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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, 1999
[ ] 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, 1999
- ---------------------------- --------------------------------------
Common Stock, $.01 par value 12,951,970
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<PAGE>
NETSPEAK CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
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Page No.
--------
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of December 31, 1998
and September 30, 1999 ............................................. 3
Condensed Consolidated Statements of Operations for the three
and nine months ended September 30, 1998 and 1999 .................. 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1999............................ 5
Notes to Condensed Consolidated Financial Statements.....................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 10
PART II - OTHER INFORMATION
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Other
Information.................................................................. 16
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)
December 31, September 30,
1998 1999
---------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 34,117 $ 24,175
Short-term investments 10,805 10,954
Accounts receivable, net of allowances for
doubtful accounts of $709 and $1,147 at
December 31, 1998 and September 30, 1999,
respectively 976 2,461
Inventory 798 205
Prepaid and other currents assets 422 468
-------- --------
Total current assets 47,118 38,263
Property and equipment, net 3,614 2,612
Other assets 993 900
-------- --------
$ 51,725 $ 41,775
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 706 $ 694
Accrued compensation 1,289 1,149
Other accrued expenses 436 631
Unearned revenue 1,610 455
-------- --------
Total current liabilities 4,041 2,929
======== ========
Commitments and contingencies -- --
Shareholders' equity:
Preferred stock 1,000,000 shares of
$.01 par value authorized, no shares
issued or outstanding
Common stock 75,000,000 shares of $.01 par
value authorized, 12,750,803 and 12,951,970
issued and outstanding at December 31,
1998 and September 30, 1999, respectively 127 130
Additional paid-in capital 68,147 69,181
Accumulated other comprehensive income (loss) 61 (61)
Accumulated deficit (20,651) (30,404)
-------- --------
Total shareholder's equity 47,684 38,846
-------- --------
$ 51,725 $ 41,775
======== ========
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,
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues $ 769 $ 2,016 $ 6,112 $ 4,552
Operating expenses:
Cost of revenues 176 185 1,412 430
Research and development 2,947 1,878 7,203 6,200
Sales and marketing 1,932 2,103 5,480 6,751
General and administrative 819 783 2,287 2,331
-------- -------- -------- --------
Total operating expenses 5,874 4,949 16,382 15,712
Loss from operations (5,105) (2,933) $(10,270) $(11,160)
Interest and other income 675 422 1,906 1,438
Other charges -- -- (383) --
-------- -------- -------- --------
Loss before income taxes (4,430) (2,511) $ (8,747) $ (9,722)
Income taxes 4 4 30 31
-------- -------- -------- --------
Net loss $(4,434) $(2,515) $ (8,777) $ (9,753)
-------- -------- -------- --------
Net loss per share (basic and diluted) $(0.35) $(0.19) $(0.72) $(0.76)
-------- -------- -------- --------
Weighted-average shares outstanding 12,541 12,947 12,182 12,866
-------- -------- -------- --------
</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,
---------------------
1998 1999
-------- ---------
<S> <C> <C>
CLASS FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,777) $ (9,753)
Adjustments to reconcile net loss to net cash
used in operations:
Depreciation 1,055 1,401
Provision for bad debts 516 540
Deferred taxes 30 11
Changes in assets and liabilities:
Accounts receivable (4,424) (2,025)
Inventory (731) 593
Prepaid and other current assets (256) (57)
Other assets (178) 93
Accounts payable 472 (12)
Accrued compensation 668 (140)
Other accrued expenses 63 195
Unearned revenue 2,196 (1,155)
-------- --------
Net cash used in operating activities (9,366) (10,309)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,881) (399)
Purchase of short-term investments (9,788) (10,768)
Maturities and sales of short-term investments 13,468 10,497
-------- --------
Net cash provided by (used in) investing activities 799 (670)
-------- --------
CASH FLOWS FROM FINANCIAL ACTIVITIES:
Net proceeds from issuance of common stock 36,753 --
Proceeds from issuance of common stock under
employee stock purchases plan -- 90
Proceeds from exercises of employee stock options 1,266 947
-------- --------
Net cash provided by financing activities 38,019 1,037
-------- --------
Net increase (decrease) in cash and cash equivalents 29,452 (9,942)
Cash and cash equivalents, beginning of period 4,718 34,117
-------- --------
Cash and cash equivalents, end of period $ 34,170 $ 24,175
-------- --------
</TABLE>
See accompanying notes to 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 (the "Company") as of September 30, 1999 and for the three and nine
months ended September 30, 1998 and 1999 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. The interim consolidated financial statements should
be read in conjunction with the audited consolidated financial statements and
notes thereto, contained in the Company's 1998 Form 10-K.
2. SALES OF COMMON STOCK
In January 1998, the Company entered into a joint development and
equity agreement with Bay Networks, Inc. In conjunction with the agreement, on
February 3, 1998, the Company issued 1,334,171 shares of common stock to Bay
Networks, Inc., raising $36,753,000, net of offering costs.
On March 18, 1998, NetSpeak entered into a joint development and a
technology license agreement ("Agreement") with Motorola, Inc. ("Motorola"),
which included a $30 million multi-year minimum purchase commitment for the
Company's products, subject to certain conditions. Additionally, the acceptance
of a specific technology platform (the "Platform") being developed by the
Company was defined in the Motorola contract as the milestone for the minimum
purchase commitment. Subsequently, a decision was made to terminate any further
development efforts for the Platform in favor of aggressively pursuing the
development of the Company's call management software technology. In September
1999, the Company and Motorola amended the Agreement. As part of the amendment,
the acceptance of the Platform, which triggered the purchase commitment, and
other conditions regarding the receipt of the commitment were eliminated. In
addition, Motorola relinquished its exclusive right to use the Company's
technology in the cable and wireless markets. In exchange, Motorola's remaining
purchase commitment was reduced from $27.3 million at September 16, 1999 to
$14.0 million. The amended purchase commitment will be payable quarterly and
will terminate in December 2001. As of September 30, 1999, Motorola's remaining
purchase commitment was $12.7 million.
In conjunction with the original agreement, in March 1998 Motorola
commenced 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
the tender offer, acquiring 2,686,470 shares of the Company's Common Stock. The
Company incurred $383,000 in other charges as a result of the cash tender offer.
Upon 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, 1999, Motorola owned 30.5% of the total outstanding common stock
of the Company.
3. NET LOSS PER SHARE
The Company computes net loss per share under Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share", 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
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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 would be
anti-dilutive. The Company excluded stock options and warrants to purchase
3,191,497 and 3,707,256 common shares from the weighted-average shares
outstanding calculation for the three and nine months ended September 30, 1998
and 1999, respectively, as their effect was anti-dilutive.
4. COMMITMENTS AND CONTINGENCIES
LITIGATION - 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.
During 1998, certain shareholder litigation was filed against the
Company and its senior officers and directors in the Circuit Court of the
Fifteenth Judicial Circuit of Florida, in and for Palm Beach County. The
purported class action alleges that the Company made false and misleading
statements to shareholders in connection with Motorola's partial tender offer
and that certain of the Company's senior officers and directors improperly
tendered their shares. The Company filed a Motion to Dismiss the lawsuit. On
July 9, 1999, the Court granted the Motion in part, and granted the Plaintiffs
leave to amend. A second amended complaint was filed on or about August 6, 1999.
The Company filed a motion to dismiss the second amended complaint on September
13, 1999. That motion remains pending before the Court. The Company believes
that these complaints are without merit and intends to contest the actions
vigorously. 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, enhances 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.
YEAR 2000 - 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 both information technology ("IT") and non-IT
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
critical IT and non-IT systems and 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
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from such entities.
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 findings, the
Company performed test procedures on 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. Additionally, the Company also
reviewed its third party hardware and software applications utilized in its
infrastructure and obtained documentation from the manufacturers certifying Year
2000 compliance.
The Company has completed its testing procedures and required Year 2000
compliance activities. In the course of its completed evaluations and testing,
the Company did not encounter any items that were not Year 2000 compliant. To
date, costs incurred in evaluating the Company's Year 2000 compliance activities
and corrective actions have not been material. The Company does not believe that
future costs required to complete its Year 2000 activities will have a material
effect on the Company's business, financial position or results of operations
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.
Notwithstanding 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. Such non-compliance could result in a
material adverse effect on the Company. As such, the Company is in the process
of developing a comprehensive contingency plan to address situations that may
result if the Company is unable to achieve Year 2000 readiness of its critical
systems.
5. RECENT ACCOUNTING PRONOUNCEMENT
In December 1998, Statement of Position ("SOP") 98-9, "Modification of
SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions"
was issued. SOP 98-9 amends SOP 97-2, to require recognition of revenue using
the residual method when certain factors of multiple-element transactions exist.
SOP 98-9 also amends SOP 98-4 to extend the deferral of the application of
certain passages of 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 through fiscal
years beginning on or before March 15, 1999. The Company will adopt SOP 98-9 for
the fiscal year beginning January 1, 2000 and does not believe that the adoption
will have a material impact on the financial position or results of operations
of the Company.
8
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6. TOTAL COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss $(4,434) $(2,515) ($8,777) $(9,753)
Adjustment to reconcile net loss to
total comprehensive loss:
Unrealized gain (loss) on investments 116 (33) 143 (122)
------- ------- ------- -------
Comprehensive loss $(4,318) $(2,548) $(8,634) $(9,875)
======= ======= ======= =======
</TABLE>
9
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NetSpeak Corporation (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. The forward-looking statements are based on management's
beliefs as well as on a number of assumptions concerning future events. 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 Company's need to develop a recurring revenue stream, the Company's
ability to transition from a technology oriented to a product based company, the
acceptance of the Company's products in the marketplace, dependence on strategic
partners, the Company's need to develop additional distribution channels for its
products and technology, the effectiveness of the Company's sales and marketing
activities, the timing and scope of customer deployments, the need for ongoing
product development in an environment of rapid technological change, technical
difficulties with respect to the Company's products or products in development,
the emergence of new competitors in the marketplace, the timing of new product
announcements and releases by the Company and its competitors, the effect of the
Year 2000 issue on customers' purchasing cycles, the uncertainty of future
governmental regulation, the uncertainty of the Internet and Internet Protocol
("IP") based networks as a medium for real-time voice and video communications,
the Company's ability to manage growth, obtain patent protection, obtain
additional funds, general economic conditions and other risks discussed in this
Report and in the Company's other filings with the Securities and Exchange
Commission.
INTRODUCTION
The Company generates revenues from product licenses and fees for
services. The principal end-users for the Company's products and solutions are
service providers, including traditional and next generation telecommunications
carriers, cable companies, value-added resellers, business enterprises, original
equipment manufacturers ("OEMs") and client software end-users. Product license
revenues are generally recognized upon product shipment, over the license term
or upon delivery of permanent authorization codes provided that no significant
post-delivery obligations and payment is due within one year. Service revenues
include fees for customer maintenance and support and professional engineering
and marketing services. Service revenues for customer maintenance and support
are recognized ratably over the term of the maintenance period, which is
typically 12 months. Professional service revenues are generally recognized when
the services are performed. If customer acceptance is a condition, product
license and service revenues are recognized upon such acceptance. Advance
payments of product licenses and services are reported as unearned revenue until
all conditions for revenue recognition are met. All research and development
costs to date have been expensed as incurred.
Since its inception, the Company has generated a significant percentage
of its revenues through several of its strategic partners and, as a result, is
highly dependent upon the sales and marketing activities of these partners for
its products. In an effort to reduce its dependency on its OEM partners, the
Company is in the process of transitioning itself from a technology-oriented
company, whose sales are heavily dependent on strategic partners, to a product
and market focused company. As part of its transition, the Company has spent the
majority of 1999 refining its product strategy, to offer customers prepackaged
solutions that meet end-users' requirements with minimal customization, as
opposed to providing its technology to OEM customers for incorporation into
their products. The Company is also expanding its
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direct sales force and developing an indirect sales channel, which targets
value-added resellers and systems integrators that concentrate on the data
networking industry.
The market for the Company's products and solutions is in the early
stages of development and is characterized by rapid technological change,
evolving industry standards, changes in end-user requirements, intense
competition by more established industry participants and frequent new product
introductions and enhancements. As is typical in the case of new and rapidly
emerging technologies, demand and market acceptance are subject to a high level
of uncertainty. Broad acceptance of the Company's products by customers and
end-users is critical to the Company's success and ability to generate revenues.
The Company has a limited operating history upon which an evaluation of the
Company and its prospects can be based. As of September 30, 1999, the Company
had an accumulated deficit of $30.4 million. Due to the Company's limited
operating history and the lack of maturity in the industry, the Company's
operating results are difficult to predict and may fluctuate significantly in
the future as a result of a variety of factors, many of which are outside the
Company's control. These factors include, but are not limited to, those set
forth above.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Net revenues for the three months ended September 30, 1999 were $2.0
million as compared to $769,000 for the three months ended September 30, 1998.
Net revenues for the nine months ended September 30, 1999 and 1998 were $4.6
million and $6.1 million, respectively.
As discussed above, the Company is in the process of transitioning from
a technology oriented strategy to a product and market focused strategy. The
Company has spent much of 1999 refining its call management and gateway product
offerings to more effectively address the broader market. As a result, the
Company experienced a reduction in sales to its prior OEM customers during the
first half of 1999 as compared to 1998. The first phase of the Company's product
transition was completed during the three months ended September 30, 1999, and
the Company began shipping its new product line during this period, which
resulted in an increase in net revenues from the three months ended September
30, 1998.
Sales of call management software products and related client licenses
for the three months ended September 30, 1999 and 1998 accounted for 70% and 11%
of net revenues, respectively, and 66% and 32% of net revenues for the nine
months ended September 30, 1999 and 1998, respectively.
Sales of gateway systems for the three months ended September 30, 1999
and 1998 represented 9% and 54% of net revenues, respectively, and 13% and 51%
for the nine months ended September 30, 1999 and 1998, respectively. Gateway
sales primarily consist of integrated systems, where the Company combines its
gateway software with third-party computer hardware and software components.
The shift in the Company's sales mix from gateway systems to call
management products is consistent with the Company's market focused strategy of
obtaining interoperability between its call management products and leading
third party gateway platforms. Accordingly during 1999, the Company's strategic
partners purchased NetSpeak's call management products for use with their own
gateway platforms.
Professional services revenues represented 15% and 11% of net revenues
for the three and nine months ended September 30, 1999, respectively as compared
to 13% and 8% for the three and nine months ended September 30, 1998.
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Net revenues from consumer sales of WebPhone client software
represented 1% and 6% of net revenues for the three months ended September 30,
1999 and 1998, respectively, and 2% and 5% of net revenues for the nine months
ended September 30, 1999 and 1998, respectively. The Company anticipates that
consumer sales of its WebPhone client software will continue to represent an
insignificant amount, as its sales and marketing activities are primarily
concentrated on its call management products.
As of September 30, 1999, the Company had a remaining multi-year
purchase commitment from Motorola, Inc. ("Motorola"), a key strategic partner,
of $12.7 million. Additionally, the acceptance of a specific technology platform
("Platform") being developed by the Company was defined in the Motorola contract
as the milestone for the minimum purchase commitment. Subsequently, a decision
was made to terminate any further development efforts for the Platform in favor
of aggressively pursuing the development of the Company's call management
software technology. In September 1999, the Company and Motorola amended the
contract. As part of the amendment, the acceptance of the Platform, which
triggered the purchase commitment, and other conditions regarding the receipt of
the commitment were eliminated. In addition Motorola relinquished its exclusive
right to use the Company's technology in the cable and wireless markets. In
exchange, Motorola's remaining purchase commitment was reduced from $27.3
million at September 16, 1999 to $14.0 million. The amended purchase commitment
will be payable quarterly and will terminate in December 2001.
For the three and nine months ended September 30, 1999, Motorola
accounted for 64% and 59% of the Company's net revenues. In addition, the
Company also had two other customers that accounted for approximately 10% of
sales. As part of the Company's transition to a product and market focused
organization, the Company is in the process of expanding its sales channels and
diversifying its customer base. As this process is ongoing the Company's
revenues are still dependent on its strategic partners and significant
customers, including Motorola. The majority of the Company's sales were
domestic.
Cost of revenues for the three months ended September 30, 1999 was
$185,000, or 9% of net revenues, as compared to $176,000, or 23% of net
revenues, for the three months ended September 30, 1998. Cost of revenues for
the nine months ended September 30, 1999 and 1998 were $430,000, or 9% of net
revenues, and $1.4 million, or 23% of net revenues, respectively. The decrease
in cost of revenues as a percentage of net revenues was due to the increase of
call management software products as a percentage of the Company's sales mix. In
connection with the Company's transition in strategy to a product and market
focus, the Company has increased its sales and marketing emphasis on its call
management products, although, the Company currently intends to continue
marketing and selling its integrated gateway systems. Cost of revenues may
fluctuate substantially as a percent of net revenues in future periods depending
on the sales mix between software-based products and lower margin items such as
integrated gateway systems and professional services.
Research and development expenses for the three months ended September
30, 1999 were $1.9 million as compared to $2.9 million for the three months
ended September 30, 1998. Research and development expenses for the nine months
ended September 30, 1999 and 1998 were $6.2 million and $7.2 million,
respectively. As part of the Company's strategy to transition NetSpeak to a
product and market focus, during 1999 the Company concentrated its development
efforts on its call management software products. As a result, the Company's
other engineering programs were reviewed and some projects were eliminated,
which resulted in lower personnel costs due to a reduction in the Company's
engineering staff and lower costs of hardware and software used in development.
All research and development costs have been expensed as incurred. The Company
anticipates that research and development expenses will increase in future
periods in order to perform new product development and enhancements.
Sales and marketing expenses for the three months ended September 30,
1999 were $2.1 million as
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compared to $1.9 million for the three months ended September 30, 1998. Sales
and marketing expenses for the nine months ended September 30, 1999 and 1998
were $6.8 million and $5.5 million, respectively. During 1999, the Company
expanded its sales and marketing staff in order to develop more diversified
sales channels, in accordance with its transition to a product and market focus.
The Company anticipates that sales and marketing expenses will increase in
future periods as the Company continues to concentrate on expanding its
distribution channels and marketing activities.
General and administrative expenses for the three months ended
September 30, 1999 were $783,000 as compared to $819,000 for the three months
ended September 30, 1998. General and administrative expenses for the nine
months ended September 30, 1999 and 1998 were $2.3 million in each period. The
Company's corporate infrastructure has been relatively unchanged during 1999
and, as a result, general and administrative expenses have remained consistent.
Interest and other income for the three months ended September 30, 1999
and 1998 was $422,000 and $675,000, respectively. Interest and other income for
the nine months ended September 30, 1999 and 1998 was $1.4 million and $1.9
million, respectively. The reduction in interest and other income was due to a
reduction in the cash and short-term investment balances during 1999.
In connection with the expansion of its strategic partnership with
Motorola in March 1998, Motorola commenced 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 the tender offer, acquiring 2,686,470 shares of
the Company's Common Stock. Upon the consummation of the tender offer, Motorola
also purchased an additional 35,000 shares from two officers at the tender offer
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.
Income taxes for the three months ended September 30, 1999 and 1998
were $4,000 in each period. Income taxes for the nine months ended September 30,
1999 and 1998 were $31,000 and $30,000, respectively. Such taxes were primarily
the result of foreign income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations through
sales of equity securities. The Company has raised $65.1 million, net of
offering costs, including $47.2 million in sales of private securities and $17.9
million in the Company's initial public offering. As of September 30, 1999, the
Company had $35.1 million in cash, cash equivalents and short-term investments.
The Company currently does not have any available lines of credit.
Net cash used in operating activities during the nine months ended
September 30, 1999 and 1998 was $10.3 million and $9.4 million, respectively.
Net cash used in operating activities primarily related to the Company's
continued expansion of its research and development and sales and marketing
efforts.
Net cash used in investing activities during the nine months ended
September 30, 1999 was $670,000. Net cash used in investing activities reflects
$271,000 in net purchases of short-term investments and $399,000 related to
purchases of computer equipment. Net cash provided by investing activities
during the nine months ended September 30, 1998 was $799,000 and reflected $3.7
million in net maturities and sales of short-term investments, which were
reinvested in cash equivalents, offset by $2.9 million primarily due to
purchases of computer equipment.
Net cash provided by financing activities during the nine months ended
September 30, 1999 was $1.0 million. The proceeds during the period resulted
from exercises of employee stock options for 191,000
13
<PAGE>
shares of common stock and the issuance of 9,900 shares of common stock under
the Company's Employee Stock Purchase Plan. Net cash provided by financing
activities for the nine months ended September 30, 1998 was $38.0 million. In
January 1998, the Company entered into joint development and stock purchase
agreements with Bay Networks. In connection with the stock purchase agreement,
the Company issued 1.3 million shares of common stock to Bay Networks for $36.8
million, net of offering costs. The Company also received proceeds of $1.2
million from exercises of employee stock options for 495,000 shares of common
stock during the nine months ended September 30, 1998.
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 may
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
sustain 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 additional financing, if and when needed, may have a
material adverse effect on the Company's business, financial condition and
results of operations.
RECENT ACCOUNTING PRONOUNCEMENT
In December 1998, Statement of Position ("SOP") 98-9, "Modification of
SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions"
was issued. SOP 98-9 amends SOP 97-2, to require recognition of revenue using
the residual method when certain factors of multiple-element transactions exist.
SOP 98-9 also amends SOP 98-4 to extend the deferral of the application of
certain passages of 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 through fiscal
years beginning on or before March 15, 1999. The Company will adopt SOP 98-9 for
the fiscal year beginning January 1, 2000 and does not believe that the adoption
will have a material impact on the financial position or results of operations
of the Company.
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 both information technology ("IT") and non-IT
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
critical IT and non-IT systems and 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 entities.
14
<PAGE>
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 findings, the
Company performed test procedures on 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. Additionally, the Company also
reviewed its third party hardware and software applications utilized in its
infrastructure and obtained documentation from the manufacturers certifying Year
2000 compliance.
The Company has completed its testing procedures and required Year 2000
compliance activities. In the course of its completed evaluations and testing,
the Company did not encounter any items that were not Year 2000 compliant. To
date, costs incurred in evaluating the Company's Year 2000 compliance activities
and corrective actions have not been material. The Company does not believe that
future costs required to complete its Year 2000 activities will have a material
effect on the Company's business, financial position or results of operations
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.
Notwithstanding 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. Such non-compliance could result in a
material adverse effect on the Company. As such, the Company is in the process
of developing a comprehensive contingency plan to address situations that may
result if the Company is unable to achieve Year 2000 readiness of its critical
systems.
15
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
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: November 9, 1999 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 24,175
<SECURITIES> 10,954
<RECEIVABLES> 2,461
<ALLOWANCES> 0
<INVENTORY> 205
<CURRENT-ASSETS> 38,263
<PP&E> 2,612
<DEPRECIATION> 0
<TOTAL-ASSETS> 41,775
<CURRENT-LIABILITIES> 2,929
<BONDS> 0
0
0
<COMMON> 130
<OTHER-SE> 69,181
<TOTAL-LIABILITY-AND-EQUITY> 41,775
<SALES> 4,552
<TOTAL-REVENUES> 4,552
<CGS> 430
<TOTAL-COSTS> 430
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (9,722)
<INCOME-TAX> (31)
<INCOME-CONTINUING> (9,722)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,753)
<EPS-BASIC> (0.76)
<EPS-DILUTED> (0.76)
</TABLE>
