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 June 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 July 31, 1998
- ---------------------------- -------------------------------------
Common Stock, $.01 par value 12,539,056
<PAGE>
NETSPEAK CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
PAGE NO.
--------
Condensed Consolidated Balance Sheets as of December 31, 1997
and June 30, 1998...........................................................3
Condensed Consolidated Statements of Operations for the three and six
months ended June 30, 1997 and 1998.........................................4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 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
- ----------------------------
Other Information.............................................................15
Signatures....................................................................17
2
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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)
(unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ --------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 4,718 $ 39,147
Short-term investments 14,336 10,490
Accounts receivable, net 898 2,721
Inventory 269 738
Prepaid and other current assets 252 529
Deferred tax asset 33 6
------ ------
Total current assets 20,506 53,631
Property and equipment, net 2,178 3,636
Other assets 517 669
------ ------
$ 23,201 $ 57,936
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 676 $ 1,299
Accrued compensation 687 965
Other accrued expenses 474 672
Unearned revenue 256 253
----- -----
Total current liabilities 2,093 3,189
----- -----
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 June 30, 1998, respectively; 10,554,721 and
12,539,056 shares issued and outstanding at
December 31, 1997 and June 30, 1998, respectively 106 125
Additional paid-in capital 29,590 67,527
Unrealized gain on investments - 27
Accumulated deficit (8,588) (12,932)
------- -------
Total shareholders' equity 21,108 54,747
------- -------
$ 23,201 $ 57,936
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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NETSPEAK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
1997 1998 1997 1998
------ ------ ----- -----
<S> <C> <C> <C> <C>
Net revenues $ 1,130 $ 2,930 $ 2,034 $ 5,343
Operating expenses:
Cost of revenues 162 569 206 1,236
Research and development 1,154 2,423 2,301 4,256
Sales and marketing 675 2,012 1,074 3,548
General and administrative 368 752 680 1,468
------- ------- ------- -------
Total operating expenses 2,359 5,756 4,261 10,508
Loss from operations (1,229) (2,826) (2,227) (5,165)
Interest and other income 126 729 183 1,231
Other charges - - - (383)
------- ------ ------- -------
Loss before income taxes (1,103) (2,097) (2,044) (4,317)
Income taxes 45 12 89 27
------- ------- ------- -------
Net loss $(1,148) $(2,109) $(2,133) $(4,344)
======= ======= ======= =======
Net loss per share (basic and diluted) $ (0.13) $ (0.17) $ (0.25) $ (0.36)
======= ======= ======= =======
Weighted-average shares outstanding 8,733 12,437 8,219 11,999
======= ======= ======= =======
</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>
SIX MONTHS ENDED
JUNE 30,
----------------
1997 1998
----- -----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (2,133) $ (4,344)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation 251 611
Provision for bad debts - 371
Deferred taxes 43 27
Changes in assets and liabilities:
Accounts receivable (156) (2,194)
Inventory (77) (469)
Prepaid and other current assets (69) (277)
Other assets (148) (152)
Accounts payable 253 623
Accrued compensation 160 278
Other accrued expenses 188 198
Unearned revenue (1,085) (3)
------- --------
Net cash used in operating activities (2,773) (5,331)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (613) (2,069)
Purchase of short-term investments - (4,191)
Maturities and sales of short-term investments - 8,064
------- --------
Net cash provided by (used in) investing activities (613) 1,804
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 17,943 36,860
Proceeds from exercise of warrant 2,491 -
Proceeds from exercises of employee stock options 8 1,096
------- --------
Net cash provided by financing activities 20,442 37,956
------- --------
Net increase in cash and cash equivalents 17,056 34,429
Cash and cash equivalents, beginning of period 6,295 4,718
-------- --------
Cash and cash equivalents, end of period $ 23,351 $ 39,147
======== ========
SUPPLEMENTAL INFORMATION:
Cash paid for income taxes $ 30 $ -
------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
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 June 30, 1998 and for the three
and six months ended June 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 joint development and
stock purchase agreements 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 from two officers at the tender officer price. As of June 30, 1998,
Motorola owned 31.6% of the total outstanding common shares of the Company.
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 2,559,045 common shares from the
weighted-average shares outstanding calculation for the three and six months
ended June 30, 1998 as their effect was anti-dulitive.
6
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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 July and August 1998, several 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.
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.
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
two separate areas, through the internal computer applications on which it
relies as well as the software which it develops and sells. NetSpeak is in
process of reviewing all significant third party applications which it utilizes
and obtaining documentation from the manufacturers which certify Year 2000
compliance. The Company also is in process of examining the architecture of its
products, as well as documentation on the third party components which are
integrated into the Company's software products, and believes that its products
are Year 2000 compliant. The Company is also developing a test plan, for both
internal applications and software which the Company develops, to validate the
results of its initial review. Should the Company find any items which are not
Year 2000 compliant in the course of its testing, the Company will take the
necessary actions to correct the matter. The Company expects that its testing
procedures and any required Year 2000 compliance activities will be completed by
December 31, 1998. The Company does not anticipate that Year 2000 compliance
activities will have a material effect on the Company's business, financial
position or results of operations. However, there can be no assurance that the
Company's systems and products are Year 2000 compliant until the successful
completion of its testing procedures. Additionally, there can be no assurance
that the systems of other companies on which the Company relies will be Year
2000 compliant which could result in a material adverse effect on the Company.
7
<PAGE>
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 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.
6. COMPREHENSIVE INCOME (LOSS)
Effective January 1, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income."
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
1997 1998 1997 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net loss $ (1,148) $ (2,109) $ (2,133) $ (4,344)
Adjustment to reconcile net loss to
comprehensive income (loss):
Unrealized gain on investments - 4 - 27
-------- -------- -------- --------
Comprehensive income (loss) $ (1,148) $ (2,105) $ (2,133) $ (4,317)
======== ======== ======== ========
</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 2,700,000 to an
aggregate 5,500,000. 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
<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 only a limited operating history upon which an
evaluation of the Company and its prospects can be based. As of June 30, 1998,
the Company had an accumulated net loss of $12.9 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
9
<PAGE>
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 SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Net revenues for the three months ended June 30, 1998 were $2.9 million
as compared to $1.1 million for the three months ended June 30, 1997. Net
revenues were $5.3 and $2.0 million for the six months ended June 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 represent the sale of fully integrated "turn-key" systems, where
the Company integrates third party computer hardware and software components
with its gateway software, while net revenues from IP telephony applications
primarily consist of software based solutions. Sales of gateway systems and IP
telephony applications accounted for 89% and 85% of net revenues for the three
and six months ended June 30, 1998, as compared to 15% and 11% for the three and
six months ended June 30, 1997, respectively. For the three months ended June
30, 1998 net revenues from IP telephony software applications increased
significantly from prior periods as a result of a several significant orders
from certain of the Company's partners and customers. The increase in gateway
system and IP telephony software application revenues was the result of new and
expanded commercial and trial deployments by new and existing customers. The
Company's primary customers for these products are equipment suppliers and
service providers, including traditional and next generation telephone companies
as well as other common carriers.
Net revenues from client software represented 4% and 6% of net revenues
for the three and six months ended June 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 six months ended
June 30, 1997 represented 75% and 72% of net revenues, respectively, and were
primarily due to a product license and distribution agreement with Creative
Technology Ltd. ("Creative"). The Company expects that net revenue generated
from client software will remain relatively consistent with the current period
as the Company's sales efforts are concentrated on gateway systems and IP
telephony software applications.
The Company currently generates a significant percentage of its
revenues through a select number of its strategic partners and, as a result, is
highly dependent upon the sales and marketing activities of its strategic
partners for its products and systems. In an effort to expand the distribution
of the Company's products and to diversify its customer base, the Company began
entering into relationships with smaller, less established organizations. These
less established customers have not demonstrated the historical operating
results nor do they possess the financial resources as many of the Company's
existing strategic partners and, as a result, the Company's exposure to credit
risk has been increased. Although the Company is working to diversify its
customer base, the Company believes that its dependence on its strategic
partners will continue for the foreseeable future and that its success in the
marketplace will be significantly influenced by the success of its partners and
customers.
The IP telephony market is in the early stages of development and
rapidly evolving as the convergence and consolidation of the telecommunications
and data networking industries is beginning to occur. For example, Northern
Telecom recently agreed to acquire Bay Networks, Inc. ("Bay Networks"), a
strategic partner of the Company. As a result of this activity, 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 beginning to
introduce competitive products into the marketplace. As such, the Company
believes that the timing in the demand and market acceptance for these recently
10
<PAGE>
introduced products and technologies are subject to a high degree of
uncertainty, and, as a result, could produce an unevenness in the Company's
revenue stream in the short-term.
Cost of revenues for the three months ended June 30, 1998 was $569,000,
or 19% of net revenues, as compared to $162,000, or 14% of net revenues, for the
three months ended June 30, 1997. Cost of revenues was $1.2 million, or 23% of
net revenues, and $206,000, or 10% of net revenues, for the six months ended
June 30, 1998 and 1997, respectively. The increase in cost of revenues as a
percentage of net revenues was primarily due to the shift in the Company's sales
mix towards the sale of fully integrated "turn-key" gateway systems. The Company
currently sells "turn-key" systems as a short-term means of expediting the
distribution of its products and addressing customers' demands in the
marketplace.
As discussed above, net revenues from software based products increased
significantly for the three months ended June 30, 1998 as compared to prior
periods. The Company does not expect software based products to continue to
represent such a significant portion of the sales mix in the near term. As a
result, the Company anticipates cost of revenues will increase as a percentage
of net revenues in the short term, as the Company anticipates its sales mix will
typically be concentrated on "turn-key" systems. Although, depending on the
variability in the mix between integrated and software based products, cost of
revenues may continue to fluctuate as a percentage of net revenues. However,
over the long term the Company believes that cost of revenues as a percentage of
net revenues will ultimately decrease as it believes system integration will
shift to its partners and, as a result, the Company's sales mix would likely be
comprised of a larger percentage of software based solutions.
Research and development expenses for the three months ended June 30,
1998 were $2.4 million as compared to $1.2 million for the three months ended
June 30, 1997. Research and development expenses were $4.3 and $2.3 million for
the six months ended June 30, 1998 and 1997, respectively. The increase in
research and development expenses was primarily due to the expansion of the
Company's research and development staff, resulting in greater personnel costs
and operating expenses. All research and development costs have been expensed as
incurred. The Company intends to continue to significantly increase research and
development expenses in future periods to perform product enhancements and new
product development in order to establish and maintain a competitive advantage.
Sales and marketing expenses for the three months ended June 30, 1998
were $2.0 million as compared to $675,000 for the three months ended June 30,
1997. Sales and marketing expenses were $3.5 and $1.1 million for the six months
ended June 30, 1998 and 1997, respectively. The increase in sales and marketing
expenses was primarily due to 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 established an allowance for uncollectible customer
accounts as a result of the significant increase in trade credit sales from
prior periods as well as the change in the Company's customer base discussed
above. The Company intends to continue to intensify and expand its sales and
marketing activities and, as a result, expects sales and marketing expenses to
significantly increase in future periods.
General and administrative expenses for the three months ended June 30,
1998 were $752,000 as compared to $368,000 for the three months ended June 30,
1997. General and administrative expenses were $1.5 million and $680,000 for the
six months ended June 30, 1998 and 1997, respectively. The increase in general
and administrative expenses resulted primarily from the expansion of the
Company's corporate infrastructure through the addition of personnel and greater
operating expenses in order to support the overall increase in the scope of the
Company's operations. The Company expects general and administrative expenses to
increase in future periods as it continues to expand its corporate
infrastructure.
Interest and other income for the three months ended June 30, 1998 was
$729,000 as compared to
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$126,000 for the three months ended June 30, 1997. Interest and other income was
$1.2 million and $183,000 for the six months ended June 30, 1998 and 1997,
respectively. The increase in interest income is the result of interest earned
on excess funds attributable to the net proceeds from the Bay Networks
investment completed in February 1998 as described below and the Company's
initial public offering ("IPO") in May 1997.
Income taxes for the three months ended June 30, 1998 were $12,000 as
compared to $45,000 for the three months ended June 30, 1997. Income taxes were
$27,000 and $89,000 for the six months ended June 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.
In connection with the expansion of its strategic partnership with
Motorola, Inc. ("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 June 30, 1998,
the Company had $49.6 million in cash, cash equivalents and short-term
investments.
Net cash used in operating activities during the six months ended June
30, 1998 and 1997 was $5.3 million and $2.8 million, respectively. Net cash used
in operating activities for the six months ended June 30, 1998 and 1997 was
primarily related to the expansion of the Company's research and development
activities, sales and marketing efforts and the corporate infrastructure.
Net cash provided by investing activities during the six months ended
June 30, 1998 was $1.8 million. Net cash provided by investing activities
reflected $3.8 million in net sales of short-term investments which was
reinvested in cash equivalents offset by $2.1 million in purchases of computer
and test equipment as well as expenditures related to the expansion of the
Company's research and development facilities. Net cash used in investing
activities during the six months ended June 30, 1997 was $613,000 and primarily
related to purchases of equipment.
Net cash provided by financing activities for the six months ended June
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 $1.1 million from exercises of employee stock options for 441,605
shares of Common Stock. Net cash provided by financing activities during the six
months ended June 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, or $5.50 per share.
12
<PAGE>
The Company has no material commitments other than those under office
and equipment operating leases. As a result of its anticipated growth, the
Company expects to increase its capital expenditures in future periods primarily
through the purchase of computer-related equipment for use in research and
development activities. 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 July and August 1998, several 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 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.
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
two separate areas, through the internal computer applications on which it
relies as well as the software which it develops and sells. NetSpeak is in
process of reviewing all significant third party applications which it utilizes
and obtaining documentation from the manufacturers which certify Year 2000
compliance. The Company also is in process of examining the architecture of its
products, as well as documentation on the third party components which are
integrated into the Company's software products, and believes that its products
are Year 2000 compliant. The Company is also developing a test plan, for both
internal applications and software which the Company develops, to validate the
results of its initial review. Should the Company find any items which are not
Year 2000 compliant in the course of its testing, the Company will take the
necessary actions to correct the matter. The Company expects that its testing
procedures and any required Year 2000 compliance activities will be completed by
December 31,
13
<PAGE>
1998. The Company does not anticipate that Year 2000 compliance activities will
have a material effect on the Company's business, financial position or results
of operations. However, there can be no assurance that the Company's systems and
products are Year 2000 compliant until the successful completion of its testing
procedures. Additionally, there can be no assurance that the systems of other
companies on which the Company relies will be Year 2000 compliant which could
result in a material adverse effect on the Company.
14
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Matters
See Recent Litigation in "Part I. Item 2. Management's Discuss and
Analysis of Financial Condition and Results of Operations."
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 June 30, 1998, the Company has used approximately $3.4
million for the purchase of equipment, approximately $2.7 million to
increase the Company's research and development and sales, marketing
and administrative staff, and approximately $8.7 million 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. The Company has invested the remaining of
proceeds of $3.1 million from the IPO in short-term, investment-grade,
interest-bearing securities.
Item 4. Submission of Matters to a Vote of Shareholders
(a) The Annual Meeting of Company's shareholders was held on June 18, 1998
(the "Meeting").
(b) Not applicable
(c) At the Meeting, the following matters were voted upon:
(i) Election of directors
The following table sets forth the name of each nominee and the
voting with respect to each nominee for director.
NAME FOR WITHHOLD AUTHORITY
---- --- ------------------
Stephen R. Cohen 10,992,552 335,389
Rober A. Kennedy 10,992,552 335,389
Shane D. Mattaway 11,236,918 91,023
John W. Staten 10,992,552 335,389
Randall Battat 10,992,552 335,389
Stephen P. Earhart 10,992,552 335,389
Michael B. Goldberg 10,992,552 335,389
15
<PAGE>
Steven D. Leeke 10,992,552 335,389
A. Jeffry Robinson 10,992,552 335,389
Martin Shum 10,992,552 335,389
(ii) Approval of an Amendment to the Company's 1995 Stock Option Plan
(the "Plan") to increase the number of shares of Common Stock issuable
under the Plan to 5,500,000 shares.
With respect to the foregoing matter 6,887,239 shares voted in favor,
919,085 shares voted against, 31,155 shares abstained and 3,409,462
shares did not vote.
(iii) Approval of the Company's Employee Stock Purchase Plan.
With respect to the foregoing matter 6,892,558 shares voted in favor,
687,195 shares voted against, 11,949 shares abstained and 3,736,209
shares did not vote.
(iv) Approval of an Amendment to the Company's Articles of
Incorporation to increase the number of authorized shares of the
Company's Common Stock to 75,000,000 shares.
With respect to the foregoing matter 7,230,521 shares voted in favor,
551,082 shares voted against, and 3,530,022 shares did not vote.
(v) Ratification and approval of the appointment of Deloitte & Touche
LLP as the Company's independent certified public accountants for the
fiscal year ending December 31, 1998.
With respect to the foregoing matter 7,267,188 shares voted in favor,
85,668 shares voted against, 47,245 shares abstained and 3,927,840
shares did not vote.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27 Financial Data Schedule.
(b) Reports on Form 8-K. None.
16
<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: August 12, 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)
17
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- ------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 39,147
<SECURITIES> 10,490
<RECEIVABLES> 2,721
<ALLOWANCES> 0
<INVENTORY> 738
<CURRENT-ASSETS> 53,631
<PP&E> 3,636
<DEPRECIATION> 0
<TOTAL-ASSETS> 57,936
<CURRENT-LIABILITIES> 3,189
<BONDS> 0
0
0
<COMMON> 125
<OTHER-SE> 67,527
<TOTAL-LIABILITY-AND-EQUITY> 57,936
<SALES> 5,343
<TOTAL-REVENUES> 5,343
<CGS> 1,236
<TOTAL-COSTS> 1,236
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,317)
<INCOME-TAX> 27
<INCOME-CONTINUING> (4,344)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,344)
<EPS-PRIMARY> (0.36)
<EPS-DILUTED> (0.36)
</TABLE>
