and 30% during the corresponding period of 2002.  Product revenue is generally recognized uponshipment if a signed contract exists, the fee is fixed or determinable,collection of the resulting receivable is probable, product returns arereasonably estimable and, if applicable, acceptance has been obtained.  

 

We sell ourMeetingPlace products primarily through our direct sales force and, to a lesserextent, through indirect distribution channels.  The majority of our revenue is derived from large enterprises andorganizations, many of which initially purchase MeetingPlace servers and laterexpand deployment of our products as they require additional capacity for voiceand web conferencing. 

 

Total cost ofrevenue consists of component and materials costs, direct labor costs,amortization of capitalized software, warranty costs, royalties and overheadrelated to manufacturing of our products, long distance services incorporatedinto fixed rate conferencing services contracts, and materials, travel andlabor costs related to personnel engaged in our service operations.  Product gross margin is impacted by theproportion of product revenue derived from software sales, which typicallycarry higher margins than hardware sales, and from indirect distributionchannels, which typically carry lower margins than direct sales.  Service gross margin is impacted by the mixof services we provide, which have different levels of profitability, usagelevels by our customers and the efficiency with which we provide support to ourcustomers.  We reduce the carrying valueof excess and obsolete inventory by identifying inventory components eitherconsidered excess based on estimates of future usage or obsolete due to changesin our product offerings.  As a resultof technological changes, our products may become obsolete or we could berequired to redesign our products. 

 

During 2002and 2001, we recorded significant accruals in connection with restructuringprograms.  These accruals includedestimates pertaining to employee separation costs and the settlements ofcontractual obligations related to excess leased facilities and othercontracts.  Although we do not currentlyanticipate significant changes, actual costs may differ from these estimates. 

 

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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 was a key step in ourstrategy to build and offer rich-media conferencing solutions that integratevoice, web, video and instant messaging technologies.

** **

**Results Of Operations**

 

The followingtable lists, for the periods indicated, the percentage of total revenue of eachline item from our condensed consolidated statement of operations to totalrevenues:

 

|                                   |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|----------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                   |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** |   |
| Revenue:                               |   |                                   |   |                                  |   |   |   |   |   |
| Product                                |   | 21.5                                   | %      | 29.8                                  | %      | 21.9 | % | 33.5 | % |
| Service                                |   | 78.5                                   |   | 70.2                                  |   | 78.1 |   | 66.5 |   |
| Total revenue                          |   | 100.0                                  |   | 100.0                                 |   | 100.0 |   | 100.0 |   |
| Cost of revenue:                       |   |                                   |   |                                  |   |   |   |   |   |
| Product                                |   | 8.7                                    |   | 12.2                                  |   | 8.6 |   | 12.3 |   |
| Service                                |   | 45.3                                   |   | 33.7                                  |   | 40.7 |   | 34.4 |   |
| Total cost of revenue                  |   | 54.0                                   |   | 45.9                                  |   | 49.3 |   | 46.7 |   |
| Gross profit                           |   | 46.0                                   |   | 54.1                                  |   | 50.7 |   | 53.3 |   |
|                                   |   |                                   |   |                                  |   |   |   |   |   |
| Operating expenses:                    |   |                                   |   |                                  |   |   |   |   |   |
| Research and development               |   | 16.9                                   |   | 15.9                                  |   | 15.1 |   | 15.3 |   |
| Marketing and sales                    |   | 34.4                                   |   | 42.9                                  |   | 35.9 |   | 47.4 |   |
| General and administrative             |   | 12.8                                   |   | 12.0                                  |   | 12.7 |   | 12.0 |   |
| Purchased in-process technology        |   | —                                 |   | —                                |   | 0.3 |   | — |   |
| Restructuring charge                   |   | —                                 |   | 50.1                                  |   | — |   | 17.8 |   |
| Total operating expenses               |   | 64.1                                   |   | 120.9                                 |   | 64.0 |   | 92.5 |   |
| Loss from operations                   |   | (18.1                                  | )      | (66.8                                 | )      | (13.3 | ) | (39.2 | ) |
| Interest income, net                   |   | 0.7                                    |   | 2.0                                   |   | 1.3 |   | 2.4 |   |
| Loss before provision for income taxes |   | (17.4                                  | )      | (64.8                                 | )      | (12.0 | ) | (36.8 | ) |
| Provision for income taxes             |   | 0.3                                    |   | 83.3                                  |   | 0.3 |   | 24.8 |   |
| Net loss                               |   | (17.7                                  | )%     | (148.1                                | )%     | (12.3 | )% | (61.6 | )% |

 

*Product Revenue*

 

Productrevenue was $1.8 million for the third quarter of 2003, a decrease of 43%compared to the corresponding period in 2002. Product revenue decreased $4.4 million, or 43%, to $5.8 million for thenine months ended September 30, 2003 from $10.1 million for the nine monthsended September 30, 2002.  The decreasesin each of the periods were due to fewer MeetingPlace system sales in acontinuing uncertain economic 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 allow companies to acquire MeetingPlace on a usage-based pricingmodel.   The combination of these twofactors resulted in product revenue decreasing from 33% to 22% of total revenuefor the nine months ended September 30, 2003. 

 

*Service Revenue*

 

Servicerevenue decreased $800,000, or 11%, to $6.8 million for the three months endedSeptember 30, 2003 from $7.6 million for the three months ended September 30,2002.  Service revenue increased$449,000, or 2%, to $20.6 million for the nine months ended September 30, 2003from $20.1 million for the nine months ended September 30, 2002.  Service revenue is comprised of two parts,product support revenue and MeetingPlace services

 

13

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revenue, which includes managedand hosted services.  Excluding revenuefrom Hewlett-Packard, MeetingPlace services revenue increased to $3.4 millionin the third quarter of 2003 from $1.5 million in the corresponding period in2002, a 127% increase, and increased $4.7 million, or 127%, to $8.5 million forthe nine months ended September 30, 2003 from $3.7 million for the nine monthsended September 30, 2002.  The increasewas attributable primarily to the sale of usage-based managed and hostedservices to both new and existing customers as well as increased minutes ofusage from existing customers.  Theforegoing calculation of services revenue, which excludes revenue fromHewlett-Packard, is a non-GAAP financial measure within the meaning ofRegulation G.  This adjustment to ourGAAP results is made with the intent of providing both management and investorsa supplemental understanding of our underlying operational results andtrends.  

 

In August2002, we announced that Hewlett-Packard, our then largest customer, had decidedto pursue alternative vendor solutions for its voice conferencing needs.  Service revenue from Hewlett-Packardconsisted of $486,000 and $2.1 million for the three months ended September 30,2003 and 2002, respectively, and $2.6 million and $6.2 million for the ninemonths ended September 30, 2003 and 2002, respectively.  For the three and nine months endedSeptember 30, 2003, Hewlett–Packard accounted for less than 10% of our totalrevenue.  Hewlett-Packard was the onlycustomer that accounted for more than 10% of our total revenue for the threeand nine months ended September 30, 2002. There were no customers that accounted for more than 10% of our totalrevenue for the three and nine months ended September 30, 2003.

 

*Total Cost of Revenue*

 

Total cost ofrevenue decreased $295,000, or 6%, to $4.6 million for the third quarter of2003, from $4.9 million for the corresponding period of 2002.  Total cost of revenue decreased $1.1million, or 8%, to $13.0 million for the nine months ended September 30, 2003from $14.1 million for the nine months ended September 30, 2002.  The decreases in total cost of revenue weredue to lower product sales, as well as lower expenses incurred in the firstnine months of 2003 resulting from the implementation of a cost reductionprogram in the third quarter of 2002, partially offset by an increase in longdistance services in 2003 that are bundled as a part of our hosted serviceoffering to new customers.

 

Gross profitwas $4.0 million for the third quarter of 2003, as compared to $5.8 million inthe corresponding period of 2002.  Grossprofit was $13.4 million for the nine months ended September 30, 2003, ascompared to $16.1 million for the nine months ended September 30, 2002.  Gross margin was 46% as a percentage ofrevenue for the third quarter of 2003, as compared to 54% for the correspondingperiod of 2002, and was 51% and 53% for the nine months ended September 30,2003 and 2002, respectively.  Thedecrease in gross margin from 2002 to 2003 was due to lower overall salescombined with the significant fixed and long distance services cost componentof our cost of revenue, as well as an increase in the mix of services revenue,which has lower gross margins than product revenue. 

 

Product grossmargin remained at 59% as a percentage of product revenue for the third quarterof 2003 and the corresponding period of 2002. Product gross margin decreased to 61% as a percentage of product revenuefor the nine months ended September 30, 2003 as compared to 63% for the ninemonths ended September 30, 2002. The decrease in product gross margin from 2002to 2003 was due to the impact of fixed manufacturing and royalty costs on lowerproduct revenue, as well as reduced selling prices.    

 

Service grossmargin decreased to 42% as a percentage of service revenue for the thirdquarter of 2003 as compared to 52% for the corresponding period in 2002.  Service gross margin remained constant at48% as a percentage of service revenue for the nine months ended September 30,2003 as compared to the nine months ended September 30, 2002.  The decrease from third quarter 2002 to 2003was due to the decrease in higher margin revenue attributable toHewlett-Packard and to a decrease in product support revenue, as well as anincrease in long distance services bundled as a part of our hosted serviceoffering to new customers.  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 on the overallservices gross margin percentage.

 

*Research and Development Expenses*

 

Research anddevelopment expenses consist of compensation and related costs for research anddevelopment personnel, facilities expenses for testing space, and equipment andpurchased software. Research and development expenses were $1.5 million for thethird quarter of 2003, which represented a decrease of 15% when compared to thecorresponding period in 2002.  Researchand development expenses decreased $639,000, or 14%, to $4.0 million

 

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for the nine months endedSeptember 30, 2003 from $4.6 million for the nine months ended September 30,2002.  These decreases in 2003 wereprimarily a result of a cost reduction program implemented in the third quarterof 2002.  The decrease from thirdquarter 2002 to 2003 was due to decreases in consulting of $108,000, occupancyof $85,000 and capitalized software of $69,000.  The decrease in expenses from the nine months ended September 30,2002 to 2003 was due to decreases in compensation of $371,000, occupancy of$173,000, expensed office equipment and software of $130,000, consulting of$95,000 and capitalized software of $65,000, offset by increases in temporaryhelp of $131,000 and depreciation of $94,000. As a percentage of total revenues, research and development expenseswere 17% and 16%, respectively, for the three months ended September 30, 2003and 2002, and were 15% for the nine months ended September 30, 2003 and2002.  

 

*Marketing and Sales Expenses*

 

Marketing andsales expenses consist of promotional expenditures and compensation and relatedcosts for marketing and sales personnel. Marketing and sales expenses were $3.0million for the third quarter of 2003, which represented a decrease of 36% whencompared to the corresponding period in 2002. Marketing and sales expenses decreased $4.4 million, or 32%, to $9.5million for the nine months ended September 30, 2003 from $13.9 million for thenine months ended September 30, 2002. These decreases in 2003 were a result of a cost reduction programimplemented in the third quarter of 2002, as well as lower product revenue in2003, resulting in lower commission expenses. The decrease from third quarter 2002 to 2003 was due to decreases of$708,000 in compensation, $348,000 in occupancy/rent, $166,000 in travel, $127,000in conferences and training, $117,000 in advertising, and $96,000 in collateralexpenses.  The decrease in expenses fromthe nine months ended September 30, 2002 to 2003 was due to decreases of $2.2million in compensation, $940,000 in occupancy/rent, $434,000 in travel,$337,000 in consulting, $333,000 in advertising, $208,000 in conferences andtraining and $131,000 in collateral expenses, offset by an increase in directlead generation expenses of $93,000.  Asa percentage of total revenues, marketing and sales expenses were 34% and 43%for the three months ended September 30, 2003 and 2002, respectively, and were36% and 46% for the nine months ended September 30, 2003 and 2002,respectively.  

 

*General and Administrative Expenses*

 

General andadministrative expenses consist of personnel expenses, legal and accountingexpenses and other general corporate expenses. General and administrative expenses were $1.1 million for the thirdquarter of 2003, which represented a decrease of 12% when compared to thecorresponding period in 2002.  Generaland administrative expenses decreased $546,000, or 14%, to $3.3 million for thenine months ended September 30, 2003 from $3.9 million for the nine monthsended September 30, 2002.  Thesedecreases in 2003 were primarily a result of a cost reduction programimplemented in the third quarter of 2002. The decrease from third quarter 2002 to 2003 was due to decreases of$51,000 in occupancy/rent, $47,000 in insurance, $35,000 in temporary help, and$32,000 in compensation.  The decreasein expenses from the nine months ended September 30, 2002 to 2003 was due todecreases in compensation of $342,000 and $194,000 in occupancy/rent.  As a percentage of total revenues, generaland administrative expenses were 13% and 12% for the three months endedSeptember 30, 2003 and 2002, respectively, and were 13% for the nine monthsended September 30, 2003 and 2002, respectively. 

* *

*Purchased In-Process Technology*

* *

In the threemonths 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 considering,among 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 approachis based 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, andall completed by September 30, 2003. Replacement cost was based on total costs,net of the unrealized income tax deduction benefit, spent developing thein-process technology from Wanadu’s inception through the date the valuationwas performed.

 

15

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*Amortization of Deferred Stock Compensation*

 

In connectionwith the completion of our initial public offering in May 1999, options grantedin the last quarter of 1997, during the year 1998 and in the first quarter of1999 have been considered to be compensatory. We amortized the deferred stock compensation associated with theseoptions over the vesting periods of the applicable options, resulting inamortization expense of $55,000 and $181,000 in the three and nine months endedSeptember 30, 2002, respectively.  Theamortization of deferred stock compensation was completed in the fourth quarterof 2002, with no additional amortization expense in 2003.

 

*Interest Income, Net*

 

Interestincome, net of interest expense, was $64,000 for the third quarter of 2003,compared to interest income, net of interest expense, of $212,000 for thecorresponding period in 2002.  Interestincome, net of interest expense, was $336,000 for the nine months ended September30, 2003, compared to $729,000 for the corresponding period in 2002.  The decrease in net interest income was dueto lower investment funds caused by our use of cash in operations, anddecreased market interest rates.

 

*Provision for Income Taxes*

 

For thequarter ended September 30, 2003, the provision for income taxes was $24,000,compared to a provision of $9.0 million in the quarter ended September 30,2002.  For the nine months endedSeptember 30, 2003, the provision for income taxes was $72,000, compared to aprovision of $7.5 million for the nine months ended September 30, 2002.  The provision for income taxes in the threeand nine months ended September 30, 2003 includes state and foreign incometaxes that we expect to pay in 2003.  

 

As describedin Note 9 of the “Notes to Condensed Consolidated Financial Statements”, werecorded a valuation allowance equal to our deferred tax asset in the thirdquarter ended September 30, 2002.  Weconcluded that a deferred tax asset valuation allowance should be establisheddue to the uncertainty of realizing the tax loss carryforwards and otherdeferred tax assets in accordance with Statement of Financial AccountingStandards No. 109 (“SFAS 109”), “Accounting for Income Taxes”. 

 

**Liquidityand Capital Resource*s***

 

In May 1999,we completed an initial public offering of common stock, resulting in netproceeds to us of approximately $33.8 million. As of September 30, 2003, we had$21.2 million of cash, cash equivalents and investments, which represented 61%of total assets.  

 

Cash used inoperating activities was $1.8 million for the nine months ended September 30,2003, compared to $4.8 million for the same period in 2002.  Principal uses of cash in operatingactivities in 2003 were a net loss, a decrease in accrued liabilities of $1.8million, an increase in inventory of $387,000 and a decrease in deferredrevenue of $296,000, partially offset by a decrease in accounts receivable of$1.7 million and a decrease in prepaids of $312,000.  

 

Cash providedby investing activities for the nine months ended September 30, 2003 was $6.6million, which consisted primarily of maturities of marketable securities of$12.0 million, offset by purchases of marketable securities of $3.3 million,acquisition costs for Wanadu of $996,000, additions to software production costsof $313,000 and by purchases of property and equipment of $1.1 million.  Cash provided by investing activities in thefirst nine months of 2002 was $465,000, which consisted of the maturities ofmarketable securities of $11.9 million, partially offset by the purchase ofmarketable securities of $9.5 million and the purchase of property andequipment of $1.8 million. 

 

Cash providedby financing activities in the first nine months of 2003 was $230,000, whichconsisted of the proceeds from issuance of common stock under employee benefitplans.  For the first nine months of2002, cash provided by financing activities was $34,000, which consisted of theproceeds from issuance of common stock under employee benefit plans, partiallyoffset by payments on obligations under capital leases and notes payable.

 

We do not haveany material commitments for capital expenditures, however we do expect to usecash for ongoing capital expenditures related to our services offerings.  We may also use cash to further acquire orlicense technology, products or businesses related to our currentbusiness.  In addition, we anticipatethat we will use cash

 

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for operating expenses.  We lease office facilities under variousleases that expire through 2005.  

 

We incurred aloss of $1.5 million and negative cash flows from operations of $1.8 millionduring the nine months ended September 30, 2003.  As of September 30,2003, we had an accumulated deficit of approximately $34.5 million.  

 

We purchaselong distance capacity from third parties. These purchase agreements require a minimum commitment at a fixed ratefor a specified period.  We incorporatelong distance services into fixed rate conferencing services contracts to someof our customers.  The terms of thepurchase agreements and conferencing services contracts do not necessarilycoincide, and as a result, increases in long distance rates could negativelyimpact service margins.

 

As permitted under Delawarelaw and in accordance with our Bylaws, we indemnify our officers and directorsfor certain events or occurrences, subject to certain limits, while the officeror director is or was serving at our request in such capacity. Theindemnification obligation is for the officer’s or director’s lifetime. Themaximum amount of potential future indemnification is unlimited; however, we dohave a Director and Officer Insurance Policy that limits our exposure andenables us to recover a portion of any future amounts paid. 

 

In our sales agreements,we typically agree to indemnify our customers for expenses or liabilityresulting from claimed infringements of patents, trademarks, copyrights orother intellectual property rights of third parties. The 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 thatour current cash, and cash equivalents will be sufficient to meet ouranticipated cash needs for working capital and capital expenditures for atleast the next 12 months. Our future capital requirements will depend upon manyfactors, including revenue growth, management of working capital, the timing ofresearch and product development efforts and the expansion of our marketing andsales efforts.  If our existing cashbalances and cash flows expected from future operations are not sufficient tomeet 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.  The issuance of additionalequity securities may dilute our existing stockholders. 

 

**Impactof Recently Issued Accounting Standards**

 

In June 2002,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No. 146, “Accounting for Exit or Disposal Activities”(“SFAS 146”). SFAS 146 addresses significant issues regarding therecognition, measurement, and reporting of costs that are associated with exitand disposal activities, including restructuring activities that are currentlyaccounted for under the Emerging Issues Task Force (“EITF”) No. 94-3,“Liability Recognition for Certain Employee Termination Benefits and OtherCosts to Exit an Activity (including Certain Costs Incurred in aRestructuring)”.  The scope ofSFAS 146 also includes costs 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. SFAS146 is effective for exit or disposal activities that are initiated afterDecember 31, 2002.  The provisions of EITF No. 94-3 shall continue to apply foran exit activity initiated under an exit plan that meets the criteria of EITFNo. 94-3 prior to the adoption of SFAS 146. The effect on adoption of SFAS 146 changed on aprospective basis the timing of when restructuring charges are recorded from acommitment date approach to when the liability is incurred. SFAS 146 wasadopted in the first quarter of 2003 and did not have a significant impact onour financial position, results of operations or cash flows.

 

In November2002, the EITF reached a consensus on Issue No. 00-21 “Accounting for RevenueArrangements With Multiple Deliverables” which provides guidance on how toaccount for arrangements that involve the delivery or performance of multipleproducts, services and/or rights to use assets.  The provisions of EITF No. 00-21 will apply to revenuearrangements entered into in fiscal periods beginning after June 15, 2003.  EITF No. 00-21 was adopted in the secondquarter of 2003 and did not have an impact on our financial position, resultsof operations or cash flows.

 

In January2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation ofVariable Interest Entities, an Interpretation of ARB No. 51”. FIN 46 requirescertain variable interest entities to be consolidated by

 

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the primary beneficiary of theentity if the equity investors in the entity do not have the characteristics ofa controlling financial interest or do not have sufficient equity at risk forthe entity to finance its activities without additional subordinated financialsupport from other parties. FIN 46 is effective immediately for all newvariable interest entities created or acquired after January 31, 2003. Forvariable interest entities created or acquired prior to February 1, 2003, theprovisions of FIN 46 must be applied for the first interim or annual periodending after December 15, 2003.  We donot have any variable interest entities. FIN 46 was adopted in the second quarter of 2003 and did not have animpact on our financial position, results of operations or cash flows.

 

In May 2003,the FASB issued Statement of Financial Accounting Standards No. 150,  “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity” (“SFAS150”).  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 150 was adopted in the second quarterof 2003 and did not have an impact on our financial position, results ofoperations or cash flows.

 

**FactorsThat May Affect Future Results**

 

In addition tothe other information in this report, the following factors should beconsidered carefully in evaluating the Company’s business and prospects:

* *

*Our future profitability is uncertain due torecent economic developments that may affect our customers’ ability to purchaseour products.* Recent economic developments have caused many companies to reduceheadcount and overhead expenses and to reconsider or delay capitalexpenditures. This has had, and may continue to have, an adverse effect on ourability to grow revenue.  Our financialstatements must be considered in light of the risks and uncertaintiesencountered by companies that sell to corporate information technologydepartments.  We rely substantially onsales of our MeetingPlace products and services, which have limited marketacceptance.  We cannot be assured thatour revenue will grow or that we will return to and/or maintain profitabilityin 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.

* *

*Our operating results may fluctuatesignificantly.*Our operating results are difficult topredict. Our future quarterly operating results may fluctuate and may not meetthe expectations of securities analysts or investors. If this occurs, the priceof our common stock would likely decline. The factors that may causefluctuations of our operating results include the following:

 

•    changesin our mix of revenues generated from product sales and services;

 

•    changesby existing customers in their levels of purchases of our products andservices;

 

•    changesin our mix of sales channels through which our products and services are sold; and

 

•    changesin our mix of domestic and international sales.

 

Orders on handat the beginning of each quarter typically do not equal expected revenue forthat quarter. In addition, a significant portion of our orders is received inthe last month of each fiscal quarter. If we fail to ship products by the endof a quarter in which the order is received, or if our prospective customersdelay their orders or delivery schedules until the following quarter, we mayfail to meet our revenue objectives.

 

Additionally,we have continued to expand our service offerings by providing hosted andmanaged services to our customers. Accordingly, future revenue from this newservice offering may increase the proportion of total revenue derived fromservices. To the extent that prospective customers elect to purchase the hostedor managed services rather than an on-premises MeetingPlace system, our productrevenue could be adversely affected.

 

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*We may encounter difficulties in integratingwith Cisco or completing the merger with Cisco, and that could adversely affectour business. *Ifthe merger is not completed for any reason, we may be subject to a number ofmaterial risks, including the following: (i) we may be required to pay Cisco atermination fee of $3.4 million, (ii) the price of our Common Stock may declineto the extent that the current market price of our Common Stock reflects amarket assumption that the merger will be completed, and (iii) costs related tothe merger, such as legal, accounting and financial advisor fees, must be paideven if the merger is not completed. In addition, our customers may, inresponse to the announcement of the merger, delay or defer purchasingdecisions. Any delay or deferral in purchasing decisions by our customers couldhave a material adverse effect on our business, regardless of whether or notthe merger is ultimately completed. Similarly, current and prospectiveemployees may experience uncertainty about their future role with Cisco untilCisco’s strategies with regard to Latitude are announced and executed. This mayadversely affect our ability to attract and retain key management, sales,marketing and technical personnel. Further, if the merger is terminated and ourboard of directors determines to seek another merger or business combination,there can be no assurance that it will be able to find a partner willing to payan equivalent or more attractive price than that which would be paid in themerger. In addition, while the merger agreement is in effect and subject tocertain limited exceptions, we are prohibited from soliciting, initiating orencouraging or entering into certain extraordinary transactions, such as amerger, sale of assets or other business combination, with any party other thanCisco. 

* *

*Our customers do not have long-termobligations to purchase our products and services; therefore our revenue andoperating results could decline if our customers do not continue to purchaseour products or use our services.*Our customers arenot obligated to continue to purchase our products or**use our services.  As a result, the failure of repeat customerusage, or our inability to retain existing customers and sustain or increasetheir usage of our services, could result in lower than expected revenue, andtherefore, harm our ability to become profitable and cause our stock price todecline.  In addition, because ourcustomers have no continuing obligations with us, we may face increased downwardpricing pressure that could cause a decrease in our gross margins.  Our customers depend on the reliability ofour services and we may lose a customer if we fail to provide reliable servicesfor even a single communication event.

* *

*We expect to depend on sales of ourMeetingPlace solution for substantially all of our revenue for the foreseeablefuture.* Weanticipate that revenues from our MeetingPlace product and related serviceswill continue to constitute substantially all of our revenues for theforeseeable future.  Consequently, anydecline in the demand for MeetingPlace or its failure to achieve broad marketacceptance, would seriously harm our business.

* *

*Our revenues could be significantly reducedby 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.  Duringthe quarter ended September 30, 2002, we announced that our then largestcustomer, Hewlett-Packard Company (“Hewlett-Packard”), had decided to pursuealternative vendor solutions for its voice conferencing needs.  For the three months ended September 30,2003, Hewlett–Packard accounted for less than 10% of our total revenue.  No customers accounted for more than 10% ofour total revenue for the nine months ended September 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:

 

•                       majortelecommunications carriers that operate service bureaus for voiceconferencing, such as AT&T Corporation, MCI Worldcom, Inc. and SprintCorporation;

 

•                       collaborativesoftware and other companies that offer voice and/or web conferencing productsand services such as Lotus Software, Microsoft Corporation, RaindanceCommunications, Inc., Spectel and WebEx Communications, Inc.; and

 

•                       privatebranch exchange, or PBX, providers that sell systems with voice conferencingcapabilities, such as Avaya, Inc., Cisco Systems, Inc. and Nortel NetworksCorporation.

 

Many of thesecompanies have longer operating histories, stronger brand names, larger marketshare and significantly greater financial, technical, marketing and otherresources than do we. These companies may have existing relationships with manyof our prospective customers. Large telecommunications carriers may also bundleconferencing with other services, such as long distance, in order to increasesales in other areas. In effect, these service providers can subsidize theirconferencing offering, enabling them to offer it to customers at very lowrates.

 

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In addition, these companiesmay be able to respond more quickly than we can to new or emerging technologiesand changes in customer requirements. 

 

*We incorporate long distance services intofixed rate conferencing services contracts to some of our customers, and as aresult increases in long distance rates would negatively affect ourmargins. *Wepurchase long distance capacity from third parties who may be ourcompetitors.  These purchase agreementsrequire a minimum commitment at a fixed rate for a specified period.  We incorporate long distance services intofixed rate conferencing services contracts to some of our customers.  The terms of the purchase agreements andconferencing services contracts do not necessarily coincide, and as a result,increases in long distance rates could reduce our margins. 

** **

*The market for rich-media conferencing is inan early stage of development, and our products and services may not beadopted.*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 to and/ormaintain profitability. The market for integrated real -time voice and webconferencing is relatively new and rapidly evolving. Our ability to beprofitable depends in large part on the widespread adoption by end users ofreal -time voice and web conferencing.

 

We will haveto devote substantial resources to educate prospective customers about the usesand benefits of our products and services. In addition, businesses that haveinvested substantial resources in other conferencing products may be reluctantor slow to adopt our products, which might replace or compete with theirexisting systems. Our efforts to educate potential customers may not result inour products and services achieving market acceptance.

* *

*Rapid technological changes could cause ourproducts and services to become obsolete or require us to redesign our productsor integrate with our competitors.*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 technology trendssuch as migrations to new operating systems, will require us to adapt ourproduct and services to remain competitive. This adaptation could be costly andtime -consuming. Our products and services could become obsolete andunmarketable if products and services using new technologies are introduced andnew industry standards emerge, resulting in a potential financial charge forobsolete inventory. For example, the widespread acceptance of competingtechnologies, such as video conferencing, could diminish demand for our currentproducts and services. As a result, the life cycle of our products and servicesis difficult to estimate.

 

Many of ourcompetitors have substantially greater resources than we do and we may not beable to match their rate of product enhancement and innovation.  In particular, if we cannot maintain acompetitive web conferencing product, we may be forced to integrate our voiceconferencing with competitors who offer more advanced web conferencingproducts.

 

To besuccessful, we will need to develop and introduce new products, productenhancements and services that respond to technological changes or evolvingindustry standards, such as the transmission of voice over the Internet, in atimely manner and on a cost effective basis. We cannot assure successfuldevelopment of these types of products and product enhancements or that ourproducts and services will achieve broad market acceptance. 

* *

*Our sales cycle is lengthy and unpredictable.*Any delay in sales of our products and services couldcause our quarterly revenue and operating results to fluctuate. The typicalsales cycle of our products is lengthy, generally between six to twelve months,unpredictable, and involves significant investment decisions by prospectivecustomers, as well as our education of potential customers regarding the useand benefits of our products. Furthermore, many of our prospective customershave neither budgeted expenses for voice and web conferencing systems nor havepersonnel specifically dedicated to procurement and implementation of theseconferencing systems. As a result, our customers spend a substantial amount oftime before purchasing our products in performing internal reviews andobtaining capital expenditure approvals. The emerging and evolving nature of the real -time voice and webconferencing market may lead to confusion in the market, which may causeprospective customers to postpone their purchase decisions.

* *

*If we fail to expand and develop ourdistribution channels, our business could suffer.*Ifwe are unable to expand and develop our distribution channels, we may not beable to increase revenue or achieve market acceptance of our MeetingPlaceproduct and services.  We believe thatour future success is dependent upon establishing successful relationships witha variety of distribution partners. We cannot be certain that we will be ableto reach

 

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agreement with the requireddistribution partners, or that these distribution partners will devote adequateresources to selling our products. Furthermore, if our distribution partnersfail to adequately market or support our products, the reputation of ourproducts in the market may suffer. In addition, we will need to managepotential conflicts between our direct sales force and third -party resellingefforts.

* *

*Our ability to expand into internationalmarkets is uncertain.*We intend to continue to expandour operations into new international markets. In addition to general risksassociated with international expansion, such as foreign currency fluctuationsand political and economic instability, we face the following risks anduncertainties, any of which could prevent us from selling our products andservices in a particular country or harm our business operations once we haveestablished operations in that country: 

 

•                       thedifficulties and costs of localizing products and services for foreign markets,including the development of multilingual capabilities in our MeetingPlacesystem;

 

•                       the need tomodify our products to comply with local telecommunications certificationrequirements in each country; 

 

•                       our lack ofa direct sales presence in other countries, our need to establish relationshipswith distribution partners to sell our products and services in these marketsand our reliance on the capabilities and performance of these distributionpartners; and

 

•                       the need tocomply with local VAT, GST, withholding, income, telecommunications or othertax requirements related to our product or service offerings or otheractivities within a foreign country. 

* *

*If we fail to integrate our products withthird -party technology, our sales could suffer.*Ourproducts and services are designed to integrate with our customers’ data andvoice networks, as well as with enterprise applications such as browsers andcollaborative software applications. If we are unable to integrate our productsand services with these networks and systems, sales of our products and servicescould suffer.

 

In addition,we may be required to engage in costly and time -consuming redesigns of ourproducts because of technology enhancements or upgrades of these systems. Wemay not be able to redesign our products or be certain that any of theseredesigns will achieve market acceptance. In addition, we will need tocontinually modify our products as newer versions of the enterpriseapplications with which our products integrate are introduced. Our ability todo so largely depends on our ability to gain access to the advanced programminginterfaces for these applications, and we cannot make assurances that we willhave access to necessary advanced programming interfaces in the future. 

* *

*Our business could suffer if we lose theservices of our current management team.*Our futuresuccess depends on the ability of our management to operate effectively, bothindividually and as a group. If we were to lose the services of any of thesekey employees, we may encounter difficulties finding qualified personnel toreplace them. 

* *

*The loss of our right to use technologylicensed to us by third parties could harm our business.*Welicense technology that is incorporated into our products and services fromthird parties, including digital signal processing algorithms and theMeetingPlace server’s operating system and relational database. Anyinterruption in the supply or support of any licensed software could disruptour operations and delay our sales, unless and until we can replace thefunctionality provided by this licensed software. Because our productsincorporate software developed and maintained by third parties, we depend onthese third parties to deliver and support reliable products, enhance theircurrent products, develop new products on a timely and cost -effective basisand respond to emerging industry standards and other technological changes.

 

We have astrategic partnership with a company based in Israel to integrate videoconferencing functionality into our products. Political instability in thisregion of the world may limit our access to this technology or delayintroduction of new products. 

* *

*Any interruption in supply of components fromoutside manufacturers and suppliers could hinder our ability to ship productsin a timely manner*. We rely on third parties to obtainmost of the components of the MeetingPlace server and integrate them with otherstandard components, such as the central processing unit and disk drives. Ifthese third parties are no longer able to supply and assemble these componentsor are unable to do so in a timely manner, we may experience delays in shippingour products and have to invest resources in finding an alternativemanufacturer or manufacture our products internally.

 

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In addition,we obtain key hardware components, including the processors and digital signalprocessing devices used in the MeetingPlace server, from sole source suppliers.In the past, we have experienced problems in obtaining some of these componentsin a timely manner from these sources, and we cannot be certain that we will beable to continue to obtain an adequate supply of these components in a timelymanner or, if necessary, from alternative sources. If we are unable to obtainsufficient quantities of components or to locate alternative sources of supply,we may experience delays in shipping our products and incur additional costs tofind an alternative manufacturer or manufacture our products internally.

* *

*Our products and services may suffer fromdefects, errors or breaches of security*. Software andhardware products and services as complex as ours are likely to containundetected errors or defects, especially when first introduced or when newversions 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 customersconduct confidential conferences, and transmit confidential data, usingMeetingPlace. Concerns over the security of information sent over the Internetand the privacy of its users may inhibit the market acceptance of our products.In addition, unauthorized users in the past have gained, and in the future maybe able 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 services willdepend on the efficient and uninterrupted operation of our computer andcommunication hardware and software systems.* Inaddition, some of our communications hardware and software for our servicesbusinesses are hosted at third party co-location facilities.  These systems and operations are vulnerableto damage or interruption as a result of human error, telecommunicationsfailures, break-ins, acts of vandalism, computer viruses and natural disasters.Systems failure or damage could cause an interruption of our services andresult in loss of customers, difficulties in attracting new customers and couldadversely impact our operating results. In addition, if the number of customers who purchase our hosted servicesincreases over time, our systems must be able to accommodate increased usage.If we are unable to increase our capacity to accommodate growth in usage, wecould encounter system performance issues, which could harm our relationshipswith customers and our reputation.

* *

*We may be unable to adequately protect ourproprietary rights, and we may be subject to infringement claims.*Unauthorizedparties may copy aspects of our products and obtain and use information that weregard as proprietary, which could cause our business to suffer. Furthermore,the laws of many foreign countries do not protect our intellectual propertyrights to the same extent as the laws of the United States.

 

In the future,we may be subject to legal proceedings and claims for alleged infringement ofthird party proprietary rights. Any of these claims, even if not meritorious,could result in costly litigation, divert management’s attention and resources,or require us to enter into royalty or license agreements which are notadvantageous to us. Parties making these claims may be able to obtaininjunctive or other equitable relief, which could prevent us from selling ourproducts.

 

Dell ComputerCorporation has registered the “Latitude” mark for computers in the UnitedStates and in other countries. Dell’s United States trademark registration andCanadian application have blocked ourability to register the “Latitude Communications” and “Latitude” with logomarks in the United States and the “Latitude Communications” mark in Canada aswell as other jurisdictions.   Consequently,we have at present terminated our efforts to register these trademarks, and wewill have to rely solely on common law protection for these marks.  We cannot make assurances that we will befree from challenges of or obstacles to our use or registration of our marks.

* *

*We may encounter difficulties in integratingfuture acquisitions and that could adversely affect our business. *We have recently acquired the assets ofWanadu Incorporated and may in the future acquire technology, products or businessesrelated to our current or future business. We have limited experience in acquisition activities and may have todevote substantial time and resources in order to complete acquisitions.  There may also be risks in entering marketswhere we have no or limited prior experience. Further, these potential acquisitions entail risks, uncertainties andpotential disruptions to our business. For example, we may not be able to successfully integrate a company’soperations, technologies, products and services, information systems andpersonnel into our business.  Anacquisition may further strain our existing financial and managerial controls,and divert management’s attention away from our other business concerns.  In connection with the Wanadu assetacquisition, we assumed certain contractual liabilities and hired certainemployees of Wanadu, which have resulted in additional research and

 

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developmentexpenses.  There may also beunanticipated costs and liabilities associated with an acquisition that couldadversely affect our operating results.

 

*Asset impairment can negatively affect ourresults of operations*.  Our acquisition of WanaduIncorporated on April 30, 2003 resulted in goodwill valued at approximately $914,000as of September 30, 2003.  Generally accepted accounting principlesrelated to goodwill and other intangibles changed with the issuance ofStatement of Financial Accounting Standards No. 142, or SFAS 142, “Goodwill andOther Intangible Assets”.  Under SFAS 142, goodwill and indefinitelived intangible assets are no longer amortized, but must be reviewed forimpairment at least annually or sooner under certain circumstances.  Otherintangible assets that are deemed to have finite useful lives willcontinue to be amortized over their useful lives, but must be reviewed forimpairment when events or changes in circumstances indicate that thecarrying amount of these assets may not be recoverable. Screening for and assessing whether impairment indicators exist, or ifevents or changes in circumstances have occurred, including changes in marketconditions, operating fundamentals, competition and general economicconditions, requires significant judgment.  Additionally, changes in thehigh-technology industry occur frequently and quickly.  Therefore, wecannot assure you that a charge to operations will not occur as a result offuture goodwill impairment tests.  If impairment is deemed to exist,we would write down the recorded value of these assets to their fairvalue, which could result in a full write-off of their book value.  Ifthese write-downs occur, they could harm our business and results ofoperations.

* *

*We are subject to government regulation, andour failure to comply with these regulations could harm our business.*Ourproducts are subject to a wide variety of safety, emissions, export andcompatibility regulations imposed by governmental authorities in the UnitedStates or in other countries in which we sell our products and services. If weare unable to obtain necessary approvals or maintain compliance with theregulations of any particular jurisdiction, we may be prohibited from sellingour products in that territory. In addition, to sell our products and servicesin many international markets, we are required to obtain certifications thatare specific to the local telephony infrastructure.

* *

*Our stock price may be volatile.*Weexpect that the market price of our common stock will fluctuate as a result ofvariations in our quarterly operating results. These fluctuations may beexaggerated by the very low trading volume of our common stock at the presenttime. In addition, due to the technology -intensive and emerging nature of ourbusiness, the market price of our common stock may rise and fall in responseto:

 

•                       announcementsof technological or competitive developments;

 

•                       acquisitionsor strategic alliances by us or our competitors; or

 

•                       the gain orloss by us of significant orders.

 

We may need toraise additional capital in the future, and if we are unable to secure adequatefunds on terms acceptable to us, we may be unable to execute our businessplan.  If our existing cash balances andcash flows expected from future operations are not sufficient to meet ourliquidity 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 depressour stock price*. If our stockholders sell substantial amounts of common stock, includingshares issued upon the exercise of outstanding options and warrants, in thepublic market, the market price of our common stock could fall.

 

*We may be delisted from the Nasdaq NationalMarket*.  OnOctober 7, 2002, we were notified by Nasdaq that Friday, October 4, 2002represented the 30th consecutive trading day in which the closing bid price wasless than the minimum $1 per share requirement for listing on the NasdaqNational Market. On November 26, 2002 the company was notified that the closingbid price had exceeded $1 per share for 10 consecutive trading days and thatthe company had regained compliance with NASDAQ’s listing requirements.  We cannot make assurances that we willmaintain compliance with all NASDAQ listing requirements in the future.  If our efforts to maintain compliance areunsuccessful, we may seek to list our shares on the Nasdaq SmallCap Market,which is generally considered to be not as broad and efficient a market as theNasdaq National Market.  This lack ofliquidity and visibility could further decrease the price of our commonstock.  In addition, delisting from theNasdaq National Market could negatively impact our reputation and customerrelationships. 

 

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| **Item 3****.** | **Quantitative and Qualitative Disclosures About Market Risk** |
|-----------------|----------------------------------------------------------------|

 

Our exposureto market risk for changes in interest rates relates primarily to ourinvestment portfolio. We do not use derivative financial instruments in ourinvestment portfolio. We place our investments with high credit quality issuersand, by policy, limit the amount of credit exposure to any one issuer. Theportfolio includes only securities with maturities of one to twelve months andwith active secondary or resale markets to ensure portfolio liquidity. We haveno investments denominated in foreign currencies and therefore are not subjectto foreign currency risk.

 

Currently, themajority of our sales and expenses are denominated in U.S. dollars and, as aresult, we have not experienced significant foreign exchange gains and losses.While we do expect to effect some transactions in foreign currencies in thenext 12 months, we do not anticipate that foreign exchange gains and losseswill be significant. We have not engaged in foreign currency hedgingactivities.

 
| **Item 4****.** | **Controls and Procedures** |
|-----------------|-----------------------------|

 

We haveevaluated the design and operation of our disclosure controls and procedures todetermine whether they are effective in ensuring that the disclosure ofrequired information is timely made in accordance with the Exchange Act and therules and regulations of the Securities and Exchange Commission. Thisevaluation was made under the supervision and with the participation ofmanagement, including our principal executive officer and principal financialofficer within the 90-day period prior to the filing of this Quarterly Reporton Form 10-Q. The principal executive officer and principal financial officerhave concluded, based on their review, that our disclosure controls andprocedures, as defined at Exchange Act Rules 13a-14(c) and 15d-14(c), areeffective to ensure that information required to be disclosed by us in reportsthat we file under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in Securities and ExchangeCommission rules and forms. No significant changes were made to our internalcontrols or other factors that could significantly affect these controlssubsequent to the date of their evaluation. 

 
| **PART II****.** | **OTHER INFORMATION** |
|------------------|-----------------------|
|             |                  |
| **Item 1****.**  | **Legal Proceedings** |

 

In November2001, a series of securities class actions were filed in the United StatesDistrict Court for the Southern District of New York against certainunderwriters for Latitude’s initial public offering (“IPO”), Latitude CommunicationsInc., and Emil C. Wang and Rick M. McConnell, who were officers of Latitude atthe time of the IPO. The complaints were consolidated into a single action, anda consolidated amended complaint against Latitude was filed in April 2002. Theamended complaint alleges, among other things, that the underwriter defendantsviolated the securities laws by failing to disclose alleged compensationarrangements in the initial public offering’s registration statement and byengaging in manipulative practices to artificially inflate the price of theCompany’s common stock after the initial public offering. The amended complaintalso alleges, 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 against morethan 300 other issuers that have had initial public offerings since 1998, andall of these actions have been included in a single coordinated proceeding.

 

Mr. McConnelland Mr. Wang have subsequently been dismissed from the action without prejudicepursuant to a tolling agreement. Furthermore, in July 2002, Latitude and theother issuers in the consolidated cases filed motions to dismiss the amendedcomplaint for failure to state a claim. The motion to dismiss claims undersection 11 was denied as to virtually all the defendants in the consolidatedactions, including Latitude. However, the claims against Latitude under section10(b) were dismissed.

 

On June 20,2003, a committee of the Company’s Board of Directors conditionally approved aproposed partial 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 direct financialimpact of the proposed settlement is expected to be borne by the Company’s

 

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insurers.   The committee agreed to approve thesettlement subject to a number of conditions, including the participation of asubstantial number of other issuer defendants in the proposed settlement, theconsent of the Company’s insurers to the settlement, and the completion ofacceptable final settlement documentation. Furthermore, the settlement is subject to a hearing on fairness andapproval by the Court overseeing the litigation.  Due to the inherentuncertainties of litigation and because the litigation and settlement processis still at a preliminary stage, the ultimate outcome of the matter cannot bepredicted.  No amount has been accruedrelated to this matter and legal costs incurred in the defense of the matterare being expensed as incurred.

 
| **Item 2.** | **Changes in Securities and Use of Proceeds** |
|-------------|-----------------------------------------------|

 

On May 6,1999, in connection with the Company’s initial public offering, a RegistrationStatement on Form S -1 (No. 333 -72935) was declared effective by theSecurities and Exchange Commission, pursuant to which 3,125,000 shares of theCompany’s Common Stock were offered and sold for the account of the Company ata price of $12.00 per share, generating gross offering proceeds of $37.5million. The managing underwriters were Credit Suisse First Boston Corporation,Hambrecht & Quist LLC and Dain Rauscher Wessels. After deductingapproximately $2.6 million in underwriting discounts and $1.1 million in otherrelated expenses, the net proceeds of the offering were approximately $33.8million. No direct or indirect payments were made to officers or directors orholders of ten percent or more of any class of equity securities of Latitude orany of their affiliates.  Latitude hasinvested such proceeds in investment grade, interest-bearing securities.  As of September 30, 2003, $21.2 million ofthe net proceeds were invested in cash and cash equivalents and approximately$12.6 million had been used for working capital.  Latitude intends to use the remaining proceeds for capitalexpenditures, including the acquisition of computer and communication systems,and for general corporate purposes, including working capital to fund increasedaccounts receivable and inventory levels.

 
| **Item 3.** | **Defaults Upon Senior Securities—Not  Applicable** |
|-------------|----------------------------------------------------------|
|        |                                                     |
| **Item 4.** | **Submission of Matters to a Vote of Security Holders**  |
|        |                                                     |
| **Item 5.** | **Other Information – None**                        |
|        |                                                     |
| **Item 6.** | **Exhibits and 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). |
|        |                                                     |   |
|        | 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 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. |
|        |                                                     |   |
|        |                                                     | On October  21, 2003, the Registrant filed an 8-K to accompany its press release  announcing certain financial results for the third quarter ending September  30, 2003. |
|        |                                                     |   |
|             |                                                          |  |  |

 

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**SIGNATURE**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the Registrant has duly caused this reportto be signed on 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:  November 13, 2003 |    |                                                                             |   |

 

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