LATITUDE COMMUNICATIONS INC
10-Q, 2000-11-14
COMPUTERS & PERIPHERAL EQUIPMENT & SOFTWARE
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q


  [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED SEPTEMBER 30, 2000

000-25475
(Commission file number )


LATITUDE COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)


  Delaware
(State or other jurisdiction of
incorporation or organization)

   94-3177392
(I.R.S. Employer
Identification No.) 		 

  2121 Tasman Drive
Santa Clara, CA
(Address of principal executive offices)

   95054
(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 [x] No [  ]

             As of October 31, 2000, there were 19,254,129 shares of the registrant’s Common Stock outstanding.


INDEX

      Page
PART I   FINANCIAL INFORMATION  
Item 1.   Financial Statements  
    Condensed Consolidated Balance Sheets at September 30, 2000
   and December 31, 1999 		3
    Condensed Consolidated Statements of Operations for the
   Three Months Ended September 30, 2000 and 1999;
   and for the Nine Months Ended September 30, 2000 and 1999 		4
    Condensed Consolidated Statements of Cash Flows
   for the Nine Months Ended September 30, 2000 And 1999 		5
    Notes to Condensed Consolidated Financial Statements 6
Item 2.   Management’s Discussion and Analysis of Financial Condition
   and Results of Operations 		8
Item 3.   Quantitative and Qualitative Disclosures About Market Risk 16
       
PART II.   OTHER INFORMATION  
Item 1.   Legal Proceedings 17
Item 2.   Changes in Securities and Use of Proceeds 17
Item 3.   Defaults Upon Senior Securities 17
Item 4.   Submission of Matters to a Vote of Security Holders 17
Item 5.   Other Information 17
Item 6.   Exhibits and Reports on Form 8-K 17
 
SIGNATURE 18
 
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PART I FINANCIAL INFORMATION

Item 1.   Financial Statements

LATITUDE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

September 30, 2000 December 31, 1999
(Unaudited)
ASSETS              
Current assets:              
   Cash and cash equivalents   $ 14,595   $ 10,847  
   Short-term marketable securities     20,398     31,611  
   Accounts receivable, net     12,645     8,006  
   Inventory     1,527     832  
   Prepaid and other assets     2,234     1,508  
   Deferred tax asset     3,457     3,457  
       Total current assets     54,856     56,261  
Property and equipment, net     3,904     2,655  
Long-term marketable securities     4,297     —  
Deposits and other long-term assets     296   199  
Deferred tax asset     939     939  
       Total assets   $ 64,292   $ 60,054  
             
LIABILITIES AND STOCKHOLDERS’ EQUITY              
Current liabilities:              
   Accounts payable   $ 573   $ 650  
   Accrued expenses     5,392     4,181  
   Deferred revenue     6,363     6,083  
   Current portion of long-term debt     432     576  
       Total current liabilities     12,760     11,490  
Long-term debt     169     453  
       Total liabilities     12,929     11,943  
             
Stockholders’ equity:              
   Common stock, $0.001 par value     19     19  
   Additional paid-in capital     57,212     56,624  
   Notes receivable from common stockholders     (30 )   (61 )
   Deferred stock compensation     (812 )   (1,441 )
   Accumulated other comprehensive loss     (16 )   (77 )
   Accumulated deficit     (5,010 )   (6,953 )
       Total stockholders’ equity     51,363     48,111  
        Total liabilities and stockholders’ equity   $ 64,292   $ 60,054  

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

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LATITUDE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)

Three Months Ended September 30, Nine Months Ended September 30,
2000 1999 2000 1999
Revenue:                        
   Product   $ 6,413   $ 6,312   $ 22,107   $ 16,515  
   Service     3,750     2,400     10,110     6,351  
     Total revenue     10,163     8,712     32,217     22,866  
Cost of revenue:                          
   Product     990     1,046     3,722     2,842  
   Service (exclusive of non-cash compensation expenses of $2,
      $21, $24 and $64, respectively) 		    1,974     1,324     5,254     3,285  
     Total cost of revenue     2,964     2,370     8,976     6,127  
Gross profit     7,199     6,342     23,241     16,739  
Operating expenses:                          
   Research and development (exclusive of non-cash compensation
      expenses of $18, $20, $57 and $59, respectively) 		    1,324     1,021     4,426     2,896  
   Marketing and sales (exclusive of non-cash compensation
      expenses of $24, $75, $75 and $228, respectively) 		    4,865     3,811     14,208     10,138  
   General and administrative (exclusive of non-cash compensation
      expenses of $68, $67, $198 and $249, respectively) 		    945     641     2,670     1,575  
   Amortization of deferred stock compensation     112     183     354     600  
     Total operating expenses     7,246     5,656     21,658     15,209  
Income (loss) from operations     (47 )   686     1,583     1,530  
Interest income, net     600     475     1,769     713  
Income before provision for income tax     553     1,161     3,352     2,243  
Provision for income tax     (253 )   (67 )   (1,409 )   (137 )
Net income   $ 300   $ 1,094   $ 1,943   $ 2,106  
Other comprehensive income (loss), net of tax—
   Unrealized gain (loss) on securities 		    178     25     61     (126 )
Comprehensive income   $ 478   $ 1,119   $ 2,004   $ 1,980  
Net income per share—basic   $ 0.02   $ 0.06   $ 0.10   $ 0.18  
Shares used in per share calculation—basic     18,718     18,590     18,693     11,498  
Net income per share—diluted   $ 0.02   $ 0.05   $ 0.10   $ 0.11  
Shares used in per share calculation—diluted     19,827     20,051     19,929     18,382  

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

4

LATITUDE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

Nine Months Ended
September 30,
2000 1999
Cash flows from operating activities:                
   Net income     $ 1,943   $ 2,106  
   Adjustments to reconcile net income to net cash                
     provided by (used in) operating activities:                
       Depreciation and amortization       1,240     589  
       Provision for excess and obsolete inventory       258     145  
       Provision for doubtful accounts       139     3  
       Amortization of deferred stock compensation       354     600  
       Changes in operating assets and liabilities:                
       Accounts receivable       (4,778 )   (198 )
       Inventory       (953 )   (206 )
       Prepaids and other assets       (726 )   (776 )
       Accounts payable       (77 )   (248 )
       Accrued expenses       1,211     926  
       Deferred revenue       280     1,653  
   
        Net cash provided by (used in) operating activities       (1,109 )   4,594  
   
               
Cash flows from investing activities:                
   Purchases of property and equipment       (2,489 )   (1,557 )
   Purchases of available for sale securities       (26,649 )   (40,920 )
   Maturities of available for sale securities       33,626     9,343  
   Other       (97 )   (59 )
   
        Net cash provided by (used in) investing activities       4,391     (33,193 )
   
               
Cash flows from financing activities:                
   Proceeds from issuance of common stock       863     33,780  
   Repayment of notes payable and capital lease obligations       (428 )   (452 )
   Other       31     64  
   
        Net cash provided by financing activities       466     33,392  
   
               
Net increase in cash and cash equivalents       3,748     4,793  
Cash and cash equivalents, beginning of period       10,847     3,982  
   
Cash and cash equivalents, end of period     $ 14,595   $ 8,775  
   

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

5

LATITUDE COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. The Company and Basis of Presentation

             Latitude Communications, Inc. (the “Company”) is a leading provider of enterprise e-conferencing solutions that enable geographically dispersed organizations to collaborate in real time. The company’s award-winning MeetingPlace system is designed for enterprise-wide deployment to improve the ability of employees, partners, and customers to meet and work. 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.

             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 year or for any future period. The balance sheet at December 31, 1999 was derived from audited financial statements, however, it does not include all disclosures required by generally accepted accounting principles.

             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, 1999, dated March 30, 2000.

Note 2. Marketable Securities

             The following table summarizes the fair value and unrealized gains and losses of marketable securities, by contractual maturity, at September 30, 2000. All marketable securities have been classified as available-for-sale:

Cost Gross Unrealized Gains Gross Unrealized Losses Estimate Fair
Value
Commercial paper                          
   Due in 1 year or less   $ 1,974     —     (1 ) $ 1,973  
Corporate notes and bonds                          
   Due in 1 year or less     18,445     —     (20 )   18,425  
   Due in 1-2 years     1,987     7           1,994  
Federal Agencies                          
Due in 1-2 years     2,300     3           2,303  
  $ 24,706   $ 10   $ (21 ) $ 24,695  

Note 3. Inventory

September 30, December 31,
2000 1999
(Unaudited)
Raw materials   $ 1,221   $ 240  
Finished goods     306     592  
  $ 1,527   $ 832  

Note 4. Recent Accounting Pronouncements

             In June 1998, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (“SFAS 133”) that requires companies to record derivative financial instruments on their balance sheets as assets or liabilities measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be recorded depending on the use of the derivative instrument and whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value or cash flows. In June 1999, the FASB issued Statement of Financial Accounting Standard No. 137, “Accounting for

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Derivative Instruments and Hedging Activities—Deferral of the Effective Date of FASB Statement No. 133,” (“SFAS 137”) that amends SFAS 133 to be effective for all fiscal quarters of fiscal years beginning after June 15, 2000. In June 2000, the Financial Accounting Standards Board issued SFAS No. 138, “Accounting for Derivative Instruments and Hedging Activities—An Amendment of FASB No. 133” (“SFAS 138”). SFAS 138 amends the accounting and reporting standards for certain derivatives and hedging activities such as net settlement contracts, foreign currency translations and intercompany derivatives. The Company will adopt SFAS 133 in its quarter ending March 31, 2001. To date, the Company has not engaged in derivatives or hedging activities.

             In November, 1999, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin 100, or SAB 100, which clarifies the SEC’s views on accounting for and disclosing certain expenses incurred in connection with exit activities and business combinations. The Company does not expect SAB 100 to have a material effect on its financial position, results of operations or cash flow. In December, 1999, SAB 101 was issued which summarizes the SEC’s views in applying generally accepted accounting principles to revenue recognition in financial statements. SAB 101 is effective beginning in the fourth quarter of 2000. In October 2000, the SEC issued SAB 100, Revenue Recognition in Financial Statements Frequently Asked Questions (“FAQ”). The Company is currently evaluating the impact SAB 101 and FAQ will have on its financial position and results of operations.

             In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44 or FIN 44, Accounting for Certain Transactions involving Stock Compensation an interpretation of APB Opinion No. 25. FIN 44 clarifies the application of Opinion 25 for (a) the definition of employee for purposes of applying Opinion 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, but certain conclusions cover specific events that occur after either December 15, 1998, or January 12, 2000. The adoption of FIN 44 did not have a material effect on the Company’s financial position or results of operations.

Note 5. Net Income Per Share

             Basic net income per share is computed by dividing net income available to common stockholders by the weighted average number of vested common shares outstanding for the period. Diluted net income per share is computed giving effect to all dilutive potential common shares, including options, warrants and preferred stock.

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

Three Months Ended September 30, Nine Months Ended September 30,
2000 1999 2000 1999
(Unaudited) (Unaudited)
Net income per share, basic and diluted:                          
   Numerator for net income, basic and diluted   $ 300   $ 1,094   $ 1,943   $ 2,106  
   Denominator for basic net income per share:                          
     Weighted average vested common shares outstanding     18,718     18,590     18,693     11,498  
   Net income per share basic   $ 0.02   $ 0.06   $ 0.10   $ 0.18  
                         
   Denominator for diluted earnings per share:                          
     Weighted average vested common shares outstanding     18,718     18,590     18,693     11,498  
     Effect of dilutive securities:                          
       Nonvested common shares     419     205     379     251  
       Common stock options     657     1,217     819     1,026  
       Warrants     33     39     38     78  
       Convertible preferred stock     —     —     —     5,529  
     Weighted average common and common equivalent shares     19,827     20,051     19,929     18,382  
   Net income per share diluted   $ 0.02   $ 0.05   $ 0.10   $ 0.11  

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 contain forward-looking statements that involve risks and uncertainties. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and similar expressions identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed or forecasted. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled “Factors That May Affect Future Results” and those appearing elsewhere in this Form 10-Q. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. 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 enterprise e-conferencing solutions that enable geographically dispersed organizations to collaborate in real time. The company’s award-winning MeetingPlace system is designed for enterprise-wide deployment to improve the ability of employees, partners, and customers to meet and work. 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 related services revenue. Product revenue is generally recognized upon shipment. We calculate an allowance for returns based on historical rates. Service revenue includes revenue from implementation, system management services, warranty coverage and customer support. Revenue from implementation is recognized as the services are performed, while revenue from system management services, 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 data conferencing. We have international sales offices in the United Kingdom and Singapore and expect to continue to expand into new international markets. In addition, we have established distributor

8

relationships in Australia, Hong Kong and Japan. While we intend to increase sales through indirect channels and internationally, we cannot assure you that we will be successful.

             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, and the efficiency with which we provide full care support and other services to our customers.

9

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 September 30, Nine Months Ended September 30,
2000 1999 2000 1999
Revenue:                          
   Product     63.1 %   72.5 %   68.6 %   72.2 %
   Service     36.9 %   27.5 %   31.4 %   27.8 %
     Total revenue     100.0 %   100.0 %   100.0 %   100.0 %
Cost of revenue:                          
   Product     9.7 %   12.0 %   11.6 %   12.4 %
   Service     19.4 %   15.2 %   16.3 %   14.4 %
     Total cost of revenue     29.1 %   27.2 %   27.9 %   26.8 %
Gross profit     70.9 %   72.8 %   72.1 %   73.2 %
                         
Operating expenses:                          
   Research and development     13.0 %   11.7 %   13.7 %   12.7 %
   Marketing and sales     47.9 %   43.7 %   44.1 %   44.3 %
   General and administrative     9.3 %   7.4 %   8.3 %   6.9 %
   Amortization of deferred stock compensation     1.1 %   2.1 %   1.1 %   2.6 %
     Total operating expenses     71.3 %   64.9 %   67.2 %   66.5 %
Income (loss) from operations     (0.4 )%   7.9 %   4.9 %   6.7 %
Interest income net     5.9 %   5.4 %   5.5 %   3.1 %
Income before provision for income tax     5.5 %   13.3 %   10.4 %   9.8 %
Provision for income tax     (2.5 )%   (0.7 )%   (4.4 )%   (0.6 )%
Net income     3.0 %   12.6 %   6.0 %   9.2 %

             Product revenue was $6.4 million and $22.1 million for the third quarter and first nine months of 2000, which represented increases of 1.6% and 33.9% when compared to the corresponding periods of 1999. The increases were due primarily to increased sales of our MeetingPlace products domestically to new customers, increased sales of additional products and features to existing customers, and, to a lesser extent, increased international sales for the full nine month period in 2000. International sales represented approximately 4.8% and 10.7% of product revenue in the three months ended September 30, 2000 and 1999, respectively and approximately 8.9% and 8.3% of product revenue in the nine months ended September 30, 2000 and 1999, respectively.

             Service revenue was $3.8 million and $10.1 million for the third quarter and first nine months of 2000, which represented increases of 56.3% and 59.2% when compared to the corresponding periods of 1999. The increases were attributable primarily to growth in our customer base during this period, which led to increased sales of full care support services, as well as the introduction of additional consulting services such as managed services and expanded implementation and integration services.

             Total cost of revenue was $3.0 million and $9.0 million for the third quarter and first nine months of 2000, which represented increases of 25.1% and 46.5% when compared to the corresponding periods of 1999. The increase in total cost of revenue was attributable primarily to increased sales of our MeetingPlace products and

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related services, as well as the increased size of our services staff and the costs of providing services to support an increasingly geographically dispersed customer base. Resulting gross profit was $7.2 million and $23.2 million for the third quarter and first nine months of 2000, as compared to $6.3 million and $16.7 million in the corresponding periods of 1999. Gross margin was 70.8% and 72.1% as a percentage of revenue, for the third quarter and first nine months of 2000, as compared to 72.8% and 73.2% for the corresponding periods of 1999.

             Product gross margin was 84.6% and 83.2% as a percentage of product revenue for the third quarter and first nine months of 2000 as compared to 83.4% and 82.8% for the corresponding periods of 1999. Product cost of revenue includes the cost of royalties payable to third parties of approximately $250,000 for both the first nine months of 2000 and the corresponding period in 1999. 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 47.4% and 48.0% as a percentage of revenue for the third quarter and first nine months of 2000 as compared to 44.8% and 48.3% for the corresponding periods in 1999. We expect that service gross margin may decline in the future as a result of the addition of support personnel, potential pricing pressure and an increase in the mix of lower margin service offerings.

             Research and development expenses consist primarily of compensation and related costs for research and development personnel, facilities expenses for testing space and equipment and payments for technology for which technological feasibility has not been established. Research and development expenses were $1.3 million and $4.4 million for the third quarter and first nine months of 2000, which represented increases of 29.7% and 52.8% when compared to corresponding periods in 1999. As a percentage of total revenues, research and development expenses were 13.0% and 13.7% in the third quarter and first nine months of 2000, increases from the 11.7% and 12.7% in the corresponding periods in 1999. The increase was attributable primarily to the addition of personnel in our research and development organization associated with product development. We expect to continue to make substantial investments in research and development and anticipate that research expenses will continue to increase in absolute dollars.

             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 and $14.2 million for the third quarter and first nine months of 2000, which represented increases of 27.6% and 40.1% when compared to corresponding periods in 1999. As a percentage of total revenues, marketing and sales expenses of 47.9% and 44.1% in the third quarter and first nine months of 2000 as compared to 43.7% and 44.3% in the corresponding periods of 1999. The increase in absolute dollars of $1.0 million and $4.1 million for the third quarter and first nine months of 2000 as compared to the corresponding period in 1999, reflected the addition of personnel in our sales and marketing organizations, as well as costs associated with increased selling efforts to develop market awareness of our products and services.

             General and administrative expenses consist primarily of personnel expenses, legal and accounting expenses and other general corporate expenses. General and administrative expenses were $945,000 and $2.7 million for the third quarter and first nine months of 2000, which represented increase of 47.3% and 69.5% when compared to the corresponding periods in 1999. As a percentage of total revenues, general and administrative expenses were 9.3% and 8.3% in the third quarter and first nine months of 2000 as compared to 7.4% and 6.9% in the corresponding periods of 1999. The increase in both absolute dollars and percentage of revenue was attributable primarily to the addition of personnel in our general and administrative organization and expenses in connection with being a public company. We expect general and administrative expenses to increase in absolute dollars as we add personnel and incur additional costs related to the anticipated growth of our business and operation as a public company.

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             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 deferred stock compensation associated with these options as of September 30, 2000 amounted to $3.1 million, of which $2,000, $299,000, $752,000 and $354,000 had been amortized to expense in 1997, 1998, 1999 and the first nine months of 2000, respectively. These amounts are being amortized based on the vesting period of these options, most of which are over 48 months. We expect amortization of approximately $111,000 in the three months ending December 31, 2000, $441,000 in 2001 and $260,000 in 2002 related to the options presently outstanding.

             Interest income, net of interest expense, was $600,000 and $1.8 million for the third quarter and first nine months of 2000, compared to $475,000 and $713,000 for the corresponding periods in 1999. The increase in net interest income was attributable primarily to interest income earned on higher cash and marketable securities average balances in the third quarter and first nine months of 2000 as compared to corresponding periods in 1999, primarily from net proceeds from our initial public offering in May 1999.

             The provision for income tax was $253,000 and $1.4 million for the third quarter and first nine months of 2000, compared to $67,000 and $137,000 for the corresponding periods in 1999. Our effective tax rate was approximately 46% for the third quarter and 42% for the first nine months of 2000 and approximately 6% for the corresponding periods in 1999. The rate in 1999 was lower than the statutory U.S. federal rate due primarily to the utilization of net operating loss carryforwards.

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 September 30, 2000, we had $39.2 million of cash, cash equivalents and marketable securities, which represented 62% of total assets.

             Cash used by operating activities was $1.1 million in the first nine months of 2000, compared to cash provided by operating activities of $4.6 million in the same period of 1999. Net cash used by operating activities in the first nine months of 2000 related to increased use of working capital of $5.0 million, compared to $1.2 million in the same period in 1999. The largest component of the increased use of working capital in the first nine months of 2000 was an increase in accounts receivable due to large sales transactions occurring late in the third quarter of 2000. This increased use was partially offset by adjustments for non-cash items of $2.0 million in the first nine months of 2000, compared to $1.3 million in the same period in 1999.

             Cash provided by investing activities in the first nine months of 2000 was $4.4 million, which consisted primarily of maturities of marketable securities of $33.6 million, partially offset by the purchase of marketable securities of $26.6 million and purchase of property and equipment of $2.5 million. For the first nine months in 1999, cash used in investing activities of $33.2 million reflected the purchase of available for sale securities of $40.9 million and the purchase of property and equipment of $1.6 million, partially offset by maturities of available for sale securities of $9.3 million.

             Cash provided by financing activities in the first nine months of 2000 of $466,000 consisted primarily of the proceeds from issuance of common stock under employee benefit plans of $863,000, partially offset by payments on obligations under capital leases and notes payable of $428,000. For the first nine months of 1999, cash provided by financing activities of $33.4 million related primarily to the proceeds of our initial public offering of common stock.

             We believe that our current cash, cash equivalents and marketable securities will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months.

Impact of Recently Issued Accounting Standards

             In June 1998, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (“SFAS 133”) that requires

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companies to record derivative financial instruments on their balance sheets as assets or liabilities measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be recorded depending on the use of the derivative instrument and whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value or cash flows. In June 1999, the FASB issued Statement of Financial Accounting Standard No. 137, “Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date of FASB Statement No. 133,” (“SFAS 137”) that amends SFAS 133 to be effective for all fiscal quarters of fiscal years beginning after June 15, 2000. In June 2000, the Financial Accounting Standards Board issued SFAS No. 138, “Accounting for Derivative Instruments and Hedging Activities—An Amendment of FASB No. 133” (“SFAS 138”). SFAS 138 amends the accounting and reporting standards for certain derivatives and hedging activities such as net settlement contracts, foreign currency translations and intercompany derivatives. The Company will adopt SFAS 133 in its quarter ending March 31, 2001. To date, the Company has not engaged in derivatives or hedging activities.

             In November, 1999, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin 100, or SAB 100, which clarifies the SEC’s views on accounting for and disclosing certain expenses incurred in connection with exit activities and business combinations. The Company does not expect SAB 100 to have a material effect on its financial position, results of operations or cash flow. In December, 1999, SAB 101 was issued which summarizes the SEC’s views in applying generally accepted accounting principles to revenue recognition in financial statements. SAB 101 is effective beginning in the fourth quarter of 2000. In October 2000, the SEC issued SAB 101, Revenue Recognition in Financial Statements Frequently Asked Questions (“FAQ”). The Company is currently evaluating the impact SAB 101 and FAQ will have on its financial position and results of operations.

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 continue to grow or that we will maintain 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, which have limited market acceptance.

             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 sustain profitability. Our ability to increase revenue and sustain 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:

             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.

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

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             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:

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

             We will have to devote substantial resources to educate prospective customers about the uses and benefits of our products. 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 achieving market acceptance.

             Rapid technological changes could cause our products 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 to remain competitive. This adaptation could be costly and time-consuming. Our products could become obsolete and unmarketable if products 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. As a result, the life cycle of our products is difficult to estimate.

             To be successful, we will need to develop and introduce new products and product enhancements 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 will achieve broad market acceptance.

             Our sales cycle is lengthy and unpredictable. Any delay in sales of our products could cause our quarterly revenue and operating results to fluctuate. The typical sales cycle of our products is lengthy, generally between six to nine 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 data 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. We cannot be certain that this cycle will not lengthen in the future. The emerging and evolving nature of the real-time voice and data conferencing market may lead to confusion in the market, which may cause prospective customers to postpone their purchase decisions.

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             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. We have recently expanded our direct sales force and plan to recruit additional sales personnel. New sales personnel 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 in a particular country or harm our business operations once we have established operations in that country:

             If we fail to integrate our products with third-party technology, our sales could suffer. Our products 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 with these networks and systems, sales of our products 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 expected growth. Our recent growth has strained, and we expect that any future growth will continue to 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. Competition for qualified personnel in the San Francisco Bay area, as well as other markets in which we recruit, is extremely intense and characterized by rapidly increasing salaries, which may increase our operating expenses or hinder our ability to recruit qualified candidates.

             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. Recently, we have had one individual join and two individuals leave the management team.

             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 from third parties, including digital signal processing algorithms

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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.

             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 may suffer from defects, errors or breaches of security. Software and hardware products 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 or increased service and warranty cost. Our products 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. Any compromise of security could deter people from using MeetingPlace and could harm our reputation and business and result in claims against us.

             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. Since we believe that we have priority of trade name usage in the United States, we have petitioned to cancel Dell’s United States registration and opposed its Canadian application. The outcome of these proceedings is uncertain. If Dell’s registration for the “Latitude” mark is not canceled or if we are unable to obtain consent from Dell for our registration of our marks, we may not be able to register our 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

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governmental authorities in the United States or in other countries in which we sell our products. 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 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:

             Our executive officers and directors and their affiliates own a large percentage of our voting stock and could control the voting power of the common stock. Our executive officers and directors and their affiliates beneficially own, in the aggregate, a large percentage of our outstanding common stock. As a result, these stockholders are able to exercise control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may delay, deter or prevent transactions that would result in the change of control, which in turn could reduce the market price of our common stock.

             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 tables below presents principal amounts and related weighted average interest rates for our investment
portfolio at September 30, 2000.

Fair Value Average
Interest Rate
Commercial paper   $ 1,973     6.58 %
Corporate notes and bonds     18,424     6.52 %
    
  $ 20,397        
    
Long-term investments (in thousands):      
  Fair Value   Average
Interest Rate		  
Corporate notes and bonds   $ 1,994     7.18 %
Federal agencies     2,303     7.25 %
    
  $ 4,297        
    

             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.

             

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PART II. OTHER INFORMATION

Item 1.   Legal Proceedings—Not Applicable.

Item 2.   Changes in Securities and Use of Proceeds.

             On May 6, 1999, in connection with the Company’s initial public offering, a Registration Statement on Form S-1 (No. 333-72935) was declared effective by the Securities and Exchange Commission, pursuant to which 3,125,000 shares of the Company’s Common Stock were offered and sold for the account of the Company at a price of $12.00 per share, generating gross offering proceeds of $37.5 million. The managing 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 were approximately $33.8 million. The Company has not yet used any of the funds from the initial public offering, and the $33.8 million has been invested in investment grade, interest bearing securities. The Company intends to use such remaining proceeds for capital expenditures, including the acquisition of redundant computer and communication systems, and for general corporate purposes, including working capital to fund increased accounts receivable and inventory levels.

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.

  Exhibit
Number		   Description
  27.1   Financial Data Schedule
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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.


Date:             November 14, 2000   By:   /s/ Rick M. McConnell
    
     Rick M. McConnell
Vice President of Finance and Administration and
Chief Financial Officer (Principal Financial and
Accounting Officer)

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EXHIBIT INDEX

  Exhibit
Number		   Description
  27.1   Financial Data Schedule
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