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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended March 31, 2002

Commission file number 000-25475

LATITUDE COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)

Delaware		94-3177392
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

2121 Tasman Drive, Santa Clara, CA 95054
(Address of principal executive offices, including zip code)

(408) 988-7200
(Registrant’s telephone number, including area code)

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

Yes ý No o

As of April 30, 2002, there were 19,398,000 shares of the registrant’s Common Stock outstanding.

INDEX

PART I.	FINANCIAL INFORMATION

	Item 1.	Financial Statements (Unaudited)

		Condensed consolidated balance sheets at March 31, 2002 and December 31, 2001

		Condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2002 and 2001

		Condensed consolidated statements of cash flows for the three months ended March 31, 2002 and 2001

		Notes to condensed consolidated financial statements

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

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk

PART II.	OTHER INFORMATION

	Item 1.	Legal Proceedings

	Item 2.	Changes in Securities and Use of Proceeds

	Item 3.	Defaults Upon Senior Securities

	Item 4.	Submission of Matters to a Vote of Security Holders

	Item 5.	Other Information

	Item 6.	Exhibits and Reports on Form 8-K

SIGNATURE

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

LATITUDE COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(Unaudited)

	March 31, 2002			December 31, 2001
ASSETS
Current assets:
Cash and cash equivalents	$	11,706		$	15,370
Short-term investments	14,324			9,352
Accounts receivable, net	6,494			5,732
Inventory	1,539			1,724
Prepaids and other assets	1,893			2,074
Deferred tax assets	1,240			1,240
Total current assets	37,196			35,492
Property and equipment, net	4,082			4,548
Long-term investments	5,117			7,607
Deferred tax assets	7,064			6,257
Deposits and other long-term assets	1,013			988
Total assets	$	54,472		$	54,892

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,547		$	887
Accrued liabilities	4,416			5,028
Deferred revenue	3,786			3,825
Current portion of long-term debt	94			110
Total current liabilities	10,843			9,850
Other non-current liabilities	217			189
Total liabilities	11,060			10,039
Stockholders’ equity:
Preferred stock, $0.001 par value Authorized: 5,000 shares at March 31, 2002 and December 31, 2001 Issued and outstanding: No shares at March 31, 2002 and December 31, 2001	—			—
Common stock, $0.001 par value Authorized: 75,000 shares at March 31, 2002 and December 31, 2001 Issued and outstanding: 19,296 and 19,290 shares at March 31, 2002 and December 31, 2001, respectively	19			19
Additional paid-in capital	57,652			57,641
Deferred stock compensation	(143		)	(212		)
Accumulated other comprehensive income	53			93
Accumulated deficit	(14,169		)	(12,688		)
Total stockholders’ equity	43,412			44,853
Total liabilities and stockholders’ equity	$	54,472		$	54,892

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

LATITUDE COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS

(in thousands, except per share amounts)

(Unaudited)

	Three Months Ended March 31,
	2002			2001

Revenue:
Product	$	3,426		$	6,156
Service	6,046			4,060
Total revenue	9,472			10,216

Cost of revenue:
Product	1,052			1,016
Service (includes non-cash stock compensation of $1 and $2 in 2002 and 2001, respectively)	3,428			2,512
Total cost of revenue	4,480			3,528

Gross profit	4,992			6,688

Operating expenses:
Research and development (includes non-cash stock compensation of $12 and $18 in 2002 and 2001, respectively)	1,420			1,758
Marketing and sales (includes non-cash stock compensation of $11 and $10 in 2002 and 2001, respectively)	4,910			5,616
General and administrative (includes non-cash stock compensation of $46 and $65 in 2002 and 2001, respectively)	1,204			1,246
Total operating expenses	7,534			8,620

Loss from operations	(2,542		)	(1,932		)

Interest income, net	267			565

Loss before benefit from income taxes	(2,275		)	(1,367		)

Benefit from income taxes	794			492

Net loss	$	(1,481	)	$	(875	)

Other comprehensive income (loss), net of tax—
Unrealized gain (loss) on securities	(53		)	24
Cumulative translation adjustment	13			(15		)

Comprehensive loss	$	(1,521	)	$	(866	)

Net loss per share—basic	$	(0.08	)	$	(0.05	)
Shares used in per share calculation—basic	19,294			18,746
Net loss per share—diluted	$	(0.08	)	$	(0.05	)
Shares used in per share calculation—diluted	19,294			18,746

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

LATITUDE COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands, except per share amounts)

(Unaudited)

	Three Months Ended March 31,
	2002			2001
Cash flows from operating activities:
Net loss	$	(1,481	)	$	(875	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	701			554
Amortization of capitalized software	121			97
Write down of excess and obsolete inventory	150			—
Provision for doubtful accounts	3			—
Amortization of deferred stock compensation	69			96
Changes in assets and liabilities:
Accounts receivable	(752		)	(2,987		)
Inventory	35			156
Prepaids and other assets	60			143
Deferred income taxes	(807		)	(493		)
Accounts payable	1,660			(244		)
Accrued liabilities	(584		)	413
Deferred revenue	(39		)	989
Net cash used in operating activities	(864		)	(2,151		)

Cash flows from investing activities:
Purchases of property and equipment	(235		)	(742		)
Purchases of available for sale securities	(6,635		)	(16,461		)
Maturities of available for sale securities	4,100			14,200
Increase in deposits and other long-term assets	(25		)	(7		)
Net cash used in investing activities	(2,795		)	(3,010		)

Cash flows from financing activities:
Proceeds from issuance of common stock	11			38
Repayment of notes payable and capital lease obligations	(16		)	(94		)
Other	—			(15		)
Net cash used in financing activities	(5		)	(71		)

Net decrease in cash and cash equivalents	(3,664		)	(5,232		)
Cash and cash equivalents, beginning of period	15,370			23,993
Cash and cash equivalents, end of period	$	11,706		$	18,761

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

LATITUDE COMMUNICATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1—The Company and Basis of Presentation

Latitude Communications, Inc. (the “Company”) is a leading provider of enterprise e-conferencing solutions. The Company develops, markets and supports its MeetingPlace system and services, which enables real-time collaboration through meetings via Web browsers, groupware applications such as Outlook and Notes, and PSTN and IP phones. MeetingPlace also allows users to share and edit live documents, record, and access meeting content. Highly scalable and designed to be deployed as part of a company’s standard communications infrastructure, MeetingPlace can support tens of thousands of users. The Company distributes its product and services through distributors and a direct sales force to companies across many industries in the United States, Europe and Asia.

The accompanying unaudited condensed consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the results for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. The balance sheet at December 31, 2001 was derived from audited financial statements, however, it does not include all disclosures required by generally accepted accounting principles in the United States of America. The financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, these financial statements should be read in conjunction with the audited financial statements and the related notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.

Note 2—Recent Accounting Pronouncements

In October 2001, 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 Assets to Be Disposed Of.” SFAS 144 applies to all long-lived assets, including discontinued operations, and consequently amends Accounting Principles Board Opinion No. 30, “Reporting Results of Operations Reporting the Effects of Disposal of a Segment of a Business”. SFAS 144 develops one accounting model for long-lived assets that are to be disposed of by sale. SFAS 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less selling costs. Additionally, SFAS 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. The adoption of SFAS 144 did not have a significant impact on our financial position or results of operations.

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

Note 3—Inventory

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

Note 4—Net Loss Per Share

Basic net loss per share is computed by dividing net loss by the weighted average number of vested common shares outstanding for the period. Diluted net loss per share is computed giving effect to all dilutive potential common shares. Diluted net loss per share is the same as basic net loss per share for the periods presented because the inclusion of potentially dilutive common shares, which consisted of common shares issuable upon the exercise of stock options, would result in an antidilutive per share amount.

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

	Three Months Ended March 31,
	2002			2001
	(Unaudited)
Net loss per share, basic and diluted:
Numerator for net loss, basic and diluted	$	(1,481	)	$	(875	)
Denominator for basic net loss per share:
Weighted average vested common shares outstanding	19,294			18,746
Net loss per share basic	$	(0.08	)	$	(0.05	)

Denominator for diluted net loss per share:
Weighted average vested common shares outstanding	19,294			18,746
Effect of dilutive securities:
Common stock options	—			—
Weighted average common and common equivalent shares	19,294			18,746

Net loss per share diluted	$	(0.08	)	$	(0.05	)

Antidilutive securities not included in diluted net loss per share calculation for the entire year:

Common stock options	4,509			3,505

Note 5—Restructuring

During the quarter ended June 30, 2001, the Company initiated a restructuring program. As a part of this restructuring program, the Company recorded costs and other charges of $870,000 classified as operating expenses. Of this amount, $442,000 related to a reduction in the workforce by approximately 40 regular employees across all functional areas of the Company, $228,000 related primarily to non-cancelable lease costs arising from the consolidation of excess facilities and $200,000 related to asset write-offs.

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

The amounts related to non-cancelable lease costs will be paid over the respective lease terms through fiscal 2003.

Note 6 — Share Repurchase Program

On July 24, 2001 the Company’s Board of Directors approved a Share Repurchase Program of up to 1,000,000 shares of common stock. There were no shares purchased during the three months ended March 31, 2002. As of March 31, 2002, the Company has purchased 240,400 shares under this program at a weighted average cost of $1.44 per share.

Note 7 — Contingencies

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

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Form 10–Q include a number of forward-looking statements that reflect our current views with respect to future events and financial performance. We use words such as “anticipates,” “believes,” “expects,” “future,” and “intends,” and similar expressions to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from 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 to reflect actual results or changes in factors or assumptions affecting such forward–looking statements.

Overview

We are a leading provider of integrated, secure voice and web conferencing solutions that enable geographically dispersed organizations to work better through real-time collaboration. The company’s award-winning MeetingPlace system integrates with standard communications infrastructures enabling people to share and edit live documents to work together productively from any location. With MeetingPlace, participants can schedule and attend a meeting, view, share and edit documents, and capture and retrieve meeting content. MeetingPlace is designed to be an enterprise-wide resource and to leverage existing technologies such as telephones, cellular phones and personal computers.

We generate revenue from sales of our MeetingPlace products and services, and from related customer support and consulting services. Revenue derived from product sales constituted 36% of total revenue in the first quarter of 2002 and 60% during the corresponding period of 2001. Product revenue is generally recognized upon shipment if a signed contract exists, the fee is fixed or determinable, collection of the resulting receivable is probable, product returns are reasonably estimable and, if applicable, acceptance has been obtained. We calculate an allowance for returns based on historical rates. Service revenue includes revenue from our usage and subscription based managed and hosted MeetingPlace services, implementation and integration services, system management services, warranty coverage and customer support. Revenue from managed, hosted, implementation and system integration services is recognized as the services are performed, while revenue from warranty coverage and customer support is recognized ratably over the period of the contract.

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

Total cost of revenue consists of component and materials costs, direct labor costs, warranty costs, royalties and overhead related to manufacturing of our products, as well as materials, travel and labor costs related to personnel engaged in our service operations. Product gross margin is impacted by the proportion of product revenue derived from software sales, which typically carry higher margins than hardware sales, and from indirect distribution channels, which typically carry lower margins than direct sales. Service gross margin is impacted by the mix of services we provide, which have different levels of profitability, usage levels by our customers and the efficiency with which we provide support to our customers. We reduce the carrying value of excess and obsolete inventory by identifying inventory components either considered excess based 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 we could be required to redesign our products.

During 2001, we recorded significant accruals in connection with our restructuring program. These accruals include estimates pertaining to employee separation costs and the settlements of contractual obligations related to excess leased facilities and other contracts. Although we do not currently anticipate significant changes, the actual costs may differ from these estimates, particularly the costs surrounding the excess leased facilities. If we are unable to negotiate affordable termination fees, if rental rates continue to decrease in the markets we are located, or if it takes us longer than expected to find a suitable sublease tenant, the actual costs could exceed our estimates.

Results Of Operations

The following table lists, for the periods indicated, the percentage of total revenue of each line item from our condensed consolidated statement of operations to total revenues:

	Three Months Ended March 31,
	2002		2001
Revenue:
Product	36.2	%	60.3	%
Service	63.8	%	39.7	%
Total revenue	100.0	%	100.0	%
Cost of revenue:
Product	11.1	%	9.9	%
Service	36.2	%	24.6	%
Total cost of revenue	47.3	%	34.5	%
Gross profit	52.7	%	65.5	%

Operating expenses:
Research and development	15.0	%	17.2	%
Marketing and sales	51.9	%	55.0	%
General and administrative	12.7	%	12.2	%
Total operating expenses	79.6	%	84.4	%
Loss from operations	(26.9	)%	(18.9	)%
Interest income, net	2.8	%	5.5	%
Loss before benefit from income taxes	(24.1	)%	(13.4	)%
Benefit from income taxes	8.4	%	4.8	%
Net loss	(15.6	)%	(8.6	)%

Product Revenue

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

Service Revenue

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

Total Cost of Revenue

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

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

Product gross margin decreased to 69% as a percentage of product revenue for the first quarter of 2002 as compared to 84% for the corresponding period of 2001. We expect that product gross margin may decrease in the

future due in part to potential pricing pressure and an expected increase in the proportion of revenue derived from indirect distribution channels.

Service gross margin was 43% as a percentage of service revenue for the first quarter of 2002 as compared to 38% for the corresponding period in 2001. The increase in service revenue margin is due to the addition of higher margin managed and hosted services to our traditional maintenance and installation service revenue streams. We expect that service gross margin to generally range from 40% to 50% of service revenue.

Research and Development Expenses

Research and development expenses consist primarily of compensation and related costs for research and development personnel, facilities expenses for testing space, and equipment and purchased software. Research and development expenses were $1.4 million for the first quarter of 2002, which represented a decrease of 19% when compared to corresponding period in 2001. As a percentage of total revenues, research and development expenses declined from 17% in the first quarter of 2001 to 15% in the first quarter of 2002. The decrease in expenses is primarily due to a decrease in purchased software during the quarter. We expect to continue to make investments in research and development and expect that research and development expenses will increase in absolute dollars in future quarters.

Marketing and Sales Expenses

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

General and Administrative Expenses

General and administrative expenses consist primarily of personnel expenses, legal and accounting expenses and other general corporate expenses. General and administrative expenses were $1.2 million for the first quarter of 2002, which represented a decline of 3% when compared to the corresponding period in 2001. As a percentage of total revenues, general and administrative expenses increased from 12% in the first quarter of 2001 to 13% in the first quarter of 2002.

Amortization of Deferred Stock Compensation

In connection with the completion of our initial public offering in May 1999, options granted in the last quarter of 1997, 1998 and the first quarter of 1999 have been considered to be compensatory. Total remaining deferred stock compensation associated with these options as of March 31, 2002 amounted to $143,000. This amount is being amortized based on the remaining vesting period of these options, and we expect the balance to be amortized over the remainder of 2002.

Interest Income, Net

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

Benefit from (Provision for) Income Taxes

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

Liquidity and Capital Resources

In May 1999, we completed an initial public offering of common stock, resulting in net proceeds to us of approximately $33.8 million. As of March 31, 2002, we had $31.1 million of cash, cash equivalents and investments, which represented 57% of total assets.

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

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

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

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

We believe that our current cash, cash equivalents and short-term investments will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. Our future capital requirements will depend upon many factors, including revenue growth, management of working capital, the timing of research and product development efforts and the expansion of our marketing and sales efforts. If our existing cash balances and cash flows expected from future operations are not sufficient to meet our liquidity needs, we will need to raise additional funds. If adequate funds are not available on acceptable terms or at all, we may not be able to take advantage of market opportunities, develop or enhance new products, pursue acquisitions that would complement our existing product offerings or enhance our technical capabilities, execute our business plan or otherwise respond to competitive pressures. The issuance of additional equity securities may dilute our existing stockholders.

Impact of Recently Issued Accounting Standards

Factors That May Affect Future Results

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

Our future profitability is uncertain due to our limited operating history. We have a limited operating history and cannot assure you that our revenue will grow or that we will return to profitability in the future. Our financial

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

Recent economic developments have caused many companies to reduce headcount and overhead expenses and to reconsider or delay capital expenditures. This has had, and may continue to have, an adverse effect on our ability to grow revenue.

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

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

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

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

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

• changes in our mix of domestic and international sales.

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

Additionally, we expanded our service offerings by providing hosted services to our customers. Accordingly, future revenue from this new service offering will increase the proportion of total revenue derived from services. To the extent that prospective customers elect to purchase the hosted service rather than an on-premises MeetingPlace system, our product revenue could be adversely affected.

Our customers do not have long-term obligations to purchase our products and services; therefore our revenue and operating results could decline if our customers do not continue to purchase our products or use our services. Our customers are not obligated to continue to purchase our products or use our services. As a result, the failure of repeat customer usage, or our inability to retain existing customers and sustain or increase their usage of our services, could result in lower than expected revenue, and therefore, harm our ability to become profitable and cause our stock price to decline. In addition, because our customers have no continuing obligations with us, we may face increased downward pricing pressure that could cause a decrease in our gross margins. Our customers depend on the reliability of our services and we may lose a customer if we fail to provide reliable services for even a single communication event.

We expect to depend on sales of our MeetingPlace solution for substantially all of our revenue for the foreseeable future. We anticipate that revenues from our MeetingPlace product and related services will continue to constitute substantially all of our revenues for the foreseeable future. Consequently, any decline in the demand for MeetingPlace or its failure to achieve broad market acceptance, would seriously harm our business.

Our revenues could be significantly reduced by the loss of a major customer. We derive a significant portion of our revenues from a limited number of customers. The loss of any of these major customers, if not replaced, could dramatically reduce our revenues. For example, for the year ended December 31, 2001, our largest customer, Hewlett-Packard Company, accounted for approximately 14% of our total revenues.

Our market is highly competitive. Because of intense market competition, we may not be successful. Currently, our principal competitors include:

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

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

• companies that offer web–based voice and web conferencing products and services such as Webex, Placeware and Raindance.

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

In addition, we expect competition to persist and intensify in the future, which could adversely affect our ability to increase sales, penetrate new markets and maintain average selling prices. In the future, we may experience competition from potential competitors that include:

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

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

Our market is in an early stage of development, and our products and services may not be adopted. If the market for our integrated voice and web conferencing products and services fails to grow or grows more slowly than we anticipate, we may not be able to increase revenues or return to profitability. The market for integrated real–time voice and web conferencing is relatively new and rapidly evolving. Our ability to be profitable depends in large part on the widespread adoption by end users of real–time voice and web conferencing.

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

Rapid technological changes could cause our products and services to become obsolete or require us to redesign our products. The market in which we compete is characterized by rapid technological change, frequent new product introductions, changes in customer requirements and emerging industry standards. In particular, we expect that the growth of the Internet and Internet–based telephony applications, as well as general technology trends such as migrations to new operating systems, will require us to adapt our product and services to remain competitive. This adaptation could be costly and time–consuming. Our products and services could become obsolete and unmarketable if products and services using new technologies are introduced and new industry standards emerge. For example, the widespread acceptance of competing technologies, such as video conferencing and the transmission of voice over the Internet, could diminish demand for our current products and services. As a result, the life cycle of our products and services is difficult to estimate.

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

Our sales cycle is lengthy and unpredictable. Any delay in sales of our products and services could cause our quarterly revenue and operating results to fluctuate. The typical sales cycle of our products is lengthy, generally between six to twelve months, unpredictable, and involves significant investment decisions by prospective customers, as well as our education of potential customers regarding the use and benefits of our products. Furthermore, many of our prospective customers have neither budgeted expenses for voice and web conferencing systems nor have personnel specifically dedicated to procurement and implementation of these conferencing systems. As a result, our customers spend a substantial amount of time before purchasing our products in performing internal reviews and obtaining capital expenditure approvals. Our sales cycle lengthened in 2001 and we cannot be certain that this cycle will not lengthen in the future. The emerging and evolving nature of the real–time voice and web conferencing market may lead to confusion in the market, which may cause prospective customers to postpone their purchase decisions.

If we fail to expand our sales and distribution channels, our business could suffer. If we are unable to expand our sales and distribution channels, we may not be able to increase revenue or achieve market acceptance of our MeetingPlace product and services. We plan to recruit additional sales personnel who will require training and take time to achieve full productivity, and there is strong competition for qualified sales personnel in our business. In addition, we believe that our future success is dependent upon establishing successful relationships with a variety of distribution partners. To date, we have entered into agreements with only a small number of these distribution partners. We cannot be certain that we will be able to reach agreement with additional distribution partners on a timely basis or at all, or that these distribution partners will devote adequate resources to selling our products. Furthermore, if our distribution partners fail to adequately market or support our products, the reputation of our products in the market may suffer. In addition, we will need to manage potential conflicts between our direct sales force and third–party reselling efforts.

Our ability to expand into international markets is uncertain. We intend to continue to expand our operations into new international markets. In addition to general risks associated with international expansion, such as foreign currency fluctuations and political and economic instability, we face the following risks and uncertainties any of which could prevent us from selling our products and services in a particular country or harm our business operations once we have established operations in that country:

• the difficulties and costs of localizing products and services for foreign markets, including the development of multilingual capabilities in our MeetingPlace system;

• the need to modify our products to comply with local telecommunications certification requirements in each country; and

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

If we fail to integrate our products with third–party technology, our sales could suffer. Our products and services are designed to integrate with our customers’ data and voice networks, as well as with enterprise applications such as browsers and collaborative software applications. If we are unable to integrate our products and services with these networks and systems, sales of our products and services could suffer.

In addition, we may be required to engage in costly and time–consuming redesigns of our products because of technology enhancements or upgrades of these systems. We may not be able to redesign our products or be certain that any of these redesigns will achieve market acceptance. In addition, we will need to continually modify our products as newer versions of the enterprise applications with which our products integrate are introduced. Our ability to do so largely depends on our ability to gain access to the advanced programming interfaces for these applications, and we cannot assure you that we will have access to necessary advanced programming interfaces in the future.

We may experience difficulties managing our future growth. We expect that any future growth may strain our management systems and resources, which could hinder our ability to continue to grow in the future. We may also experience difficulties meeting the demand for our products and services. If we are unable to provide training and support for our products, the implementation process will be longer and customer satisfaction may be lower.

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

Our business could suffer if we lose the services of our current management team. Our future success depends on the ability of our management to operate effectively, both individually and as a group. If we were to lose the services of any of these key employees we may encounter difficulties finding qualified personnel to replace them.

The loss of our right to use technology licensed to us by third parties could harm our business. We license technology that is incorporated into our products and services from third parties, including digital signal processing algorithms and the MeetingPlace server’s operating system and relational database. Any interruption in the supply or support of any licensed software could disrupt our operations and delay our sales, unless and until we can replace the functionality provided by this licensed software. Because our products incorporate software developed and maintained by third parties, we depend on these third parties to deliver and support reliable products, enhance their current products, develop new products on a timely and cost–effective basis and respond to emerging industry standards and other technological changes.

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

Any interruption in supply of components from outside manufacturers and suppliers could hinder our ability to ship products in a timely manner. We rely on third parties to obtain most of the components of the MeetingPlace server and integrate them with other standard components, such as the central processing unit and disk drives. If these third parties are no longer able to supply and assemble these components or are unable to do so in a timely manner, we may experience delays in shipping our products and have to invest resources in finding an alternative manufacturer or manufacture our products internally.

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

Our products and services may suffer from defects, errors or breaches of security. Software and hardware products and services as complex as ours are likely to contain undetected errors or defects, especially when first introduced or when new versions are released. Any errors or defects that are discovered after commercial release could result in loss of revenue or delay in market acceptance, diversion of development resources, damage to our customer relationships or reputation and increased service and warranty cost. Our products and services may not be free from errors or defects after commercial shipments have begun, and we are aware of instances in which some of our customers have experienced product failures or errors.

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

In 2001, we expanded our service offerings to include hosted services for our customers. The success of our hosted services will depend on the efficient and uninterrupted operation of our computer and communication hardware and software systems. In addition, some of our communications hardware and software for our services businesses are hosted at third party co-location facilities. These systems and operations are vulnerable to damage or interruption as a result of human error, telecommunications failures, break-ins, acts of vandalism, computer viruses and natural disasters. Systems failure or damage could cause an interruption of our services and result in loss of customers, difficulties in attracting new customers and could adversely impact our operating results. In addition, if the number of customers who purchase our hosted services increases over time, our systems must be able to accommodate increased usage. If we are unable to increase our capacity to accommodate growth in usage, we could encounter system performance issues, which could harm our relationships with customers and our reputation.

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

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

Dell Computer Corporation has registered the “Latitude” mark for computers in the United States and in other countries. Dell’s United States trademark registration and Canadian application have blocked our ability to register the “Latitude Communications” and “Latitude” with logo marks in the United States and the “Latitude Communications” mark in Canada. While we believe that we have priority of trade name usage in the United States, our United States trademark applications are still under appeal. Our opposition against Dell’s Canadian application was successful; however, Dell has filed an appeal of this decision. The outcome of these proceedings is uncertain. Consequently, we may not be able to register these marks and would have to rely solely on common law protection for these marks. We cannot assure you that we will be free from challenges of or obstacles to our use or registration of our marks.

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

Our stock price may be volatile. We expect that the market price of our common stock will fluctuate as a result of variations in our quarterly operating results. These fluctuations may be exaggerated if the trading volume of our common stock is low. In addition, due to the technology–intensive and emerging nature of our business, the market price of our common stock may rise and fall in response to:

• announcements of technological or competitive developments;

• acquisitions or strategic alliances by us or our competitors; or

• the gain or loss by us of significant orders.

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

Future sales of our common stock may depress our stock price. If our stockholders sell substantial amounts of common stock, including shares issued upon the exercise of outstanding options and warrants, in the public market, the market price of our common stock could fall.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments in our investment portfolio. We place our investments with high credit quality issuers and, by policy, limit the amount of credit exposure to any one issuer. The portfolio includes only marketable securities with maturities of three to 24 months and with active secondary or resale markets to ensure portfolio liquidity. We have no investments denominated in foreign country currencies and therefore are not subject to foreign currency risk on such investments.

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

	2002			2003			Total

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

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

In November 2001, a series of securities class actions were filed in United States District Court for the Southern District of New York against certain underwriters for Latitude’s initial public offering (“IPO”), Latitude, and certain officers of Latitude. The complaint alleges undisclosed and improper practices by the underwriters concerning the allocation of Latitude’s IPO shares, in violation of the federal securities laws, and seeks unspecified damages on behalf of persons who purchased Latitude’s stock during the period from May 6, 1999 to December 6, 2000. Latitude believes it has meritorious defenses to the claims against it and will defend itself vigorously. In the opinion of management, after consultation with legal counsel and based on currently available information, the ultimate disposition of these matters is not expected to have a material adverse effect on our business, financial condition or results of operations, and hence no amounts have been accrued for these cases.

Item 2. Not Applicable.

Item 3. Defaults Upon Senior Securities—Not Applicable.

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

Item 5. Other Information—Not Applicable.

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

(a) Reports on Form 8–K—None

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Latitude Communications, Inc.


	By:	/s/ JOSEPH J. COONEY
		Joseph J. Cooney
		Vice President, Finance
		(Principal Financial and Accounting Officer)

Date: May 15, 2002