PROSPECTUS
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2,400,000 SHARES
NETSPEAK CORPORATION LOGO
Common Stock
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NetSpeak Corporation ("NetSpeak" or the "Company") hereby offers 2,400,000
shares of common stock, par value $.01 per share (the "Common Stock"). Prior to
this offering (the "Offering"), there has been no public market for the Common
Stock and there can be no assurance that such a market will develop after
completion of this Offering or, if developed, that it will be sustained. For
information regarding the factors considered in determining the initial public
offering price of the Common Stock, see "RISK FACTORS" and "UNDERWRITING." The
Company's Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "NSPK."
ACT Networks, Inc. has indicated to the Company that it has an interest in
purchasing $2,000,000 of the Common Stock in this Offering, see "BUSINESS."
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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 7 AND "DILUTION."
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNTS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share ...... $ 8.75 $ .61 $ 8.14
Total(3) ...... $21,000,000 $1,470,000 $19,530,000
</TABLE>
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(1) Does not include compensation payable to Josephthal Lyon & Ross Incorporated
("Josephthal") and Cruttenden Roth Incorporated (the "Underwriters") in the
form of a non-accountable expense allowance. In addition, see "UNDERWRITING"
for information concerning indemnification and contribution arrangements
with and other compensation payable to the Underwriters.
(2) Before deducting expenses estimated to be $1,000,000, including the
Underwriters' non-accountable expense allowance.
(3) The Company has granted to the Underwriters an option (the "Over-Allotment
Option"), exercisable for a period of 30 days after the date of this
Prospectus to purchase up to 360,000 additional shares of Common Stock upon
the same terms and conditions set forth above, solely to cover
over-allotments, if any. If the Over-Allotment Option is exercised in full,
the total Price to Public, Underwriting Discounts and Proceeds to Company
will be $24,150,000, $1,690,500 and $22,459,500, respectively. See
"UNDERWRITING."
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The Common Stock is being offered by the Underwriters subject to prior sale
when, as and if delivered to and accepted by the Underwriters, and subject to
approval of certain legal matters by their counsel and to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
this Offering and to reject any order in whole or in part. It is expected that
delivery of the shares of Common Stock offered hereby will be made against
payment on or about June 3, 1997 at the offices of Josephthal Lyon & Ross
Incorporated, New York, New York.
Josephthal Lyon & Ross Cruttenden Roth
The date of this Prospectus is May 29, 1997
<PAGE>
[PHOTOGRAPHS OR ARTWORK]
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WebPhone- is a registered trademark of the Company.
---------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES
OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO,
APPEARING ELSEWHERE IN THIS PROSPECTUS. INVESTORS SHOULD CAREFULLY CONSIDER THE
INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS." EXCEPT AS OTHERWISE
INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) ASSUMES NO EXERCISE OF THE
OVER-ALLOTMENT OPTION; (II) ASSUMES NO EXERCISE OF THE WARRANTS TO BE ISSUED BY
THE COMPANY TO THE UNDERWRITERS, TO PURCHASE UP TO 240,000 SHARES OF COMMON
STOCK (THE "ADVISORS' WARRANTS"); (III) ASSUMES THE EXERCISE UPON CONSUMMATION
OF THIS OFFERING OF A WARRANT TO PURCHASE 452,855 SHARES OF COMMON STOCK (THE
"MOTOROLA WARRANT") HELD BY MOTOROLA, INC. ("MOTOROLA"); (IV) DOES NOT GIVE
EFFECT TO 207,679 SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF ANOTHER
OUTSTANDING WARRANT; AND (V) DOES NOT GIVE EFFECT TO 2,382,500 SHARES OF COMMON
STOCK ISSUABLE UPON THE EXERCISE OF OUTSTANDING STOCK OPTIONS GRANTED UNDER THE
COMPANY'S 1995 STOCK OPTION PLAN (THE "1995 PLAN").
THE COMPANY
NetSpeak develops, markets, licenses, and supports a suite of intelligent
software modules which enable real-time, concurrent interactive voice, video and
data transmission over packetized data networks such as the Internet and
local-area and wide-area networks ("LANs" and "WANs", respectively). The Company
believes that its technology is strategically positioned to capitalize on the
rudimentary shift in corporate telecommunications philosophy as businesses seek
to expand the functionality of their communication systems as well as optimize
their use of packetized data networks. Netspeak is currently marketing a
user-friendly core communications technology which enables, in a cost-effective
manner, corporations and other users to enhance the role of their packetized
data networks to support concurrent voice, video and data transmission. NetSpeak
believes that as potential users become increasingly educated as to the benefits
of integrating the two networks, significant revenue opportunities for the
Company will be generated.
The Company's software uses patent-pending intelligent virtual circuit
switching technology to provide gateways between packetized data networks and
traditional voice transmission networks. The technology also allows users to
integrate into packetized data networks a variety of features and functions
commonly found in traditional voice transmission networks, including automatic
call distribution ("ACD"), multi-point conferencing, interactive voice response
services, messaging services, and least cost routing, as well as to expand
functionality by offering additional features such as concurrent voice and data
transmission and video conferencing. The Company's patent-pending virtual
circuit switching technology provides intelligent call routing which enables
users to transparently communicate with each other on a point-to-point basis.
The Company believes that its products and systems are designed to allow
customers to integrate NetSpeak's technology into their existing network
infrastructures without the need for significant upgrading, and can ultimately
provide a complete software-based solution for the delivery of concurrent
real-time interactive voice, video and data communications over packetized data
networks.
In order to facilitate and accelerate the acceptance of NetSpeak's
technology as well as enhance the marketing and distribution of its products and
systems, the Company has established a number of strategic alliances with
various telecommunications and computer industry leaders. Under certain of these
agreements, either the Company's technology is integrated into products which
are marketed by its strategic partners or the Company's products and systems are
marketed and distributed by its strategic partners through various distribution
channels. The Company believes that these strategic alliances also offer access
to its partners' leading edge technologies, as well as insights into market
trends and product development.
In August 1996, the Company established a strategic alliance with Motorola
pursuant to which Motorola made a minority investment in the Company and the
Company granted Motorola a right of
3
<PAGE>
first negotiation on licenses of the Company's technology as it applies to the
cellular, cable and wireless communications industries. Motorola, through its
affiliates, is also conducting a test trial of a system that uses the Company's
products and systems and those of Motorola.
Beginning in June 1996, the Company entered into a strategic alliance with
Creative Technology, Ltd. ("Creative"), a world leader in the manufacture and
distribution of audio cards and multimedia computer peripherals. Pursuant to
such alliance, Creative made a minority investment in the Company. NetSpeak
granted Creative a world-wide license to market, distribute and bundle
NetSpeak's WebPhone client (or end-user) software under the Creative brand name
in the retail distribution channel and the Company and Creative are jointly
developing various other Internet-related software applications which use both
the Company's and Creative's proprietary technologies, in such areas as
multimedia applications for Internet Protocol ("IP") based networks.
In May 1997, the Company entered into a Technology Development and License
Agreement with ACT Networks, Inc. ("ACT"), an industry-leading provider of WAN
access products which utilize frame relay systems to integrate voice, data and
facsimile communications. Under the agreement, the Company will adapt certain of
its software modules to execute on ACT's hardware products. In addition, the
Company granted ACT a license to distribute a variety of the Company's products
to ACT customers and ACT will integrate their respective technologies into a
bundled solution to be distributed and marketed by both the Company and ACT. The
Company has entered into a related agreement pursuant to which ACT has indicated
that it has an interest in purchasing $2,000,000 of Common Stock in this
Offering (228,571 shares or approximately 10% of the shares of Common Stock
offered hereby).
In August 1996, the Company established a strategic alliance with the
Switching Systems Division of Rockwell International Corporation ("Rockwell"),
an industry leader in medium to high end ACD systems. As part of this alliance,
the Company's gateway products and ACD systems are being integrated into
Rockwell's ACD systems. Beginning in November 1996, the Company entered into a
strategic alliance with Infonet Services Corporation ("Infonet"), one of the
largest commercial data network carriers in the world. Pursuant to such
alliance, the Company will integrate its technology with Infonet's existing
global data network, to enhance concurrent voice and data transmission over the
network.
In April 1997, the Company entered into a non-binding memorandum of
understanding with Fujitsu Business Communication Systems ("Fujitsu"). In May
1997, the Company entered into an original equipment manufacturer ("OEM")
agreement, pursuant to which Fujitsu will integrate, distribute and resell the
Company's products to Fujitsu customers and undertake joint development efforts
with the Company.
In March 1997, the Company entered into a non-binding memorandum of
understanding with Telstra R&D Management Pty, Ltd. ("TRDM"), a subsidiary of
Telstra Corporation Ltd. ("TCL"), the Australian telecommunications carrier. In
May 1997, the Company entered into a development and marketing agreement
pursuant to which the Company and TRDM intend to integrate their respective
existing technologies into a product which facilitates increased call completion
rates for telecommunications carriers. The jointly developed product is intended
to be marketed by both the Company and TRDM to other telecommunications
carriers, including TCL.
MCI Communications Corp. ("MCI"), one of the nation's largest long-distance
carriers, has initially licensed and used limited quantities of the Company's
products in MCI's new VAULT technology, designed to bridge traditional telephone
networks with packetized data networks such as the Internet. MCI has
subsequently selected the Company as one of its suppliers for components of its
VAULT technology products and services, and is currently negotiating a volume
software license agreement with the Company. The Company intends to establish
additional strategic alliances.
In addition to marketing its technology, products and systems with its
strategic partners, NetSpeak has begun to market its products directly to
end-users, including telephone companies, cable companies,
4
<PAGE>
and other common carriers, large business enterprises, ACD manufacturers and
OEMs, governmental and educational entities, as well as to distributors, such as
systems integrators ("SIs") and value added resellers ("VARs"). To date, such
marketing efforts primarily have been limited to direct contacts with a number
of these customers. In addition, NetSpeak is marketing its WebPhone client
software products over the Internet, by advertising in computer periodicals and
through distribution agreements with over 700 Internet service providers
("ISPs") worldwide. The Company is currently developing an in-house marketing
and sales infrastructure.
The Company's strategy is to become an industry leader in providing
business solutions for concurrent real-time interactive voice, video and data
transmission over packetized data networks. The Company intends to achieve its
goal by (i) establishing strategic alliances to facilitate technological
acceptance and enhance the marketing and distribution of its products and
systems; (ii) expanding its internal marketing and sales efforts; and (iii)
continuing research and development to enhance existing product applications, as
well as develop new applications.
NetSpeak was incorporated in the State of Florida on December 8, 1995 under
the name "Comnet Corporation." The Company began using the mark "NetSpeak" on
December 14, 1995 and formally assumed its present name on December 18, 1995,
when it acquired Internet Telephone Company ("ITC"), which had begun development
of the Company's technology in May 1995. Unless the context otherwise requires,
references herein to "NetSpeak" or the "Company" are to NetSpeak and ITC, its
subsidiary and Predecessor. The Company's executive offices are located at 902
Clint Moore Road, Suite 104, Boca Raton, Florida 33487, and Company's telephone
number is (561) 997-4001.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company ...... 2,400,000 shares.
Common Stock outstanding
before the Offering ..................... 7,698,532 shares.
Common Stock to be outstanding
after the Offering(1) .................. 10,551,387 shares.
Use of Proceeds ........................... Expansion of sales and marketing efforts,
additional research and development expenditures,
capital expenditures and working capital and other
general corporate purposes. See "Use of Proceeds."
Risk Factors .............................. The securities offered hereby involve a high degree
of risk and immediate and substantial dilution. See
"Risk Factors" and "Dilution."
Nasdaq National Market symbol ............ "NSPK."
</TABLE>
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(1) Gives effect to exercise of the Motorola Warrant. Does not give effect to
the exercise of (i) the Over-Allotment Option; (ii) the Advisors' Warrants
to purchase 240,000 shares of Common Stock, exercisable at 120% of the
initial public offering price per share; (iii) an outstanding warrant to
purchase 207,679 shares of Common Stock exercisable at a price of $5.05 per
share; and (iv) stock options granted under the 1995 Plan to purchase
2,263,500 shares of Common Stock at exercise prices ranging from $1.00 to
$7.00 per share and 119,000 shares of Common Stock at an exercise price
equal to the price per share in this Offering.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
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<CAPTION>
PREDECESSOR(1) SUCCESSOR(1)
------------------ ------------------------------------------------------------------
THREE MONTHS
MAY 15, 1995 DECEMBER 8, 1995 YEAR ENDED ENDED MARCH 31,
TO DECEMBER 18, TO DECEMBER 31, DECEMBER 31, -----------------------------
1995 1995 1996 1996 1997
------------------ --------------------------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues ..................... $ - $ - $ 867,117 $ 90,681 $ 903,766
Total operating expenses ......... 180,682 642,483 3,861,917 508,471 1,902,208
Loss from operations ............ (180,682) (642,483) (2,994,800) (417,790) (998,442)
Net loss ........................ (180,682) (642,483) (2,865,704) (400,367) (984,935)
Net loss per share ............... $ (.35) $ (0.05) $ (0.12)
Shares used in computing net loss
per share(2) .................. 8,197,568 8,197,568 8,197,568
</TABLE>
<TABLE>
<CAPTION>
SUCCESSOR(1)
MARCH 31, 1997
--------------------------------- -----------------
PRO FORMA
ACTUAL PRO FORMA(3) AS ADJUSTED(3)(4)
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<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ...... $4,869,565 $7,360,268 $25,939,168
Working capital ............... 2,711,290 5,201,993 24,030,893
Total assets .................. 7,411,244 9,901,947 28,181,947
Shareholders' equity ............ 4,693,968 7,184,671 25,714,671
</TABLE>
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(1) NetSpeak acquired ITC by issuing 2,500,000 shares of common stock, valued at
$500,000, in exchange for all of the outstanding shares of ITC. The
acquisition was accounted for as a purchase, and the purchase price was
allocated to the assets acquired, including purchased research and
development in process, and liabilities assumed based upon their fair value
on the date of acquisition. The financial information identified herein as
for the Predecessor is for ITC for the period May 15, 1995 (inception) to
December 18, 1995, the date of its acquisition by NetSpeak. The financial
information identified herein as for the Successor is for NetSpeak
(including ITC on a consolidated basis from the date of acquisition) as of
March 31, 1997 and for the period from December 8, 1995 (inception) to
December 31, 1995, for the year ended December 31, 1996 and the three months
ended March 31, 1996 and 1997.
(2) See Note 1 of "Notes to Consolidated Financial Statements" for an
explanation of the determination of the number of shares and share
equivalents used in computing the per share amounts. Does not give effect to
the exercise of (i) the Over-Allotment Option; (ii) the Advisors' Warrants
to purchase 240,000 shares of Common Stock, exercisable at 120% of the
initial public offering price per share; and (iii) stock options to purchase
1,710,000 shares of Common Stock granted under the 1995 Plan prior to
February 1, 1996, which are not included because such options were issued
prior to the 12 months immediately preceding the Offering and the effect on
net loss per share would be anti-dilutive.
(3) Gives the effect to exercise of the Motorola Warrant and the receipt of
$2,490,703 or $5.50 per share therefrom. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(4) As adjusted to give effect to the sale by the Company of 2,400,000 shares of
Common Stock at an initial public offering price of $8.75 per share and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."
6
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY IS SPECULATIVE
IN NATURE AND INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THE OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING FACTORS SHOULD BE
CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE
PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY. THIS PROSPECTUS CONTAINS,
IN ADDITION TO HISTORICAL INFORMATION, FORWARD- LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED BELOW AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS
PROSPECTUS.
LIMITED OPERATING HISTORY; ACCUMULATED NET LOSS; EARLY STAGE OF
DEVELOPMENT. The Company commenced initial research and development efforts in
May 1995, released its initial products in February 1996 and has only recently
emerged from the development stage. Accordingly, the Company has only a limited
operating history upon which an evaluation of the Company and its prospects can
be based. As of March 31, 1997, the Company had an accumulated net loss of
$4,493,122. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in an early stage
of development, particularly companies in new and rapidly evolving industries.
To address these risks and achieve profitability and increased sales levels, the
Company must, among other things, establish and increase market acceptance of
its technology, products and systems, respond effectively to competitive
pressures, introduce on a timely basis products and systems incorporating its
technology and enhancements to its product applications and successfully market
and support its products and systems. There can be no assurance that the Company
will achieve or sustain significant sales or profitability in the future. The
Company has provided a valuation allowance for the full amount of the deferred
tax asset arising from the Company's net operating loss carryforward. Such
valuation allowance is the result of management's belief, based on the
evaluation of currently available evidence, in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," that it
is more likely than not that the Company will not generate sufficient future
taxable income to utilize the net operating loss carryforward. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
UNCERTAINTY OF PRODUCT ACCEPTANCE IN DEVELOPING MARKETS; NEW PRODUCT
DEVELOPMENT RISKS. The markets for the Company's technology, products and
systems have only recently begun to develop and are rapidly evolving. In
addition, the Company's products and systems are new and based on emerging
technologies. As is typical in the case of new and rapidly evolving industries,
demand and market acceptance for recently introduced technology and products are
subject to a high level of uncertainty. Broad acceptance of the Company's
technology, products and systems is critical to the Company's success and
ability to generate revenues. Acceptance of the Company's technology, products
and systems will be highly dependent on the functionality and performance of the
products and systems and particularly on the success of the initial
implementation of its products and systems. There can be no assurance that the
Company will be successful in obtaining market acceptance of its technology,
products and systems. In addition, the Company's products and systems must be
adapted in certain instances to meet the specific requirements of the customer
hardware or software in which it is to be integrated. The adaptation process can
be time consuming and costly to both the Company and its customers and the
acceptance of the product or system may depend, to a substantial extent, on the
success of the adaptation.
Furthermore, products and systems offered by the Company may contain
undetected errors or defects when first introduced or as new versions are
released. Introduction by the Company of products and systems with reliability,
quality or compatibility problems could result in reduced revenues,
uncollectible accounts receivable, delays in collecting accounts receivable and
additional costs. There can be no assurance that, despite testing by the Company
or by its customers, errors will not be found in the Company's products and
systems after commencement of commercial deployment, resulting in product
redevelopment costs and loss of, or delay in, market acceptance. In addition,
there can be no assurance that the Company will not experience significant
product returns in the future. Any such event could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business-Products" and "-Research and Development."
7
<PAGE>
NEED FOR CONTINUOUS PRODUCT DEVELOPMENT; RISKS OF RAPID TECHNOLOGICAL
CHANGE. The markets for the Company's products and systems are characterized by
rapidly changing technology. The introduction of products and systems which
offer applications incorporating new technologies could render the Company's
products obsolete and unmarketable and could exert price pressures on existing
products. Further, the markets for the Company's products and systems, including
the market for voice transmission over packetized data networks, are
characterized by evolving industry standards and specifications. As new
standards or specifications are adopted, the Company may be required to devote
substantial time and expense in order to adapt its technology, products and
systems. The Company's ability to anticipate changes in technology and industry
standards and successfully develop and introduce enhanced product applications
as well as new applications, in each case in a cost effective and timely manner,
will be a critical factor in the Company's ability to grow and be competitive.
There can be no assurance that the Company will successfully develop enhanced or
new product applications, that any enhanced or new product application will
achieve market acceptance, that the Company will be able to adapt its products
or systems to comply with new standards or specifications, or that the
introduction of new products or technologies by others will not render the
Company's technology, products and systems obsolete. See "Business-Products and
Systems" and "-Research and Development."
LIMITED MARKETING EFFORTS; RELIANCE ON STRATEGIC PARTNERS. To date, the
Company's marketing efforts primarily have been limited to establishing
strategic alliances and, to a lesser extent, commencement of in-house marketing
efforts to end-users and distributors. The Company believes that it will be
dependent in the near term upon its strategic alliances, in particular those
with Rockwell and Creative, to generate revenues from the sales of products and
systems incorporating the Company's technology or products. Creative, one of the
Company's strategic partners, accounted for approximately 44% and 76% of the
Company's net revenues during the year ended December 31, 1996 and for the three
months ended March 31, 1997, respectively. There can be no assurance that any
strategic partner will actively distribute the Company's technology, products
and systems or that, if they do so, that their efforts will be successful or
generate significant revenues for the Company. Although the Company is currently
developing an in-house marketing and sales infrastructure to focus on direct
sales to potential end-users and distributors, there can be no assurance that
the Company will have the necessary resources to do so, or that any such efforts
undertaken will be successful. See "Business-Strategic Alliances" and
"-Marketing and Sales."
HIGHLY COMPETITIVE INDUSTRY. The Company is unaware of any other company
which competes directly with the entire spectrum of products and systems it
offers. The Company does, however, face competition for each of the individual
products and systems. The Company competes with companies such as Vienna Systems
Corporation ("Vienna Systems"), Lucent Technologies, Inc. ("Lucent"), VocalTec,
Ltd. ("VocalTec") and Dialogic Corporation ("Dialogic") with respect to its
gateway products. Principal competitors for NetSpeak's software-based business
systems include companies such as Lucent. In the market for client software
products, the Company competes with VocalTec, Microsoft Corporation
("Microsoft") and Intel Corporation ("Intel"), among others. The Company expects
competition to persist, intensify and increase in the future. Many of the
Company's current and potential competitors have longer operating histories,
greater name recognition, larger customer bases and significantly greater
financial, technical and marketing resources than the Company. In addition, the
Company competes with manufacturers of hardware-based business systems. Certain
of these competitors may be existing or potential strategic partners. There can
be no assurance that the Company will be able to compete effectively against its
competitors. See "Business-Competition."
DEPENDENCE ON KEY PERSONNEL. The Company's performance is substantially
dependent on the performance of its executive officers, particularly Stephen R.
Cohen, the Company's Chairman of the Board and Chief Executive Officer; Robert
Kennedy, President and Chief Operating Officer and Shane D. Mattaway, Executive
Vice President and Chief Technical Officer. Given the Company's early stage of
development, it is dependent on its ability to retain and motivate high quality
personnel, especially management and skilled development teams. The Company
maintains $2,000,000 in key man life insurance on Mr. Mattaway. The Company
currently does not intend to secure key man life insurance
8
<PAGE>
on other key personnel. The loss of the services of any of its executive
officers or other key employees could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company's
future success also depends on its continuing ability to attract and retain
additional highly qualified technical personnel. Competition for qualified
personnel is intense and there can be no assurance that the Company will be able
to attract, assimilate or retain qualified personnel in the future. The
inability to attract and retain the necessary technical and other personnel
could have a material adverse effect upon the Company's business, operating
results and financial condition. See "Business-Research and Product Development"
and "-Employees" and "Management."
BENEFITS OF THE OFFERING TO CURRENT SHAREHOLDERS. The Offering will result
in an initial offering price per share of Common Stock substantially in excess
of the net tangible book value per share of Common Stock. In addition, the
8,151,387 shares of Common Stock held by existing shareholders, including the
452,855 shares of Common Stock to be issued upon exercise of the Motorola
Warrant (which will represent, in the aggregate, approximately 77% of the
outstanding Common Stock after completion of this Offering), were acquired for
an effective cash consideration of $11,199,407, or an average of $1.37 per
share, as compared to new investors who will by paying $21,000,000 or an initial
public offering price of $8.75 per share for the 2,400,000 shares of Common
Stock offered hereby, and which will represent approximately 23% of the
outstanding Common Stock after completion of this Offering. Accordingly,
existing shareholders will realize an effective appreciation of $7.38 per share
of Common Stock in the value of their shares as a result of this Offering. See
"Dilution." The Offering will also result in a public market for the Common
Stock, which will be a benefit to affiliates and non- affiliates of the Company
alike because prior to the Offering there had been no public market for the
Common Stock.
UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS. The Company's
success will depend in part on its ability to obtain patent protection for its
products, preserve its trade secrets and operate without infringing upon the
proprietary rights of other parties. The Company has filed ten U.S. utility
patent applications, eight U.S. provisional patent applications and one Patent
Cooperation Treaty patent application relating to various aspects of the
WebPhone client and server software, the virtual circuit switching technology,
and techniques for resolving dynamically assigned Internet Protocol addresses.
There can be no assurance that patent applications to which the Company holds
rights will result in the issuance of patents, or that any issued patents will
provide commercially significant protection to the Company's technology. In
addition, there can be no assurance that others will not independently develop
substantially equivalent proprietary information not covered by patents to which
the Company owns rights or obtain access to the Company's know-how, or that
others will not claim to have or will not be issued patents which may prevent
the sale of one or more of the Company's products. In particular, Elk
Industries, Inc. ("Elk Industries") has asserted in a letter to NetSpeak just
prior to the expiration of U.S. Patent No. 4,124,773 owned by Elk Industries,
that the Company's WebPhone client software product infringed the now expired
patent. Given the initial distribution of the Company's WebPhone client software
prior to expiration of the asserted patent, the Company believes any potential
liability related to the allegation will not have a material effect on the
Company's financial position or results of operations. In addition, in May 1997,
the Company received a letter from e-Net, Inc. ("e-Net") alleging that the
Company's WebPhone product infringes U.S. Patent No. 5,526,353 owned by e-Net.
Although there can be no assurance of the outcome of this uncertainty, following
an analysis of the subject patent and the WebPhone product, management believes
the allegations are without merit and that any potential liability related to
e-Net's allegations will not have a material effect on the Company's financial
position or results of operations.
Generally, litigation, which could be costly and time consuming, may be
necessary to determine the scope and validity of others' proprietary rights, or
to enforce any patents issued to the Company, in either case, in judicial or
administrative proceedings. An adverse outcome could subject the Company to
significant liabilities to third parties, require the Company to obtain licenses
from third parties or require the Company to cease product sale and possibly
alter the design of the products. There can be no assurance that any licenses
required under any other third-party patents or proprietary rights would
9
<PAGE>
be made available on acceptable terms, if at all. In addition, the laws of
certain countries may not protect the Company's intellectual property.
The software market has traditionally experienced widespread unauthorized
reproduction of products in violation of manufacturers' intellectual property
rights. Such activity is difficult to detect and legal proceedings to enforce
manufacturers' intellectual property rights are often burdensome and involve a
high degree of uncertainty and costs. The Company's success is also dependent
upon unpatented trade secrets which are difficult to protect. To help protect
its rights, the Company currently requires employees, consultants and strategic
partners to enter into confidentiality agreements that prohibit disclosure of
the Company's proprietary information. The Company also currently requires
employees and consultants to assign to the Company their ideas, developments,
discoveries and inventions. There can be no assurance that these agreements will
provide adequate protection for the Company's trade secrets, know-how, or other
proprietary information in the event of any unauthorized use or disclosures. See
"Business-Patents and Proprietary Rights."
RISKS OF INTERNET DISTRIBUTION. The Company distributes certain of its
client software products through, among other channels, the Internet.
Distributing the Company's products through the Internet makes the Company's
software products more susceptible to unauthorized copying and use than
distribution through conventional means. The Company has allowed, and currently
intends to continue to allow, potential customers to electronically download
from the Internet basic versions of its software for free to evaluate the
Company's products and subsequently order enhanced and other existing or future
products.
POTENTIAL EFFECTS OF GOVERNMENT REGULATION. At present, there are few laws
or regulations that specifically address access to or commerce on the Internet.
The increasing popularity and use of the Internet, however, enhance the risk
that the governments of the United States and other countries in which the
Company sells or expects to sell its products and systems will seek to regulate
computer telephony and the Internet with respect to, among other things, user
privacy, pricing, and the characteristics and quality of products and services.
The Company is unable to predict the impact, if any, that future legislation,
legal decisions or regulations concerning the Internet may have on its business,
financial condition or results of operations.
In March 1996, the America's Carriers Telecommunication Association (the
"ACTA"), a group of telecommunications common carriers, filed a petition (the
"ACTA Petition") with the Federal Communications Commission (the "FCC") arguing
that providers (such as the Company) of computer software products that enable
voice transmission over the Internet (Internet "telephone" services) are
operating as common carriers without complying with various regulatory
requirements and without paying certain charges required by law. The ACTA
Petition argues that the FCC has the authority to regulate both the Internet and
the providers of Internet "telephone" services and requests that the FCC declare
its authority over interstate and international telecommunications services
using the Internet, initiate rule-making proceedings to consider rules governing
the use of the Internet for the provision of telecommunications services, and
order providers of Internet "telephone" software to immediately cease the sale
of such software. The FCC has thus far not granted relief sought under the ACTA
Petition, however, any action taken by the FCC to grant the relief sought by
ACTA or otherwise to regulate use of the Internet as a medium of communication,
including any action to permit local exchange carriers to impose additional
charges for connections used for Internet access, could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business-Government Regulation."
UNCERTAIN ABILITY TO MANAGE RAPID GROWTH. The Company has been rapidly
expanding and expects to continue to expand its management, research and
development, testing, quality control, marketing, sales and customer service and
support operations, as well as its financial and accounting controls, all of
which has placed and is expected to continue to place a significant strain on
the Company. The Company has grown from a development staff of six persons at
December 31, 1995 to 59 employees at March 31, 1997. Failure to integrate new
personnel on a timely basis could have an
10
<PAGE>
adverse effect on the Company's operations. Furthermore, the expenses associated
with expanding the Company's management team and hiring new employees have been
and are being incurred prior to the generation of any significant revenues. If
the Company's management is unable to manage growth effectively, the quality of
the Company's products, its ability to retain key personnel and its business,
financial condition and results of operations could be materially adversely
affected.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. Significant annual and
quarterly fluctuations in the Company's results of operations may be caused by,
among other factors, the volume of revenues generated by the Company's strategic
partners from sales of products and systems incorporating the Company's
technology or products, the mix of distribution channels used by the Company,
the timing of new product announcements and releases by the Company and its
competitors and general economic conditions. There can be no assurance that the
level of revenues and profits, if any, achieved by the Company in any particular
fiscal period will not be significantly lower than in other, including
comparable, fiscal periods. The Company's expense levels are based, in part, on
its expectations as to future revenues. As a result, if future revenues are
below expectations, net income or loss may be disproportionately affected by a
reduction in revenues as any corresponding reduction in expenses may not be
proportionate to the reduction in revenues. As a result, the Company believes
that period-to- period comparisons of its results of operations may not
necessarily be meaningful and should not be relied upon as indications of future
performance. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
POSSIBLE NEED FOR ADDITIONAL CAPITAL. The Company anticipates that, based
on its present plans and assumptions, the net proceeds of this Offering, when
combined with the Company's existing capital resources and anticipated revenues
from operations, will be sufficient to enable it to maintain its current and
planned operations for a period of at least 12 months after consummation of this
Offering. If the Company's estimates or assumptions prove to be incorrect, the
Company may require additional capital. Additional funding, whether obtained
through public or private debt or equity financings, or from strategic
alliances, may not be available when needed or may not be available on terms
acceptable to the Company, if at all. Additional financings may result in
dilution to existing shareholders. Failure to secure needed additional
financing, if and when needed, may have a material adverse effect on the
Company's business, financial condition, and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."
CONCENTRATION OF COMMON STOCK OWNERSHIP. Upon completion of this Offering,
the directors and executive officers of the Company will beneficially own
approximately 38% of the Common Stock (assuming the exercise of stock options
held by such parties). Accordingly, management will have the ability to
influence significantly the Company's affairs and operations following
completion of this Offering including election of the Board of Directors. See
"Principal Shareholders."
SIGNIFICANT DILUTION TO NEW INVESTORS. Purchasers of shares of Common
Stock in the Offering will experience immediate and substantial dilution in net
tangible book value per share from the initial public offering price. Such
dilution at March 31, 1997 would have been equal to $6.31 per share (or 72%) at
an initial public offering price of $8.75 per share.
LACK OF PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE. Prior
to this Offering, there has been no public market for the Common Stock. Although
the Common Stock has been approved for listing on the Nasdaq National Market,
there can be no assurance that an active trading market will develop or be
sustained. The initial public offering price for the Common Stock to be sold in
this Offering will be arbitrarily determined by negotiation between the Company
and the Representative, and does not necessarily bear any relationship to the
Company's asset value, net worth or other established criteria of value, and
should not be considered indicative of the actual value of the Common Stock and
may bear no relationship to the price at which the Common Stock will trade after
completion of this Offering. The market price of the Company's Common Stock is
likely to be highly volatile and could be subject to wide fluctuations in
response to quarterly variations in operating results, losses of significant
customers, announcements of technological innovations or new products by the
Company
11
<PAGE>
and its competitors, changes in financial estimates by securities analysts, or
other events or factors, including the risk factors described herein. In
addition, the stock market has experienced significant price and volume
fluctuations that have particularly affected the market prices of equity
securities of many high technology companies and that often have been unrelated
to the operating performance of such companies. In the past, following periods
of volatility in the market price of a company's securities, securities class
action litigation has often been instituted against such a company. Such
litigation could result in substantial costs and a diversion of management's
attention and resources, which would have a material adverse effect on the
Company's business, operating results and financial condition. See
"Underwriting."
POTENTIAL ADVERSE MARKET EFFECT OF FUTURE SALES OF COMMON STOCK. Upon
completion of this Offering, the Company will have 10,551,387 shares of Common
Stock outstanding. Of these shares, the 2,400,000 shares of Common Stock sold in
this Offering will be freely tradeable without restriction under the Securities
Act of 1933, as amended (the "Securities Act"), except any such shares which may
be acquired by an "affiliate" of the Company. Of the currently outstanding
8,151,387 shares of Common Stock (including the 452,855 shares to be issued upon
exercise of the Motorola Warrant), the holders of 7,924,206 shares have agreed
not to offer, sell or otherwise dispose of such shares for nine months after the
date of this Prospectus without the prior written consent of Josephthal. After
this period, 7,471,351 of the shares subject to this restriction will be
eligible for sale in the public market pursuant to Rule 144 under the Securities
Act, subject to the volume limitations and other restrictions contained in Rule
144. The remaining 452,855 shares of Common Stock subject to the restrictions on
sale will become eligible for public sale under Rule 144 one year from the
consummation of this Offering. The 227,181 shares of Common Stock not subject to
the nine month restriction on sale described above will be eligible for sale
subject to the volume limitations of Rule 144 commencing 90 days after the date
of this Prospectus.
As of the date of this Prospectus, options to purchase 2,382,500 shares of
common stock and a warrant to purchase 207,679 shares of Common Stock are issued
and outstanding. In addition, the Company has granted to Motorola and Creative
certain demand and piggy-back registration rights under the Securities Act with
respect to the shares of Common Stock beneficially owned by them. Future sales
of the shares of Common Stock held by existing shareholders, or the perception
that such sales may occur, could have an adverse effect on the price of the
Common Stock. See "Certain Transactions" and "Shares Eligible for Future Sale."
ANTI-TAKEOVER EFFECT OF PROVISIONS OF ARTICLES OF INCORPORATION, BYLAWS AND
CERTAIN FLORIDA LEGISLATION. The Company's Board of Directors has the authority
to issue up to 1,000,000 shares of "blank-check" preferred stock ("Preferred
Stock"). Accordingly, shares of the Company's Preferred Stock may be issued in
the future without shareholder approval and upon such terms and conditions, and
having such rights, privileges and preferences as the Board of Directors may
determine. Such rights, privileges and preferences could include preferential
voting rights, dividend rights in excess of those provided to holders of Common
Stock, and conversion rights, redemption privileges or liquidation preferences
not available to holders of Common Stock. The rights of holders of Common Stock
will be subject to, and may be adversely affected by, the rights of holders of
any Preferred Stock that may be issued in the future. Although the Company has
no present intention to issue shares of Preferred Stock, any issuance of
Preferred Stock, while potentially providing desirable flexibility in connection
with possible acquisitions and other corporate purposes, could have the effect
of making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. In addition to the foregoing, the 1995
Plan, under which immediately exercisable stock options may be granted in
certain circumstances and the requirement in the Company's Bylaws that
shareholders constituting 50% or more of all or votes entitled to be cast are
needed to call a special meeting, may also have the effect of delaying,
deferring or preventing a change in control of the Company.
In addition, Florida has enacted legislation that may deter or frustrate
takeovers of Florida corporations. The Florida Control Share Act generally
provides that shares acquired in a "control share acquisition" will not possess
any voting rights unless such voting rights are approved by a majority of the
corporation's disinterested shareholders. A "control share acquisition" is an
acquisition, directly or
12
<PAGE>
indirectly, by any person of ownership of, or the power to direct the exercise
of voting power with respect to, issued and outstanding "control shares" of a
publicly held Florida corporation. "Control shares" are shares, which, except
for the Florida Control Share Act, would have voting power that, when added to
all other shares owned by a person or in respect to which such person may
exercise or direct the exercise of voting power, would entitle such person,
immediately after acquisition of such shares, directly or indirectly, alone or
as a part of a group, to exercise or direct the exercise of voting power in the
election of directors within any of the following ranges: (a) at least 20% but
less than 331/3% of all voting power, (b) at least 331/3% but less than a
majority of all voting power; or (c) a majority or more of all voting power. The
Florida Affiliated Transactions Act generally requires supermajority approval by
disinterested shareholders of certain specified transactions between a public
corporation and holders of more than 10% of the outstanding voting shares of the
corporation (or their affiliates). See "Description of Capital Stock."
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS
PROSPECTUS. This Prospectus contains certain forward-looking statements
regarding the plans and objectives of management for future operations,
including plans and objectives relating to the development of the Company's
business. The forward-looking statements included herein are based on current
expectations that involve numerous risks and uncertainties. The Company's plans
and objectives are based on a successful execution of the Company's business
strategy and assumptions that the Company will be profitable, that the market
for packetized voice transmission will not change materially or adversely, and
that there will be no unanticipated material adverse change in the Company's
operations or business. Assumptions relating to the foregoing involve judgments
with respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of the
Company. Although the Company believes that its assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, there can be no assurance that the forward-
looking statements included in this Prospectus will prove to be accurate. In
light of the significant uncertainties inherent in the forward-looking
statements included herein, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives and plans of the Company will be achieved.
NO DIVIDENDS. The Company has not paid any dividends on its Common Stock
and anticipates for the foreseeable future that all earnings, if any, will be
retained for the operation and expansion of the Company's business. See
"Dividend Policy."
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of 2,400,000
shares of Common Stock offered hereby at an initial public offering price of
$8.75 per share are estimated to be approximately $18,530,000 ($21,412,250 if
the Underwriters' over-allotment option is exercised in full), after deducting
the underwriting discount, the non-accountable expense allowance and other
estimated expenses of the Offering payable by the Company.
The Company anticipates that approximately $5,100,000 of the net proceeds
will be used for increased marketing and sales efforts, approximately $6,800,000
will be used for additional research and development efforts and approximately
$2,000,000 for capital expenditures. The balance of the net proceeds will be
used for working capital and other general corporate purposes. Furthermore, from
time to time the Company expects to evaluate possible acquisitions of or
investments in businesses, products and technologies that are complementary to
those of the Company, for which a portion of the net proceeds from this offering
may be used. While the Company engages from time to time in discussions with
respect to potential investments or acquisitions, the Company has no plans,
commitments, or agreements with respect to any such investments or acquisitions.
Pending such uses, the Company intends to invest the net proceeds of this
Offering in short-term, investment-grade, interest-bearing securities.
The Company believes that the net proceeds of this Offering, together with
its existing capital resources and anticipated revenues from operations, will be
sufficient to enable it to maintain its current
13
<PAGE>
and planned operations for a period of at least 12 months after consummation of
the Offering. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
DIVIDEND POLICY
The Company has not paid dividends on its Common Stock and does not intend
to pay dividends for the foreseeable future. The Company intends to retain
earnings, if any, to finance the development and expansion of its business.
Payment of dividends in the future will depend upon, among other things, the
Company's ability to generate earnings, need for capital and overall financial
condition.
DILUTION
As of March 31, 1997, the net tangible book value of the Company was
$4,693,968 or $0.61 per share. Net tangible book value represents the amount of
total assets, less any intangible assets and total liabilities. After giving
effect to (i) the exercise of the Motorola Warrant and the receipt of the
exercise price of $5.50 per share therefrom and (ii) the sale of the 2,400,000
shares of Common Stock offered hereby (at an initial public offering price of
$8.75 per share, and after deducting the underwriting discount, the
non-accountable expense allowance and other estimated expenses of this
Offering), the pro forma net tangible book value as of March 31, 1997 would have
been $25,714,671 or $2.44 per share. This represents an immediate increase in
net tangible book value of $1.83 per share to existing shareholders and an
immediate dilution of $6.31 per share to investors in the Offering. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price .............................. $8.75
Net tangible book value per share at March 31, 1997 ............... $0.61
Increase attributable to exercise of Motorola Warrant ............... 0.27
Increase attributable to new investors(1) ........................ 1.56
------
Pro forma net tangible book value per share after the offering ...... 2.44
------
Dilution to new investors(2) ....................................... $6.31
======
</TABLE>
If the Over-Allotment Option is exercised in full, the pro forma net
tangible book value per share of Common Stock after the Offering would be $2.62,
which would result in dilution to new investors in this Offering of $6.13 per
share of Common Stock.
The following table shows, at March 31, 1997, a comparison of the total
number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price paid per share by existing shareholders
and to be paid by investors who purchase shares of Common Stock in the Offering
(at an initial public offering price of $8.75 per share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- --------------------------
AVERAGE PRICE
NUMBER PERCENT DOLLARS PERCENT PER SHARE
------------ ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing Shareholders ............ 7,698,532 73% $ 8,708,704 27% $1.13
Exercise of Motorola Warrant ...... 452,855 4% 2,490,703 8% 5.50
New Investors(1) .................. 2,400,000 23% 21,000,000 65% 8.75
---------- ----- ------------ ----- -------
Total(2) ........................ 10,551,387 100% $32,199,407 100%
========== ===== ============ =====
</TABLE>
- ----------------
(1) Includes 228,571 shares of Common Stock in which ACT has indicated an
interest in purchasing in this Offering. See "Business-Strategic Alliances."
(2) Does not give effect to the exercise of (i) the Over-Allotment Option; (ii)
the Advisors' Warrants to purchase 240,000 shares of Common Stock,
exercisable at 120% of the initial public offering price per share; (iii) an
outstanding warrant to purchase 207,679 shares of Common Stock exercisable
at a price of $5.05 per share; and (iv) stock options granted under the 1995
Plan to purchase 2,263,500 shares of Common Stock at exercise prices ranging
from $1.00 to $7.00 per share and 119,000 shares of Common Stock at an
exercise price equal to the price per share in this Offering.
14
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1997, (i) the actual
capitalization of the Company, (ii) the pro forma capitalization after giving
effect to the exercise of the Motorola Warrant and the receipt of the exercise
price of $5.50 per share therefrom and (iii) the pro forma capitalization as
adjusted to give effect to the sale of 2,400,000 shares of Common Stock offered
by the Company (at an initial public offering price of $8.75 per share and after
deducting the underwriting discount, the non- accountable expense allowance and
other estimated expenses of the Offering) and the receipt of the net proceeds
therefrom. The table should be read in conjunction with the consolidated
financial statements and the related notes appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
-------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------------- --------------- -------------
<S> <C> <C> <C>
Stockholders' equity:
Preferred Stock, $.01 par value, 1,000,000 shares
authorized; none outstanding, actual,
pro forma and as adjusted .............................. $ - $ - $ -
Common Stock, $.01 par value, 25,000,000 shares authorized;
7,698,532 shares (actual); 8,151,387 shares (pro forma);
10,551,387 shares (pro forma as adjusted) issued and
outstanding(1) .......................................... 76,985 81,514 105,514
Additional paid-in capital .............................. 9,110,105 11,596,279 30,102,279
Accumulated deficit ....................................... (4,493,122) (4,493,122) (4,493,122)
------------ ------------ ------------
Total stockholders' equity .............................. $ 4,693,968 $ 7,184,671 $ 25,714,671
============ ============ ============
</TABLE>
- ----------------
(1) Does not give effect to the exercise of (i) the Over-Allotment Option; (ii)
the Advisors' Warrants to purchase 240,000 shares of Common Stock,
exercisable at 120% of the initial public offering price per share; (iii) an
outstanding warrant to purchase 207,679 shares of Common Stock exercisable
at a price of $5.05 per share; and (iv) stock options granted under the 1995
Plan to purchase 2,263,500 shares of Common Stock at exercise prices ranging
from $1.00 to $7.00 per share and 119,000 shares of Common Stock at an
exercise price equal to the price per share in this Offering.
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected statement of operations data for the Predecessor for the
period from May 15, 1995 (Predecessor's inception) to December 18, 1995, and for
the Successor for the period from December 8, 1995 (inception) to December 31,
1995, and the year ended December 31, 1996 and the selected actual balance sheet
data of the Successor as of December 31, 1995 and 1996 set forth below have been
derived from the consolidated financial statements of the Predecessor and the
Company, which have been audited by Deloitte & Touche LLP, independent auditors,
as stated in their report, which is included elsewhere in this Prospectus. The
selected statement of operations data for the three months ended March 31, 1996
and 1997 and the selected actual balance sheet data as of March 31, 1997 set
forth below have been derived from the Company's unaudited interim consolidated
financial statements, included elsewhere in this Prospectus, which in the
opinion of management, reflect all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the financial position
and results of operations for the periods presented. The selected consolidated
financial data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and notes thereto included elsewhere in
the Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR(1) SUCCESSOR(1)
------------------ ---------------------------------------------------------------
THREE MONTHS
MAY 15, 1995 DECEMBER 8, 1995 YEAR ENDED ENDED MARCH 31,
TO DECEMBER 18, TO DECEMBER 31, DECEMBER 31, ---------------------------
1995 1995 1996 1996 1997
------------------ ------------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues ................................. $ - $ - $ 867,117 $ 90,681 $ 903,766
Operating expenses:
Cost of revenues ........................... - - 47,129 3,752 43,522
Research and development .................. 175,038 28,301 2,255,644 327,947 1,147,402
Sales and marketing ........................ - - 722,353 91,604 399,185
General and administrative .................. 5,644 57,200 836,791 85,168 312,099
Purchased research and development(2) ...... - 556,982 - - -
----------- ----------- ------------ ---------- ----------
Total operating expenses .................. 180,682 642,483 3,861,917 508,471 1,902,208
Loss from operations ........................ (180,682) (642,483) (2,994,800) (417,790) (998,442)
Interest and other income .................. - - 172,096 17,423 57,317
----------- ----------- ------------ ---------- ----------
Loss before income taxes ..................... (180,682) (642,483) (2,822,704) (400,367) (941,125)
Income taxes ................................. - - 43,000 - 43,810
----------- ----------- ------------ ---------- ----------
Net loss .................................... $ (180,682) $ (642,483) $ (2,865,704) $ (400,367) $ (984,935)
=========== =========== ============ ========== ==========
Net loss per share ........................... $ (0.35) $ (0.05) $ (0.12)
============ ========== ==========
Shares used in computing net loss per share(3) 8,197,568 8,197,568 8,197,568
============ ========== ==========
</TABLE>
<TABLE>
<CAPTION>
SUCCESSOR(1)
----------------------------------------------------------
DECEMBER 31, MARCH 31, 1997
--------------------------- ----------------------------
1995 1996 ACTUAL PRO FORMA(4)
----------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ...... $483,084 $6,294,697 $4,869,565 $7,360,268
Working capital ............... 390,868 4,303,825 2,711,290 5,201,993
Total assets .................. 555,566 8,277,615 7,411,244 9,901,947
Shareholders' equity ......... 447,517 5,678,903 4,693,968 7,184,671
</TABLE>
- ----------------
(1) NetSpeak acquired ITC by issuing 2,500,000 shares of common stock, valued at
$500,000, in exchange for all of the outstanding shares of ITC. The
acquisition was accounted for as a purchase, and the purchase price was
allocated to the assets acquired, including purchased research and
development in process, and liabilities assumed based upon their fair value
on the date of acquisition. The financial information identified herein as
for the Predecessor is for ITC for the period May 15, 1995 (inception) to
December 18, 1995, the date of its acquisition by NetSpeak. The financial
information identified herein as for the Successor is for NetSpeak
(including ITC on a consolidated basis from the date of acquisition) as of
December 31, 1995 and 1996 and March 31, 1997 and for the period from
December 8, 1995 (inception) to December 31, 1995, for the year ended
December 31, 1996 and the three months ended March 31, 1996 and 1997.
(2) In connection with the acquisition of ITC purchased research and development
of $556,982 was charged to expense.
(3) See Note 1 of "Notes to Consolidated Financial Statements" for an
explanation of the determination of the number of shares and share
equivalents used in computing the per share amounts. Does not give effect to
the exercise of (i) the Over-Allotment Option; (ii) the Advisors' Warrants
to purchase 240,000 shares of Common Stock, exercisable at 120% of the
initial public offering price per share; and (iii) stock options to purchase
1,710,000 shares of Common Stock granted under the 1995 Plan prior to
February 1, 1996, which are not included because such options were issued
prior to the 12 months immediately preceding the Offering and the effect on
net loss per share would not be anti-dilutive.
(4) Gives effect to exercise of the Motorola Warrant and the receipt of
$2,490,703 or $5.50 per share therefrom.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The Company was incorporated on December 8, 1995 and acquired ITC on
December 18, 1995 by issuing 2,500,000 shares of Common Stock valued at
$500,000. ITC was incorporated on May 15, 1995 and, prior to its acquisition,
ITC's activities consisted of research and development of telephony
communications software for use on the Internet and LANs and WANs. From December
8, 1995 to December 31, 1995 the Company's operating activities related
primarily to raising initial capital and continuing ITC's research and
development. The Company released its first product in February 1996 and, for
accounting purposes, emerged from the development stage during 1996. Since
inception, the Company has raised an aggregate of $8,652,090, net of offering
costs, through private offerings of its equity securities. See "Liquidity and
Capital Resources."
The Company generates revenues from products, licenses and fees for
services provided. The Company's products are licensed primarily to telephone
companies, network service providers, corporate customers and directly to
individual client software end-users. Service revenues consist of customer
support and engineering fees.
Product and license revenues are generally recognized upon shipment,
provided that there are no significant post-delivery obligations and that
payment is due within one year. If customer acceptance is required, revenues are
recognized upon customer acceptance. Customer support revenues are recognized
over the term of the support period, which is typically one year. Engineering
fees are recognized upon customer acceptance or over the period in which
services are provided if customer acceptance is not required. All research and
development costs to date have been expensed as incurred.
The Company has only a limited operating history upon which an evaluation
of the Company and its prospects can be based. As of March 31, 1997, the Company
had an accumulated net loss of $4,493,122. The limited operating history of the
Company makes its future results of operations difficult to predict. In
addition, the Company's operating results may fluctuate significantly in the
future as a result of a variety of factors such as the introduction of new
products or services by the Company or its competitors, the amount and timing of
capital expenditures and other costs relating to the expansion of the Company's
operations, the budgeting cycles of potential customers, technical difficulties
with respect to the use of products developed by the Company and general
economic conditions. See "Risk Factors."
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AS COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1996 AND THE YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO THE PERIOD
FROM DECEMBER 8, 1995 (INCEPTION) TO DECEMBER 31, 1995 COMBINED WITH THE
PREDECESSOR FOR THE PERIOD FROM MAY 15, 1995 (PREDECESSOR'S INCEPTION) TO
DECEMBER 18, 1995. UNLESS OTHERWISE INDICATED THE DISCUSSION OF THE COMBINED
AMOUNTS IS REFERRED TO AS "1995" HEREIN.
Net revenues for the three months ended March 31, 1997 were $903,766 as
compared to $90,681 for the three months ended March 31, 1996. The increase in
net revenues was primarily due to fees for engineering services and license fees
received from Creative, a strategic partner of the Company, for providing it
with the right to distribute certain products using the Company's WebPhone
client software. Net revenues for the year ended December 31, 1996 were
$867,117. The Company had no revenues during 1995 when its initial products were
in the process of development. Net revenues during 1996 were primarily generated
from license fees from Creative and license fees paid by individual client
software end-users. Creative, the Company's largest customer, accounted for 76%
of net revenues for the three months ended March 31, 1997 and 44% of net
revenues for the year ended December 31, 1996; Creative is expected to continue
to be one of the Company's largest customers in the near future. As of March 31,
1997, the Company had unearned revenue of $1,596,376 of which approximately
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$1,215,000 represents the advance payments for product licenses and maintenance
agreements, and approximately $320,000 represents the advance payment under an
agreement to provide engineering services. These agreements, entered into with
Creative, do not require any future customer acceptance. See "Business-Strategic
Alliances."
Cost of revenues primarily consist of direct product costs, costs of
engineering services and certain costs associated with providing customer
support. Cost of revenues for the three months ended March 31, 1997 was $43,522
as compared to $3,752 for the three months ended March 31, 1996. The increase in
cost of revenues was primarily due to costs associated with providing
engineering services. Cost of revenues was $47,129 for the year ended December
31, 1996. The Company had no cost of revenues during 1995. The Company may
resell third party computer hardware and software platforms with its gateway
products and business systems, but it anticipates that such amounts will not
become a significant portion of the Company's sales mix. As a result, the
Company anticipates that cost of revenues will continue to remain relatively
consistent as a percentage of net revenues as the Company's sales mix is
comprised primarily of software based products. Should the Company begin to sell
a significant amount of third party computer platforms or elect to manufacture
and sell certain specialized computer hardware components that it is currently
designing, cost of revenues would increase as a percentage of net revenues.
Research and development expenses primarily consist of employee
compensation, computer hardware and software utilized in product development,
and equipment depreciation. Research and development expenses for the three
months ended March 31, 1997 were $1,147,402 as compared to $327,947 for the
three months ended March 31, 1996. Research and development expenses were
$2,255,644 for the year ended December 31, 1996 and $203,339 during 1995. The
increases in research and development expenses were primarily the result of an
increase in employee compensation due to the expansion of the engineering staff
to 29 employees at March 31, 1997 from 10 employees at March 31, 1996. The
Company also provided incentive bonuses to the engineering staff during the
three months ended March 31, 1997 in order to expedite the development of
certain of its products. All research and development costs have been expensed
as incurred. Although research and development for the Company's initial gateway
products and business systems was substantially completed by March 31, 1997, the
Company intends to increase research and development expenses in future periods
to perform product enhancements and new product development to establish and
maintain a competitive advantage. The Company currently estimates that research
and development expenses for 1997 will be approximately $5,000,000 to
$6,000,000. In connection with the acquisition of ITC, $556,982 of purchased
research and development was charged to expense in 1995. See Note 2 to the
consolidated financial statements.
Sales and marketing expenses primarily consist of employee compensation,
travel expenses, trade shows and the costs of promotional materials. Sales and
marketing expenses for the three months ended March 31, 1997 were $399,185 as
compared to $91,604 for the three months ended March 31, 1996. Sales and
marketing expenses were $722,353 for the year ended December 31, 1996. The
Company had no sales and marketing expenses during 1995. The increases in sales
and marketing expenses were primarily due to the creation and expansion of the
Company's sales and marketing department through the addition of sales,
marketing and customer support personnel to 22 employees at March 31, 1997 from
15 employees at March 31, 1996. The Company has also continuously expanded its
promotional and marketing activities of its products and systems. The Company
intends to continue to intensify and expand its sales and marketing efforts and,
as a result, intends to significantly increase sales and marketing expenses in
future periods.
General and administrative expenses for the three months ended March 31,
1997 were $312,099 as compared to $85,168 for the three months ended March 31,
1996. General and administrative expenses were $836,791 for the year ended
December 31, 1996 and $62,844 during 1995. The increases in general and
administrative expenses were due to the addition of finance and administrative
personnel, professional services primarily associated with filing patent
applications and office expenses as a result of the expansion of the Company's
corporate infrastructure. The Company intends to increase general and
administrative expenses in future periods in order to continue to expand its
infrastructure.
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Income taxes for the three months ended March 31, 1997 and the year ended
December 31, 1996 were $43,810 and $43,000, respectively. Such taxes were the
result of income taxes paid to the Singapore government related to license fees
received pursuant to the agreement with Creative. The Company paid no income
taxes for the three months ended March 31, 1996 and during 1995.
As of December 31, 1996, the Company had approximately $3,254,000 of
federal and state net operating loss carryforwards which, if not utilized, will
begin to expire in 2009. Under the Tax Reform Act of 1986, the amounts of and
the benefits from net operating loss carryforwards may be impaired in certain
circumstances. Events which may cause such limitations in the amount of net
operating losses that the Company may utilize in any one year include, but are
not limited to, a cumulative ownership change of more than 50% over a three year
period. The effect of any limitation, if imposed, is not expected to be
material. As of December 31, 1996, the Company has provided a valuation
allowance for the full amount of the deferred tax asset resulting from the net
operating loss carryforwards due to the uncertainty as to the utilization of the
net operating loss carryforwards, primarily as a result of considering such
factors as the Company's limited operating history and the operating losses
incurred to date. See Note 7 to the consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Company had $4,869,565 in cash and cash
equivalents. The Company does not currently have any available lines of credit.
Since inception, the Company has financed its operations through the sale of
equity securities in private transactions as described below.
Net cash used in operating activities during the three months ended March
31, 1997 was $999,130 and was primarily related to continued research and
development and the expansion of the Company's sales, marketing, finance and
administrative infrastructure. Included in accounts receivable at March 31, 1997
was $117,000 primarily related to license fees from Creative.
Net cash of $1,033,643 was used in operating activities during the year
ended December 31, 1996 and was primarily attributable to research and
development and building the corporate infrastructure, partially offset by
unearned revenue of $2,242,011 resulting from fees paid in advance for licensed
goods and engineering services not yet shipped and performed, respectively.
Included in accounts receivable at December 31, 1996 was $300,000 related to
license fees from Creative.
Net cash used for investing activities during the three months ended March
31, 1997 and the year ended December 31, 1996 was $377,102 and $1,216,834,
respectively. The expenditures primarily related to purchases of computer
equipment.
Net cash provided by financing activities from inception (December 8, 1995)
to March 31, 1997 was $8,652,090 and was attributable to private offerings of
equity securities, including $590,000 in the initial capitalization of the
Company. Additionally, the Company has paid $48,900 in costs related to this
Offering.
In January and February of 1996, the Company sold 1,204,000 shares of
Common Stock at $2.50 per share in a private offering raising $2,992,028, net of
offering costs. In January 1996, the Company issued stock options under the 1995
Plan to purchase 250,000 shares of Common Stock for $2.50 per share to a
consulting firm, which assisted the Company with its private offering.
In June 1996, the Company issued 207,679 shares of Common Stock to Creative
at a price of $5.05 per share raising $943,698, net of offering costs. The
Company also issued Creative a 21 month warrant to purchase up to an additional
207,679 shares of Common Stock at a price of $5.05 per share, which warrant is
only exercisable if Creative distributes, during a specified period, a
predetermined quantity of the Company's Internet telephone client software
product licensed to Creative.
In August 1996, the Company issued 769,853 shares of Common Stock and the
Motorola Warrant to purchase up to an additional 452,855 shares of Common Stock
at a price of $5.50 per share for a six
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year period expiring in August 2002 to Motorola raising $3,993,864, net of
offering costs. In the event the Company consummates the Offering or any other
underwritten public offering of its Common Stock at a price of at least $7.00
per share resulting in the receipt by the Company of net proceeds of not less
than $10,000,000, the Company, at its option, upon not less than 20 business
days notice given prior to the planned closing date of such public offering, may
require Motorola to exercise the Motorola Warrant, provided, however, that
within 15 business days of receipt of the Company's notice, Motorola may elect
to cancel the Motorola Warrant unexercised. Motorola has advised the Company
that it will exercise the Motorola Warrant in full upon consummation of this
Offering, provided that the Offering meets the criteria set forth above.
The Company has no material commitments other than those under office and
equipment leases. During the 12 months after consummation of this Offering, the
Company expects to incur approximately $2,000,000 in capital expenditures
consisting primarily of computer-related equipment. The Company anticipates
that, based on its present plans and assumptions, the net proceeds of the
Offering combined with the Company's existing capital resources and anticipated
revenues from operations will be sufficient to enable it to maintain its current
and planned operations for a period of at least 12 months after consummation of
the Offering. If the Company's estimates or assumptions prove to be incorrect,
the Company may require additional capital. Additional funding, whether obtained
through public or private debt or equity financing, or from strategic alliances,
may not be available when needed or may not be available on terms acceptable to
the Company. Additional financings may result in dilution to existing
shareholders. Failure to secure needed additional financing, if and when needed,
may have a material adverse effect on the Company's business, financial
condition and results of operations. See "Risk Factors-Possible Need for
Additional Capital."
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BUSINESS
OVERVIEW
NetSpeak develops, markets, licenses, and supports a suite of intelligent
software modules which enable real-time, concurrent interactive voice, video and
data transmission over a packetized data network such as the Internet, LANs and
WANs. The Company believes that its technology is strategically positioned to
capitalize on the rudimentary shift in corporate telecommunications philosophy
as businesses seek to expand the functionality of their communication systems as
well as optimize their use of packetized data networks. Netspeak is currently
marketing a user-friendly core communications technology which enables, in a
cost-effective manner, corporations and other users to enhance the role of their
packetized data networks to support concurrent voice, video and data
transmission. NetSpeak believes that as potential users become increasingly
educated as to the benefits of integrating the two networks, significant revenue
opportunities for the Company will be generated.
The Company's software uses patent-pending intelligent virtual circuit
switching technology to provide gateways between packetized data networks and
traditional voice transmission networks. The technology allows users to
integrate into packetized data networks a variety of features and functions
commonly found in traditional voice transmission networks, including ACD,
multi-point conferencing, interactive voice response services, messaging
services and least cost routing, as well as to expand network functionality by
offering additional features such as concurrent voice and data transmission and
video conferencing. The Company's patent-pending intelligent virtual circuit
switching technology provides intelligent call routing to enable users to
transparently communicate with each other on a point-to-point basis. The Company
believes that its products and systems are designed to allow customers to
integrate NetSpeak's technology into their existing network infrastructures
without the need for significant upgrading, and can ultimately provide a
complete software-based solution for the delivery of concurrent real-time
interactive voice, video and data communications over packetized data networks.
In order to facilitate and accelerate the acceptance of NetSpeak's
technology as well as enhance the marketing and distribution of its products and
systems, the Company has established a number of strategic alliances with
various telecommunications and computer industry leaders. Under certain of these
agreements, either the Company's technology is integrated into products which
are marketed by its strategic partners or the Company's products and systems are
marketed and distributed by its strategic partners through the various
distribution channels. The Company believes that these strategic alliances also
offer access to its strategic partners' leading edge technologies, as well as
insights into market trends and product development.
In August 1996, the Company established a strategic alliance with Motorola
pursuant to which Motorola made a minority investment in the Company and the
Company granted Motorola a right of first negotiation on licenses of the
Company's technology as it applies to the cellular, cable and wireless
communications industries. Motorola, through its affiliates, is also conducting
a test trial of a system which uses the Company's products and systems and those
of Motorola.
Beginning in June 1996, the Company also entered into a strategic alliance
with Creative, a world leader in the manufacture and distribution of audio cards
and multimedia computer peripherals. Pursuant to such alliance, Creative made a
minority investment in the Company. NetSpeak granted Creative a world-wide
license to market, distribute and bundle NetSpeak's WebPhone client (or end-
user) software under the Creative brand name in the retail distribution channel
and the Company and Creative are jointly developing various other
Internet-related software applications which use the Company's and Creative's
proprietary technologies, in such areas as multimedia applications for IP based
networks.
In May 1997, the Company entered into a Technology Development and License
Agreement with ACT, an industry-leading provider of WAN access products which
utilize frame relay systems to
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integrate voice, data and facsimile communications. Under the agreement, the
Company will adapt certain of its software modules to execute on ACT's hardware
products. In addition, the Company granted ACT a license to distribute a variety
of the Company's products to ACT customers and ACT will integrate their
respective technologies into a bundled solution to be distributed and marketed
by both the Company and ACT. The Company has entered into a related agreement
pursuant to which ACT has indicated that it has an interest in purchasing
$2,000,000 of Common Stock in this Offering (228,571 shares or approximately 10%
of the shares of Common Stock offered hereby).
In August 1996, the Company established a strategic alliance with Rockwell,
an industry leader in medium to high end ACD systems. As part of this alliance,
the Company's gateway products and ACD systems are being integrated into
Rockwell's ACD systems. Beginning in November 1996, the Company entered into a
strategic alliance with Infonet, one of the largest commercial data network
carriers in the world. Pursuant to such alliance, the Company will integrate its
technology with Infonet's existing global data network, to enhance concurrent
voice and data transmission over the network.
In April 1997, the Company entered into a non-binding memorandum of
understanding with Fujitsu. In May 1997, the Company entered into an OEM
agreement, pursuant to which Fujitsu will integrate, distribute and resell the
Company's products to Fujitsu customers and undertake joint development efforts
with the Company.
In March 1997, the Company entered into a non-binding memorandum of
understanding with TRDM, a subsidiary of TCL, the Australian telecommunications
carrier. In May 1997, the Company entered into a development and marketing
agreement pursuant to which the Company and TRDM intend to integrate their
respective existing technologies into a product which facilitates increased call
completion rates for telecommunications carriers. The jointly developed product
is intended to be marketed by both the Company and TRDM to other
telecommunications carriers, including TCL.
MCI, one of the nation's largest long-distance carriers, has initially
licensed and used limited quantities of the Company's products in MCI's new
VAULT technology, designed to bridge traditional telephone networks with
packetized data networks such as the Internet. MCI has subsequently selected the
Company as one of its suppliers for components of its VAULT technology products
and services, and is currently negotiating a volume software license agreement
with the Company. The Company intends to establish additional strategic
alliances.
In addition to marketing its technology products and systems with its
strategic partners, NetSpeak has begun to market its products directly to
end-users, including telephone companies, cable companies, and other common
carriers, large business enterprises, ACD manufacturers and other OEMs,
governmental and educational entities, as well as to distributors, such as SIs
and VARs. To date, such marketing efforts have been limited to direct contacts
with a number of these customers. NetSpeak is also marketing its WebPhone client
software products over the Internet, by advertising in computer periodicals and
through distribution agreements with over 700 ISPs worldwide. The Company is
currently developing an in-house marketing and sales infrastructure.
The Company's strategy is to become an industry leader in providing
business solutions for concurrent real-time interactive voice, video and data
transmission over packetized data networks. The Company intends to achieve its
goal by (i) establishing strategic alliances to facilitate technological
acceptance and enhance the marketing and distribution of its products and
systems; (ii) expanding its internal marketing and sales efforts; and (iii)
continuing research and development to enhance existing product applications and
develop new applications.
INDUSTRY BACKGROUND
Two fundamentally different switching technologies exist that enable
digital communications: circuit switching and packet switching. Since the
differing performance requirements for voice transmission and data transmission
impose different design priorities, historical development of voice
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communication systems such as the telephone, and its related business systems,
such as a corporate business telephone system ("PBX") and ACD, has centered on
circuit switching technology, while that of data communications systems such as
LANs and WANs and the Internet have primarily relied upon packet switching
technology. As a result, separate cultures and networking fabrics have evolved
for the design, development, application, and support for real-time voice
communications (circuit switched networks) and non real-time data transmission
(packetized data networks).
High quality, real-time interactive voice communications must emulate a
reasonable approximation of a face to face conversation between two
geographically separated people. To accomplish this, the modulated signal
representing the spoken words must (i) have enough information to re-create a
recognizable voice by using a fixed bandwidth, (ii) be delivered with minimum
delay by using a dedicated path in order not to impede interactive
communications, (iii) be delivered at a constant rate in order to avoid
distortion to the ear of the listener and (iv) not be subject to significant
loss of information en route. These capabilities are inherent in circuit
switched networks such as the public switching telephone network (the "PSTN")
but must be created when using packetized data networks for voice transmission.
The design of private Intranets such as LANs and WANs, and that of the
Internet generally is fundamentally different from the architecture of
conventional voice transmission networks. Each of these packetized data networks
breaks down data into a series of small, discrete packets for transmission. Each
packet of data travels independently through the network to the destination
address where application software reassembles the packets to recreate the
original data set. As currently designed, packetized data networks handle
congestion by discarding or delaying packets or by sending packets from the same
source along different pathways, which can result in packets which were sent in
sequence arriving out of order. If the transmitted data packet represents
real-time voice, the listener may perceive a gap or "choppiness" as a result of
missing, late-arriving or out-of-sequence packets.
As the work environment increasingly demands faster access to greater
volumes of information from multiple sources, the individual capabilities of
separate circuit switched and packetized data networks are being seriously
challenged. The response from circuit switch manufacturers has been the
development of new switching system architectures that make it easier for
separate, application-specific software to control the circuit switching
function, and to seek to maintain the market value of circuit switched systems
by increasingly using voice applications processes to offer additional services
such as voice mail, interactive voice response and ACD. The intensity of
technical activity involved in further integrating the interaction of specific
application processes and information delivery systems has given computer
telephony integration the status of a technology in its own right.
A growing number of businesses and other organizations have recognized the
Internet as a network which enables an enhanced form of public communication. In
order to create conditions amenable to satisfactory commerce and business
communications on the Internet, the same kinds of services offered in
communicating with customers via traditional voice transmission networks such as
the PSTN must be available when communicating with customers via the Internet.
The Internet represents primarily an access to potential markets that
cannot be efficiently exploited if a separate, parallel infrastructure is
required for its service. Its evolution, however, has supported the development
of technologies such as those of NetSpeak that have made feasible the
integration of the two different architectures of circuit switched and
packetized data networks in such a way that communications between the two are
meaningful, and such that each can selectively take advantage of the special
capabilities of the other.
There are many applications currently utilizing traditional telephony that
could benefit from various of the capabilities available from data
communications networks such as contemporaneous transmission of data and voice
over a single system. The general difficulty in adapting some of these
capabilities to the circuit switching environment lies in the limited expertise
of those in the traditional telephony environment in developing and applying the
desired adaptations on the one hand, and the
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limited systems and application expertise necessary for those in the packetized
data network environment to recognize the problems, understand the
opportunities, or design appropriate solutions on the other.
The introduction and rapid development of IP technology revolutionized the
deployment and use of data communications networks such as the Internet. Even
though this technology is in its infancy, it is already creating a growing
demand for the integration of features and functions available in traditional
voice communications networks into the packetized data network environment.
NETSPEAK'S CORE COMMUNICATIONS TECHNOLOGY
NetSpeak has developed a core communications technology which addresses the
challenges associated with real-time interactive voice transmission over
packetized data networks. NetSpeak's technology surmounts the difficulties
inherent in real-time interactive voice transmissions in the packetized data
network environment and permits the integration into this environment of
features commonly found in traditional voice transmission networks, as well as
enabling the concurrent voice, video and data transmission over packetized data
networks, thereby expanding the functionality of packetized data networks. For
example, NetSpeak's core communications technology will permit a call placed
over the Internet to the service department of a customer to be transferred from
the Internet to the customer's LAN, route the call to the next available service
agent, provide the service agent with information regarding the call and
transfer the call to the customer's PBX for answer by the service agent.
NetSpeak's technology also facilitates the concurrent transmission of voice and
data over a packetized data network. NetSpeak's core communications technology
is the platform utilized in all of its products and systems. Among other
features and functions, NetSpeak's core communications technology:
/bullet/ permits encrypted, two-way voice transmission. NetSpeak's
software manages different types of information streams, using
different priorities, to optimize use of available bandwidth capacity,
while providing the most sensitive applications such as voice
transmission with first priority to that capacity, thereby minimizing
the choppiness typically associated with voice transmission over
packetized data networks. Encryption allows for secure communications
even over packetized data networks, such as the Internet;
/bullet/ allows users to connect to other users in a point-to-point
fashion, rather than through an intermediate routing mechanism.
NetSpeak's intelligent virtual switching technology implements a
patent-pending technique for address resolution which translates
circuit switching addresses to IP network addresses, thereby
eliminating the need to know an end-user's packetized network address;
/bullet/ provides dynamic and fixed IP address mixing which can create
networks that carry traffic from both fixed-address networks such as a
LAN and dynamically-assigned address networks such as the Internet to
form a seamless communications network (a "network of networks")
infrastructure. This infrastructure can operate over any physical
network that support the IP protocol;
/bullet/ uses a common object-oriented code base that allows the
technology to be integrated into other Netspeak and third party
products;
/bullet/ operates on multiple operating systems and can be ported to
various operating platforms; and
/bullet/ can be embedded in firmware, including portable and handheld
devices.
NetSpeak is conducting ongoing research and development to further enhance
its core technology, such as developing the plug-and-play processes that allow
for the addition of new software components such as voice and video codecs,
encryption "engines", animation controllers, user interfaces and communications
protocols, and providing dynamic swapping of these components.
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NETSPEAK'S STRATEGY
The Company's goal is to use its core communications technology to become
an industry leader in providing business solutions for concurrent real-time
interactive voice transmission over packetized data networks while seemlessly
integrating the features and functions of existing voice transmission networks
into the packetized data networking environment. The Company's strategy includes
the following key elements:
ESTABLISH STRATEGIC ALLIANCES TO FACILITATE TECHNOLOGICAL ACCEPTANCE
In order to facilitate and accelerate the acceptance of NetSpeak's
technology, as well as enhance marketing and distribution of its products and
systems, the Company has established a number of strategic alliances with
various telecommunications and computer industry leaders. Pursuant to certain of
these agreements, either the Company's technology is integrated into products
which are marketed by its strategic partners or the Company' s products and
systems are marketed and distributed by its strategic partners through various
distribution channels. The Company believes that these strategic alliances also
offer access to its partners' leading edge technologies. To date, the Company
has established strategic alliances with Motorola, Creative, ACT, Rockwell,
Infonet, Fujitsu, Telstra and MCI and intends to seek to establish additional
strategic alliances.
EXPAND INTERNAL MARKETING AND SALES EFFORTS
The Company has recently hired a Vice President of Sales and a Vice
President of Marketing to develop an infrastructure to facilitate distribution
of the Company's technology, products and services. The Company is presently
developing an in-house sales force and expanding its direct marketing and sales
efforts to end-users, including telephone companies, cable companies and other
common carriers, large business enterprises, ACD manufacturers and other OEMs,
and governmental and educational entities, as well as to SIs, VARs and other
distributors.
EDUCATE THE MARKETPLACE
Given the historical use of different infrastructures for voice and data
transmission, NetSpeak believes that it needs to educate its potential customer
base on how its core communications technology can facilitate the consolidation
of these infrastructures by integrating capabilities and features commonly found
in traditional voice transmission networks into the packetized data network
environment. The Company intends to expand the number of marketing programs it
conducts in this regard, including advertising in trade journals and similar
media, attendance at industry trade shows and direct mail campaigns. In
addition, the Company has been and continues to be involved in industry wide
standard setting bodies, such as the Massachusetts Institute of Technology's
("MIT") ITC (Internet Telephony Interoperability Consortium) consortium, VoIP
(Voice on IP) forum, IMTC (Interoperable Multimedia Teleconference), and VON
(Voice on the Net) Coalition.
CONTINUE RESEARCH AND DEVELOPMENT
The Company intends to extend the functionality and uses of its core
communications technology by continuing to invest in research and development.
The Company believes that it can further improve its technology which will allow
it to enhance its existing product applications as well as develop new
applications.
PRODUCTS AND SYSTEMS
NetSpeak's products and systems consist of four principal groups: gateway
products, business systems, server software and client (or end-user) software
products. NetSpeak's products and systems combine its various intelligent
software modules to provide applications that furnish each particular product's
desired features and functions.
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GATEWAY PRODUCTS
Gateway products are designed as transition points between two different
network types, such as between the PSTN and the Internet. Gateway products
convert regular voice transmission to or from the compressed data packets that
travel over packetized data networks. Gateway products can be used to bring
packetized voice transmission into existing voice transmission networks such as
a PBX or translate voice from the voice transmission network to a user's
Intranet.
WebPhone Gateway eXchange ("WGX") is NetSpeak's initial gateway product.
NetSpeak has developed two versions of the WGX, which differ primarily in the
types of interfaces they provide to the PSTN, the manner in which voice
compression is performed, and the maximum number of simultaneously supported
connection ports. The initial version of the WGX, the WGX-M, is PC-based,
provides standard analog interfaces to the PSTN network and is offered in sizes
up to 16 voice channels (ports). A second version, the WGX-MD, is PC-based,
provides digital T1 interface to the PSTN network, and is offered in sizes up to
24 ports. NetSpeak is also developing the WGX-L series. This series is based on
a NetSpeak proprietary hardware design which will provide digital T1 interfaces
to the voice network and will be offered in sizes up to 96 ports. The WGX-L
series will be designed to meet stringent central office requirements for
telephone company networks and offer a number of other systems management and
remote operations, administration and maintenance features.
BUSINESS SYSTEMS
NetSpeak's business systems consist of two product subgroups: call center
systems and PBX systems.
CALL CENTER SYSTEMS. Call center systems are generally used by customer
service departments within corporations for a wide variety of communications
functions, such as sales, service and technical support between such companies
and their customers. Call center systems route calls to individual customer
service agents based on factors such as agent skills or agent call volume, and
provide the agents with information about incoming calls in order to facilitate
customer interaction. In NetSpeak's call center systems, agents answer calls by
using NetSpeak's Agent WebPhone client software products that are running in
their individual PCs. Call center systems are high-visibility, traffic intensive
application environments, and therefore are usually much higher in cost than
simple business telephone systems. NetSpeak's call center systems can be
integrated with existing ACDs to provide voice transmission over a customer's
existing packetized data network without the need for significant upgrading of
the network infrastructure and ultimately can provide a customer with a
software-based solution to its call center requirements.
NetSpeak's call center systems consist of:
The WebPhone Automatic Call Distributor-Internet Attachment is the basic
component of this system and allows a user to integrate Internet-based telephony
with its existing circuit switched ACD. This system enables a call center agent
to know to which incoming-line on the existing ACD a specific Internet voice
call has been directed and forwards certain information to the next available
agent. With this information, the agent can use the NetSpeak's WebPhone client
software product running in its local PC to retrieve additional information
about the incoming caller. This capability provides more information about the
caller than existing circuit switched ACDs.
The WebPhone Virtual ACD allows a customer to construct a call center
entirely in a packetized data network environment utilizing only a PC as the
call center agent's user interface. The system allows for transmission of voice
and video based calls.
The WebPhone Enterprise ACD is a tool for facilitating the development of
the next generation of call centers. It integrates the capabilities of the
WebPhone Virtual-ACD with the power of WGX for translating calls from the PSTN
and converting them to packetized voice for distribution to an agent's
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PC. As a result, all caller traffic arrives at the agent's desktop as packetized
voice, whether originated over the Internet, the user's Intranet or the PSTN,
and all caller information is presented to the agent in a uniform format.
In addition, the Company is developing the WebPhone ACD-CTx. This system
will offer customized computer telephony interfaces between NetSpeak's WGX and
the customer's existing circuit switched ACD. ACDs, including most telephone
company Centrex-based ACD service offerings, require a specialized CTx interface
to integrate a NetSpeak system. The WebPhone ACD-CTx will preserve the existing
integral skills-based routing and other ACD vendor-specific value-added
functions, while integrating IP-delivered calls with regular PSTN calls.
PBX SYSTEMS. PBX Systems are the basic business telephone systems which
service multiple users in an organization where employees need to communicate
with each other, as well as with persons outside the organization. NetSpeak's
PBX systems provide existing circuit switch PBX systems the ability to
communicate with NetSpeak WebPhone client software anywhere on a packetized data
network by bringing voice traffic from the PSTN into a NetSpeak PBX-based
system, and carrying all voice, video and data communication to every user in a
common packetized digital format.
NetSpeak's PBX systems currently consist of:
The WebPhone Virtual PBX allows a business to construct an in-house voice
network which delivers packetized voice to every PC. All calls between users are
carried over the packetized data network and there is no need to install and
maintain separate voice network wiring or separate databases of information
relative to individual users and their locations.
The WebPhone Enterprise PBX combines the WebPhone Virtual PBX and WGX to
create an integrated system that allows voice traffic coming from the PSTN, as
well as voice traffic coming from packetized data networks, to be integrated and
delivered over the customer's existing network infrastructure to individual
end-users logged on to NetSpeak's WebPhone client software products.
SERVER SOFTWARE
All key NetSpeak software (i) controls the connection process between
users, (ii) manages network operations, (iii) coordinates billing, (iv) provides
value-added features and functions to the users and (v) is designed to run on
PCs or larger workstation-type systems utilizing the Microsoft Windows NT
operating system. Since many networks need high levels of reliability, such as
common carrier networks, NetSpeak has incorporated certain contingency features
into its software such as enabling its server software to permit multiple copies
to run concurrently on the same network.
NetSpeak's various software modules can be combined to construct various
types of voice transmission networks. These software modules include the Global
Information Server, which is responsible for finding the destination party and
coordinating the connection between users; the Control Center module, which is
the management control software for all of NetSpeak's products; the DataBase
Services module, which acts as an "event management utility" for distributing
activity messages relating to billing and other operations events; and the ACD
Server module, which is the key to NetSpeak's call center systems. A variety of
other support modules are under development, including the Credit Processing
Server, that is used for real-time collection and customer account management
and an Interactive Voice Response Server module which will guide a caller
through a series of information steps.
CLIENT SOFTWARE PRODUCTS
NetSpeak's client or end-user software products include the standard
NetSpeak WebPhone, NetSpeak's Internet telephone software product, which was the
first NetSpeak client product on the market. WebPhone, winner of PC Magazines'
Editor's Choice (October 8, 1996) award, is the basis of
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all other NetSpeak client software products including the Business WebPhone and
the Agent WebPhone, which are key components of NetSpeak's PBX and call center
systems. NetSpeak's other client software products include the Mini-WebPhone, a
minimum-function telephone which can be quickly downloaded by the end-users of a
NetSpeak ACD system and the Virtual WebPhone, which is integrated into the
NetSpeak WGX and is responsible for maintaining the connection with other
WebPhones. In order to maximize the amount of caller information provided to
agents, the Company is developing additional agent software which is designed to
be used in conjunction with NetSpeak's call center systems.
STRATEGIC ALLIANCES
In order to facilitate and accelerate the acceptance of NetSpeak technology
as well as enhance the marketing and distribution of its products and systems,
the Company has established a number of strategic alliances with various
telecommunications and computer industry leaders. Under certain of these
agreements, either the Company's technology is integrated into products which
are marketed by its strategic partners or the Company's products and systems are
marketed and distributed by its strategic partners through the various
distribution channels currently utilized by such partners. The Company believes
that these strategic alliances also offer access to its partners' leading edge
technologies, as well as insights into market trends and product development.
Companies with which NetSpeak is currently participating in a strategic alliance
include:
MOTOROLA
In August 1996, the Company established a strategic alliance with Motorola,
as part of which Motorola made a minority investment in the Company. In
connection with the investment by Motorola, the Company granted to Motorola a
right of first negotiation on licenses of NetSpeak's technology as it applies to
the cellular, cable and wireless communications industries. A designee of
Motorola serves on the Company's Board of Directors. See "Management-Directors
and Executive Officers" and "Certain Transactions".
Motorola has become a customer of the Company, and through its affiliates
is conducting a test trial of a system that uses the Company's products and
systems and those of Motorola.
CREATIVE
Beginning in June 1996, the Company entered into a strategic alliance with
Creative, producer of the Sound Blaster- family of products and one of the
world's leaders in the manufacture and distribution of audio cards and
multimedia computer peripherals. Pursuant to the agreements between NetSpeak and
Creative, Creative made a minority investment in the Company and the Company
granted Creative a worldwide exclusive license to market, distribute and bundle
an Internet telephone based on the Company's WebPhone client software product
under the Creative brand name in the retail distribution channel until August
2000. The Company received a fixed license fee upon execution of the agreement
and will receive a fixed royalty for each copy of the full version Internet
telephone software products sold at retail by Creative. NetSpeak and Creative
subsequently expanded their relationship to include a license granted on a
royalty-free basis by Creative to NetSpeak for Creative's video codec technology
for a period to be coterminous with the WebPhone technology license which was
granted to Creative by the Company. NetSpeak and Creative are also jointly
developing other Internet-related applications which use both the Company's and
Creative's proprietary technology in such areas as multimedia applications for
IP based networks and granted licenses in this regard which expire in 2006.
Creative will have an exclusive right of up to seven months to market any
applications jointly developed.
ACT
In May 1997, the Company entered into a Technology Development and License
Agreement with ACT, an industry-leading provider of WAN access products which
utilize frame relay systems to
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integrate voice, data and facsimile communications. Under the agreement, the
Company will adapt certain of its software modules to execute on ACT's hardware
products. In addition, the Company granted ACT a license to distribute a variety
of the Company's products to ACT customers and ACT will integrate their
respective technologies into a bundled solution to be distributed and marketed
by both the Company and ACT. The Company has entered into a related agreement
pursuant to which ACT has indicated that it has an interest in purchasing
$2,000,000 of Common Stock in this Offering (228,571 shares or approximately 10%
of the shares of Common Stock offered hereby). ACT will also have the right to
designate one member of the Company's Board of Directors for a period of two
years from consummation of this Offering.
ROCKWELL
In August 1996, the Company established a strategic alliance with Rockwell,
an industry leader in medium to high end ACD systems. As part of this alliance,
the Company's gateway products and ACD systems are being integrated into
Rockwell ACD systems. The integration of NetSpeak's technology into Rockwell ACD
systems will enable call center agents to receive real-time voice and data
information transmitted from customers' voice-enabled web pages. NetSpeak and
Rockwell are cooperating on the marketing of these systems and both companies
have agreed to explore the joint development of a software solution for the
low-end ACD market.
INFONET
Beginning in November 1996, the Company entered into a strategic alliance
with Infonet, one of the largest commercial data network carriers in the world.
Pursuant to such alliance, the Company will integrate its technology with
Infonet's existing global data network to enhance concurrent voice and data
transmission over the network. In addition, Infonet has and is expected to
continue to purchase the Company's products in connection with the ongoing
operation of its voice enabled data network.
FUJITSU
In April 1997, the Company entered into a non-binding memorandum of
understanding with Fujitsu. In May 1997, the Company entered into an OEM
agreement pursuant to which Fujitsu will integrate, distribute and resell the
Company's products to Fujitsu customers and undertake joint development efforts
with the Company.
TELSTRA
In March 1997, the Company entered into a non-binding memorandum of
understanding with TRDM, a subsidiary of TCL, the Australian telecommunications
carrier. In May 1997, the Company entered into a development and marketing
agreement pursuant to which the Company and TRDM intend to integrate their
respective existing technologies into a product which facilitates increased call
completion rates for telecommunications carriers. The jointly developed product
is intended to be marketed by both the Company and TRDM to other
telecommunications carriers, including TCL.
OTHER ALLIANCES
MCI, one of the nation's largest long-distance carriers, has initally
licensed and used limited quantities of the Company's products in MCI's new
VAULT technology, designed to bridge traditional telephone networks with
packetized data networks such as the Internet. MCI has subsequently selected the
Company as one of its suppliers for components of its VAULT technology products
and services, and is currently negotiating a volume software license agreement
with the Company. The Company intends to establish additional strategic
alliances.
The Company has entered into non-binding memorandums of understandings with
a number of other companies, including Siemens Stromberg-Carlson, Harris
Corporation, BellSouth
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Telecommunications, Inc. and Communicator InfoTech AB, a Swedish communications
company, pursuant to which the Company is pursuing entering into OEM Agreements
with each of these potential strategic partners. These companies may seek to
distribute the Company's technology, integrate the Company's technology into
products and systems of their own, and possibly undertake to jointly develop new
products with the Company. There can be no assurances that such understandings
will result in binding agreements. The Company intends to establish additional
strategic alliances.
MARKETING AND SALES
The principal target market for NetSpeak's products and systems encompasses
a wide variety of end-users, such as telephone companies, cable companies and
other common carriers, large business entities, ACD manufacturers and other
OEMS, and governmental and educational entities, as well as SIs, VARs and other
distributors.
In addition to marketing its products and systems with its strategic
partners, NetSpeak has begun to market its products directly to end-users and
distributors. To date, such marketing efforts primarily have been limited to
direct contacts with a number of these customers. NetSpeak is also marketing its
WebPhone client software products over the Internet, by advertising in computer
periodicals, and through distribution agreements with over 700 ISPs worldwide.
The Company has recently hired a Vice President of Sales and a Vice
President of Marketing to develop an infrastructure to facilitate distribution
of the Company's technology, products and production systems. NetSpeak is
developing an in-house sales force in order to focus its sales efforts on direct
sales to end-users and distributors. The Company anticipates that its sales
force will consist of between ten and 15 people by the end of 1997. NetSpeak
intends to divide its in-house sales force into groups, each of which will focus
on one or more categories of potential customers. In addition to direct contact
with potential customers, in-house marketing and sales efforts will include
direct mail, advertising, and other marketing campaigns and attendance at
industry trade shows, which in addition to generating sales, are intended to
educate potential customers as to the features, functionality, cost
effectiveness and other benefits of NetSpeak's technology, products and systems.
In addition, the Company's site on the World Wide Web will permit prospective
customers to obtain information about its products and services, download
software for evaluation and order certain products. The Company intends to
continue to intensify and expand its marketing and sales efforts and, as a
result, intends to significantly increase marketing and sales expenses in future
periods.
CUSTOMER SERVICE AND SUPPORT
NetSpeak is committed to maintaining customer satisfaction and loyalty. As
of March 31, 1997, NetSpeak employed 18 technical representatives to support and
service its customer base. The Company intends to hire additional technical
customer representatives to support the expected increase in its installed base
for its business products, such as gateway products and business systems. The
Company also provides back-up support with respect to NetSpeak technology,
products and systems marketed by its strategic partners.
The Company maintains a technical support hotline to answer customer
inquiries and provides an on-line database of technical product information. The
Company's support staff also responds to e-mail inquiries and monitors several
e-mail mailing lists. Customer support specialists diagnose and solve technical
problems related not only to the Company's products and systems but also to
other hardware and software with which the Company's products and systems may be
integrated. The Company tracks all support requests, through a series of
customer databases, including current status reports and historical customer
interaction logs. The Company uses customer feedback as a source of ideas for
product application improvements and enhancements.
The Company intends to provide maintenance for all of its business systems
through a program of periodic technical upgrades. The price of a NetSpeak
business system includes 90 days of maintenance
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service. For a fee, the Company will provide extended maintenance services to
its business systems customers and to certain volume purchasers of its client
software products.
RESEARCH AND DEVELOPMENT
The market for the Company's products is characterized by rapidly changing
technology, evolving industry standards, and frequent new product introductions.
Management believes that the Company's future success depends in large part upon
its ability to continue to enhance the functionality and uses of its core
technology. The Company believes that it can further improve its technology
which will allow it to enhance its existing products applications as well as
develop new applications.
The Company intends to be involved in the review and establishment of
industry standards by actively participating in standard setting bodies such as
MIT's ITC (Internet Telephony Interoperability Consortium) consortium, VoIP
(Voice on IP) Forum, IMTC (Interoperable Multimedia Teleconference) and VON
(Voice on the Net) Coalition.
The Company currently conducts the majority of its product development
efforts in-house. The Company also employs independent contractors, to a limited
degree, to assist with certain product development and testing activities and
intends to work with its strategic partners with a view to enhancing its
products. The Company has aggressively expanded its Research and Development
group from six software engineers as of December 31, 1995 to 29 software
engineers and support staff as of March 31, 1997. Research and development
expenses were approximately $1.1 million for the three months ended March 31,
1997 and approximately $2.3 million and $200,000 in 1996 and 1995, respectively.
All of the Company's research and development costs have been expensed as
incurred, including purchased research and development of $556,982 in connection
with the acquisition of ITC. The Company intends to significantly increase
research and development expenses in future periods to perform product
enhancements and new product development in order to seek to establish and
maintain a competitive advantage. In connection therewith, the Company
anticipates increasing its research and development staff by approximately 15 to
20 people during 1997.
COMPETITION
The Company is unaware of any other company which competes directly with
the entire spectrum of products and systems it offers. The Company does,
however, face competition for each of its individual products and systems. The
Company competes with companies such as Vienna Systems, Lucent, VocalTec and
Dialogic with respect to its gateway products. Principal competitors for
NetSpeak's software-based business systems include companies such as Lucent. In
the market for client software products, the Company competes with VocalTec,
Microsoft and Intel, among others.
The Company believes that the principal competitive factors affecting its
potential success include development; time-to-market; product features, such as
flexibility, scalability, interoperability, functionality and ease of use; as
well as product/vendor reputation, quality, performance, price, customer service
and support, and the overall effectiveness of its sales and marketing efforts.
The Company may also face further competition in all market segments from
companies in the telecommunications and computer industries which decide to
develop and market competitive technology, products or systems. Many of the
Company's current and potential competitors have longer operating histories,
greater name recognition, larger customer bases and significantly greater
financial, technical and marketing resources than the Company. In addition, the
Company competes with manufacturers of hardware-based business systems. Certain
of these competitors may be existing or potential strategic partners.
GOVERNMENT REGULATION
At present, there are few laws or regulations that specifically address
access to or commerce on the Internet. The increasing popularity and use of the
Internet, however, enhance the risk that the
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governments of the United States and other countries in which the Company sells
or expects to sell its products will seek to regulate computer telephony and the
Internet with respect to, among other things, user privacy, pricing, and the
characteristics and quality of products and services. The Company is unable to
predict the impact, if any, that future legislation, legal decisions or
regulations may have on its business, financial condition or results of
operations.
In March 1996, the ACTA, a group of telecommunications common carriers,
filed the ACTA Petition with the FCC arguing that providers (such as the
Company) of computer software products that enable voice transmission over the
Internet (Internet "telephone" services) are operating as common carriers
without complying with various regulatory requirements and without paying
certain charges required by law. The ACTA Petition argues that the FCC has the
authority to regulate both the Internet and the providers of Internet
"telephone" services and requests that the FCC declare its authority over
interstate and international telecommunications services using the Internet,
initiate rule- making proceedings to consider rules governing the use of the
Internet for the provision of telecommunications services, and order providers
of Internet "telephone" software to immediately cease the sale of such software.
Any action by the FCC to grant the relief sough by ACTA or otherwise to regulate
use of the Internet as a medium of communication, including any action to permit
local exchange carriers to impose additional charges for connections used for
Internet access, could have a material adverse effect on the Company's business,
financial condition and results of operations.
PATENTS AND PROPRIETARY RIGHTS
The Company generally relies upon patent, copyright, trademark and trade
secret laws to protect and maintain its proprietary rights for its technology
and products. The Company has filed ten U.S. utility patent applications, eight
U.S. provisional patent applications and one Patent Cooperation Treaty patent
application relating to various aspects of the WebPhone client and server
software, the virtual circuit switching technology, and techniques for resolving
dynamically assigned Internet Protocol addresses. Several additional patent
applications are currently being prepared. The Company expects to routinely file
patent applications, as deemed appropriate to protect its technology and
products.
Elk Industries has asserted, in a letter to NetSpeak, just prior to the
November 1996 expiration of U.S. Patent No. 4,128,773, owned by Elk Industries,
that the Company's WebPhone client software product infringed the now expired
patent. Given the initial distribution of the Company's WebPhone client software
prior to expiration of the asserted patent, the Company believes any potential
liability related to the allegation will not have a material effect on the
Company's financial position or results of operations. In May 1997, the Company
received a letter from e-Net, alleging that the Company's WebPhone product
infringes U.S. Patent No. 5,526,353 owned by e-Net. Although there can be no
assurance of the outcome of this uncertainty, following an analysis of the
subject patent and the WebPhone product, management believes the allegations are
without merit and that any potential liability related to e-Net's allegations
will not have a material effect on the Company's financial position or results
of operations.
Generally, litigation, which could be costly and time consuming, may be
necessary to determine the scope and validity of others' proprietary rights, or
to enforce any patents issued to the Company, in either case, in judicial or
administrative proceedings. An adverse outcome could subject the Company to
significant liabilities to third parties, require the Company to obtain licenses
from third-parties, or require the Company to cease product sales and possibly
alter the design of the products. There can be no assurance that any licenses
required under any third-party patents or proprietary rights would be made
available on acceptable terms, if at all. In addition, the laws of certain
countries may not protect the Company's intellectual property.
To help protect its rights, the Company currently requires employees,
consultants and strategic partners to enter into confidentiality agreements that
prohibit disclosure of the Company's proprietary information. The Company also
currently requires employees and consultants to assign to it their ideas,
developments, discoveries and inventions.
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NetSpeak has entered into agreements with customers which require the
Company to place its source code in escrow. These agreements provide that
customers will have a limited, non-exclusive right to use such code in the event
that there is a bankruptcy proceeding by or against the Company, if the Company
ceases to do business or if the Company fails to meet its support obligations.
The Company may enter into similar agreements in the future which may increase
the likelihood of misappropriation by third parties.
EMPLOYEES
As of March 31, 1997, the Company employed 59 persons, including 47 in
engineering and support and 12 in sales, marketing and administration. The
Company anticipates increasing its research and development staff by
approximately 15 to 20 people during 1997. The Company considers its relations
with its employees to be satisfactory.
Competition for technical personnel in the Company's industry is intense.
The Company believes that it has been successful in recruiting qualified
employees, but there is no assurance that it will continue to be as successful
in the future. The Company believes that its future success depends in part on
its continued ability to hire, assimilate and retain qualified personnel.
FACILITIES
The Company occupies approximately 10,000 square feet of space in Boca
Raton, Florida, which it leases at an annual rental of $132,565. The initial
term of the lease for the Company's facility expires on January 30, 2000. The
Company believes that existing facilities are adequate for its needs through at
least the end of 1997. Should the Company require additional space at that time
or prior thereto, it believes that such space can be secured on commercially
reasonable terms and without undue operational disruption.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information concerning the directors and
executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------- ------ ----------------------------------------------------
<S> <C> <C>
Stephen R. Cohen ......... 54 Chairman of the Board and Chief Executive Officer
Robert Kennedy ............ 48 President, Chief Operating Officer and Director
Shane D. Mattaway ......... 40 Executive Vice President, Chief Technical Officer
and Director
John W. Staten ............ 30 Chief Financial Officer and Assistant Secretary
Steven F. Mills ......... 42 Vice President of Marketing
Harvey Kaufman ............ 65 Executive Vice President, Secretary and Treasurer
Steven D. Leeke ......... 35 Director
A. Jeffry Robinson ...... 54 Director
Michael B. Goldberg ...... 50 Director Nominee
Martin Shum ............... 48 Director Nominee
</TABLE>
STEPHEN R. COHEN has served as Chairman of the Board and Chief Executive
Officer of the Company since December 1995. From 1975 until January 1995, Mr.
Cohen served as Chairman of the Board of TPI Enterprises, Inc., formerly Telecom
Plus International, Inc. ("TPI"). Under Mr. Cohen's stewardship, TPI grew from a
small, local telephone interconnect company with approximately $1,000,000 in
revenue in 1975 to become the largest independent supplier of telecommunications
equipment in the United States, with over $300 million in revenue in 1987. Mr.
Cohen also oversaw the expansion of TPI's operations into other segments of the
telecommunications industry, including cellular operations, radio common carrier
paging and telecommunications software development. In 1987, TPI sold its core
telecommunications business to Siemens AG ("Siemens"), who had been TPI's joint
venture partner since 1984. Following the sale to Siemens, Mr. Cohen oversaw the
redeployment of TPI's assets into new businesses including restaurants and movie
theaters. Mr. Cohen retired from TPI in January 1995.
ROBERT KENNEDY has served as a director of the Company since December 1995
and became its President and Chief Operating Officer in March 1996. Mr. Kennedy
has over 20 years experience in the telecommunications industry. From 1976 until
joining NetSpeak, Mr. Kennedy served in a number of executive positions at TPI,
including Vice President of Sales and Marketing from 1976 to 1985 and as
Executive Vice President since 1985. In the latter capacity, Mr. Kennedy was
responsible for sales, marketing, strategic planning, product development and
overall profit responsibility for a number of TPI's operating subsidiaries. Mr.
Kennedy also served as a member of TPI's Board of Directors from 1984 to 1993
and as its Executive Vice President to March 1996.
SHANE D. MATTAWAY co-founded ITC in May 1995 and became the Company's
Executive Vice President, Chief Technical Officer and a director upon the
Company's acquisition of ITC in December 1995. For approximately 10 years prior
to founding ITC, Mr. Mattaway was the founder and President of Boca Development,
a computer consulting and software development firm. Mr. Mattaway has also
served as an Adjunct Professor in Computer Science at the University of Miami,
Florida International University and Florida Atlantic University.
JOHN W. STATEN joined NetSpeak as its Chief Financial Officer and Assistant
Secretary in February 1996. From 1990 to January 1996, Mr. Staten was employed
by Deloitte & Touche LLP, a public accounting firm, most recently as Manager
focusing on the retail and technology sectors.
STEVEN F. MILLS joined NetSpeak as Vice President of Marketing in October
1996. From April 1995 to October 1996, Mr. Mills was employed by Boca Research,
Inc., a developer and manufacturer of
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modems, most recently as Vice President of Business Development. From January
1994 to April 1995, Mr. Mills was employed by General DataCom Services, as
Assistant Vice President of Transmission Products. Prior to General DataCom, Mr.
Mills was employed by Primary Access Corp. from 1991 to January 1994 serving in
various capacities.
HARVEY KAUFMAN has served as Executive Vice President, Secretary and
Treasurer of NetSpeak since December 1995. Mr. Kaufman has over 25 years of
expertise in the telecommunications industry. He joined TPI in 1979 as Vice
President of Strategic Planning with additional responsibilities for
Applications Engineering and Product Management. Upon the sale of TPI's core
telecommunications business to Siemens in 1987, Mr. Kaufman joined Siemens as
Executive Director of Marketing for Siemens Information Systems and subsequently
served as Vice President of Product Management and Applications Engineering and
Director for Advanced Systems and Applications. Mr. Kaufman retired from Siemens
in October 1995.
STEVEN D. LEEKE was appointed to the Company's Board of Directors in
November 1996 as the designee of Motorola. See "Certain Transactions." Mr. Leeke
is currently the Director and General Manager of Internet Content and Service
Businesses within Motorola New Enterprises. He joined Motorola in March 1995 as
Director of Strategy for New Enterprises. In 1988 he joined Texas Instruments:
first as a member of their Corporate Research Development & Engineering
Department; then as Branch Manager, Production Management Decision Systems; and
finally as Manager of Strategic Development, Semiconductor Group Research &
Development, reporting to the Chief Technical Officer.
A. JEFFRY ROBINSON has served as a director of NetSpeak since December
1995. Since April 1996, Mr. Robinson has been a partner in the Miami law firm of
Broad and Cassel, the Company's counsel, specializing in corporate and
securities matters. From March 1992 until April 1996, Mr. Robinson was a
shareholder in the Miami law firm of Greenberg, Traurig, Hoffman, Lipoff, Rosen
& Quentel, P.A.
MICHAEL B. GOLDBERG will become a director of the Company upon consummation
of this Offering. Since 1991, Mr. Goldberg has been Managing Director at Kelso &
Company, a private investment firm. From 1989 to 1991, Mr. Goldberg was a
Managing Director and Co-head of the Mergers and Acquisitions department at the
First Boston Corporation. Mr. Goldberg is also a director of Hosiery Corporation
of America, Inc. and Universal Outdoor Holdings, Inc. Prior thereto he was a
partner in Skadden, Arps, Slate, Meagher & Flom.
MARTIN SHUM will become a director of the Company upon consummation of this
Offering, as the designee of ACT. See "Business-Strategic Alliances." Mr. Shum
founded ACT in May 1987 and has served as Chairman of the Board of Directors,
President and Chief Executive Officer since that time.
There are no family relationships among the Company's directors and
executive officers.
Directors of the Company hold their offices until the next annual meeting
of the Company's shareholders and until their successors have been duly elected
and qualified or their earlier resignation, removal from office or death. There
are no committees of the Board of Directors. Upon consummation of this Offering,
the Company intends to establish an audit and compensation committee, consisting
of a majority of independent directors.
Officers of the Company serve at the pleasure of the Board of Directors and
until the first meeting of the Board of Directors following the next annual
meeting of the Company's shareholders and until their successors have been
chosen and qualified.
DIRECTOR COMPENSATION
The Company currently does not pay cash compensation to non-employee
directors. Following consummation of this Offering, the Company intends to pay
non-employee directors a fee of $1,000 per
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meeting of the Board of Directors or committee thereof attended and to provide
non-employee directors with annual grants of stock options under the 1995 Plan
to purchase 5,000 shares of Common Stock. Directors are reimbursed for travel
and lodging expenses in connection with their attendance at meetings. In January
1996, A. Jeffry Robinson and L. Richard Mattaway, a former director, were each
granted ten-year options under the 1995 Plan to purchase 75,000 shares of Common
Stock at a price of $2.50 per share.
INDEMNIFICATION AGREEMENTS
The Company has entered into an indemnification agreement with each of its
directors and executive officers. Each indemnification agreement provides that
the Company will indemnify such person against certain liabilities (including
settlements) and expenses actually and by him or her in connection with any
threatened or pending legal action, proceeding or investigation (other than
actions brought by or in the right of the Company) to which he or she is, or is
threatened to be, made a party by reason of his or her status as a director,
officer or agent of the Company, provided that such director or executive
officer acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the best interests of the Company and, with respect to any
criminal proceedings, had no reasonable cause to believe his or her conduct was
unlawful. With respect to any action brought by or in the right of the Company,
a director or executive officer will also be indemnified, to the extent not
prohibited by applicable law, against expenses and amounts paid in settlement,
and certain liabilities if so determined by a court of competent jurisdiction,
actually and reasonably incurred by him or her in connection with such action if
he or she acted in good faith and in a manner he or she reasonably believed to
be in or not opposed to the best interests of the Company.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning compensation for 1996
received by the Chief Executive Officer (the "CEO") and the only other executive
officer whose annual salary and bonus exceeded $100,000 during 1996
(collectively with the CEO, the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
-------------------- -------------
SECURITIES
OTHER ANNUAL UNDERLYING
SALARY BONUS COMPENSATION OPTIONS
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)(1) (#)(2)
- ------------------------------- ------- --------- -------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Stephen R. Cohen 1996 43,080 - 1,662 300,000
Chairman of the Board and CEO
Shane D. Mattaway 1996 109,171 - 1,662 100,000
Executive Vice President and
Chief Technical Officer
</TABLE>
- ----------------
(1) Represents a car allowance of $600 per month.
(2) Represents options to purchase Common Stock granted to the Named Executive
Officer under the 1995 Plan.
EMPLOYMENT AGREEMENTS
Effective October 1996, the Company entered into employment agreements with
Stephen R. Cohen, the Company's Chairman and Chief Executive Officer, Robert
Kennedy, the Company's President and Chief Operating Officer, Shane D. Mattaway,
the Company's Executive Vice President and Chief Technical Officer, John W.
Staten, the Company's Chief Financial Officer and Assistant Secretary and Harvey
Kaufman, the Company's Executive Vice President and Secretary. The employment
agreements have "rolling" two year terms, so that at all times the remaining
term of the agreement is two years. The employment agreements provide for annual
salaries initially set at $175,000, $150,000, $125,000, $90,000 and $75,000 for
Messrs. Cohen, Kennedy, Mattaway, Staten and Kaufman respectively.
36
<PAGE>
Each employment agreement provides that the executive officer who is a
party thereto (the "Executive Officer") will continue to receive his salary for
a period of two years after termination of employment, if his employment is
terminated by the Company for any reason other than death, disability or Cause
(as defined in the employment agreement), or for a period of 12 months after
termination of the agreement as a result of the Executive Officer's disability,
and the Executive Officer's estate will receive a lump sum payment equal to one
year's salary plus a pro rata portion of any bonus to which the Executive
Officer is entitled upon termination of the employment agreement by reason of
the Executive Officer's death. Each employment agreement also prohibits the
Executive Officer from directly or indirectly competing with the Company for one
year after termination for any reason except a termination without Cause. If a
Change of Control (as defined in the employment agreement) occurs, the
employment agreement provides for the continued employment of the Executive
Officer for a period of two years following the Change of Control. In addition,
following the Change of Control, if the Executive Officer's employment is
terminated by the Company other than for Cause or by reason of the Executive
Officer's death or disability, or by the Executive Officer for certain specified
reasons (such as a reduction of compensation or a diminution of duties), the
Executive Officer will receive a lump sum cash payment equal to 200% of the cash
compensation received by the Executive Officer during the 12 calendar months
prior to such termination.
The Company is also party to a two year employment agreement with Steven F.
Mills expiring in October 1998. The term of Mr. Mills' employment agreement will
automatically be extended for successive one-year terms unless the Company or
Mr. Mills gives written notice of its or his, respectively, intent not to extend
such agreement to the other party at least 60 days prior to the then scheduled
expiration date. Mr. Mills' annual salary is initially set at $120,000. Mr.
Mills employment agreement contains confidentiality and non-competition
provisions.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning individual grants of
stock options made during 1996 to any of the Named Executive Officers.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
-------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE OF ASSUMED
NUMBER % OF TOTAL ANNUAL RATES OF
OF SHARES OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED EXERCISE OR FOR OPTION TERMS($)(1)
OPTIONS TO EMPLOYEES BASE PRICE EXPIRATION --------------------------
GRANTED(#)(1) IN FISCAL YEAR ($/SH) DATE 5% 10%
---------------- ----------------- -------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Stephen R. Cohen ...... 300,000 18.5 $2.50 1/24/06 $472,000 $1,195,000
Shane D. Mattaway ...... 100,000 6.2 2.50 1/24/06 157,000 398,000
</TABLE>
- ----------------
(1) Based upon the exercise price, which was equal to the fair market on the
date of grant, and annual appreciation at the rate stated on such price
through the expiration date of the options. Amounts represented hypothetical
gains that could be achieved for the options if exercised at the end of the
term. The assumed 5% and 10% rates of stock price appreciation are provided
in accordance with the rules of the Securities and Exchange Commission (the
"Commission") and do not represent the Company's estimate or projection of
the future stock price. Actual gains, if any, are contingent upon the
continued employment of the Named Executive Officer through the expiration
date, as well as being dependent upon the general performance of the Common
Stock. The potential realizable values have not taken into account amounts
required to be paid for federal income taxes.
37
<PAGE>
STOCK OPTIONS HELD AT END OF 1996
The following table indicates the total number and value of exercisable and
unexercisable stock options held by each of the Named Executive Officers as of
December 31, 1996. No options were exercised by any of the Named Executive
Officers during 1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END(#) AT FISCAL YEAR-END($)
--------------------------------- ------------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE(1) UNEXERCISABLE(1)
-------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Stephen R. Cohen ...... 300,000 0 $1,875,000 0
Shane D. Mattaway ...... 250,000 0 1,787,500 0
</TABLE>
- ----------------
(1) Based upon the assumed initial public offering price of $8.75 per share,
less the applicable exercise price.
COMPENSATION COMMITTEE, INTERLOCKS AND INSIDER PARTICIPATION
The Company does not have a compensation committee and all decisions
regarding executive compensation have been made by the Board of Directors as a
whole. See "Certain Transactions" with respect to the payment of legal fees to a
law firm of which A. Jeffry Robinson is a partner.
1995 STOCK OPTION PLAN
Under the 1995 Plan, as amended, an aggregate of 2,700,000 shares of Common
Stock are reserved for issuance upon exercise of options ("1995 Plan Options").
1995 Plan Options are designed to serve as incentives for retaining qualified
and competent directors, employees, consultants and independent contractors of
the Company.
The Company's Board of Directors, or a committee thereof, administers and
interprets the 1995 Plan and is authorized to grant 1995 Plan Options thereunder
to all eligible employees of the Company, including directors and executive
officers (whether or not employees) of the Company, as well as consultants and
independent contractors hired by the Company. The 1995 Plan provides for the
granting of both "incentive stock options" (as defined in Section 422 of the
Internal Revenue Code of 1986, as amended) and nonstatutory stock options.
Incentive stock options may only be granted, however, to employees. 1995 Plan
Options can be granted on such terms and at such prices as determined by the
Board, or a committee thereof, except that the per share exercise price of
incentive 1995 Plan Options will not be less than the fair market value of the
Common Stock on the date of grant and, in the case of an incentive 1995 Plan
Option granted to a 10% shareholder, the per share exercise price will not be
less than 110% of such fair market value as defined in the 1995 Plan.
In accordance with the Internal Revenue Service Code, options granted under
the 1995 Plan that would otherwise qualify as incentive stock options will not
be treated as incentive stock options to the extent that the aggregate fair
market value of the shares covered by the incentive stock options which are
exercisable for the first time by any individual during any calendar year
exceeds $100,000.
1995 Plan Options will be exercisable after the period or periods specified
in the option agreement, provided, however, that incentive 1995 Plan Options
vest in three annual installments commencing one year from the date of grant.
1995 Plan Options granted are not exercisable after the expiration of ten years
from the date of grant and are not transferable other than by will or by the
laws of descent and distribution. Adjustments in the number of shares subject to
1995 Plan Options can be made by the Board of Directors or the appropriate
committee in the event of a stock dividend or recapitalization resulting in a
stock split-up, combination or exchange of shares. Under the 1995 Plan, options
may become immediately exercisable in the event of a change in control or
approval by stockholders of the Company of a merger, reorganization,
liquidation, dissolution or disposition of all or substantially all of the
assets of the Company. The 1995 Plan also authorizes the Company to make loans
to optionees to enable them to exercise their options.
38
<PAGE>
Non-statutory options to purchase an aggregate of 53,000 shares of Common
Stock previously granted under the 1995 Plan to various employees have been
exercised. As of the date of this Prospectus, the Company has 1995 Plan Options
outstanding to purchase an aggregate of 2,263,500 shares of Common Stock at
exercise prices ranging from $1.00 to $7.00 and 119,000 shares of Common Stock
at an exercise price equal to the price per share in this Offering. Of such
options, 1,012,500 are incentive stock options and 1,370,000 are non-statutory
stock options.
CERTAIN TRANSACTIONS
Upon incorporation of the Company in December 1995, the Company sold an
aggregate of 2,950,000 shares of Common Stock to various executive officers,
directors and advisors for an aggregate of $590,000, including 1,750,000 shares
to Stephen R. Cohen, 500,000 shares to Robert Kennedy, 250,000 shares to Harvey
Kaufman and 100,000 shares to each of L. Richard Mattaway and A. Jeffry
Robinson.
In December 1995, the Company acquired all of the issued and outstanding
capital stock of ITC by merger of ITC with a wholly-owned subsidiary of the
Company. As consideration for such, the Company issued an aggregate of 2,500,000
shares of Common Stock to the shareholders of ITC in exchange for all of their
ITC shares, including 1,000,000 shares to an affiliate of L. Richard Mattaway
and 850,000 shares to Shane D. Mattaway.
In connection with the establishment of a strategic alliance, in August
1996, Motorola made a minority investment in the Company pursuant to which it
purchased 769,853 shares of Common Stock and the Motorola Warrant to purchase up
to an additional 452,855 shares of Common Stock at a price of $5.50 per share
for a six year period expiring in August 2002 for an aggregate of $4,234,192. In
the event the Company consummates the Offering or any other underwritten public
offering of its Common Stock at a price of at least $7.00 per share resulting in
the receipt by the Company of net proceeds of not less than $10,000,000, the
Company, at its option, upon not less than 20 business days' notice given prior
to the planned closing date of such public offering, may require Motorola to
exercise the Motorola Warrant, provided, however, that within 15 business days
of receipt of the Company's notice, Motorola may elect to cancel the Motorola
Warrant unexercised. In addition, Motorola was granted the right to designate
one member of the Company's Board of Directors so long as Motorola and its
affiliates beneficially own 5% or more of the Company's outstanding Common
Stock. Motorola has advised the Company that it will exercise the Motorola
Warrant in full upon consummation of this Offering, provided that the Offering
meets the criteria set forth above. There are no agreements between management
and Motorola with respect to voting their respective shares of Common Stock.
A. Jeffry Robinson is a partner of the law firm of Broad and Cassel, which
serves as counsel to the Company. The Company has paid legal fees to Broad and
Cassel for services rendered.
The Company has adopted a policy that any transactions between the Company
and its executive officers, directors, principal shareholders or their
affiliates take place on an arms-length basis and require the approval of a
majority of the independent directors of the Company.
39
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of the date of this Prospectus and as adjusted
after this Offering by (i) each of the shareholders of the Company owning more
than 5% of the outstanding shares of Common Stock; (ii) each director of the
Company and director nominee; (iii) each of the Named Executive Officers; and
(iv) all directors and executive officers of the Company as a group:
<TABLE>
<CAPTION>
PERCENTAGE OF CLASS(3)
------------------------
NAME AND ADDRESS OF NUMBER OF SHARES BEFORE AFTER
BENEFICIAL OWNER OF GROUP(1) BENEFICIALLY OWNED(2) OFFERING OFFERING
- -------------------------------------- ----------------------- ----------- ----------
<S> <C> <C> <C>
Stephen R. Cohen(4) .................. 2,000,000 23.7% 18.4%
Robert Kennedy(5) .................. 760,000 9.0 7.0
Shane D. Mattaway(6) ............... 1,078,000 12.8 10.0
Steven D. Leeke(7) .................. -0- -0- -0-
A. Jeffry Robinson(8) ............... 175,000 2.1 1.6
Michael B. Goldberg .................. -0- -0- -0-
Martin Shum(9) ..................... -0- -0- -0-
All directors and executive officers
as a group (nine persons)(10) ...... 4,319,667 47.5 37.6
5% OR GREATER HOLDERS
Motorola, Inc. ..................... 1,222,708 15.0 11.6
1303 E. Algonquin Road
Schaumburg, Illinois 60196(3)
L. Richard Mattaway(11) ............ 675,000 8.2 6.3
1508 San Ignacio Ave.
Suite 200
Coral Gables, Florida 33416
Garmarin Investments, Ltd. ......... 500,000 6.1 4.7
c/o CIBC Bank and Trust Company
(Cayman) Limited
P.O. Box 694GT
Edward Street
Grand Cayman, Cayman Islands(12)
Glenn Hutton ........................ 500,000 6.1 4.7
9725 Hammock Boulevard
Suite 206
Miami, Florida 33196
</TABLE>
- ----------------
(1) Except as indicated, the address of each person named in the table is c/o
NetSpeak, 902 Clint Moore Road, Suite 104, Boca Raton, Florida 33487.
(2) Except as otherwise indicated, the persons named in this table have sole
voting and investment power with respect to all shares of Common Stock
listed, which include shares of Common Stock that such persons have the
right to acquire a beneficial interest within 60 days from the date of this
Prospectus.
(3) Gives effect to exercise of the Motorola Warrant.
(4) Includes 300,000 shares of Common Stock issuable upon the exercise of stock
options.
(5) Includes 250,000 shares of Common Stock issuable upon the exercise of stock
options and 10,000 shares of Common Stock issuable upon the exercise of
stock options held by Mr. Kennedy's spouse.
(6) Includes 250,000 shares of Common Stock issuable upon the exercise of stock
options.
(7) Does not include the shares of Common Stock beneficially owned by Motorola,
in which shares Mr. Leeke disclaims beneficial ownership.
(8) Includes 75,000 shares of Common Stock issuable upon the exercise of stock
options.
(9) Does not include the shares of Common Stock to be purchased by ACT in this
Offering, in which shares Mr. Shum disclaims beneficial ownership.
(10) Includes (i) the shares of Common Stock described in notes (3) through (8),
(ii) 40,000 shares of Common Stock issuable upon the exercise of stock
options held by John W. Staten, and (iii) 250,000 shares of Common Stock
held by Harvey Kaufman and 16,667 shares of Common Stock issuable upon the
exercise of stock options held by Mr. Kaufman.
(11) Includes 400,000 shares of Common Stock held in a family limited
partnership, 100,000 shares of Common Stock held by an affiliated
corporation and 75,000 shares of Common Stock issuable upon the exercise of
stock options.
(12) Luis Gallego is the beneficial owner of these shares.
40
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of (i) 25,000,000
shares of Common Stock, par value $.01 per share, 10,551,387 shares of which
will be outstanding upon consummation of this Offering and (ii) 1,000,000 shares
of Preferred Stock, par value $.01 per share (the "Preferred Stock"), none of
which will be outstanding upon consummation of this Offering. As of the date of
this Prospectus, there were approximately 100 holders of record of the Common
Stock.
COMMON STOCK
Subject to the rights of the holders of any Preferred Stock that may be
outstanding, each holder of Common Stock on the applicable record date is
entitled to receive such dividends as may be declared by the Board of Directors
out of funds legally available therefor, and, in the event of liquidation, to
share pro rata in any distribution of the Company's assets after payment or
providing for the payment of liabilities and the liquidation preference of any
outstanding Preferred Stock. Each holder of Common Stock is entitled to one vote
for each share held of record on the applicable record date on all matters
presented to a vote of shareholders, including the election of directors.
Holders of Common Stock have no cumulative voting rights or preemptive rights to
purchase or subscribe for any stock or other securities, and there are no
conversion rights or redemption or sinking fund provisions with respect to such
stock. All outstanding shares of Common Stock are, and the shares of Common
Stock issuable upon exercise of the Investor Warrants, the Agent's Option and
the Agent's Warrants will be, when issued, fully paid and nonassessable.
PREFERRED STOCK
The Company's Board of Directors has the authority to issue 1,000,000
shares of Preferred Stock in one or more series and to fix, by resolution,
conditional, full, limited or no voting powers, and such designations,
preferences and relative, participating, optional or other special rights, if
any, and the qualifications, limitations or restrictions thereof, if any,
including the number of shares in such series (which the Board may increase or
decrease as permitted by Florida law), liquidation preferences, dividend rates,
conversion or exchange rights, redemption provisions of the shares constituting
any series and such other special rights and protective provisions with respect
to any class or series as the Board may deem advisable without any further vote
or action by the shareholders. Any shares of Preferred Stock so issued would
have priority over the Common Stock with respect to dividend or liquidation
rights or both and could have voting and other rights of shareholders. The
Company has no present plans to issue shares of Preferred Stock.
CERTAIN FLORIDA LEGISLATION
Florida has enacted legislation that may deter or frustrate takeovers of
Florida corporations. The Florida Control Share Act generally provides that
shares acquired in a "control share acquisition" will not possess any voting
rights unless such voting rights are approved by a majority of the corporation's
disinterested shareholders. A "control share acquisition" is an acquisition,
directly or indirectly, by any person of ownership of, or the power to direct
the exercise of voting power with respect to, issued and outstanding "control
shares" of a publicly held Florida corporation. "Control shares" are shares,
which, except for the Florida Control Share Act, would have voting power that,
when added to all other shares owned by a person or in respect to which such
person may exercise or direct the exercise of voting power, would entitle such
person, immediately after acquisition of such shares, directly or indirectly,
alone or as a part of a group, to exercise or direct the exercise of voting
power in the election of directors within any of the following ranges: (i) at
least 20% but less than 331/3% of all voting power; (ii) at least 331/3% but
less than a majority of all voting power; or (iii) a majority or more of all
voting power. The Florida Affiliated Transactions Act generally requires
supermajority approval by disinterested shareholders of certain specified
transactions between a public corporation and holders of more than 10% of the
outstanding voting shares of the corporation (or their affiliates). Florida law
and the Company's Articles and Bylaws also authorize the Company to indemnify
the Company's directors,
41
<PAGE>
officers, employees and agents. In addition, the Company's Articles and Florida
law presently limit the personal liability of corporate directors for monetary
damages, except where the directors (i) breach their fiduciary duties, and (ii)
such breach constitutes or includes certain violations of criminal law, a
transaction from which the directors derived an improper personal benefit,
certain unlawful distributions or certain other reckless, wanton or willful acts
or misconduct.
TRANSFER AGENT
The transfer agent for the Common Stock is American Stock Transfer & Trust
Company, New York, New York.
REPORTS TO SHAREHOLDERS
The Company intends to furnish registered holders with annual reports
containing financial statements audited by its independent accounting firm and
quarterly reports for the first three quarters of each fiscal year containing
unaudited interim financial information.
42
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 10,551,387 shares
of Common Stock outstanding. Of these shares, the 2,400,000 shares of Common
Stock sold in this offering will be freely tradeable without restriction under
the Securities Act, except for any such shares which may be acquired by an
"affiliate" of the Company as that term is defined in Rule 144 under the
Securities Act (an "Affiliate"), which shares generally may be sold publicly
without registration under the Securities Act only in compliance with Rule 144.
In general, under Rule 144 as currently in effect, if a period of at least
one year has elapsed since the later of the date the "restricted shares" (as
that phrase is defined in Rule 144) were acquired from the Company and the date
they were acquired from an Affiliate, then the holder of such restricted shares
(including an Affiliate) is entitled to sell a number of shares within any
three-month period that does not exceed the greater of 1% of the then
outstanding shares of the Common Stock or the average weekly reported volume of
trading of the Common Stock on the Nasdaq National Market during the four
calendar weeks preceding such sale. The holder may only sell such shares through
unsolicited brokers' transactions or directly to market makers. Sales under Rule
144 are also subject to certain requirements pertaining to the manner of such
sales, notices of such sales and the availability of current public information
concerning the Company. Affiliates may sell shares not constituting restricted
shares in accordance with the foregoing volume limitations and other
requirements but without regard to the one-year holding period.
Under Rule 144(k), if a period of at least two years has elapsed between
the later of the date restricted shares were acquired from the Company and the
date they were acquired from an Affiliate, as applicable, a holder of such
restricted shares who is not an Affiliate at the time of the sale and has not
been an Affiliate for at least three months prior to the sale would be entitled
to sell the shares immediately without regard to the volume limitations and
other conditions described above.
The Company's executive officers and directors, and certain shareholders
who collectively own an aggregate of 7,924,206 shares of Common Stock have
agreed that they will not directly or indirectly, sell, offer, contract to sell,
make a short sale, pledge or otherwise dispose of any shares of Common Stock (or
any securities convertible into or exchangeable or exercisable for any other
rights to purchase or acquire Common Stock other than shares of Common Stock
issuable upon exercise of outstanding options) owned by them, for a period of
nine months after the date of this Prospectus, without the prior written consent
of Josephthal. After the nine month period, 7,471,351 of the shares subject to
the sale restriction will be eligible for sale in the public market pursuant to
Rule 144 under the Securities Act, subject to the volume limitations and other
restrictions contained in Rule 144. The remaining 452,855 shares of Common Stock
subject to the restrictions on sale will become eligible for public sale under
Rule 144 one year from the consummation of this Offering. The 227,181 shares of
Common Stock not subject to the nine month restriction on sale described above
will be eligible for sale subject to the volume limitations of Rule 144
commencing 90 days after the date of the Prospectus.
The Company has granted to Motorola and Creative certain demand and
piggy-back registration rights under the Securities Act, with respect to the
shares of Common Stock beneficially owned by them.
Prior to this Offering, there has been no market for the Common Stock of
the Company. The Company can make no predictions as to the effect, if any, that
sales of shares of Common Stock or the availability of shares of Common Stock
for sale will have on the market price prevailing from time to time.
Nevertheless, sales of significant amounts of shares of Common Stock in the
public market, or the perception that such sales may occur, could adversely
affect prevailing market prices.
43
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters") have severally agreed,
subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement"), to purchase from the Company, and the Company has
agreed to sell to the Underwriters on a firm commitment basis, the respective
numbers of shares of Common Stock set forth below opposite their names:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- --------------------------------------------- ----------
<S> <C>
Josephthal Lyon & Ross Incorporated ...... 1,200,000
Cruttenden Roth Incorporated ............... 1,200,000
----------
Total ................................. 2,400,000
==========
</TABLE>
The Underwriters are committed to purchase all the shares of Common Stock
offered hereby, if any of such shares are purchased. The Underwriting Agreement
provides that the obligations of the several Underwriters are subject to the
conditions precedent specified therein.
The Company has been advised by the Underwriters that they initially
propose to offer the Common Stock to the public at the initial public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less concessions of not in excess of $.3675 per share of Common
Stock. Such dealers may re-allow a concession not in excess of $.10 per share of
Common Stock to other dealers. After the commencement of the Offering, the
public offering price, concession and reallowance may be changed.
The Underwriters have advised the Company that they do not anticipate sales
to discretionary accounts to exceed five percent of the securities offered by
the Company hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. The Company has
also agreed to pay the Underwriters an expense allowance on a non-accountable
basis equal to one and one-half percent of the gross proceeds of this Offering,
of which $35,000 has been paid to date.
The Underwriters have been granted an option by the Company, exercisable
within 30 days of the date of this Prospectus, to purchase up to an additional
360,000 shares of Common Stock at the initial public offering price per share of
Common Stock offered hereby, less underwriting discounts and the non-accountable
expense allowance. Such option may be exercised solely for the purpose of
covering over-allotments, if any, incurred in the sale of the shares offered
hereby. To the extent such option is exercised, in whole or in part, each
Underwriter will have a firm commitment, subject to certain conditions, to
purchase the number of the additional shares of Common Stock proportionate to
its initial commitment.
Holders of approximately 97% of the shares of the Company's Common Stock,
including each officer, director and principal shareholder of the Company, have
executed agreements pursuant to which they have agreed not to sell or otherwise
dispose of their shares for a period of nine months from the date of this
Prospectus without the prior written consent of Josephthal. An appropriate
legend shall be marked on the face of the certificates representing all of such
securities.
Upon consummation of this Offering, the Company has agreed to sell to the
Underwriters, for nominal consideration, the Advisors' Warrants to purchase from
the Company 240,000 shares of Common Stock. The Advisors' Warrants are initially
exercisable at a price per share equal to 120% of the initial public offering
price for a period of four years commencing one year after the date of this
Prospectus and are restricted from sale, transfer, assignment or hypothecation
for a period of twelve months from the date hereof, except to officers of
Josephthal. The Advisors' Warrants also provide for adjustment in the number of
shares of Common Stock issuable upon the exercise thereof as a result of
44
<PAGE>
certain subdivisions and combinations of the Common Stock. The Advisors'
Warrants grant to the holders thereof certain rights of registration for the
securities issuable upon exercise of the Advisors' Warrants.
Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering for the Common Stock has been
determined by negotiations between the Company and the Underwriters and is not
necessarily related to the Company's asset value, net worth or other established
criteria of value. The factors considered in such negotiations, in addition to
prevailing market conditions, included the history of and prospects for the
industry in which the Company competes, an assessment of the Company's
management, the prospects of the Company, its capital structure and certain
other factors as were deemed relevant.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering than
they are committed to purchase from the Company, and in such case may purchase
Common Stock in the open market following completion of the Offering to cover
all or a portion of such short position. The Underwriters may also cover all or
a portion of such short position, up to 360,000 shares of Common Stock, by
exercising the Over-Allotment Option. In addition, the Underwriters may impose
"penalty bids" whereby they may reclaim from each other (or any dealer
participating in the Offering) for their account, the selling concession with
respect to Common Stock that is distributed in the Offering but subsequently
purchased for their account in the open market. Any of the transactions
described in this paragraph may result in the maintenance of the price of the
Common Stock at a level above that which might otherwise prevail in the open
market. None of the transactions described in this paragraph is required, and,
if they are undertaken, they may be discontinued at any time.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a copy
of each such agreement which are filed as exhibits to the Registration
Statement. See "Additional Information."
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Broad and Cassel, a partnership including professional
associations, Miami, Florida. A. Jeffry Robinson, a partner of Broad and Cassel
is a director of the Company and owns 100,000 shares of Common Stock and options
to purchase 75,000 shares of Common Stock. Orrick, Herrington & Sutcliffe LLP,
New York, New York, has acted as counsel to the Underwriters in connection with
this Offering.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1995 and 1996 and for the period December 8, 1995 (inception) to December 31,
1995 and the year ended December 31, 1996; and of Internet Telephone Company for
the period May 15, 1995 (inception) to December 18, 1995, included in this
Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and are included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
45
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement (of
which this Prospectus is a part and which term shall encompass any amendments
thereto) on Form S-1 pursuant to the Securities Act with respect to the Common
Stock being offered in this offering. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits and
schedules thereto, certain portions of which are omitted as permitted by the
rules and regulations of the Commission. Statements made in this Prospectus as
to the contents of any contract, agreement or other document referred to are not
necessarily complete; with respect to any such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by reference to the
Registration Statement and to the financial statements, schedules and exhibits
filed as a part thereof.
This Registration Statement and all other information filed by the Company
with the Commission may be inspected without charge at the principal reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661, and at 7 World Trade
Center, 13th Floor, New York, New York 10048. Copies of all or any part thereof
may be obtained upon payment of fees prescribed by the Commission from the
Public Reference Section of the Commission at its principal office in
Washington, D.C. set forth above. Such material may also be accessed
electronically by means of the Commission's home page on the Internet at
http://www.sec.gov.
46
<PAGE>
NETSPEAK CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Independent Auditors' Report ...................................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996
and March 31, 1997 (unaudited) ................................................... F-3
Consolidated Statements of Operations for the Predecessor for the period
May 15, 1995 (date of inception) to December 18, 1995 and for the
Successor for the period December 8, 1995 (date of inception) to
December 31, 1995 and the year ended December 31, 1996
and for the three months ended March 31, 1996 and 1997 (unaudited) ............... F-4
Consolidated Statements of Shareholders' Equity for the Predecessor for the period
May 15, 1995 (date of inception) to December 18, 1995 and for the
Successor for the period December 8, 1995 (date of inception) to
December 31, 1995 and the year ended December 31, 1996
and for the three months ended March 31, 1997 (unaudited) ........................ F-5
Consolidated Statements of Cash Flows for the Predecessor for the period
May 15, 1995 (date of inception) to December 18, 1995 and for the
Successor for the period December 8, 1995 (date of inception) to
December 31, 1995 and the year ended December 31, 1996
and for the three months ended March 31, 1996 and 1997 (unaudited) ............... F-6
Notes to Consolidated Financial Statements ....................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of NetSpeak Corporation:
We have audited the accompanying consolidated balance sheets of NetSpeak
Corporation and subsidiary (the "Company") as of December 31, 1995 and 1996, and
the related consolidated statements of operations, shareholders' equity and cash
flows of Internet Telephone Company (the "Predecessor") for the period from May
15, 1995 (date of inception) to December 18, 1995, and of the Company for the
period December 8, 1995 (date of inception) to December 31, 1995 and for the
year ended December 31, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1995 and 1996, and the results of operations and cash flows of the Predecessor
for the period from May 15, 1995 (date of inception) to December 18, 1995, and
of the Company for the period December 8, 1995 (date of inception) to December
31, 1995 and the year ended December 31, 1996 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Fort Lauderdale, Florida
January 24, 1997 (March 26, 1997 as
to the sixth paragraph of Note 3)
F-2
<PAGE>
NETSPEAK CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
MARCH 31,
1995 1996 1997
------------- --------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents .................................... $ 483,084 $ 6,294,697 $ 4,869,565
Accounts receivable .......................................... - 340,000 236,927
Prepaid and other current assets .............................. 15,833 85,840 138,884
Deferred tax asset ............................................. - 182,000 183,190
---------- ------------ ------------
Total current assets ....................................... 498,917 6,902,537 5,428,566
Property and equipment, net .................................... 31,290 1,049,952 1,315,388
Deferred offering costs ....................................... - - 298,900
Other assets ................................................... 25,359 325,126 368,390
---------- ------------ ------------
$ 555,566 $ 8,277,615 $ 7,411,244
========== ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable ............................................. $ 80,045 $ 92,192 $ 453,898
Accrued compensation .......................................... - 82,707 386,511
Accrued expenses ............................................. 28,004 181,802 280,491
Unearned revenue ............................................. - 2,242,011 1,596,376
---------- ------------ ------------
Total current liabilities ................................. 108,049 2,598,712 2,717,276
---------- ------------ ------------
Commitments and contingencies (Note 6) ........................ - - -
Shareholders' equity:
Preferred stock: 1,000,000 shares of $.01 par value authorized;
no shares issued or outstanding ..............................
Common stock: 25,000,000 shares of $.01 par value
authorized; 5,450,000 shares issued and outstanding at
December 31, 1995; 7,698,532 shares issued and outstanding
at December 31, 1996 and March 31, 1997 ..................... 54,500 76,985 76,985
Additional paid-in capital .................................... 1,035,500 9,110,105 9,110,105
Accumulated deficit .......................................... (642,483) (3,508,187) (4,493,122)
---------- ------------ ------------
Total shareholders' equity ................................. 447,517 5,678,903 4,693,968
---------- ------------ ------------
$ 555,566 $ 8,277,615 $ 7,411,244
========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
NETSPEAK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------------ ------------------------------------------------------------------
THREE MONTHS
MAY 15, 1995 DECEMBER 8, 1995 YEAR ENDED ENDED MARCH 31,
TO DECEMBER 18, TO DECEMBER 31, DECEMBER 31, -----------------------------
1995 1995 1996 1996 1997
------------------ --------------------------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues ..................... $ - $ - $ 867,117 $ 90,681 $ 903,766
Operating expenses:
Cost of revenues ............... - - 47,129 3,752 43,522
Research and development ......... 175,038 28,301 2,255,644 327,947 1,147,402
Sales and marketing ............ - - 722,353 91,604 399,185
General and administrative ...... 5,644 57,200 836,791 85,168 312,099
Purchased research and
development ..................... - 556,982 - - -
----------- ----------- ------------ ----------- -----------
Total operating
expenses ........................ 180,682 642,483 3,861,917 508,471 1,902,208
Loss from operations ............ (180,682) (642,483) (2,994,800) (417,790) (998,442)
Interest and other income ...... - - 172,096 17,423 57,317
----------- ----------- ------------ ----------- -----------
Loss before income taxes ......... (180,682) (642,483) (2,822,704) (400,367) (941,125)
Income taxes ..................... - - 43,000 - 43,810
----------- ----------- ------------- ----------- -----------
Net loss ........................ $ (180,682) $ (642,483) $ (2,865,704) $ (400,367) $ (984,935)
=========== =========== ============= =========== ===========
Net loss per share ............... $ (0.35) $ (0.05) $ (0.12)
============= =========== ===========
Shares used in computing net
loss per share .................. 8,197,568 8,197,568 8,197,568
============= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
NETSPEAK CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------------- ADDITIONAL
PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- --------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Predecessor
Balance at May 15, 1995 ............ - $ - $ - $ - $ -
Sale of common stock ............... 1,000 1,000 - - 1,000
Capital paid in .................. - - 128,200 - 128,200
Net loss ........................... - - - (180,682) (180,682)
--------- ------- ---------- ------------- ------------
Balance at December 18, 1995 ...... 1,000 $ 1,000 $ 128,200 $ (180,682) $ (51,482)
========= ======= ========== ============= ============
- ---------------------------------------------------------------------------------------------------------------
Successor
Balance at December 8, 1995 ...... - $ - $ - $ - $ -
Sale of common stock ............... 2,950,000 29,500 560,500 - 590,000
Issuance of common stock in
acquisition ........................ 2,500,000 25,000 475,000 - 500,000
Net loss ........................... - - - (642,483) (642,483)
--------- ------- ---------- ------------- ------------
Balance at December 31, 1995 ...... 5,450,000 54,500 1,035,500 (642,483) 447,517
Issuance of common stock
and warrants ..................... 2,195,532 21,955 7,942,635 - 7,964,590
Exercises of stock options ......... 53,000 530 131,970 - 132,500
Net loss ........................... - - - (2,865,704) (2,865,704)
--------- ------- ---------- ------------- ------------
Balance at December 31, 1996 ...... 7,698,532 76,985 9,110,105 (3,508,187) 5,678,903
Net loss (unaudited) ............... - - - (984,935) (984,935)
--------- ------- ---------- ------------- ------------
Balance at March 31, 1997
(unaudited) ..................... 7,698,532 $76,985 $9,110,105 $ (4,493,122) $ 4,693,968
========= ======= ========== ============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
NETSPEAK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PREDECESSOR
------------------ -------------------
MAY 15, 1995 TO DECEMBER 8, 1995
DECEMBER 18, TO DECEMBER 31,
1995 1995
------------------ -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................ $ (180,682) $ (642,483)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation ....................................... 1,500 -
Purchased research and development .................. - 556,982
Common stock issued for services ..................... - -
Deferred taxes ....................................... - -
Changes in assets and liabilities:
Accounts receivable .............................. - -
Prepaid and other current assets .................. - (15,833)
Other assets ....................................... - (25,359)
Accounts payable ................................. 43,927 36,118
Accrued compensation .............................. - -
Accrued expenses ................................. - 28,004
Unearned revenue ................................. - -
----------- -----------
Net cash used in operating activities ............... (135,255) (62,571)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .................................... (26,027) (6,763)
Acquisition costs paid and cash overdraft assumed ...... - (37,582)
----------- -----------
Net cash used in investing activities ............... (26,027) (44,345)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock
and warrants .......................................... 129,200 590,000
Cash overdraft .......................................... 32,082 -
Deferred offering costs paid ........................... - -
----------- -----------
Net cash provided by (used in)
financing activities ................................. 161,282 590,000
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ....................................... - 483,084
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD .................................... - -
----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD .......................................... $ - $ 483,084
=========== ===========
SUPPLEMENTAL INFORMATION:
Cash paid for income taxes .............................. - -
----------- -----------
NONCASH INVESTING AND FINANCING
ACTIVITIES-SEE NOTES 2 AND 3
<CAPTION>
SUCCESSOR
-----------------------------------------------
THREE MONTHS
YEAR ENDED ENDED MARCH 31,
DECEMBER 31, -------------------------------
1996 1996 1997
--------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................ $ (2,865,704) $ (400,367) $ (984,935)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation ....................................... 198,172 22,728 111,666
Purchased research and development .................. - - -
Common stock issued for services ..................... 35,000 - -
Deferred taxes ....................................... (182,000) - (1,190)
Changes in assets and liabilities:
Accounts receivable .............................. (340,000) - 103,073
Prepaid and other current assets .................. (70,007) (18,813) (53,044)
Other assets ....................................... (299,767) (121,527) (43,264)
Accounts payable ................................. 12,147 50,264 111,706
Accrued compensation .............................. 82,707 36,581 303,804
Accrued expenses ................................. 153,798 (3,518) 98,689
Unearned revenue ................................. 2,242,011 - (645,635)
------------- ------------ ------------
Net cash used in operating activities ............... (1,033,643) (434,652) (999,130)
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .................................... (1,216,834) (479,780) (377,102)
Acquisition costs paid and cash overdraft assumed ...... - - -
------------- ------------ ------------
Net cash used in investing activities ............... (1,216,834) (479,780) (377,102)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock
and warrants .......................................... 8,062,090 3,134,528 -
Cash overdraft .......................................... - - -
Deferred offering costs paid ........................... - - (48,900)
------------- ------------ ------------
Net cash provided by (used in)
financing activities ................................. 8,062,090 3,134,528 (48,900)
------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ....................................... 5,811,613 2,220,096 (1,425,132)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD .................................... 483,084 483,084 6,294,697
------------- ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD .......................................... $ 6,294,697 $ 2,703,180 $ 4,869,565
============= ============ ============
SUPPLEMENTAL INFORMATION:
Cash paid for income taxes .............................. $ 225,000 - $ 30,000
------------- ------------ ------------
NONCASH INVESTING AND FINANCING
ACTIVITIES-SEE NOTES 2 AND 3
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
NETSPEAK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS-NETSPEAK CORPORATION AND ITS SUBSIDIARY (THE
"Company") develops, markets, licenses, and supports a suite of intelligent
software modules, which enable real-time, concurrent interactive voice, video
and data transmission over packetized data networks such as the Internet and
local-area and wide-area networks ("LANs" and "WANs", respectively).
The markets for the Company's products and systems have only recently begun
to develop and are rapidly evolving. In addition, the Company's products and
systems are new and based on emerging technologies. As is typical in the case of
new and rapidly evolving industries, demand and market acceptance for recently
introduced technology products are subject to a high level of uncertainty. Broad
acceptance of the Company's products by customers and end users is critical to
the Company's success and ability to generate revenues. The Company has a
limited operating history upon which an evaluation of the Company and its
prospects can be based. The Company's prospects must be considered in light of
the risks, expenses and difficulties frequently encountered by companies in the
early stage of development, particularly companies in new and rapidly evolving
markets. As of December 31, 1996, the Company had an accumulated deficit of
$3,508,187. Additionally, the Company's operating results may fluctuate
significantly in the future as a result of a variety of factors, many of which
are outside the Company's control. These factors include the volume of revenues
generated to the Company's strategic partners from sales of products and systems
incorporating the Company's technology or products, the mix of distribution
channels used by the Company, the timing of new product announcements and
release by the Company and its competitors, and general economic conditions.
However, the Company believes that adequate capital resources are available to
fund the Company's operations for a period of at least twelve months.
The Company was incorporated on December 8, 1995 under the name "Comnet
Corporation" and assumed its present name on December 18, 1995. For accounting
purposes, the Company emerged from the development stage during 1996.
Effective December 18, 1995, NetSpeak acquired the Internet Telephone
Company ("ITC"). ITC was incorporated for the purpose of developing telephony
communication software for use on the Internet and LANs and WANs. The
accompanying financial statements identified as for the Predecessor are for ITC
for the period from May 15, 1995 (inception) to the date of acquisition. The
accompanying financial statements identified as for the Successor are for
NetSpeak Corporation, including ITC on a consolidated basis from the date of its
acquisition, as of December 31, 1995 and 1996 and March 31, 1997 and for the
period from December 8, 1995 (inception) to December 31, 1995, for the year
ended December 31, 1996 and the three months ended March 31, 1996 and 1997. See
Note 2.
CONSOLIDATION-The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary, ITC. Significant intercompany
transactions and balances have been eliminated in consolidation.
ACCOUNTING ESTIMATES-The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
NET LOSS PER SHARE-Net loss per share was calculated by dividing net loss
by the weighted average number of common shares outstanding during 1996 adjusted
for the effect of common stock
F-7
<PAGE>
NETSPEAK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES-(CONTINUED)
equivalents, consisting of stock options and warrants, using the treasury stock
method with an initial public offering price of $8.75 per share. Pursuant to the
requirements of the Securities and Exchange Commission, common stock issued by
the Company during the twelve months immediately preceding the planned initial
public offering, plus the number of common equivalent shares pursuant to the
grant of common stock options or warrants during the same period, have been
included in the calculation of the shares used in computing net loss per share
as if they were outstanding for all of 1996. The Company issued 1,710,000 stock
options prior to February 1, 1996, which were not included in weighted average
shares outstanding because such options were issued prior to the twelve months
immediately preceding the proposed offering and the effect on net loss per share
would be anti-dilutive.
REVENUE RECOGNITION-The Company generates revenues from products, licenses
and fees for services. License revenue includes a combination of fees for
initial and annual license fees. Service revenues are derived from fees for
customer maintenance and support and engineering.
Product and license revenues are generally recognized upon product shipment
or delivery of permanent authorization codes. License fees which cover a
specified time period are amortized ratably over the term of the license
agreement.
Service revenues for customer maintenance and support are recognized
ratably over the term of the maintenance period which is typically twelve
months. Service revenues for engineering services are generally recognized when
the services are performed, except when customer acceptance is required, then
revenues are recognized when customer acceptance has been received.
Costs related to insignificant obligations, primarily telephone support,
are accrued upon product shipment.
Advance payments of products, licenses and services are reported as
unearned revenue until all conditions for revenue recognition are met.
RESEARCH AND DEVELOPMENT-Research and development expenditures are charged
to operations as incurred. Statement of Financial Accounting Standard ("SFAS")
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," requires capitalization of certain software development
costs once technological feasibility has been established.
Based on the Company's product development process, technological
feasibility is established upon completion of a working model. Costs incurred by
the Company between completion of the working model and the point at which the
product is ready for general release have been insignificant. All research and
development costs have been expensed as incurred.
CASH AND CASH EQUIVALENTS-Cash and cash equivalents include cash and
short-term investments purchased with a maturity of three months or less.
PROPERTY AND EQUIPMENT-Property and equipment is recorded at cost.
Depreciation is provided on the straight-line basis over the estimated useful
lives of the assets. Estimated useful lives range from 3 to 5 years.
FAIR VALUE OF FINANCIAL INSTRUMENTS-SFAS No. 107, "Disclosure about Fair
Value of Financial Instruments," requires disclosure of the fair value of
financial instruments, both assets and
F-8
<PAGE>
NETSPEAK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES-(CONTINUED)
liabilities, recognized and not recognized in the Consolidated Balance Sheets of
the Company, for which it is practicable to estimate fair value. The estimated
fair values of financial instruments which are presented herein have been
determined by the Company using available market information. There were no
significant differences as of December 31, 1995 and 1996 in the carrying value
and fair value.
INCOME TAXES-Income taxes are provided based on the treatment prescribed by
SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires accounting
for income taxes based on the liability method and, accordingly, deferred income
taxes are provided to reflect temporary differences between financial and tax
reporting bases of assets and liabilities.
UNAUDITED INTERIM FINANCIAL STATEMENTS-The interim consolidated financial
statements and the related information in the notes as of March 31, 1997 and for
the three months ended March 31, 1996 and 1997 are unaudited. Such interim
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements and, in the opinion of management,
reflect all adjustments (consisting only of normal recurring accruals) necessary
for a fair presentation of the financial position, the results of operations and
cash flows for the interim periods presented. The results of operations for the
interim periods presented are not necessarily indicative of the results to be
expected for the full year.
RECLASSIFICATIONS-Certain reclassifications have been made to prior year
statements to conform to current year presentations.
2. ACQUISITION OF ITC
EFFECTIVE DECEMBER 18, 1995, THE COMPANY ACQUIRED ITC BY ISSUING 2,500,000
SHARES OF THE Company's common stock, valued at $500,000, in exchange for all of
the outstanding shares of ITC. The acquisition was accounted for as a purchase.
The purchase price was allocated to the assets acquired, including purchased
research and development in process, and liabilities assumed based upon their
fair value on the date of acquisition. ITC's only activities from inception to
the date of acquisition consisted of research and development of telephony
communication software, and as such operating activities did not commence. As of
the date of the acquisition, technological feasibility of the telephony
communication software in process of development had not been established and
there was no alternative use; accordingly, the portion of the purchase price
allocated to purchased research and development was immediately expensed in
accordance with general accepted accounting principles. Pro forma information
giving effect to the acquisition is not presented because such information would
not be significantly different from that in the historical statements of
operations. The following summarizes the acquisition:
<TABLE>
<S> <C>
Equipment acquired .................................... $ 24,527
Purchased research and development ..................... 556,982
Accounts payable assumed .............................. (43,927)
Acquisition costs paid and cash overdraft assumed ...... (37,582)
-----------
Common stock issued .................................... $ 500,000
===========
</TABLE>
F-9
<PAGE>
NETSPEAK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
3. SHAREHOLDERS' EQUITY
THE INITIAL CAPITALIZATION OF THE COMPANY CONSISTED OF THE ISSUANCE OF
2,500,000 SHARES OF COMMON stock for $500,000.
ITC's capitalization since inception consisted of the issuance of 1,000
shares of common stock for $1,000 cash and additional capital contributions of
$128,200.
During the period from December 8, 1995 to December 14, 1995, the Company
issued 450,000 shares of common stock for $90,000.
In the first quarter of 1996 the Company sold 1,204,000 shares of common
stock for $2.50 per share in a private placement raising $2,992,028, net of
offering costs. In January 1996, the Company issued an option to purchase
250,000 shares of common stock for $2.50 per share to a consulting firm, which
assisted the Company with its private placement. The fair value of this option,
$271,339, was recorded as a cost of the offering. The option is exercisable
through January 2003.
In June 1996, the Company issued 207,679 shares of common stock to Creative
Technology Ltd. ("Creative") at a price of $5.05 per share raising an aggregate
of $943,698, net of offering costs. The Company also issued Creative a 21 month
warrant to purchase up to an additional 207,679 shares of common stock at a
price of $5.05 per share, which warrant is only exercisable if Creative
distributes, during a specified period, a predetermined quantity of the
Company's Internet telephone client software product licensed to Creative. The
Company will record as an expense the fair value, $66,217, of the warrant if the
product distribution requirement becomes likely to be met. At December 31, 1996
no amounts have been recorded. The Company derived 44% of its revenues for the
year ended December 31, 1996 and at December 31, 1996, had $300,000 in accounts
receivable from Creative.
In August 1996, the Company issued 769,853 shares of common stock and a
warrant to purchase up to an additional 452,855 shares of common stock at a
price of $5.50 per share for a six year period expiring in August 2002 to
Motorola , Inc. ("Motorola") raising $3,993,864, net of offering costs. In the
event the Company consummates an underwritten public offering of its common
stock at a price of at least $7.00 per share resulting in the receipt by the
Company of net proceeds of not less than $10,000,000, the Company, at its
option, upon not less than 20 business days notice given prior to the planned
closing date of such public offering, may require Motorola to exercise the
warrant, provided, however, that within 15 business days of receipt of the
Company's notice, Motorola may elect to cancel the warrant unexercised. On March
26, 1997 Motorola advised the Company that it will exercise the warrant in full
upon consummation of the Company's initial public offering provided that the
offering meets the criteria set forth above.
Employees exercised stock options to purchase 53,000 shares of common stock
for $132,500 during the year ended 1996.
During the three months ended March 31, 1997 the Company incurred $298,900
in deferred costs related to the Company's pending initial public offering of
which $250,000 was included in accounts payable at March 31, 1997.
The Company has authorized 1,000,000 shares of preferred stock, $.01 par
value. No shares of preferred stock have been issued.
Shareholders owning 5,100,000 shares of the Company's common stock have
entered into a Shareholders Agreement which, among other matters, provides for
restrictions on the sale or transfer of shares by such shareholders and
specifies procedures for the election of directors. The Shareholders Agreement
terminates upon the consummation of an initial public offering by the Company.
F-10
<PAGE>
NETSPEAK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
--------------- -------------
<S> <C> <C>
Computer equipment ........................... $25,759 $ 1,029,808
Furniture, fixtures and office equipment ...... 5,531 155,673
Leasehold improvements ........................ - 62,643
-------- -----------
Property and equipment, cost .................. 31,290 1,248,124
Accumulated depreciation ..................... - (198,172)
-------- -----------
Property and equipment, net .................. $31,290 $ 1,049,952
======== ===========
</TABLE>
Depreciation expense during 1995 and 1996 was $0 and $198,172,
respectively.
5. STOCK BASED COMPENSATION
THE COMPANY MAY GRANT STOCK OPTIONS UNDER THE 1995 STOCK OPTION PLAN (THE
"PLAN") TO KEY employees, consultants, officers and directors for up to 2.7
million shares of common stock. Under the Plan, the exercise price of each
option must not be less than the fair market value of the Company's stock on the
date of grant and an option's maximum term is 10 years. Incentive stock options
vest equally over 3 years beginning on the first anniversary date of the grant,
while non-statutory options vest over various periods.
A summary of the status of the Plan as of December 31, 1995 and 1996, and
changes during the periods ended on those dates is presented below:
<TABLE>
<CAPTION>
DECEMBER 8, 1995 TO YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------------------- ----------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- ----------------- ----------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period ...... - - 550,000 $1.00
Granted ................................. 550,000 $1.00 1,620,500 3.24
Exercised .............................. - - 53,000 2.50
Canceled .............................. - - 132,000 1.36
------- ------ ---------- -------
Outstanding at end of year ............... 550,000 $1.00 1,985,500 $2.76
======= ====== ========== =======
Options exercisable at year-end ......... 150,000 1,149,997
Weighted-average fair value of options
granted during the year .................. $ -
$ 0.83
</TABLE>
F-11
<PAGE>
NETSPEAK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
5. STOCK BASED COMPENSATION-(CONTINUED)
The following table summarizes information about employee stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ---------------------------------
WEIGHTED-AVERAGE
RANGE OF REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ----------------- -------------- --------------------------- ------------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$1.00 450,000 9.0 $1.00 249,997 $1.00
2.50 1,132,500 9.1 2.50 900,000 2.50
5.05 to 5.50 403,000 9.7 5.47 - -
- ---------------- ---------- ---- ------- ---------- -------
$ 1.00 to 5.50 1,985,500 9.2 $2.76 1,149,997 $2.17
================ ========== ==== ======= ========== =======
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations in measuring stock
based compensation, including options. Accordingly, no compensation expense has
been recognized for options granted under the Plan. Had compensation expense
been determined based upon the fair value at the grant date for awards under the
Plan consistent with SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company's net loss, on a pro forma basis, for 1995 and 1996 would have been
$292,183 or $0.04 per share and $3,122,726 or $0.38 per share, respectively.
The fair value of each employee stock option grant has been estimated on
the date of grant using the Black-Scholes option pricing model with the
following assumptions: dividend yield 0%, expected volatility 0%, risk-free
interest rates ranging between 5.39% and 6.77%, and an expected life of 5 years.
6. COMMITMENTS AND CONTINGENCIES
THE COMPANY LEASES ITS OFFICE FACILITY AND CERTAIN EQUIPMENT UNDER
OPERATING LEASES WITH REMAINING lease terms in excess of one year. Future
minimum lease payments as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ---------------------------
<S> <C>
1997 ..................... $138,025
1998 ..................... 142,086
1999 ..................... 137,734
2000 ..................... 5,713
--------
$423,558
========
</TABLE>
Rent expense for the periods ended December 31, 1995 and 1996 was $1,000
and $67,000, respectively.
In September 1996, the Company established a 401(k) deferred compensation
plan for all employees meeting certain service requirements. The Company matches
employee contributions to the Plan at its discretion. No matching contributions
were made during the year ended December 31, 1996. The Company pays the
administrative costs of the plan.
The Company has entered into employment agreements with six officers with
initial salaries aggregating $735,000 annually. The terms of these agreements
are for two years.
F-12
<PAGE>
NETSPEAK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
6. COMMITMENTS AND CONTINGENCIES-(CONTINUED)
The Company has entered into Indemnification Agreements with each of the
existing directors and officers, which provides for the maximum indemnification
permitted by law.
The Company may, from time to time, be involved in certain legal actions
arising in the ordinary course of business. In the opinion of management, the
outcome of such actions known to date will not have a material adverse effect on
the Company's financial position or results of operations.
Elk Industries has asserted, in a letter to the Company, just prior to the
November 1996 expiration of U.S. Patent No. 4,128,773, owned by Elk Industries,
that the Company's WebPhone client software product infringed the now expired
patent. Given the initial distribution of the Company's WebPhone client software
prior to expiration of the asserted patent, the Company believes any potential
liability related to the allegation is not significant. Accordingly, the Company
believes that this matter will not have a material effect on its financial
position or results of operations.
In May 1997, the Company received a letter from e-Net, Inc. ("e-Net")
alleging that the Company's WebPhone product infringes U.S. Patent No. 5,526,353
owned by e-Net. Although, there can be no assurance of the outcome of this
uncertainty, following an analysis of the subject patent and the WebPhone
product, management believes the allegations are without merit and that any
potential liability related to e-Net's allegations will not have a material
effect on the Company's financial position and results of operations.
At present, there are few laws or regulations that specifically address
access to or commerce on the Internet. The increasing popularity and use of the
Internet, however, enhance the risk that the governments of the United States
and other countries in which the Company sells or expects to sell its products
will seek to regulate computer telephony and the Internet with respect to, among
other things, user privacy, pricing and the characteristics and quality of
products and services . The Company is unable to predict the impact, if any,
that future legislation, legal decisions or regulations may have on its
business, financial condition or results of operations.
7. INCOME TAXES
THE COMPANY'S PROVISION FOR INCOME TAXES CONSISTS OF THE FOLLOWING:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Current-Foreign ...... $ 225,000
Deferred-Foreign ...... (182,000)
--------
$ 43,000
========
</TABLE>
Income taxes for the year ended December 31, 1996 were attributable to
income taxes paid to the Singapore government related to license fees received
pursuant to an agreement with Creative.
F-13
<PAGE>
NETSPEAK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
7. INCOME TAXES-(CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and their income tax bases. As of December 31, 1995 and 1996, the
Company had deferred tax assets as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
--------------- --------------
<S> <C> <C>
Deferred tax assets:
Unearned revenue-foreign ............... $ - $ 182,000
Net operating loss carryforwards ...... 110,000 1,291,000
Valuation allowance ..................... (110,000) (1,291,000)
---------- ------------
Net deferred tax asset ............... $ - $ 182,000
========== ============
</TABLE>
The valuation allowance is based on the uncertainty as to the utilization
of the net operating loss carryforwards due to the Company's short operating
history and losses to date.
As of December 31, 1996, the Company had approximately $ 3,254,000 of
federal and state net operating loss carryforwards available to offset future
taxable income; such carryforwards begin to expire in 2009. Under the Tax Reform
Act of 1986, the amounts of and benefits from net operating losses carried
forward may be impaired or limited in certain circumstances. Events which may
cause limitations in the amount of net operating losses that the Company may
utilize in any one year include, but are not limited to, a cumulative ownership
change of more than 50% over a three year period. As of December 31, 1996, the
effect of such limitations, if imposed, is not expected to be material.
F-14
<PAGE>
----------------------------- -----------------------------
----------------------------- -----------------------------
No dealer, salesperson, or any other person has BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR SINCE THE DATES AS OF WHICH INFORMATION IS SET FORTH HEREIN. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION.
---------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Prospectus Summary ........................... 3
Risk Factors ................................. 7
Use of Proceeds .............................. 13
Dividend Policy .............................. 14
Dilution .................................... 14
Capitalization .............................. 15
Selected Consolidated Financial Data ......... 16
Management's Discussion and
Analysis of Financial Condition
and Results of Operations .................. 17
Business .................................... 21
Management ................................. 34
Certain Transactions ........................ 39
Principal Shareholders ..................... 40
Description of Capital Stock ............... 41
Shares Eligible for Future Sale ............ 43
Underwriting ................................. 44
Legal Matters .............................. 45
Experts .................................... 45
Additional Information ..................... 46
Index to Consolidated Financial Statements ... F-1
</TABLE>
UNTIL JUNE 23, 1997, (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE SHARES OF COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
2,400,000 Shares
NETSPEAK CORPORATION LOGO
Common Stock
-------------------
P R O S P E C T U S
-------------------
JOSEPHTHAL LYON & ROSS
CRUTTENDEN ROTH
May 29, 1997
----------------------------- -----------------------------
----------------------------- -----------------------------
