**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

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**FORM 10-Q**

 

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

 

**Forthe quarter ended June 30, 2002**

 

**Commission file number 000-25475**

 

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**LATITUDE COMMUNICATIONS, INC.**

(Exact name of registrant as specified in itscharter)

 

| **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

 

As of July 31, 2002, there were 19,378,000 shares of the registrant’sCommon Stock outstanding.

 

 

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**INDEX**

 
| **PART I.**   | **FINANCIAL INFORMATION** |
|---------------|---------------------------|
|          |                      |   |
|          | **Item 1.**               | **Financial Statements (Unaudited)** |
|          |                      |   |
|          |                      | Condensed consolidated balance sheets at  June 30, 2002 and December 31, 2001 |
|          |                      |   |
|          |                      | Condensed consolidated statements of  operations and comprehensive loss for the three months ended June 30, 2002  and 2001; and for the six months ended June 30, 2002 and 2001 |
|          |                      |   |
|          |                      | Condensed consolidated statements of cash  flows for the six months ended June 30, 2002 and 2001 |
|          |                      |   |
|          |                      | Notes to condensed consolidated financial  statements |
|          |                      |   |
|          | **Item 2.**               | **Management’s Discussion and Analysis of  Financial Condition and Results of Operations** |
|          |                      |   |
|          | **Item 3.**               | **Quantitative and Qualitative Disclosures  About Market Risk** |
|          |                      |   |
| **PART II.**  | **OTHER INFORMATION**     |
|          |                      |   |
|          | **Item 1.**               | **Legal Proceedings** |
|          |                      |   |
|          | **Item 2.**               | **Changes in Securities and Use of Proceeds** |
|          |                      |   |
|          | **Item 3.**               | **Defaults Upon Senior Securities** |
|          |                      |   |
|          | **Item 4.**               | **Submission of Matters to a Vote of Security  Holders** |
|          |                      |   |
|          | **Item 5.**               | **Other Information** |
|          |                      |   |
|          | **Item 6.**               | **Exhibits and Reports on Form 8-K** |
|          |                      |   |
| **SIGNATURE** |                      |

 

2

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**PARTI.                FINANCIAL INFORMATION**

**Item1.   Financial Statements.**

** **

**LATITUDE COMMUNICATIONS, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(in thousands, unaudited)**

 
|                                                                                                                                                                                                     |   | **June 30,  2002** |   | **December  31,  2001** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|-------------------------|--------|
|                                                                                                                                                                                                     |   |               |   |                    |   |
| **ASSETS**                                                                                                                                                                                               |   |               |   |                    |   |
| Current assets:                                                                                                                                                                                          |   |               |   |                    |   |
| Cash and cash equivalents                                                                                                                                                                                |   | $                  | 8,392  |                    | $      | 15,370 |   |
| Short-term investments                                                                                                                                                                                   |   | 18,952             |   | 9,352                   |   |
| Accounts receivable, net                                                                                                                                                                                 |   | 8,988              |   | 5,732                   |   |
| Inventory                                                                                                                                                                                                |   | 1,061              |   | 1,724                   |   |
| Prepaids and other assets                                                                                                                                                                                |   | 2,525              |   | 2,074                   |   |
| Deferred tax assets                                                                                                                                                                                      |   | 1,240              |   | 1,240                   |   |
| Total current assets                                                                                                                                                                                     |   | 41,158             |   | 35,492                  |   |
| Property and equipment, net                                                                                                                                                                              |   | 4,073              |   | 4,548                   |   |
| Long-term investments                                                                                                                                                                                    |   | —             |   | 7,607                   |   |
| Deferred tax assets                                                                                                                                                                                      |   | 7,739              |   | 6,257                   |   |
| Deposits and other long-term assets                                                                                                                                                                      |   | 1,056              |   | 988                     |   |
| Total assets                                                                                                                                                                                             |   | $                  | 54,026 |                    | $      | 54,892 |   |
|                                                                                                                                                                                                     |   |               |   |                    |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                            |   |               |   |                    |   |
| Current liabilities:                                                                                                                                                                                     |   |               |   |                    |   |
| Accounts payable                                                                                                                                                                                         |   | $                  | 2,161  |                    | $      | 887 |   |
| Accrued liabilities                                                                                                                                                                                      |   | 4,079              |   | 5,028                   |   |
| Deferred revenue                                                                                                                                                                                         |   | 5,134              |   | 3,825                   |   |
| Current portion of long-term debt                                                                                                                                                                        |   | 62                 |   | 110                     |   |
| Total current liabilities                                                                                                                                                                                |   | 11,436             |   | 9,850                   |   |
| Other non-current liabilities                                                                                                                                                                            |   | 243                |   | 189                     |   |
| Total liabilities                                                                                                                                                                                        |   | 11,679             |   | 10,039                  |   |
| Stockholders’ equity:                                                                                                                                                                               |   |               |   |                    |   |
| Preferred stock, $0.001 par value  Authorized: 5,000 shares at June 30, 2002 and December 31, 2001  Issued and outstanding: No shares at June 30, 2002 and December 31, 2001                             |   | —             |   | —                  |   |
| Common stock, $0.001 par value  Authorized: 75,000 shares at June 30, 2002 and December 31, 2001  Issued and outstanding: 19,378 and 19,290 shares at June 30, 2002 and  December 31, 2001, respectively |   | 19                 |   | 19                      |   |
| Additional paid-in capital                                                                                                                                                                               |   | 57,764             |   | 57,641                  |   |
| Deferred stock compensation                                                                                                                                                                              |   | (86                | )      | (212                    | )      |
| Accumulated other comprehensive income                                                                                                                                                                   |   | 32                 |   | 93                      |   |
| Accumulated deficit                                                                                                                                                                                      |   | (15,382            | )      | (12,688                 | )      |
| Total stockholders’ equity                                                                                                                                                                          |   | 42,347             |   | 44,853                  |   |
| Total liabilities and stockholders’ equity                                                                                                                                                          |   | $                  | 54,026 |                    | $      | 54,892 |   |

 

*The accompanying notes are an integral partof these condensed consolidated 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  June 30,** |   | **Six Months  Ended  June 30,** |   |
|------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                                                                       |   | **2002**                          |   | **2001**                        |   | **2002** |   | **2001** |   |
| Revenue:                                                                                                   |   |                              |   |                            |   |   |   |   |   |
| Product                                                                                                    |   | $                                 | 3,498  |                            | $      | 2,984 |   | $ | 6,924 |   | $ | 9,140 |   |
| Service                                                                                                    |   | 6,517                             |   | 5,269                           |   | 12,563 |   | 9,329 |   |
| Total revenue                                                                                              |   | 10,015                            |   | 8,253                           |   | 19,487 |   | 18,469 |   |
| Cost of revenue:                                                                                           |   |                              |   |                            |   |   |   |   |   |
| Product                                                                                                    |   | 1,356                             |   | 661                             |   | 2,408 |   | 1,677 |   |
| Service (includes non-cash stock  compensation of $0, $2, $1 and $4, respectively)                         |   | 3,335                             |   | 2,642                           |   | 6,763 |   | 5,154 |   |
| Total cost of revenue                                                                                      |   | 4,691                             |   | 3,303                           |   | 9,171 |   | 6,831 |   |
| Gross profit                                                                                               |   | 5,324                             |   | 4,950                           |   | 10,316 |   | 11,638 |   |
|                                                                                                       |   |                              |   |                            |   |   |   |   |   |
| Operating expenses:                                                                                        |   |                              |   |                            |   |   |   |   |   |
| Research and development (includes non-cash  stock compensation of $10, $17, $22 and $35, respectively)    |   | 1,510                             |   | 1,413                           |   | 2,930 |   | 3,171 |   |
| Marketing and sales (includes non-cash  stock compensation of $8, $11, $18 and $22, respectively)          |   | 4,800                             |   | 5,150                           |   | 9,710 |   | 10,766 |   |
| General and administrative (includes  non-cash stock compensation of $39, $65, $85 and $130, respectively) |   | 1,150                             |   | 1,914                           |   | 2,354 |   | 3,160 |   |
| Restructuring charge                                                                                       |   | 0                                 |   | 870                             |   | 0 |   | 870 |   |
| Total operating expenses                                                                                   |   | 7,460                             |   | 9,347                           |   | 14,994 |   | 17,967 |   |
| Loss from operations                                                                                       |   | (2,136                            | )      | (4,397                          | )      | (4,678 | ) | (6,329 | ) |
| Interest income, net                                                                                       |   | 250                               |   | 484                             |   | 517 |   | 1,049 |   |
| Loss before benefit from  income tax                                                                  |   | (1,886                            | )      | (3,913                          | )      | (4,161 | ) | (5,280 | ) |
| Benefit from income tax                                                                                    |   | 673                               |   | 1,374                           |   | 1,467 |   | 1,866 |   |
|                                                                                                       |   |                              |   |                            |   |   |   |   |   |
| Net loss                                                                                                   |   | $                                 | (1,213 | )                               | $      | (2,539 | ) | $ | (2,694 | ) | $ | (3,414 | ) |
|                                                                                                       |   |                              |   |                            |   |   |   |   |   |
| Other comprehensive income (loss), net of  tax— Unrealized gain (loss) on securities                  |   | (28                               | )      | (57                             | )      | 26 |   | (33 | ) |
|                                                                                                       |   |                              |   |                            |   |   |   |   |   |
| Cumulative translation adjustment                                                                          |   | 48                                |   | (1                              | )      | 35 |   | (17 | ) |
|                                                                                                       |   |                              |   |                            |   |   |   |   |   |
| Comprehensive loss                                                                                         |   | $                                 | (1,193 | )                               | $      | (2,597 | ) | $ | (2,633 | ) | $ | (3,464 | ) |
|                                                                                                       |   |                              |   |                            |   |   |   |   |   |
| Net loss per share-basic and diluted                                                                       |   | $                                 | (0.06  | )                               | $      | (0.14 | ) | $ | (0.14 | ) | $ | (0.18 | ) |
|                                                                                                       |   |                              |   |                            |   |   |   |   |   |
| Shares used in per share calculation—basic  and diluted                                               |   | 19,361                            |   | 18,752                          |   | 19,328 |   | 18,749 |   |

 

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

 

4

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**LATITUDE COMMUNICATIONS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

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

**(Unaudited)**

 
|                                                                                       |   | **Six Months  Ended  June 30,** |   |
|--------------------------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                                       |   | **2002**                        |   | **2001** |   |
| Cash flows from operating activities:                                                      |   |                            |   |   |   |
| Net loss                                                                                   |   | $                               | (2,694 | ) | $ | (3,414 | ) |
| Adjustments to reconcile net loss to net  cash (used in) provided by operating activities: |   |                            |   |   |   |
| Depreciation and amortization                                                              |   | 1,412                           |   | 1,189 |   |
| Amortization of capitalized software                                                       |   | 274                             |   | 229 |   |
| Write down of excess and obsolete inventory                                                |   | 250                             |   | — |   |
| Provision for doubtful accounts                                                            |   | 3                               |   | 650 |   |
| Amortization of deferred stock compensation                                                |   | 126                             |   | 191 |   |
| Changes in assets and liabilities:                                                         |   |                            |   |   |   |
| Accounts receivable                                                                        |   | (3,294                          | )      | 3,902 |   |
| Inventory                                                                                  |   | 413                             |   | (511 | ) |
| Prepaids and other assets                                                                  |   | (725                            | )      | 279 |   |
| Deferred income taxes                                                                      |   | (1,482                          | )      | (1,866 | ) |
| Accounts payable                                                                           |   | 1,274                           |   | 231 |   |
| Accrued liabilities                                                                        |   | (895                            | )      | 897 |   |
| Deferred revenue                                                                           |   | 1,309                           |   | (1,474 | ) |
| Net cash (used in) provided by operating  activities                                       |   | (4,029                          | )      | 303 |   |
|                                                                                       |   |                            |   |   |   |
| Cash flows from investing activities:                                                      |   |                            |   |   |   |
| Purchases of property and equipment                                                        |   | (937                            | )      | (1,780 | ) |
| Purchases of available for sale securities                                                 |   | (9,624                          | )      | (29,595 | ) |
| Maturities of available for sale securities                                                |   | 7,605                           |   | 22,525 |   |
| Increase in deposits and other long-term  assets                                           |   | (68                             | )      | (50 | ) |
| Net cash used in investing activities                                                      |   | (3,024                          | )      | (8,900 | ) |
|                                                                                       |   |                            |   |   |   |
| Cash flows from financing activities:                                                      |   |                            |   |   |   |
| Proceeds from issuance of common stock, net                                                |   | 123                             |   | 216 |   |
| Repayment of notes payable and capital  lease obligations                                  |   | (48                             | )      | (152 | ) |
| Other                                                                                      |   | —                          |   | 21 |   |
| Net cash provided by financing activities                                                  |   | 75                              |   | 85 |   |
|                                                                                       |   |                            |   |   |   |
| Net decrease in cash and cash equivalents                                                  |   | (6,978                          | )      | (8,512 | ) |
| Cash and cash equivalents, beginning of  period                                            |   | 15,370                          |   | 23,993 |   |
| Cash and cash equivalents, end of period                                                   |   | $                               | 8,392  |   | $ | 15,481 |   |

 

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

 

5

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**LATITUDE COMMUNICATIONS, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

 

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

 

LatitudeCommunications, Inc. (the “Company”) is a leading provider of enterprisee-conferencing solutions. The Company develops, markets and supports itsMeetingPlace system, and related services, which enables real-timecollaboration through meetings via Web browsers, groupware applications such asOutlook and Notes, and PSTN and IP phones. MeetingPlace also allows users toshare and edit live documents, record, and access meeting content.  The Company distributes its product andservices through distributors and a direct sales force to companies across manyindustries in the United States, Europe and Asia.

 

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 operationsfor such periods are not necessarily indicative of the results expected for thefull fiscal year or for any future period. The balance sheet at December 31,2001 was derived from audited financial statements; however, it does notinclude all disclosures required by generally accepted accounting principles inthe United States of America. The financial statements and related disclosureshave been prepared with the presumption that users of the interim financialinformation have read or have access to the audited financial statements forthe preceding fiscal year.  Accordingly,these financial statements should be read in conjunction with the auditedfinancial statements and the related notes thereto contained in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2001.

 

**Note2—Recent Accounting Pronouncements**

 

In June 2002,the FASB issued SFAS 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 EITF No. 94-3, “Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring).” The scope of SFAS 146 also includescosts related to terminating a contract that is not a capital lease andtermination benefits that employees who are involuntarily terminated receiveunder the terms of a one-time benefit arrangement that is not an ongoingbenefit arrangement or an individual deferred-compensation contract. SFAS 146will be effective for exit or disposal activities that are initiated afterDecember 31, 2002 and early application is encouraged.  The provisions of EITF No. 94-3 shallcontinue to apply for an exit activity initiated under an exit plan that meetsthe criteria of EITF No. 94-3 prior to the adoption of SFAS 146.  The effect on adoption of SFAS 146 willchange on a prospective basis the timing of when restructuring charges arerecorded from a commitment date approach to when the liability is incurred. Wewill adopt SFAS 146 during the first quarter ending March 31, 2003 and donot expect an impact on our financial position and results of operations fromthe adoption of SFAS 146.

 

In October2001, the FASB issued Statement of Financial Accounting Standards No. 144(“SFAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets”.SFAS 144 supercedes Statement of Financial Accounting Standards No. 121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto Be Disposed Of.” SFAS 144 applies to all long-lived assets, including discontinuedoperations, and consequently amends Accounting Principles Board Opinion No. 30,“Reporting Results of Operations Reporting the Effects of Disposal of a Segmentof a Business”. SFAS 144 develops one accounting model for long-lived assetsthat are to be disposed of by sale. SFAS 144 requires that long-lived assetsthat are to be disposed of by sale be measured at the lower of book value orfair value less selling costs. Additionally, SFAS 144 expands the scope ofdiscontinued operations to include all components of an entity with operationsthat (1) can be distinguished from the rest of the entity and (2) will beeliminated from the ongoing operations of the entity in a disposal transaction.The adoption of SFAS 144 did not have a significant impact on our financialposition or results of operations.

 

6

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**Note3—Inventory**

** **

Inventoryconsists of following (in thousands):

** **
|           |   | **June 30,  2002** |   | **December  31, 2001** |   |
|----------------|--------|--------------------|--------|------------------------|--------|
|           |   | **(Unaudited)**    |   |
| Raw materials  |   | $                  | 737    |                   | $      | 1,113 |   |
| Finished goods |   | 324                |   | 611                    |   |
|           |   | $                  | 1,061  |                   | $      | 1,724 |   |

 

**Note4—Net Loss Per Share**

 

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

 

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  June 30** |   | **Six Months  Ended  June 30,** |   |
|-------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|---------------------------------|--------|
|                                                                                                              |   | **2002**                         |   | **2001**                        |   | **2002** |   | **2001** |   |
|                                                                                                              |   | **(Unaudited)**                  |   | **(Unaudited)**                 |   |
| Net loss per share, basic and diluted:                                                                            |   |                             |   |                            |   |   |   |   |   |
| Numerator for net loss, basic and diluted                                                                         |   | $                                | (1,213 | )                               | $      | (2,539 | ) | $ | (2,694 | ) | $ | (3,414 | ) |
| Denominator for basic and diluted net loss  per share:                                                            |   |                             |   |                            |   |   |   |   |   |
| Weighted average vested common shares  outstanding                                                                |   | 19,361                           |   | 18,752                          |   | 19,328 |   | 18,749 |   |
| Net loss per share basic and diluted                                                                              |   | $                                | (0.06  | )                               | $      | (0.14 | ) | $ | (0.14 | ) | $ | (0.18 | ) |
|                                                                                                              |   |                             |   |                            |   |   |   |   |   |
| Anti-dilutive securities not included in  the calculation of diluted EPS because the Company incurred a net loss: |   |                             |   |                            |   |   |   |   |   |
| Nonvested common shares                                                                                           |   | —                           |   | 626                             |   | — |   | 626 |   |
| Common stock options                                                                                              |   | 4,533                            |   | 3,570                           |   | 4,533 |   | 3,570 |   |

 

7

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**Note5—Restructuring**

 

During thequarter ended June 30, 2001, the Company initiated a restructuring program. Asa part of this restructuring program, the Company recorded costs and othercharges of $870,000 classified as operating expenses.  Of this amount, $442,000 related to a reduction in the workforceby approximately 40 regular employees across all functional areas of theCompany, $228,000 related primarily to non-cancelable lease costs arising fromthe consolidation of excess facilities and $200,000 related to assetwrite-offs.

 

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

 
|                                                          |   | **Severance  and  Benefits** |   | **Facilities  and  Other Charges** |   | **Asset  Write-Offs** |   | **Total** |   |
|---------------------------------------------------------------|--------|------------------------------|--------|------------------------------------|--------|-----------------------|--------|-----------|--------|
| Provisions  for fiscal 2001                                   |   | $                            | 442    |                               | $      | 228                   |   | $         | 200    |   | $ | 870 |   |
| Cash paid                                                     |   | (222                         | )      | (70                                | )      | —                |   | (292      | )      |
| Non-cash charges                                              |   | (31                          | )      | —                             |   | (200                  | )      | (231      | )      |
| Adjusted provision                                            |   | (189                         | )      | 189                                |   | —                |   | —    |   |
| Restructuring reserve balance at  December 31, 2001 |   | —                       |   | 347                                |   | —                |   | 347       |   |
| Cash paid                                                     |   |                         |   | (74                                | )      | —                |   | (74       | )      |
| Restructuring reserve balance at  June 30, 2002     |   | $                            | — |                               | $      | 273                   |   | $         | — |   | $ | 273 |   |

 

The amountsrelated to non-cancelable lease costs will be paid over the respective leaseterms through fiscal 2003.

 

**Note 6 — 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 months ended June 30, 2002, 20,000 shares wererepurchased.  As of June 30, 2002, theCompany has purchased 260,400 shares under this program at a weighted averagecost of $1.44 per share.

 

**Note 7 — Contingencies**

 

In November2001, a series of securities class actions were filed in United States DistrictCourt for the Southern District of New York against certain underwriters forLatitude’s initial public offering (“IPO”), Latitude Communications, andcertain officers of Latitude. The complaint alleges undisclosed and improperpractices by the underwriters concerning the allocation of Latitude’s IPOshares, in violation of the federal securities laws, and seeks unspecifieddamages on behalf of persons who purchased Latitude’s stock during the periodfrom May 6, 1999 to December 6, 2000. Latitude believes it has meritoriousdefenses to the claims against it and will defend itself vigorously. In theopinion of management, after consultation with legal counsel and based oncurrently available information, the ultimate disposition of these matters isnot expected to have a material adverse effect on our business, financialcondition or results of operations, and hence no amounts have been accrued forthese cases.

 

**Item2.   Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

 

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 tofuture events and financial performance. We use words such as “anticipates,”“believes,” “expects,” “future,” and “intends,” and similar expressions toidentify forward-looking statements. You should not place undue reliance onthese forward-looking statements, which apply only as of the date of thisQuarterly Report on Form 10-Q. These forward-looking statements are subject torisks and uncertainties that could cause actual results to differ materiallyfrom historical results or our predictions. These risks are described in “Factors Affecting Future Operating Results” and elsewhere in this Form 10-Q.The Company assumes no obligation to update these forward-looking statements toreflect actual results or changes in factors or assumptions affecting suchforward-looking statements.

 

8

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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, 2001 filed with theSecurities and Exchange Commission (“SEC”).

 

**Overview**

 

We are aleading provider of integrated, secure voice and web conferencing solutionsthat enable geographically dispersed organizations to work better throughreal-time collaboration. The company’s award-winning MeetingPlace systemintegrates with standard communications infrastructures enabling people toshare and edit live documents to work together productively from any location.With MeetingPlace, participants can schedule and attend a meeting, view, shareand edit documents, and capture and retrieve meeting content. MeetingPlace isdesigned to be an enterprise-wide resource and to leverage existingtechnologies such as telephones, cellular phones and personal computers.

 

We generaterevenue from sales of our MeetingPlace products and services, and from relatedcustomer support and consulting services. Revenue derived from product salesconstituted 35% of total revenue in the second quarter of 2002 and 36% duringthe corresponding period of 2001. 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. Wecalculate an allowance for returns based on historical rates. Service revenueincludes revenue from our usage and subscription based managed and hostedMeetingPlace services, implementation and integration services, systemmanagement services, warranty coverage and customer support. Revenue frommanaged, hosted, implementation and system integration services is recognizedas the services are performed, while revenue from warranty coverage andcustomer support is recognized ratably over the period of the contract.

 

We sell ourMeetingPlace products primarily through our direct sales force and, to a lesserextent, through indirect distribution channels. The majority of our revenue isderived from Fortune 1000 companies, many of which initially purchaseMeetingPlace servers and later expand deployment of our products as theyrequire additional capacity for voice and web conferencing.

 

Total cost ofrevenue consists of component and materials costs, direct labor costs, warrantycosts, royalties and overhead related to manufacturing of our products, as wellas materials, travel and labor costs related to personnel engaged in ourservice operations. Product gross margin is impacted by the proportion ofproduct revenue derived from software sales, which typically carry highermargins than hardware sales, and from indirect distribution channels, whichtypically carry lower margins than direct sales. Service gross margin isimpacted by the mix of services we provide, which have different levels ofprofitability, usage levels by our customers and the efficiency with which weprovide support to our customers. We reduce the carrying value of excess andobsolete inventory by identifying inventory components either considered excessbased on estimates of future usage or obsolete due to changes in our products.As a result of technological changes, our products may become obsolete or wecould be required to redesign our products.

 

During 2001,we recorded significant accruals in connection with our restructuring program.These accruals included estimates pertaining to employee separation costs andthe settlements of contractual obligations related to excess leased facilitiesand other contracts.  The actual costsmay differ from these estimates, particularly the costs surrounding the excessleased facilities. If we are unable to negotiate affordable termination fees,if rental rates continue to decrease in the markets in which we are located, orif it takes us longer than expected to find a suitable sublease tenant, theactual costs could exceed our estimates.

 

9

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**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 June 30,** |   | **Six Months  Ended June 30,** |   |
|---------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                  |   | **2002**                         |   | **2001**                       |   | **2002** |   | **2001** |   |
| Revenue:                              |   |                             |   |                           |   |   |   |   |   |
| Product                               |   | 34.9                             | %      | 36.2                           | %      | 35.5 | % | 49.5 | % |
| Service                               |   | 65.1                             |   | 63.8                           |   | 64.5 |   | 50.5 |   |
| Total revenue                         |   | 100.0                            |   | 100.0                          |   | 100.0 |   | 100.0 |   |
| Cost of revenue:                      |   |                             |   |                           |   |   |   |   |   |
| Product                               |   | 13.5                             |   | 8.0                            |   | 12.4 |   | 9.1 |   |
| Service                               |   | 33.3                             |   | 32.0                           |   | 34.7 |   | 27.9 |   |
| Total cost of revenue                 |   | 46.8                             |   | 40.0                           |   | 47.1 |   | 37.0 |   |
| Gross profit                          |   | 53.2                             |   | 60.0                           |   | 52.9 |   | 63.0 |   |
|                                  |   |                             |   |                           |   |   |   |   |   |
| Operating expenses:                   |   |                             |   |                           |   |   |   |   |   |
| Research and development              |   | 15.1                             |   | 17.1                           |   | 15.0 |   | 17.2 |   |
| Marketing and sales                   |   | 47.9                             |   | 62.5                           |   | 49.8 |   | 58.3 |   |
| General and administrative            |   | 11.5                             |   | 23.2                           |   | 12.1 |   | 17.1 |   |
| Restructuring charge                  |   | 0.0                              |   | 10.5                           |   | 0.0 |   | 4.7 |   |
| Total operating expenses              |   | 74.5                             |   | 113.3                          |   | 76.9 |   | 97.3 |   |
| Loss from operations                  |   | (21.3                            | )      | (53.3                          | )      | (24.0 | ) | (34.3 | ) |
| Interest income, net                  |   | 2.5                              |   | 5.9                            |   | 2.7 |   | 5.7 |   |
| Loss before benefit from income taxes |   | (18.8                            | )      | (47.4                          | )      | (21.3 | ) | (28.6 | ) |
| Benefit from income taxes             |   | 6.7                              |   | 16.6                           |   | 7.5 |   | 10.1 |   |
| Net loss                              |   | (12.1                            | )%     | (30.8                          | )%     | (13.8 | )% | (18.5 | )% |

 

*Product Revenue*

 

Productrevenue was $3.5 million for the second quarter of 2002, which represented anincrease of 17% when compared to the corresponding period of 2001.  Product revenue decreased $2.2 million, or24%, to $6.9 million for the six months ended June 30, 2002 from $9.1 millionfor the six months ended June 30, 2001. The increase from second quarter 2001to 2002 was due to an increase in the number of systems shipped in the secondquarter of 2002.  The decrease from thesix months ended June 30, 2001 to 2002 was due to fewer MeetingPlace systemsales in an environment of reduced capital spending by our existing and targetcustomers as compared to historical highs in the first quarter of 2001.International product sales represented approximately 15% and 18% of productrevenue in the three months ended June 30, 2002 and 2001, respectively, andapproximately 19% and 17% of product revenue in the six months ended June 30,2002 and 2001, respectively.  While weexpect the number of systems shipped to continue to increase each quarterduring 2002, the capital spending environment continues to be uncertain and wemay experience quarter-to-quarter variability in product revenue in absolutedollars.

 

*Service Revenue*

 

Servicerevenue increased $1.2 million, or 24%, to $6.5 million for the three monthsended June 30, 2002 from $5.3 million for the three months ended June 30,2001.  Service revenue increased $3.3million, or 35%, to $12.6 million for the six months ended June 30, 2002 from$9.3 million for the six months ended June 30, 2001.  The increase was attributable primarily to the introduction ofnew usage-based managed and hosted services to both new and existing customersas well as increased minutes of usage from existing customers.  We expect that service revenues willcontinue to grow in absolute dollars as we add new customers using theseservices.

 

10

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*Total Cost of Revenue*

 

Total cost ofrevenue increased  $1.4 million, or 42%,to $4.7 million for the second quarter of 2002, from $3.3 million for thecorresponding period of 2001. Total cost of revenue increased $2.3 million, or34%, to $9.2 million for the six months ended June 30, 2002.  The increase in total cost of revenue wasattributable to a change in the mix of revenues from higher margin productrevenue to lower margin service revenue, including the fixed infrastructurecosts necessary to support the service revenue.  We expect total cost of revenue to remain flat or decreasenominally as a percentage of revenue to the extent that product revenuecontinues to grow and our mix of product and service revenue remains relativelyconstant.

 

Gross profitwas $5.3 million for the second quarter of 2002, as compared to $4.9 million inthe corresponding period of 2001. Gross profit was $10.3 million for the sixmonths ended June 30, 2002, as compared to $11.6 million for the six monthsended June 30, 2001.  Gross margin was53% as a percentage of revenue, for the second quarter of 2002, as compared to60% for the corresponding period of 2001, and was 53% and 63%, respectively,for the six months ended June 30, 2002 and June 30, 2001.

 

Product grossmargin decreased to 61% as a percentage of product revenue for the secondquarter of 2002 as compared to 78% for the corresponding period of 2001.Product gross margins decreased to 65% for the six months ended June 30, 2002from 82% for the six months ended June 30, 2001.  The decrease in product gross margin was due to hardware platformupgrade orders from existing customers and smaller average selling price ofsystems sold during the period.  Weexpect that product gross margin will stabilize and possibly increase in thefuture, to the extent that product revenues increase, offset in part byexpected pricing pressure.

 

Service grossmargin was 49% as a percentage of service revenue for the second quarter of2002 as compared to 50% for the corresponding period in 2001.  Service gross margin was 46% as a percentageof revenue for the six months ended June 30, 2002 as compared to 45% for thesix months ended June 30, 2001. We generally expect service gross margin torange from 40% to 50% of service revenue.

 

*Research and Development Expenses*

 

Research anddevelopment expenses consist primarily of compensation and related costs forresearch and development personnel, facilities expenses for testing space, andequipment and purchased software. Research and development expenses were $1.5million for the second quarter of 2002, which represented an increase of 7%when compared to the corresponding period in 2001. Research and developmentexpenses were $2.9 million for the six months ended June 30, 2002, whichrepresented a decrease of 8% when compared to the corresponding period in2001.  The increase from second quarter2001 to 2002 was primarily due to increased compensation related expenses.  The decrease in expenses from the six monthsended June 30, 2001 to 2002 was primarily due to a decrease in purchasedsoftware in 2002 relative to 2001.  As apercentage of total revenues, research and development expenses were 15% and17%, respectively, for the three months ended June 30, 2002 and 2001, and were15% and 17% for the six months ended June 30, 2002 and 2001.  We expect to continue to make investments inresearch and development and expect that research and development expenses willincrease in absolute dollars in future quarters.

 

*Marketing and Sales Expenses*

 

Marketing andsales expenses consist primarily of promotional expenditures and compensationand related costs for marketing and sales personnel. Marketing and salesexpenses decreased $350,000, or 7%, to $4.8 million for the three months endedJune 30, 2002 from $5.2 million for the corresponding period in 2001.  Marketing and sales expenses decreased $1.1million, or 10%, to $9.7 million for the six months ended June 30, 2002 from$10.8 million for the six months ended June 30, 2001.  The decrease in expenses was primarily due to lower compensationexpenses due to reduced headcount.  As apercentage of total revenues, marketing and sales expenses were 48% and 62% forthe three months ended June 30, 2002 and 2001, and 50% and 58% for the sixmonths ended June 30, 2002 and 2001.

 

*General and Administrative Expenses*

 

General andadministrative expenses consist primarily of personnel expenses, legal andaccounting expenses and other general corporate expenses. General andadministrative expenses decreased $764,000, or 40%, to $1.2 million for thethree months ended June 30, 2002 from $1.9 million for the three months endedJune 30, 2001.  General andadministrative expenses decreased $806,000, or 26%, to $2.4 million for the sixmonths ended June 30, 2002 from $3.2 million for the six months ended June 30,2001.  As a percentage of totalrevenues, general and administrative expenses were 12% and 23% for the threemonths ended June 30, 2002 and 2001, and 12% and 17% for the six months endedJune 30, 2002 and 2001.  The decrease inboth absolute dollars and percentage of revenue

 

11

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was attributable primarily to$650,000 of bad debt expense that was recorded during the three months endedJune 30, 2001.

 

*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 the first quarter of 1999have been considered to be compensatory. Total remaining deferred stockcompensation associated with these options as of June 30, 2002 amounted to$86,000. This amount is being amortized based on the remaining vesting periodof these options, and we expect the balance to be fully amortized over theremainder of 2002.

 

*Interest Income, Net*

 

Interestincome, net of interest expense, was $250,000 for the second quarter of 2002,compared to interest income, net of interest expense of $484,000 for thecorresponding period in 2001. Interest income, net, was $517,000 for the sixmonths ended June 30, 2002, compared to $1.0 million for the correspondingperiod in 2001.  The decrease in netinterest income was attributable primarily to lower market interest rates and,to a lesser extent, lower average balances of cash and investments.

 

*Benefit from Income Taxes*

 

For thequarter ended June 30, 2002, the benefit from income taxes was $673,000,compared to a benefit of $1.4 million in the quarter ended June 30, 2001. Forthe six months ended June 30, 2002, the benefit from income taxes was $1.5million, compared to a benefit of $1.9 million for the six months ended June30, 2001.  Our effective tax rate wasapproximately 36% for the second quarter of 2002 and approximately 35% for thesecond quarter 2001 and the six months ended June 30, 2002 and 2001.

 

We believe itis more likely than not that we will be able to realize the deferred tax assetsthrough expected future taxable profits and therefore we recorded no valuationallowance related to this asset. If we conclude that these deferred tax assetsrequire a valuation allowance in the future, the effect on income tax expenseand our statement of operations could be material.

 

**Liquidityand Capital Resources**

 

In May 1999,we completed an initial public offering of common stock, resulting in netproceeds to us of approximately $33.8 million. As of June 30, 2002, we had$27.3 million of cash, cash equivalents and investments, which represented 51%of total assets.  See Item 3 for adescription of our investments.

 

Cash used inoperating activities was $4.0 million for the six months ended June 30, 2002,compared to cash provided by operating activities of $300,000 in the sameperiod of 2001. Cash used in operating activities in 2002 was primarily due toa net loss and changes in working capital, especially an increase in accountsreceivable, partially offset by non-cash charges such as depreciation expense.

 

Cash used ininvesting activities in the first six months of 2002 was $3.0 million, whichconsisted primarily of the purchase of marketable securities of $9.6 millionand purchase of property and equipment of $0.9 million, partially offset bymaturities of marketable securities of $7.6 million. For the first six monthsin 2001, cash used in investing activities of $8.9 million consisted primarilyof the purchase of marketable securities of $29.6 million and purchase ofproperty and equipment of $1.8 million, partially offset by maturities ofmarketable securities of $22.5 million.

 

Cash providedby financing activities in the first six months of 2002 of $75,000, whichconsisted of the proceeds from issuance of common stock under employee benefitplans, partially offset primarily by payments on obligations under capitalleases and notes payable.  For the firstsix months of 2001, cash provided by financing activities of $85,000, whichconsisted of the proceeds from issuance of common stock under employee benefitplans, partially offset by payments on obligations under capital leases andnotes payable of $152,000.

 

We have nomaterial commitments for capital expenditures or strategic investments andanticipate a low rate of capital expenditures. We may use cash to acquire or license technology, products or businessesrelated to our current business.  Inaddition, we anticipate that we will experience low or no growth or a declinein our operating expenses for the foreseeable future and that our operatingexpenses will be a material use of our cash resources.

 

Latitude hasincurred losses of $7.4 million and $2.6 million and negative cash flows of$8.6 million and $7.0 million during the year ended December 31, 2001 and thesix months ended June 30, 2002, respectively.  As of June 30, 2002,Latitude had an accumulated deficit of approximately $15.4 million. Latitude

 

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expects to incur operatinglosses and negative cash flows through at least the fourth quarter of2002.  Future payments due underoperating lease obligations as of June 30, 2002 are $1.3 million, $2.4 million,$2.4 million and $2.4 million in 2002, 2003, 2004 and 2005, respectively.

 

We believethat our current cash, cash equivalents and short-term investments will besufficient to meet our anticipated cash needs for working capital and capitalexpenditures for at least the next 12 months. Our future capital requirementswill depend upon many factors, including revenue growth, management of workingcapital, the timing of research and product development efforts and theexpansion of our marketing and sales programs.  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.  Ifadequate funds are not available on acceptable terms or at all, we may not beable to take advantage of market opportunities, develop or enhance newproducts, pursue acquisitions that would complement our existing productofferings or enhance our technical capabilities, execute our business plan orotherwise respond to competitive pressures.  The issuance of additionalequity securities may dilute our existing stockholders.

 

**Impactof Recently Issued Accounting Standards**

 

In June 2002, the FASB issued SFAS No. 146, "Accounting for Exitor Disposal Activities" ("FASF 146") SFAS 146 addressessignificant issues regarding the recognition, measurement, and reporting ofcosts that are associated with exit and disposal activities, includingrestructuring activities that are currently accounted for under EITF No. 94-3,"Liability Recognition for Certain Employee Termination Benefits and OtherCosts to Exit an Activity (including Certain Costs Incurred in a Restructuring)."  The scope of SFAS 146 also includes costsrelated to terminating a contract that is not a capital lease and terminationbenefits that employees who are involuntarily terminated receive under the termsof a one-time benefit arrangement that is not an ongoing benefit arrangement oran individual deferred-compensation contract. SFAS 146 will be effective for exit or disposal activities that areinitiated after December 31, 2002 and early application is encouraged.  The provisions of EITF No. 94-3 shallcontinue to apply for an exit activity initiated under an exit plan that meetsthe criteria of EITF No. 94-3 prior to the adoption of SFAS 146.  The effect on adoption of SFAS 146 willchange on a prospective basis the timing of when restructuring charges arerecorded from a commitment date approach to when the liability isincurred.  We will adopt SFAS 146 duringthe first quarter ending March 31, 2003 and do not expect an impact on ourfinancial position and results of operations from the adoption of SFAS 146.

 

In October2001, the FASB issued Statement of Financial Accounting Standards No. 144(“SFAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets”.SFAS 144 supercedes Statement of Financial Accounting Standards No. 121, “Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assets to BeDisposed Of.” SFAS 144 applies to all long-lived assets, including discontinuedoperations, and consequently amends Accounting Principles Board Opinion No. 30,“Reporting Results of Operations Reporting the Effects of Disposal of a Segmentof a Business”. SFAS 144 develops one accounting model for long-lived assetsthat are to be disposed of by sale. SFAS 144 requires that long-lived assetsthat are to be disposed of by sale be measured at the lower of book value orfair value less selling costs. Additionally, SFAS 144 expands the scope ofdiscontinued operations to include all components of an entity with operationsthat (1) can be distinguished from the rest of the entity and (2) will beeliminated from the ongoing operations of the entity in a disposal transaction.The adoption of SFAS 144 did not have a significant impact on our financialposition or results of operations.

 

**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 toour limited operating history.*We have a limitedoperating history and cannot assure you that our revenue will grow or that wewill return to profitability in the future. Our financial statements must beconsidered in light of the risks and uncertainties encountered by companies inthe early stages of development. We rely substantially on sales of ourMeetingPlace products and services, which have limited market acceptance.

 

Recenteconomic developments have caused many companies to reduce headcount andoverhead expenses and to reconsider or delay capital expenditures. This hashad, and may continue to have, an adverse effect on our ability to growrevenue.

 

In addition,we are unable to predict our future product development, sales and marketing,and administrative expenses. To the extent that these expenses increase, we willneed 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.

 

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Orders at thebeginning of each quarter typically do not equal expected revenue for that quarter.In addition, a significant portion of our orders is received in the last monthof each fiscal quarter. If we fail to ship products by the end of a quarter inwhich the order is received, or if our prospective customers delay their ordersor delivery schedules until the following quarter, we may fail to meet ourrevenue objectives.

 

Additionally,we expanded our service offerings by providing hosted services to ourcustomers. Accordingly, future revenue from this new service offering willincrease the proportion of total revenue derived from services. To the extentthat prospective customers elect to purchase the hosted service rather than anon-premises MeetingPlace system, our product revenue could be adverselyaffected.

* *

*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 and,therefore, 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 increaseddownward pricing pressure that could cause a decrease in our grossmargins.  Our customers depend on thereliability of our services and we may lose a customer if we fail to providereliable services for 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.*We derive asignificant portion of our revenues from a limited number of customers.  The loss of any of these major customers, ifnot replaced, could dramatically reduce our revenues.  Approximately one third of our current service revenue is derivedfrom one customer. If this customer were to reduce usage, renegotiate pricingor move a significant portion of their conferencing usage to another vendor,our services revenue could be adversely affected.  For the six month period ended June 30, 2002, our largestcustomer, Hewlett—Packard Company, accounted for approximately 21% of our totalrevenues.

* *

*Our market is highly competitive.*Becauseof intense market competition, we may not be successful. Currently, ourprincipal competitors include:

 

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

 

•                                          privatebranch exchange, or PBX, vendors that sell systems with voice conferencingcapabilities, such as Lucent Technologies Inc. and Nortel Networks; and

 

•                                          companiesthat offer voice and web conferencing products and services such as Webex,Placeware, Raindance and Spectel.

 

Many of thesecompanies have longer operating histories, stronger brand names andsignificantly greater financial, technical, marketing and other resources thanwe do. These companies also may have existing relationships with many of ourprospective customers. In addition, these companies may be able to respond morequickly than we can to new or emerging technologies and changes in customerrequirements.

 

In addition,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. In the future, we may experience competitionfrom potential competitors that include:

 

•                                          networkingcompanies, such as Cisco Systems, Inc., Lucent Technologies Inc. and NortelNetworks that are focusing on enabling the transmission of voice over theInternet and that may offer voice and web conferencing functionality; and

 

•                                          collaborativesoftware providers, such as Microsoft Corporation and Lotus DevelopmentCorporation, that are focusing on web conferencing products and that may in thefuture incorporate voice conferencing functionality into their products.

 

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*Our market is in an early stage ofdevelopment, and our products and services may not be adopted.*Ifthe market for our integrated voice and web conferencing products and servicesfails to grow or grows more slowly than we anticipate, we may not be able toincrease revenues or return to profitability. The market for integrated real–timevoice and web conferencing is relatively new and rapidly evolving. Our abilityto be profitable depends in large part on the widespread adoption by end usersof real-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 ourproducts.*The market in which we compete ischaracterized 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. For example, the widespread acceptance ofcompeting technologies, such as video conferencing and the transmission ofvoice over the Internet, could diminish demand for our current products andservices. As a result, the life cycle of our products and services is difficultto estimate.

 

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 you that we willsuccessfully develop these types of products and product enhancements or thatour products 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 have personnelspecifically dedicated to procurement and implementation of these conferencingsystems. As a result, our customers spend a substantial amount of time beforepurchasing our products in performing internal reviews and obtaining capitalexpenditure approvals. The emerging and evolving nature of the real-time voiceand web conferencing market may lead to confusion in the market, which maycause prospective customers to postpone their purchase decisions.

* *

*If we fail to expand our sales anddistribution channels, our business could suffer.*Ifwe are unable to expand our sales and distribution channels, we may not be ableto increase revenue or achieve market acceptance of our MeetingPlace productand services. We plan to recruit additional sales personnel who will requiretraining and take time to achieve full productivity, and there is strongcompetition for qualified sales personnel in our business. In addition, webelieve that our future success is dependent upon establishing successfulrelationships with a variety of distribution partners. To date, we have enteredinto agreements with only a small number of these distribution partners. Wecannot be certain that we will be able to reach agreement with additionaldistribution partners on a timely basis or at all, or that these distributionpartners will devote adequate resources to selling our products. Furthermore,if our distribution partners fail to adequately market or support our products,the reputation of our products in the market may suffer. In addition, we willneed to manage potential conflicts between our direct sales force andthird-party reselling efforts.

* *

*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;

 

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•                                          theneed to modify our products to comply with local telecommunicationscertification requirements in each country; and

 

•                                          ourlack of a direct sales presence in other countries, our need to establishrelationships with distribution partners to sell our products and services inthese markets and our reliance on the capabilities and performance of thesedistribution partners.

 

*If we fail to integrate our products with third-partytechnology, our sales could suffer.*Our products andservices are designed to integrate with our customers’ data and voice networks,as well as with enterprise applications such as browsers and collaborativesoftware applications. If we are unable to integrate our products and serviceswith these networks and systems, sales of our products and services couldsuffer.

 

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 enterprise applicationswith which our products integrate are introduced. Our ability to do so largelydepends on our ability to gain access to the advanced programming interfacesfor these applications, and we cannot assure you that we will have access tonecessary advanced programming interfaces in the future.

* *

*We may experience difficulties managing ourfuture growth.*We expect that any future growth maystrain our management systems and resources, which could hinder our ability tocontinue to grow in the future. We may also experience difficulties meeting thedemand for our products and services. If we are unable to provide training andsupport for our products, the implementation process will be longer andcustomer satisfaction may be lower.

 

We may not beable to install management information and control systems in an efficient andtimely manner, and our current or planned personnel, systems, procedures andcontrols may not be adequate to support our future operations.

* *

*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 basis andrespond to emerging industry standards and other technological changes.

 

We recentlyannounced a strategic partnership with a company based in Israel to integratevideo conferencing functionality into our products. Political instability inthis region 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.

 

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.

 

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*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 ourcustomers conduct confidential conferences, and transmit confidential data,using MeetingPlace. Concerns over the security of information sent over theInternet and the privacy of its users may inhibit the market acceptance of ourproducts. In addition, unauthorized users in the past have gained, and in thefuture may be able to gain, access to our customers’ MeetingPlace systems orour hosted services. Any compromise of security could deter people from usingMeetingPlace and could harm our reputation and business and result in claimsagainst us.

 

In 2001, weexpanded our service offerings to include hosted services for our customers.The success of our hosted services will depend on the efficient anduninterrupted operation of our computer and communication hardware and softwaresystems. In addition, some of our communications hardware and software for ourservices businesses 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 blockedour ability 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 registerthese trademarks, and we will have to rely solely on common law protection forthese marks.  We cannot assure you thatwe will be free from challenges of or obstacles to our use or registration ofour marks.

* *

*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 and compatibilityregulations imposed by governmental authorities in the United States or inother countries in which we sell our products and services. If we are unable toobtain necessary approvals or maintain compliance with the regulations of anyparticular jurisdiction, we may be prohibited from selling our products in thatterritory. In addition, to sell our products and services in many internationalmarkets, we are required to obtain certifications that are specific to thelocal telephony infrastructure.

* *

*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 ofour business, the market price of our common stock may rise and fall inresponse to:

 

•                                          announcementsof technological or competitive developments;

 

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•                                          acquisitionsor strategic alliances by us or our competitors; or

 

•                                          thegain or loss by us of significant orders.

 

*We may need to raise additional capital inthe future, and if we are unable to secure adequate funds on terms acceptableto us, we may be unable to execute our business plan. *If our existing cash balances and cashflows expected from future operations are not sufficient to meet our liquidityneeds, we will need to raise additional funds. If adequate funds are not available on acceptable terms or at all, wemay not be able to take advantage of market opportunities, develop or enhancenew products, pursue acquisitions that would complement our existing product offeringsor enhance our technical capabilities, execute our business plan or otherwiserespond to competitive pressures 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, in the public market,the market price of our common stock could fall.

 

**Item 3.   Quantitativeand 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 marketable securities with maturities of one to twelvemonths and with active secondary or resale markets to ensure portfolioliquidity. We have no investments denominated in foreign country currencies andtherefore are not subject to foreign currency risk on such investments.

 

The tablebelow presents principal amounts and related weighted average interest rates byyear of maturity for our investment portfolio at June 30, 2002 (in thousands).

 
|                      |   | **2002** |   | **2003** |   | **Total** |   |
|---------------------------|--------|----------|--------|----------|--------|-----------|--------|
|                      |   |     |   |     |   |      |   |
| Corporate notes and bonds |   | $        | 6,707  |     | $      | 9,180     |   | $ | 15,887 |   |
| Average interest rate     |   | 5.10     | %      | 3.64     | %      | 4.26      | %      |
| Federal agencies          |   | $        | — |     | $      | 3,065     |   | $ | 3,065 |   |
| Average interest rate     |   | —   |   | 4.28     | %      | 4.28      | %      |

 

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 lossesto date. While we do expect to effect some transactions in foreign currenciesin the next 12 months, we do not anticipate that foreign exchange gains andlosses will be significant. We have not engaged in foreign currency hedgingactivities to date.

 

**PARTII.               OTHER INFORMATION**

 

**Item1.   Legal Proceedings.**

 

In November2001, a series of securities class actions were filed in United States DistrictCourt for the Southern District of New York against certain underwriters forLatitude’s initial public offering (“IPO”), Latitude, and certain officers ofLatitude. The complaint alleges undisclosed and improper practices by theunderwriters concerning the allocation of Latitude’s IPO shares, in violationof the federal securities laws, and seeks unspecified damages on behalf ofpersons who purchased Latitude’s stock during the period from May 6, 1999 toDecember 6, 2000. Latitude believes it has meritorious defenses to the claimsagainst it and will defend itself vigorously. In the opinion of management,after consultation with legal counsel and based on currently availableinformation, the ultimate disposition of these matters is not expected to havea material adverse effect on our business, financial condition or results ofoperations, and hence no amounts have been accrued for these cases.

 

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**Item2.   Changes in Securities and Use ofProceeds.**

 

On May 6, 1999, in connection with the Company's initial publicoffering, a Registration Statement on Form S-1 (No. 333-72935) was declaredeffective by the Securities and Exchange Commission, pursuant to which3,125,000 shares of the Company's Common Stock were offered and sold for theaccount of the Company at a price of $12.00 per share, generating grossoffering proceeds of $37.5 million.  Themanaging underwriters were Credit Suisse First Boston Corporation, Hambrecht& Quist LLC and Dain Rauscher Wessels. After deducting approximately $2.6 million in underwriting discounts and$1.1 million in other related expenses, the net proceeds of the offering wereapproximately $33.8 million.  No director indirect payments were made to officers or directors or holders of tenpercent or more of any class of equity securities of Latitude or any of theiraffiliates.  Latitude has invested suchproceeds in investment grade, interest bearing securities.  As of June 30, 2002, $27.3 million of thenet proceeds were invested in cash and cash equivalents and short-terminvestments and approximately $6.5 million had been used for workingcapital.  Latitude intends to useremaining proceeds for capital expenditures, including the acquisition ofredundant computer and communication systems, and for general corporatepurposes, including working capital to fund increased accounts receivable andinventory levels.

 

 

 

**Item3.   Defaults Upon Senior Securities—NotApplicable.**

 

**Item4.   Submission of Matters to a Vote ofSecurity Holders**

 

On June 12,2002, the Company held its 2002 annual meeting of stockholders.  The following summarizes the matterssubmitted to a vote of the stockholders:

 

1. Theelection of the following nominees to serve as members of the Board ofDirectors:

 
| **NOMINEE**         |   | **IN FAVOR** |   | **WITHHELD** |   | **ABSTAIN** |   |
|---------------------|--------|--------------|--------|--------------|--------|-------------|--------|
|                |   |         |   |         |   |        |   |
| James L. Patterson  |   | 17,698,619   |   | 0            |   | 537,242     |   |
| Robert J. Finocchio |   | 17,698,619   |   | 0            |   | 537,242     |   |

 

2. Theapproval of an amendment to the Company’s 1999 Stock Plan to (a) increase thenumber of shares of common stock reserved for issuance under the 1999 StockPlan, effective as of the 2002 Annual Meeting of Stockholders, by 800,000shares to an aggregate of 3,500,000 shares, and (b) provide for an automaticincrease in the shares reserved for issuance under the 1999 Stock Plan on thefirst day of each year in 2003, 2004, 2005 and 2006 equal to the lesser of 4%of the Company’s outstanding common stock as of the last day of immediatelypreceding year, 1,500,000 shares or a lesser number of shares as determined bythe Board:

 
| **IN FAVOR** |   | **WITHHELD** |   | **ABSTAIN** |   | **BROKER  NON-VOTE** |   |
|--------------|--------|--------------|--------|-------------|--------|----------------------|--------|
| 8,600,649    |   | 3,630,595    |   | 12,964      |   | 5,996,379            |   |

 

3. Theratification of the appointment of PricewaterhouseCoopers, LLP as the Company’sindependent accountants for the fiscal year ending December 31, 2002:

 
| **IN FAVOR** |   | **WITHHELD** |   | **ABSTAIN** |   |
|--------------|--------|--------------|--------|-------------|--------|
| 18,159,480   |   | 60,143       |   | 8,488       |   |

 

**Item 5.    OtherInformation.**

 

In accordancewith Section 10A(i)(2) of the Securities Exchange Act of 1934, as adoptedpursuant to Section 202 of the Sarbanes-Oxley Act of 2002 (the “Act”), weare hereby disclosing the non-audit services approved by our Audit Committee tobe performed by PricewaterhouseCoopers LLP, our external auditor.  Non-audit services are defined in the Act asservices provided by the external auditor other than those provided inconnection with an audit or a review of the financial statements of acompany.  The Audit Committee hasapproved the engagement of PricewaterhouseCoopers LLP for the followingnon-audit services: (1) tax matter consultations concerning state taxes; and(2) the preparation of federal and state income tax returns.

 

**Item 6****.    Exhibits andReports on Form 8-K.**

 
|   | (a)    |   | Exhibits                                                                                                                           |
|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                               |
|   | 99.1   |   | Certification  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—None                                                                                                     |

 

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

 

**Date: August 14, 2002**

 

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