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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended September 30, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to .
Commission File Number 0-22521
NETSPEAK CORPORATION
(Exact Name of Registrant
as Specified in Its Charter)
Florida 65-0627616
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
902 Clint Moore Road, Suite 104
Boca Raton, Florida 33487
561-998-8700
(Address, including zip code, and telephone
number (including area code) of registrant's
principal executive office)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the last 90 days. [X] YES [ ] NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS SHARES OUTSTANDING AT OCTOBER 31, 1998
- ---------------------------- --------------------------------------
Common Stock, $.01 par value 12,557,889
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NETSPEAK CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
PAGE NO.
--------
Condensed Consolidated Balance Sheets as of December 31, 1997
and September 30, 1998.................................................. 3
Condensed Consolidated Statements of Operations for the three and nine
months ended September 30, 1997 and 1998................................ 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1997 and 1998........................... 5
Notes to Condensed Consolidated Financial Statements....................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 9
PART II - OTHER INFORMATION
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Other Information..........................................................15
Signatures.................................................................16
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PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. FINANCIAL STATEMENTS
NETSPEAK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 4,718 $ 34,170
Short-term investments 14,336 10,799
Accounts receivable, net 898 4,806
Inventory 269 1,000
Prepaid and other current assets 252 508
Deferred tax asset 33 3
-------- --------
Total current assets 20,506 51,286
Property and equipment, net 2,178 4,004
Other assets 517 695
-------- --------
$ 23,201 $ 55,985
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 676 $ 1,148
Accrued compensation 687 1,355
Other accrued expenses 474 537
Unearned revenue 256 2,452
-------- --------
Total current liabilities 2,093 5,492
-------- --------
Commitments and contingencies -- --
Shareholders' equity:
Preferred stock: 1,000,000 shares of $.01 par value
authorized; no shares issued or outstanding
Common stock: 25,000,000 and 75,000,000 shares of
$.01 par value authorized at December 31, 1997
and September 30, 1998, respectively; 10,554,721 and
12,557,889 shares issued and outstanding at
December 31, 1997 and September 30, 1998, respectively 106 126
Additional paid-in capital 29,590 67,589
Unrealized gain on investments -- 143
Accumulated deficit (8,588) (17,365)
-------- --------
Total shareholders' equity 21,108 50,493
-------- --------
$ 23,201 $ 55,985
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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NETSPEAK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
1997 1998 1997 1998
---------- --------- --------- --------
<S> <C> <C> <C> <C>
Net revenues $ 1,503 $ 769 $ 3,537 $ 6,112
Operating expenses:
Cost of revenues 180 176 386 1,412
Research and development 1,412 2,947 3,713 7,203
Sales and marketing 810 1,932 1,885 5,480
General and administrative 447 819 1,127 2,287
-------- -------- -------- --------
Total operating expenses 2,849 5,874 7,111 16,382
Loss from operations (1,346) (5,105) (3,574) (10,270)
Interest and other income 287 675 470 1,906
Other charges -- -- -- (383)
-------- -------- -------- --------
Loss before income taxes (1,059) (4,430) (3,104) (8,747)
Income taxes 92 4 180 30
-------- -------- -------- --------
Net loss $ (1,151) $ (4,434) $ (3,284) $ (8,777)
======== ======== ======== ========
Net loss per share (basic and diluted) $ (0.11) $ (0.35) $ (0.36) $ (0.72)
======== ======== ======== ========
Weighted-average shares outstanding 10,555 12,541 9,006 12,182
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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NETSPEAK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997 1998
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,284) $ (8,777)
Adjustments to reconcile net loss to net cash
used in operations:
Depreciation 406 1,055
Provision for bad debts -- 516
Deferred taxes 135 30
Changes in assets and liabilities:
Accounts receivable (230) (4,424)
Inventory (180) (731)
Prepaid and other current assets (350) (256)
Other assets (137) (178)
Accounts payable 611 472
Accrued compensation 486 668
Other accrued expenses 203 63
Unearned revenue (1,882) 2,196
-------- --------
Net cash used in operating activities (4,222) (9,366)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (939) (2,881)
Purchases of short-term investments (20,957) (9,788)
Maturities and sales of short-term investments 4,695 13,468
-------- --------
Net cash provided by (used in) investing activities (17,201) 799
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 17,943 36,753
Proceeds from exercise of warrant 2,491 --
Proceeds from exercises of employee stock options 8 1,266
-------- --------
Net cash provided by financing activities 20,442 38,019
-------- --------
Net increase (decrease) in cash and cash equivalents (981) 29,452
Cash and cash equivalents, beginning of period 6,295 4,718
-------- --------
Cash and cash equivalents, end of period $ 5,314 $ 34,170
======== ========
SUPPLEMENTAL INFORMATION:
Cash paid for income taxes $ 30 $ --
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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NETSPEAK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The interim condensed consolidated financial statements of NetSpeak
Corporation ("NetSpeak" or the "Company") as of September 30, 1998 and for the
three and nine months ended September 30, 1997 and 1998 are unaudited. Such
interim condensed 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, 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. Certain reclassifications have
been made to prior year statements to conform to current year presentations. The
interim consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto, contained in the
Company's 1997 Form 10-K.
2. SALES OF COMMON STOCK
On January 5, 1998, the Company entered into a joint development and a
stock purchase agreement with Bay Networks, Inc. ("Bay Networks"). In
conjunction with the agreement, on February 3, 1998, the Company issued
1,334,171 shares of common stock to Bay Networks, raising $36,753,000, net of
offering costs.
On March 18, 1998, NetSpeak entered into a joint development and a
technology license agreement with Motorola, Inc. ("Motorola") which included a
$30 million multi-year minimum purchase commitment for the Company's products
subject to certain conditions. In conjunction with the agreement, Motorola
announced a cash tender offer for 3.0 million shares of the Company's Common
Stock at a price of $30.00 per share. On April 22, 1998, Motorola consummated
its tender offer, acquiring 2,686,470 shares of the Company's Common Stock. Upon
the consummation of the tender offer, Motorola purchased an additional 35,000
shares of common stock from two officers at the tender offer price. As of
September 30, 1998, Motorola owned 31.4% of the Company's total outstanding
common stock.
3. NET LOSS PER SHARE
The Company computes net loss per share under Statement of Financial
Accounting Standards ("SFAS") No. 128 which requires a dual presentation of
basic and diluted earnings per share on the face of the income statement. Basic
earnings per share excludes dilution and is computed by dividing income or loss
attributable to common shareholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were converted into common stock, but such securities or contracts
are excluded if their effects are anti-dilutive. The Company excluded stock
options and warrants to purchase 3,191,497 common shares from the
weighted-average shares outstanding calculation for the three and nine months
ended September 30, 1998 as their effect was anti-dulitive.
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4. COMMITMENTS AND CONTINGENCIES
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.
In recent months, five similar class action lawsuits were filed against the
Company and its senior officers and directors. The complaints allege that the
Company made false and misleading statements to shareholders in connection with
the Motorola tender offer and that certain of the Company's senior officers and
directors improperly tendered their shares. The Company believes that these
actions are without merit and intends to vigorously defend thereagainst.
Although the outcome of these actions cannot presently be determined, an adverse
resolution of these matters could have a material adverse 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.
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year, consequently, in the
year 2000 such systems may be unable to accurately process certain date-based
information. The Company can potentially be affected by this issue in several
areas including computer systems and software which are utilized in the
Company's infrastructure, the products which the Company develops and sells and
the impact of the Year 2000 Issue on the Company's significant vendors,
strategic business partners and customers.
The Company's Year 2000 compliance activities include the identification
and evaluation of systems that are critical to the Company's operations,
including systems of its significant vendors, strategic business partners and
customers. Additionally, the Company will also evaluate the Year 2000 compliance
of all of the products that the Company sells, which include internally
developed software and third party computer related components. Evaluation
procedures for the Company's internal critical systems and its products for sale
consist of performing Year 2000 test simulations and obtaining Year 2000
compliance documentation for external products and components, as applicable. In
order to evaluate Year 2000 compliance for the Company's significant vendors,
strategic business partners and customers, the Company obtains published Year
2000 compliance documentation from such entries.
The Company has examined the architecture of its products, as well as
relevant documentation related to third party components that are integrated
into these products. Based upon these examinations, the Company's products
appear to be Year 2000 compliant. In order to validate these preliminary
findings, to date the Company has completed limited test procedures on certain
of its internally developed products, as well as the associated third party
components. The results of these tests do not indicate any instances of
non-compliance. To date, the Company has reviewed many of its third party
hardware and software applications utilized in its infrastructure and have
obtained documentation from the manufacturers certifying Year 2000 compliance.
The Company generates a significant portion of its revenue from several of
its strategic partners and, as a result, revenues could be materially impacted
if the Year 2000 Issue adversely affects the operations of these partners. Based
upon the examination of available information, the Company does not believe that
the Year 2000 Issue will have a material adverse effect on the operations of its
significant strategic partners and customers.
The Company expects that its testing procedures and any required Year 2000
compliance activities will be completed by December 31, 1998. Should the Company
encounter any items that are not Year 2000 compliant in the course of its
evaluations and testing, the Company will take necessary actions to correct the
matter. To date, costs incurred in evaluating the Company's Year 2000 compliance
have been minimal. The Company does not anticipate that additional Year 2000
compliance activities and corrective actions, where and if required, will have a
material effect on the Company's business, financial position or results of
operations.
Nothwithstanding the foregoing, there can be no assurance that the Year
2000 compliance activities performed by the Company will adequately identify and
test all of the Company's products and critical internal and external systems to
ensure Year 2000 compliance. Moreover, there can be no assurance that the
systems of the Company's significant vendors, strategic business partners and
customers will be Year 2000 compliant which could result in a material adverse
effect on the Company.
5. RECENT ACCOUNTING PRONOUNCEMENT
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position (SOP) 97-2, "Software Revenue
Recognition," which the Company has adopted for transactions entered into for
the year beginning January 1, 1998. SOP 97-2 provides guidance for recognizing
revenue on software transactions and supersedes SOP 91-1, "Software Revenue
Recognition." In March 1998, the AICPA issued SOP 98-4, "Deferral of the
Effective Date of a Provision of SOP 97-2, Software Revenue Recognition." SOP
98-4 defers, for one year, the application of certain passages in SOP 97-2
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which limit what is considered vendor-specific objective evidence necessary to
recognize revenue for software licenses in multiple-element arrangements when
undelivered elements exist. The adoption of SOP 97-2 and 98-4 did not have a
material effect on the Company's financial position and results of operations.
6. COMPREHENSIVE INCOME (LOSS)
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income."
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss $(1,151) $(4,434) $(3,284) $(8,777)
Adjustment to reconcile net loss to
comprehensive income (loss):
Unrealized gain on investments -- 116 -- 143
------- ------- ------- -------
Comprehensive income (loss) $(1,151) $(4,318) $(3,284) $(8,634)
======= ======= ======= =======
</TABLE>
7. SHAREHOLDERS' EQUITY
On June 18, 1998, the Company's shareholders approved an increase in
authorized Common Stock from 25,000,000 shares, $0.01 par value per share, to
75,000,000 shares, $0.01 par value per share. The shareholders also approved an
amendment to the Company's 1995 Stock Option Plan to increase the number of
shares reserved for issuance thereunder from an aggregate of 2,700,000 shares to
an aggregate of 5,500,000 shares. Additionally, the Company's shareholders
approved the NetSpeak Corporation Employee Stock Purchase Plan, under which
400,000 shares of Common Stock are available for purchase by eligible employees
of the Company or any of its subsidiaries.
8. SUBSEQUENT EVENT
On November 10, 1998 the Company appointed Michael Rich as its President
and Chief Operating Officer. Mr. Rich was also elected to the Company's board of
directors. The Company entered into an employment agreement with Mr. Rich for a
period of three years, which provided for a minimum annual salary of $200,000, a
minimum bonus during the first year of $100,000 and an option to purchase
250,000 shares of the Company's Common Stock. In addition, the Company lent Mr.
Rich the sum of $400,000 evidenced by an interest-bearing promissory note. The
Company will forgive one third of the principal amount of the loan and accrued
interest thereon, on the first, second and third anniversary of the employment
agreement, provided that Mr. Rich continues to be employed by the Company on
such date. In the event Mr. Rich leaves the Company, any unforgiven principal
amount of the loan, together with accrued interest thereon, will be payable in
full. Additionally, Robert Kennedy, the Company's previous President and Chief
Operating Officer, has been appointed Vice-Chairman of the Company's board of
directors.
8
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NetSpeak Corporation ("NetSpeak" or the "Company") cautions readers that
certain important factors may affect the Company's actual results and could
cause such results to differ materially from any forward-looking statements
which may be deemed to have been made in this report or which are otherwise made
by or on behalf of the Company. For this purpose, any statements contained in
this report that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the generality of the foregoing,
words such as "may", "will", "expect", believe", "anticipate", "intend",
"could", "would", "estimate", or "continue" or the negative other variations
thereof or comparable terminology are intended to identify forward-looking
statements. Factors which may affect the Company's results include, but are not
limited to, the Company's limited operating history, the need for ongoing
product development in an environment of rapidly changing technology, the
uncertainty of acceptance of the Company's products in the marketplace, the
uncertainty of the Internet and its use as a means for real-time voice and video
communications, the uncertainty of future governmental regulation, the highly
competitive nature of the industry and the Company's ability to compete
successfully, the Company's ability to successfully enter into new, and maintain
existing, strategic relationships, the Company's ability to develop a recurring
revenue stream, manage growth, obtain patent protection, obtain additional funds
and other risks discussed elsewhere in this Report and in the Company's other
filings with the Securities and Exchange Commission.
INTRODUCTION
NetSpeak develops, markets, licenses and supports a suite of intelligent
software modules which provide business solutions for concurrent, real-time
interactive voice, video and data communications over packetized data networks
such as the Internet and Local Area Networks and Wide Area Networks. NetSpeak's
technologies allow organizations to build voice and video-enabled communications
networks, or to add these communications capabilities to their existing
packetized data networks.
The Company released its first product in February 1996 and, for
accounting purposes, emerged from the development stage during 1996. The Company
generates revenues from the sale of products, licenses and fees for services.
The Company's products are licensed primarily to service providers, including
telecommunications carriers, cable companies and other common carriers, business
enterprises, original equipment manufacturers, systems integrators, value-added
resellers and directly to individual client software end-users. Service revenues
consist of customer support, maintenance 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 a limited operating history upon which an evaluation of the
Company and its prospects can be based and, at September 30, 1998, had an
accumulated net loss of $17.4 million. The limited operating history of the
Company makes its future results of operations difficult to predict. 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 effectiveness of the sales and
marketing efforts of the Company's products by the Company and its strategic
partners, 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, the timing in the deployment of the Company's
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products by customers, technical difficulties with respect to product
development or the use of products developed by the Company and general economic
conditions.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net revenues for the three months ended September 30, 1998 were $769,000 as
compared to $1.5 million for the three months ended September 30, 1997. Net
revenues were $6.1 and $3.5 million for the nine months ended September 30, 1998
and 1997, respectively.
The Company's sales mix during 1998 primarily consisted of gateway systems
and IP telephony software applications. Net revenues generated from gateway
systems primarily represent the sale of fully integrated "turn-key" systems,
where the Company integrates third party computer hardware and software
components with its gateway software. Net revenues from IP telephony
applications primarily consist of software based solutions. Sales of gateway
systems and IP telephony applications accounted for 65% and 83% of net revenues
for the three and nine months ended September 30, 1998, as compared to 45% and
26% for the three and nine months ended September 30, 1997, respectively. The
increase in net revenues for the nine months ended September 30, 1998 was due to
greater sales of the Company's gateway systems and IP telephony software
applications resulting from increased trial deployments by new and existing
customers. The Company's principal customers for these products are equipment
suppliers and service providers, primarily consisting of next generation
telephone companies.
Net revenues for the three months ended September 30, 1998 decreased
$734,000 as compared to the three months ended September 30, 1997. The decline
in net revenues for the period was due to lower sales of the Company's gateway
systems and IP telephony software applications. This reduction was due to a
combination of several factors, including, but not limited to, increased
competition in the industry, uncertainty regarding the acceptance of the
Company's products, consolidation within the telecommunications industry and
reduced sales to several of the company's strategic partners. These risks are
discussed in more detail below.
During the quarter ended September 30, 1998, the Company shipped to
Motorola, Inc. ("Motorola"), a strategic partner of the Company, $2.3 million in
software products, primarily consisting of IP telephony software applications.
The Company deferred recognition of the related revenue as a result of certain
exchange provisions associated with the order. The exchange provisions entitle
Motorola to upgrade and/or exchange the software included in the order for other
NetSpeak products for a period of 18 months. The Company expects to recognize
revenue on this order when no further significant post-delivery obligations
exist, although not later than 18 months from the date of shipment at which
time the exchange provisions expire. The exchange provisions are not applicable
to Motorola's remaining $27.5 million multi-year purchase commitment for
NetSpeak's products.
Net revenues from client software represented 6% and 5% of net revenues for
the three and nine months ended September 30, 1998, respectively. Client
software revenues for 1998 were related to sales of the Company's WebPhone
client software. Net revenues from client software for the three and nine months
ended September 30, 1997 represented 43% and 46% of net revenues, respectively.
Client software revenues during 1997 related to sales of the Company's WebPhone
client software and a product license and distribution agreement with Creative
Technology Ltd. ("Creative"). The Company anticipates that net revenues
generated from client software products will remain relatively consistent with
the current period as the Company's sales efforts are focused on its gateway
systems and IP telephony software applications.
Since its inception, the Company has generated a significant percentage of
its revenues through several of its strategic partners and, as a result, the
Company is highly dependent upon the sales and
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marketing activities of these strategic partners for its products. A significant
reduction in revenues from such partners, as evidenced in the current period,
could produce an unevenness in the Company's revenue stream in any given period.
In an effort to broaden the distribution of the Company's products and diversify
its customer base, the Company began selling products to smaller, less
established enterprises. These less established customers have not demonstrated
the historical operating results nor do they possess the financial resources as
many of the Company's strategic partners, accordingly, the Company's credit risk
exposure has increased. Although the Company is diversifying its customer base,
the Company believes that its dependence on its strategic partners will continue
for the foreseeable future and that the Company's revenue stream will be
significantly impacted by the success of its partners and customers.
The IP telephony industry is in the early stages of development and is
rapidly changing as voice and data networks are beginning to converge. As a
result, the timing in the demand and market acceptance for these recently
introduced products and technologies are subject to a high degree of
uncertainty. Additionally, this convergence has also led to consolidation within
the telecommunications and data networking industries. Specifically, Bay
Networks, Inc. ("Bay Networks"), a strategic partner of the Company, was
recently acquired by Northern Telecom Limited ("Northern Telecom"). Subsequent
to the announced acquisition, certain joint development projects between the
companies were suspended as a result in the change in ownership of Bay Networks.
The companies are continuing to evaluate future endeavors together, although the
ultimate relationship between the Northern Telecom and the Company is uncertain
at this time. Furthermore, the IP telephony marketplace is becoming intensely
competitive. A number of more established industry participants, which possess
longer operating histories, greater name recognition, larger customer bases and
significantly greater financial, technical and marketing resources than the
Company, are introducing competitive products into the market. Such companies
have certain inherent competitive advantages over the Company. As a result of
the above factors, there exists some uncertainty regarding the Company's ability
to sustain a consistent revenue stream in the future.
Cost of revenues for the three months ended September 30, 1998 was
$176,000, or 23% of net revenues, as compared to $180,000, or 12% of net
revenues, for the three months ended September 30, 1997. Cost of revenues was
$1.4 million, or 23% of net revenues, and $386,000, or 11% of net revenues, for
the nine months ended September 30, 1998 and 1997, respectively. The increase in
cost of revenues as a percentage of net revenues was primarily related to a
shift in the Company's sales mix towards the sale of fully integrated "turn-key"
gateway systems, which include lower margin third party components. The Company
offers "turn-key" systems as a short-term means of expediting the distribution
of its products. As a result of the potential variability in the Company's sales
mix between integrated and software based products, cost of revenues may
fluctuate as a percentage of net revenues.
Research and development expenses for the three months ended September 30,
1998 were $2.9 million as compared to $1.4 million for the three months ended
September 30, 1997. Research and development expenses were $7.2 million and $3.7
million for the nine months ended September 30, 1998 and 1997, respectively. The
increase in research and development expenses was due to the expansion of the
Company's research and development staff and greater equipment depreciation as a
result of the expansion thereof. All research and development costs have been
expensed as incurred. The Company expects to increase research and development
expenses in future periods in order to perform new product development and
product enhancements.
Sales and marketing expenses for the three months ended September 30, 1998
were $1.9 million as compared to $810,000 for the three months ended September
30, 1997. Sales and marketing expenses were $5.5 million and $1.9 million for
the nine months ended September 30, 1998 and 1997, respectively. The increase in
sales and marketing expenses resulted primarily from the expansion of the
Company's sales and marketing staff, resulting in greater personnel costs and
direct selling expenses associated with efforts to increase the distribution of
the Company's products. During 1998, the Company also
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established an allowance for uncollectible customer accounts as a result of the
significant increase in trade credit sales from the prior year, as well as the
change in the Company's customer base discussed above. Sales and marketing
expenses may increase in future periods as the Company seeks to expand its sales
and marketing activities.
General and administrative expenses for the three months ended September
30, 1998 were $819,000 as compared to $447,000 for the three months ended
September 30, 1997. General and administrative expenses were $2.3 million and
$1.1 million for the nine months ended September 30, 1998 and 1997,
respectively. The increase in general and administrative expenses was due to the
expansion of the Company's corporate infrastructure primarily through the
addition of personnel as well as greater professional service fees. General and
administrative expenses may increase in future periods upon further expansion of
the Company's infrastructure.
Interest and other income for the three months ended September 30, 1998 was
$675,000 as compared to $287,000 for the three months ended September 30, 1997.
Interest and other income was $1.9 million and $470,000 for the nine months
ended September 30, 1998 and 1997, respectively. The increase in interest income
was due to interest earned on net proceeds from the Bay Networks investment,
consummated in February 1998 as described below and the Company's initial public
offering ("IPO") in May 1997.
Income taxes for the three months ended September 30, 1998 were $4,000 as
compared to $92,000 for the three months ended September 30, 1997. Income taxes
were $30,000 and $180,000 for the nine months ended September 30, 1998 and 1997,
respectively. Such taxes were the result of income taxes paid to the Singapore
government related to license fees received pursuant to agreements with
Creative. The decrease in income taxes during 1998 was due to a reduction in
revenue from Creative.
In connection with the expansion of its strategic partnership with Motorola
in March 1998, the Company entered into a joint development and technology
license agreement with Motorola which includes a $30.0 million multi-year
minimum purchase commitment for the Company's products subject to certain
conditions. In conjunction with the agreement, Motorola announced a cash tender
offer for 3.0 million shares of the Company's Common Stock at a price of $30.00
per share. On April 22, 1998, Motorola consummated its tender offer, acquiring
2,686,470 shares of the Company's Common Stock. Upon the consummation of the
tender offer, Motorola purchased an additional 35,000 shares from two officers
at the tender officer price. The Company incurred $383,000 in other charges as a
result of the cash tender offer by Motorola. Such expenses were primarily the
result of professional fees incurred in connection with the tender offer.
LIQUIDITY AND CAPITAL RESOURCES
The Company currently does not have any available lines of credit. The
Company has financed its operations through sales of equity securities. Prior to
completion of the IPO, the Company raised approximately $8.7 million, net of
offering costs, from private sales of securities. In February 1998, the Company
issued 1.3 million shares of Common Stock to Bay Networks in a private
transaction, raising $36.8 million, net of offering costs. As of September 30,
1998, the Company had $45.0 million in cash, cash equivalents and short-term
investments.
Net cash used in operating activities during the nine months ended
September 30, 1998 and 1997 was $9.4 million and $4.2 million, respectively. Net
cash used in operating activities was primarily related to the expansion of the
Company's research and development activities, sales and marketing efforts and
the corporate infrastructure.
12
<PAGE>
Net cash provided by investing activities during the nine months ended
September 30, 1998 was $799,000. Net cash provided by investing activities
reflected $3.7 million in net sales of short-term investments which was
reinvested in cash equivalents offset by $2.9 million in capital expenditures,
primarily related to purchases of computer and test equipment and the expansion
of the Company's research and development facilities. Net cash used in investing
activities during the nine months ended September 30, 1997 was $17.2 million and
primarily related to net purchases of short-term investments.
Net cash provided by financing activities for the nine months ended
September 30, 1998 was $38.0 million which included net proceeds of $36.8
million from the sale of 1.3 million shares of Common Stock to Bay Networks. The
Company also received $1.2 million from exercises of employee stock options for
495,438 shares of Common Stock. Net cash provided by financing activities during
the nine months ended September 30, 1997 was $20.4 million. On June 3, 1997, the
Company closed on the IPO of its Common Stock. The Company offered and sold 2.4
million shares of Common Stock at an initial public offering price of $8.75 per
share, raising net proceeds of approximately $17.9 million. Upon consummation of
the IPO, Motorola exercised a previously granted warrant to purchase 452,855
shares of Common Stock for $2.5 million.
The Company has no material commitments other than those under office and
equipment operating leases. As a result of the Company's continued research and
development and sales and marketing efforts, capital expenditures are expected
to increase in future periods primarily through the purchase of computer-related
equipment. The Company anticipates that, based on its present plans and
assumptions, the current cash balances will be sufficient to enable it to
maintain its current and planned operations for a period of at least 12 months.
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. 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.
RECENT LITIGATION
In recent months, five similar class action lawsuits were filed against the
Company and its senior officers and directors. The complaints allege that the
Company made false and misleading statements to shareholders in connection with
the Motorola tender offer and that certain of the Company's senior officers and
directors improperly tendered their shares. The Company believes that these
actions are without merit and intends to vigorously defend thereagainst.
Although the outcome of these actions cannot presently be determined, an adverse
resolution of these matters could have a material adverse effect on the
Company's financial position and results of operations.
RECENT ACCOUNTING PRONOUNCEMENT
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position (SOP) 97-2, "Software Revenue
Recognition," which the Company has adopted for transactions entered into for
the year beginning January 1, 1998. SOP 97-2 provides guidance for recognizing
revenue on software transactions and supersedes SOP 91-1, "Software Revenue
Recognition." In March 1998, the AICPA issued SOP 98-4, "Deferral of the
Effective Date of a Provision of SOP 97-2, Software Revenue Recognition." SOP
98-4 defers, for one year, the application of certain passages in SOP 97-2 which
limit what is considered vendor-specific objective evidence necessary to
recognize revenue for software licenses in multiple-element arrangements when
undelivered elements exist. The adoption of SOP 97-2 and 98-4 did not have a
material effect on the Company's financial position and results of operations.
13
<PAGE>
YEAR 2000 MATTERS
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year, consequently, in the
year 2000 such systems may be unable to accurately process certain date-based
information. The Company can potentially be affected by this issue in several
areas including computer systems and software which are utilized in the
Company's infrastructure, the products which the Company develops and sells and
the impact of the Year 2000 Issue on the Company's significant vendors,
strategic business partners and customers.
The Company's Year 2000 compliance activities include the identification
and evaluation of systems that are critical to the Company's operations,
including systems of its significant vendors, strategic business partners and
customers. Additionally, the Company will also evaluate the Year 2000 compliance
of all of the products that the Company sells, which include internally
developed software and third party computer related components. Evaluation
procedures for the Company's internal critical systems and its products for sale
consist of performing Year 2000 test simulations and obtaining Year 2000
compliance documentation for external products and components, as applicable. In
order to evaluate Year 2000 compliance for the Company's significant vendors,
strategic business partners and customers, the Company obtains published Year
2000 compliance documentation from such entries.
The Company has examined the architecture of its products, as well as
relevant documentation related to third party components that are integrated
into these products. Based upon these examinations, the Company's products
appear to be Year 2000 compliant. In order to validate these preliminary
findings, to date the Company has completed limited test procedures on certain
of its internally developed products, as well as the associated third party
components. The results of these tests do not indicate any instances of
non-compliance. To date, the Company has reviewed many of its third party
hardware and software applications utilized in its infrastructure and have
obtained documentation from the manufacturers certifying Year 2000 compliance.
The Company generates a significant portion of its revenue from several of
its strategic partners and, as a result, revenues could be materially impacted
if the Year 2000 Issue adversely affects the operations of these partners. Based
upon the examination of available information, the Company does not believe that
the Year 2000 Issue will have a material adverse effect on the operations of its
significant strategic partners and customers.
The Company expects that its testing procedures and any required Year 2000
compliance activities will be completed by December 31, 1998. Should the Company
encounter any items that are not Year 2000 compliant in the course of its
evaluations and testing, the Company will take necessary actions to correct the
matter. To date, costs incurred in evaluating the Company's Year 2000 compliance
have been minimal. The Company does not anticipate that additional Year 2000
compliance activities and corrective actions, where and if required, will have a
material effect on the Company's business, financial position or results of
operations.
Nothwithstanding the foregoing, there can be no assurance that the Year
2000 compliance activities performed by the Company will adequately identify and
test all of the Company's products and critical internal and external systems to
ensure Year 2000 compliance. Moreover, there can be no assurance that the
systems of the Company's significant vendors, strategic business partners and
customers will be Year 2000 compliant which could result in a material adverse
effect on the Company.
14
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
Item 2. Changes in Securities
(a) Use of Proceeds
On May 29, 1997, the U.S. Securities and Exchange Commission
declared effective the Company's Registration Statement of Form S-1
(SEC File Number 333-22123). The offering of the securities (the "IPO")
registered pursuant to the Registration Statement also commenced on May
29, 1997. The IPO terminated after the sale of 2,400,000 shares of the
Company's Common Stock for $8.75 per share. The managing underwriters
for the public offering of the Company's Common Stock were Josephthal,
Lyon & Ross Incorporated and Cruttenden Roth, Inc.
The Company incurred expenses of approximately $1.6 million in
connection with the IPO. These expenses represented direct payments to
others and not direct or indirect payments to directors or officers of
the Company or to persons owning more than 10% of any class of
securities of the Company. Net proceeds from the IPO were $17.9
million. Through September 30, 1998, the Company has used approximately
$4.1 million for the purchase of equipment, approximately $4.0 million
to increase the Company's research and development and sales, marketing
and administrative staff, and the remainder for working capital. None
of the payments from the use of proceeds were made to officers,
directors or persons owning more than 10% of any class of securities of
the Company.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.17 Employment Agreement between the Registrant and Michael R. Rich
27 Financial Data Schedule.
(b) Reports on Form 8-K. None.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NETSPEAK CORPORATION
--------------------
(Registrant)
Date: November 13, 1998 By: /s/ Stephen R. Cohen
------------------------------------
Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
By: /s/ John W. Staten
------------------------------------
Chief Financial Officer (Principal Financial and
Accounting Officer)
16
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.17 Employment Agreement between the Registrant and Michael R. Rich
27 Financial Data Schedule
EXHIBIT 10.17
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
the 9th day of November, 1998 by and between NETSPEAK CORPORATION, a Florida
corporation with its principal office at 102 Clint Moore Road, Boca Raton,
Florida 33487 (the "Company"), and MICHAEL R. RICH, whose residence address is
19 Thousand Oaks Terrace, Howell, New Jersey 07731 (the "Executive").
The Company wishes to employ the Executive and the Executive wishes to
enter into the employ of the Company as President and Chief Operating Officer of
the Company.
NOW, THEREFORE, in consideration of the premises and mutual covenants
set forth herein, the parties hereby agree as follows:
1. EMPLOYMENT.
1.1 EMPLOYMENT AND TERM. The Company shall continue to employ the
Executive and the Executive shall continue to serve the Company, on the terms
and conditions set forth herein, for the period (the "Term") effective as of
December 1, 1998 or such earlier date as may be agreed to by the parties (the
"Commencement Date") and expiring on the third anniversary of the Commencement
Date, unless sooner terminated as hereinafter set forth.
1.2 DUTIES OF EXECUTIVE. The Executive shall serve as President and
Chief Operating Officer of the Company and shall perform the duties of an
executive commensurate with such position, shall diligently perform all services
as may be assigned to him by the Board of Directors (the "Board") and shall
exercise such power and authority as may from time to time be delegated to him
by the Board. The Executive shall devote all his working time and attention to
the business and affairs of the Company.
1.3 DIRECTORSHIP. The Company agrees to nominate and use its best
efforts to cause the Executive to be elected to the Board throughout the Term.
If the Executive is so elected, he agrees to serve on the Board without
additional compensation; provided, however, that the Executive shall resign
immediately from the Board at such time as he is no longer employed by the
Company.
1.4 PLACE OF PERFORMANCE. In connection with his employment by the
Company, the Executive shall be based at the Company's principal executive
offices in Boca Raton, Florida except for required travel on the Company's
business to an extent substantially consistent with his present travel
obligations.
1.5 THE COMPANY. As used herein the term the "Company" shall be
deemed to include any and all present and future subsidiaries, divisions and
affiliates of the Company.
<PAGE>
2. COMPENSATION.
2.1 BASE SALARY. During the Term, the Executive shall receive a base
salary at the annual rate of $200,000, subject to adjustment in accordance with
Section 2.2 hereof (the "Base Salary"). The Base Salary shall be payable in
substantially equal installments consistent with the Company's normal payroll
schedule, subject to applicable withholding and other taxes.
2.2 ADDITIONAL CASH COMPENSATION. The Executive shall also be
entitled to receive such increments in base salary and performance or merit
bonuses (collectively, "Bonus") as shall be determined from time to time during
the term by the Board. The minimum amount of the Bonus (the "Minimum Bonus")
that the Executive shall receive for the first year of the Term shall be
$100,000, payable quarterly. During the second and third years of the Term, the
Executive and the Company's Chief Executive Officer shall mutually agree on a
level of Minimum Bonus, which shall be submitted to the Board for approval.
2.3 STOCK OPTIONS. On the Commencement Date, the Company shall grant
to the Executive non-qualified stock options under the Company's 1995 Stock
Option Plan, as amended (the "Plan") to purchase an aggregate of 250,000 Shares
of Common Stock at an exercise price equal to the fair market value on the
Commence Date (the "Options"). The Options shall vest as to 25,000 Options on
the Commencement Date, with the remainder to vest in equal installments on the
first, second and third anniversary of the Commencement Date. The Options shall
otherwise be subject to and governed by the other terms of the Plan.
2.4 LOAN. On the Commencement Date, the Company shall lend the
Executive the sum of $400,000 evidenced by a promissory note (the "Note"). The
Note shall bear interest at the Adjusted Federal Rate. The principal amount of
the Note shall be payable in three equal installments on the first, second and
third anniversary of the Commencement Date together with accrued interest
thereon; provided, however, that the principal amount and accrued interest due
on each of the foregoing dates shall be forgiven in the event the Executive is
still employed by the Company on such date or in the event the Company
terminates the Executive's employment without Cause (as hereinafter defined)..
2.5 NON-RENEWAL. If at the end of the Term the Company shall elect
not to extend or renew this Agreement, then the Company shall continue to pay to
the Executive his Base Salary at the rate then in effect for a period of 12
months after the expiration of the Term (the "Severance Period"), payable in
accordance with the Company's normal payroll schedule, subject to applicable
withholding and other taxes. Any such amount payable pursuant to this Section
2.5, shall be offset by cash compensation payable to the Executive during the
Severance Period from other employment.
3. EXPENSE REIMBURSEMENT AND OTHER BENEFITS.
3.1 EXPENSE REIMBURSEMENT. During the Term, the Company, upon the
submission of supporting documentation by the Executive, and in accordance with
Company policies for its executives, shall reimburse the Executive for all
expenses actually paid or incurred by the Executive in the course of and
pursuant to the business of the Company, including expenses for travel and
entertainment.
2
<PAGE>
3.2 OTHER BENEFITS. The Company shall obtain or shall continue in
force such medical, dental, life and disability insurance coverages, either
group or individual, as the Company may provide for its executive employees
generally, for the Executive (collectively, the "Policies"), which Policies the
Company shall keep in effect throughout the Term. The Policies to be provided by
the Company shall be on terms as determined by the Board.
3.3 VACATION. Executive shall be entitled to three weeks vacation
paid during each year of the Term which shall not accrue from year to year.
4. TERMINATION.
4.1 TERMINATION FOR CAUSE. Notwithstanding anything contained in this
Agreement to the contrary, this Agreement may be terminated by the Company for
Cause. As used in this Agreement "Cause" shall mean (i) subject to the following
sentences, any action or omission of the Executive which constitutes a willful
breach of this Agreement which is not cured or as to which diligent attempts to
cure have not commenced within 10 days after receipt by Executive of notice of
thereof, (ii) fraud, embezzlement or misappropriation as against the Company or
(iii) the conviction of Executive for any criminal act. Upon any termination
pursuant to this Section 4.1, (a) the Company shall pay to the Executive any
unpaid Base Salary at the rate then in effect accrued through the effective date
of termination specified in such notice, and (b) the unpaid principal of balance
and accrued but unpaid interest on the Note as of the effective date of
termination shall be immediately due and payable. Except as provided above, the
Company shall have no further liability hereunder (other than for reimbursement
for reasonable business expenses incurred prior to the date of termination,
subject, however to the provisions of Section 3.1 and all Options not vested
shall immediately terminate and expire).
4.2 RESIGNATION BY EXECUTIVE. This Agreement may be terminated by the
Executive upon delivery of notice therefore not less than 45 days prior to such
termination date. Upon receipt of such notice, the Company may, in its sole
discretion, release the Executive of his duties and his employment hereunder
prior to the expiration of the 45 day notice period. Notwithstanding anything
contained in this Agreement or the Plan to contrary, in the event of a
termination by the Executive pursuant to this Section 4.2, (i) the Company shall
pay to the Executive any unpaid Base Salary accrued through the effective date
of termination, (ii) all Options granted to the Executive pursuant to the Plan
not fully vested as of the date of termination shall immediately be canceled and
(iii) the unpaid principal balance of and accrued but unpaid interest on the
Note as of the effective date of termination shall be immediately due and
payable.
4.3 DISABILITY. Notwithstanding anything contained in this Agreement
to the contrary, the Company, by 30 days written notice to the Executive, shall
at all times have the right to terminate this Agreement, and the Executive's
employment hereunder, if the Executive shall, as the result of mental or
physical incapacity, illness or disability, fail to perform his duties and
responsibilities provided for herein for a period of more than 60 days in any 12
month period. Upon the termination pursuant to this Section 4.3, the Company
shall continue (i) to pay to the Executive Base Salary and Minimum Bonus at the
rates then in effect for a period of 12 months after the effective date of
termination (the "Severance Period") and (ii) employee benefit programs as to
the Executive for the Severance Period. In addition, the unpaid principal
balance
3
<PAGE>
of and accrued but unpaid interest on the Note as of the termination of the
Severance Period shall be due and payable upon termination of the Severance
Period. Except as provided above, the Company shall have no further liability
hereunder (other than for reimbursement for reasonable business expenses,
incurred prior to the date of termination, subject, however to the provisions of
Section 3.1).
5. DEATH. In the event of the death of the Executive during the Term
of his employment hereunder, the Company shall pay to the personal
representative of the estate of the deceased Executive (i) any unpaid Base
Salary accrued through the date of his death plus (ii) an amount equal to the
Minimum Bonus at the rate then in effect for the year in which termination
occurs. In addition, the unpaid principal balance of and accrued but unpaid
interest on the Note as of the date of death shall become immediately due and
payable. Except as provided above, the Company shall have no further liability
hereunder (other than for reimbursement for reasonable business expenses
incurred prior to the date of the Executive's death, during the Severance
Period, subject, however to the provisions of Section 3.1).
6. RESTRICTIVE COVENANTS.
6.1 NON-COMPETITION. During the Term and for a period of one year
following the termination of the Executive's employment by the Company,
Executive shall not, directly or indirectly engage in or have any interest in,
directly or indirectly, any sole proprietorship, partnership, corporation,
business or any other person or entity (whether as an employee, officer,
director, partner, agent, security holder, creditor, consultant or otherwise)
that, directly or indirectly, engages primarily in the development,
manufacturing, distribution, or supply of products and services competitive with
the Company's and/or any subsidiary's products and services in any and all
states in which the Company and/or any subsidiary conducts its business during
the Term or at the time Executive's employment with the Company is terminated
(the "Territory"); provided, however, that Executive may hold Company securities
and/or acquire, solely as an investment, shares of capital stock or other equity
securities of any such company, so long as Executive does not control acquire a
controlling interest in or become a member of a group which exercises direct or
indirect control of, more than five percent of any class of capital stock of
such corporation.
6.2 NONDISCLOSURE. During the Term and following termination of the
Executive's employment with the Company, Executive shall not divulge,
communicate, use to the detriment of the Company or for the benefit of any other
person or persons, or misuse in any way, any Confidential Information (as
hereinafter defined) pertaining to the business of the Company. Any Confidential
Information or data now or hereafter acquired by the Executive with respect to
the business of the Company (which shall include, but not be limited to,
information concerning the Company's financial condition, prospects, technology,
customers, suppliers, methods of doing business and promotion of the Company's
products and services) shall be deemed a valuable, special and unique asset of
the Company that is received by the Executive in confidence and as a fiduciary.
For purposes of this Agreement "Confidential Information" means information
disclosed to the Executive or known by the Executive as a consequence of or
through his employment by the Company (including information conceived,
originated, discovered or developed by the Executive) prior to or after the date
hereof and not generally known or in the public domain, about the Company or its
business. Notwithstanding the
4
<PAGE>
foregoing, nothing herein shall be deemed to restrict the Executive from
disclosing Confidential Information to the extent required by law.
6.3 NONSOLICITATION OF EMPLOYEES. During the Term and for a period of
two years following termination of the Executive's employment with the Company,
Executive shall not directly or indirectly, for himself or for any other person,
firm, corporation, partnership, association or other entity, attempt to employ
or enter into any contractual arrangement with any employee or former employee
of the Company, unless such employee or former employee has not been employed by
the Company for a period in excess of six months.
6.4 BOOKS AND RECORDS. All books, records, accounts and similar
repositories of Confidential Information of the Company, whether prepared by the
Executive or otherwise coming into the Executive's possession, shall be the
exclusive property of the Company and shall be returned immediately to the
Company on termination of this Agreement or on the Board's request at any time.
7. INJUNCTION. It is recognized and hereby acknowledged by the parties
hereto that a breach by the Executive of any of the covenants contained in
Section 6 of this Agreement will cause irreparable harm and damage to the
Company, the monetary amount of which may be virtually impossible to ascertain.
As a result, the Executive recognizes and hereby acknowledges that the Company
shall be entitled to an injunction from any court of competent jurisdiction
enjoining and restraining any violation of any or all of the covenants contained
in Section 6 of this Agreement by the Executive or any of his affiliates,
associates, partners or agents, either directly or indirectly, and that such
right to injunction shall be cumulative and in addition to whatever other
remedies the Company may possess.
8. CONSOLIDATION, MERGER OR SALE OF ASSETS. Nothing in this Agreement
shall preclude the Company from consolidating or merging into or with, or
transferring all or substantially all of its assets to, another corporation
which assumes this Agreement, and all obligations of the Company hereunder, in
writing. Upon such consolidation, merger, or transfer of assets and assumption,
the term "the Company" as used herein, shall mean such other corporation and
this Agreement shall continue in full force and effect. Notwithstanding the
foregoing, in the event that the Company merges into or with, or transfers all
or substantially all, of its assets to another corporation, which results in a
material change of ownership of the Company, all Options granted to the
Executive pursuant to the Plan not fully vested shall immediately vest upon such
transaction.
9. ARBITRATION. Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, shall be settled by arbitration in
accordance herewith, and judgment upon the award rendered by the arbitrators may
be entered in any Court having jurisdiction thereof. Venue of the arbitration
shall be in Palm Beach County, Florida. Any controversy or claim shall be
submitted to three arbitrators selected from the panels of the arbitrators of
the American Arbitration Association. The arbitrators, in addition to any award
made, shall have the discretion to award the prevailing party the costs of the
proceedings, together with reasonable attorneys' fees, provided that absent such
award, each party shall bear the costs of its own counsel and presentation of
evidence, and each party shall share equally the cost of such arbitration
proceeding. Any award made hereunder may be docketed in a court of
5
<PAGE>
competent jurisdiction in Palm Beach County, Florida, and all parties hereby
consent to the personal jurisdiction of such court for purposes of the
enforcement of the arbitration award.
10. BINDING EFFECT. Except as herein otherwise provided, this Agreement
shall inure to the benefit of and shall be binding upon the parties hereto,
their personal representatives, successors, heirs and assigns. The Executive may
not assign his rights or benefits, or delegate any of his duties, hereunder
without the prior written consent of the Company.
11. FURTHER ASSURANCES. At any time, and from time to time, each party
will take such action as may be reasonably requested by the other party to carry
out the intent and purposes of this Agreement.
12. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof. It
supersedes all prior negotiations, letters and understandings relating to the
subject matter hereof.
13. AMENDMENT. This Agreement may not be amended, supplemented or
modified in whole or in part except by an instrument in writing signed by the
party or parties against whom enforcement of any such amendment, supplement or
modification is sought.
14. ASSIGNMENT. This Agreement may not be assigned by any party hereto
without the prior written consent of the other party and except as provided in
Section 9 hereof.
15. CHOICE OF LAW. This Agreement will be interpreted, construed and
enforced in accordance with the laws of the State of Florida, without giving
effect to the application of the principles pertaining to conflicts of laws.
16. EFFECT OF WAIVER. The failure of any party at any time or times to
require performance of any provision of this Agreement will in no manner affect
the right to enforce the same. The waiver by any party of any breach of any
provision of this Agreement will not be construed to be a waiver by any such
party of any succeeding breach of that provision or a waiver by such party of
any breach of any other provision.
17. CONSTRUCTION. The parties hereto and their respective legal counsel
participated in the preparation of this Agreement; therefore, this Agreement
shall be construed neither against nor in favor of any of the parties hereto,
but rather in accordance with the fair meaning thereof.
18. SEVERABILITY. The invalidity, illegality or unenforceability of any
provision or provisions of this Agreement will not affect any other provision of
this Agreement, which will remain in full force and effect, nor will the
invalidity, illegality or unenforceability of a portion of any provision of this
Agreement affect the balance of such provision. In the event that any one or
more of the provisions contained in this Agreement or any portion thereof shall
for any reason be held to be invalid, illegal or unenforceable in any respect,
this Agreement shall be reformed, construed and enforced as if such invalid,
illegal or unenforceable provision had never been contained herein.
6
<PAGE>
19. NO THIRD-PARTY BENEFICIARIES. No person shall be deemed to possess
any third-party beneficiary right pursuant to this Agreement. It is the intent
of the parties hereto that no direct benefit to any third party is intended or
implied by the execution of this Agreement.
20. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed an original.
21. NOTICE. Any notice required or permitted to be delivered hereunder
shall be in writing and shall be deemed to have been delivered when hand
delivered, sent by facsimile with receipt confirmed or when deposited in the
United States mail, postage prepaid, registered or certified mail, return
receipt requested, or by overnight courier, addressed to the parties at the
addresses first stated herein, or to such other address as either party hereto
shall from time to time designate to the other party by notice in writing as
provided herein.
IN WITNESS WHEREOF, this Agreement has been duly signed by the parties
hereto on the day and year first above written.
NETSPEAK CORPORATION
By:
-------------------------------
Name:
-----------------------
Title:
---------------------
----------------------------------
MICHAEL R. RICH
7
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</TABLE>
