================================================================================
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 March 31, 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 APRIL 30, 1999
- ---------------------------- ------------------------------------
Common Stock, $.01 par value 12,804,305
================================================================================
<PAGE>
NETSPEAK CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
- ------------------------------
PAGE NO.
--------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1998
and March 31, 1999.......................................................3
Condensed Consolidated Statements of Operations for the three
months ended March 31, 1998 and 1999.....................................4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 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
- ---------------------------
Other Information..........................................................16
Signatures.................................................................17
2
<PAGE>
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, MARCH 31,
1998 1999
------------ ---------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 34,117 $ 30,137
Short-term investments 10,805 10,839
Accounts receivable, net of allowances for doubtful
accounts of $709 and $970 at December 31, 1998 and
March 31, 1999, respectively 976 618
Inventory 798 481
Prepaid and other current assets 408 333
Deferred tax asset 14 10
-------- --------
Total current assets 47,118 42,418
Property and equipment, net 3,614 3,332
Other assets 993 886
-------- --------
$ 51,725 $ 46,636
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 706 $ 458
Accrued compensation 1,289 1,203
Other accrued expenses 436 448
Unearned revenue 1,610 364
-------- --------
Total current liabilities 4,041 2,473
-------- --------
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 12,799,305 issued
and outstanding at December 31, 1998 and
March 31, 1999, respectively 127 128
Additional paid-in capital 68,147 68,257
Accumulated other comprehensive income (loss) 61 (18)
Accumulated deficit (20,651) (24,204)
-------- --------
Total shareholders' equity 47,684 44,163
-------- --------
$ 51,725 $ 46,636
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
NETSPEAK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1999
-------- --------
Net revenues $ 2,413 $ 1,512
Operating expenses:
Cost of revenues 667 93
Research and development 1,833 2,400
Sales and marketing 1,536 2,297
General and administrative 716 798
-------- --------
Total operating expenses 4,752 5,588
Loss from operations (2,339) (4,076)
Interest and other income 502 534
Other charges (383) --
-------- --------
Loss before income taxes (2,220) (3,542)
Income taxes 15 11
-------- --------
Net loss $ (2,235) $ (3,553)
======== ========
Net loss per share (basic and diluted) $ (0.19) $ (0.28)
======== ========
Weighted-average shares outstanding 11,548 12,770
======== ========
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
NETSPEAK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,235) $ (3,553)
Adjustments to reconcile net loss to net cash
used in operations:
Depreciation 247 464
Provision for bad debts -- 262
Deferred taxes 15 4
Changes in assets and liabilities:
Accounts receivable, net (996) 97
Inventory (3) 317
Prepaid and other current assets (199) 75
Other assets 87 107
Accounts payable 467 (249)
Accrued compensation 48 (86)
Other accrued expenses 205 12
Unearned revenue (135) (1,246)
-------- --------
Net cash used in operating activities (2,499) (3,796)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (937) (182)
Purchase of short-term investments (2,335) (7,166)
Maturities and sales of short-term investments 6,371 7,052
-------- --------
Net cash (used in) provided by investing activities 3,099 (296)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 36,753 --
Proceeds from exercises of employee stock options 956 112
-------- --------
Net cash provided by financing activities 37,709 112
-------- --------
Net increase (decrease) in cash and cash equivalents 38,309 (3,980)
Cash and cash equivalents, beginning of period 4,718 34,117
-------- --------
Cash and cash equivalents, end of period $ 43,027 $ 30,137
======== ========
SUPPLEMENTAL INFORMATION:
Cash paid for income taxes $ -- $ --
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
NETSPEAK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The interim condensed consolidated financial statements as of March 31,
1999 and for the three months ended March 31, 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 with Motorola, Inc. ("Motorola") which included a
$30 million multi-year minimum purchase commitment for the Company's products,
subject to certain conditions, of which $27.5 million remains at March 31, 1999.
Additionally, the acceptance of a specific technology platform being developed
by the Company (the "Platform") was defined in the Motorola contract as the
trigger 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 new call management
software technology. NetSpeak and Motorola are in discussions regarding
replacing the acceptance of the Platform with another triggering event. Although
the Company believes that it will be successful in negotiating a new trigger for
the minimum commitment, there can be no assurances that the Company will be
successful in this effort and, as a result, there exists uncertainty as to the
receipt, amount and timing of the remaining minimum commitment from Motorola.
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 a cash 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 March 31, 1999, Motorola
owned 30.8% 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, "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 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
6
<PAGE>
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 2,532,000 and 3,900,000 common shares from the
weighted-average shares outstanding calculation for the three months ended March
31, 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.
To date, the Company has filed a Motion to Dismiss, which has not yet been
scheduled for hearing. No discovery has taken place, nor is any anticipated
prior to the disposition of the Motion to Dismiss. 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
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,
7
<PAGE>
the Company's products appear to be Year 2000 compliant. In order to validate
these preliminary findings, to date the Company has completed 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 completed a substantial portion of its testing procedures and
required Year 2000 compliance activities on or prior to December 31, 1998. In
the course of its completed evaluations and testing, the Company did not
encounter any items that were not Year 2000 compliant. However, the Company is
still in the process of completing its remaining testing procedures and
compliance activities, as well as obtaining certification from certain
significant vendors and strategic partners. Should the Company encounter any
items that are not Year 2000 compliant in the course of its remaining evaluation
and testing procedures, the Company will take necessary actions to correct the
matter. To date, costs incurred in evaluating the Company's Year 2000 compliance
activities and corrective actions, where and if required, 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 which 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
<PAGE>
6. TOTAL COMPREHENSIVE LOSS
THREE MONTHS ENDED
MARCH 31,
------------------------
1998 1999
-------- --------
Net loss $(2,235) $(3,553)
Adjustment to reconcile net loss to
total comprehensive loss:
Unrealized gain (loss) on investments 23 (79)
------- -------
Comprehensive loss $(2,212) $(3,632)
======= =======
9
<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. 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
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
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 deployments of the Company's products by
customers, 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 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, 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 engineering. Service
revenues for customer maintenance and support are recognized ratably over the
term of the maintenance period, which is typically 12 months. Service revenues
for engineering services 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, principally OEMs, 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 from a technology
oriented company, whose sales are heavily dependent on strategic partners, to a
product and market focused company. As part of the Company's transition, the
Company spent the first quarter of 1999 refining its products to develop
prepackaged solutions that meet end-users' requirements with minimal
customization efforts. Previously, the Company's development
10
<PAGE>
efforts were primarily concentrated on providing its technology to OEM customers
for incorporation into their products, which is different than the Company's
current objectives. The Company is also expanding its 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 March 31, 1999, the Company had an
accumulated deficit of $24.2 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 MONTHS ENDED MARCH 31, 1999 AND 1998
Net revenues for the three months ended March 31, 1999 were $1.5 million as
compared to $2.4 million for the three months ended March 31, 1998.
The reduction in net revenues was due to a decrease in sales of integrated
gateway systems, which represented 12% of net revenues for the three months
ended March 31, 1999 as compared to 66% of net revenues for the three months
ended March 31, 1998. Gateway sales primarily consist of integrated "turn-key"
systems, where the Company integrates its gateway software with third-party
computer hardware and software components. The reduction in gateway sales was
offset by an increase in sales of call management software and related client
applications, which accounted for 79% of net revenues for the three months ended
March 31, 1999 as compared to 15% of net revenues for the three months ended
March 31, 1998. The shift in the Company's sales mix was primarily due to the
Company's strategic partners purchasing NetSpeak's call management applications
for use with their own gateway platforms. The increase in call management
application sales was primarily due to commencement of distribution of these
products by Motorola. For the three months ended March 31, 1998, the Company's
strategic partners primarily purchased call management applications along with
NetSpeak's gateway products. The majority of the Company's sales were domestic,
although the Company's strategic partners distribute its products
internationally.
Net revenues from consumer sales of the Company's WebPhone client software
represented 3% and 6% of net revenues for the three months ended March 31, 1999
and 1998, respectively. The Company anticipates that consumer sales of its
WebPhone client software will remain consistent with the three months ended
March 31, 1999, as the Company's sales and marketing activities are concentrated
on its call management and gateway products.
In September 1998, the Company shipped $2.3 million in software products,
primarily consisting of call management software to Motorola. 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. In December 1998 and March 1999, the Company
recognized $988,000 and $1.1 million,
11
<PAGE>
respectively, of this deferred revenue as the exchange provisions were
terminated for these portions of the order. The exchange provisions are not
applicable to Motorola's remaining $27.5 million multi-year purchase commitment
for NetSpeak's products; however, certain other conditions remain applicable.
Additionally, the acceptance of a specific technology platform being developed
by NetSpeak (the "Platform") was defined in the Motorola contract as the trigger
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 new call management
software technology. NetSpeak and Motorola are in discussions regarding
replacing the acceptance of the Platform with another triggering event. Although
the Company believes that it will be successful in negotiating a new trigger for
the minimum commitment, there can be no assurances that NetSpeak will be
successful in this effort and, as a result, there exists some uncertainty as to
the receipt, amount and timing of the remaining minimum commitment from
Motorola.
For the three months ended March 31, 1999, Motorola accounted for 76% of
the Company's net revenues. As the expansion of the Company's sales channel is
in process, the Company's revenues are still heavily dependent on its strategic
partners. Accordingly, a significant reduction in revenues from the Company's
strategic partners in subsequent periods may result in a substantial decrease in
net revenues from those generated during the three months ended March 31, 1999.
As part of the Company's efforts to broaden the product distribution 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 and, accordingly, the Company's credit
risk exposure has increased.
Cost of revenues for the three months ended March 31, 1999 was $93,000, or
6% of net revenues, as compared to $667,000, or 28% of net revenues, for the
three months ended March 31, 1998. The decrease in cost of revenues and cost of
revenues as of percentage of net revenues was due to a shift in the Company's
sales mix as discussed above. Sales of integrated gateway systems, which are
hardware-based products that contain significantly higher costs than
software-based products, declined, while sales of call management and client
software applications increased. Although sales of integrated gateway systems
decreased from the prior year, the Company currently intends to continue
marketing and selling integrated gateway systems. However, the market for such
products is highly competitive and the ultimate success of the Company's
turn-key gateway products is unknown at this time. As a result, the sales mix
between integrated systems and software based products may vary significantly
from period to period and, as a result, cost of revenues may fluctuate
substantially as a percent of net revenues in future periods.
Research and development expenses for the three months ended March 31,
1999 were $2.4 million as compared to $1.8 million for the three months ended
March 31, 1998. The increase in research and development expenses were primarily
due to the expansion of the Company's research and development staff, resulting
in greater personnel costs and equipment depreciation. All research and
development costs have been expensed as incurred. Research and development
expenses may increase in future periods in order to perform new product
development and enhancements.
Sales and marketing expenses for the three months ended March 31, 1999 were
$2.3 million as compared to $1.5 million for the three months ended March 31,
1998. The increase in sales and marketing expenses was primarily due to the
expansion of the Company's sales and marketing staff. The Company also increased
its allowance for uncollectible customer accounts due to the change in the
Company's customer base as discussed above. The Company anticipates that sales
and marketing expenses will increase in future periods as the Company seeks to
expand its marketing activities and broaden its sales distribution channels.
12
<PAGE>
General and administrative expenses for the three months ended March 31,
1999 were $798,000 as compared to $716,000 for the three months ended March 31,
1998. General and administrative expenses were consistent for the three months
ended March 31, 1999 and 1998, as the Company's corporate infrastructure was
relatively unchanged during this period. General and administrative expenses may
increase in future periods due to expansion of the Company's corporate
infrastructure.
Interest and other income for the three months ended March 31, 1999 and
1998 was $534,000 and $502,000, respectively.
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 included 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 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 March 31, 1999 and 1998 were
$11,000 and $15,000, respectively. Such taxes were primarily the result of
income taxes paid to the Singapore government related to license fees received
pursuant to agreements with Creative Technology Ltd.
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 March 31, 1999, the Company had
$41.0 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 three months ended March
31, 1999 and 1998 was $3.8 million and $2.5 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 three months ended March
31, 1999 was $296,000. Net cash used in investing activities reflects $114,000
in net purchases of short-term investments and $182,000 primarily related to
purchases of computer equipment. Net cash provided by investing activities
during the three months ended March 31, 1998 was $3.1 million and reflected $4.0
million in net maturities and sales of short-term investments, which were
reinvested in cash equivalents, offset by $937,000 in capital expenditures
related primarily to purchases of computer equipment.
Net cash provided by financing activities during the three months ended
March 31, 1999 was $112,000 which consisted of proceeds received from exercises
of employee stock options for 48,502 shares of common stock during the period.
Net cash provided by financing activities for the three months ended March 31,
1998 was $37.7 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 $956,000 from exercises of employee stock options for
13
<PAGE>
400,483 shares of common stock during the months ended March 31, 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.
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 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
14
<PAGE>
software applications utilized in its infrastructure and have obtained
documentation from the manufacturers certifying Year 2000 compliance.
The Company completed a substantial portion of its testing procedures and
required Year 2000 compliance activities on or prior to December 31, 1998. In
the course of its completed evaluations and testing, the Company did not
encounter any items that were not Year 2000 compliant. However, the Company is
still in the process of completing its remaining testing procedures and
compliance activities, as well as obtaining certification from certain
significant vendors and strategic partners. Should the Company encounter any
items that are not Year 2000 compliant in the course of its remaining evaluation
and testing procedures, the Company will take necessary actions to correct the
matter. To date, costs incurred in evaluating the Company's Year 2000 compliance
activities and corrective actions, where and if required, 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 which 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: May 14, 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
ACCOMPNAYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 30,137
<SECURITIES> 10,839
<RECEIVABLES> 618
<ALLOWANCES> 0
<INVENTORY> 481
<CURRENT-ASSETS> 42,418
<PP&E> 3,332
<DEPRECIATION> 0
<TOTAL-ASSETS> 46,636
<CURRENT-LIABILITIES> 2,473
<BONDS> 0
0
0
<COMMON> 128
<OTHER-SE> 68,257
<TOTAL-LIABILITY-AND-EQUITY> 46,636
<SALES> 1,512
<TOTAL-REVENUES> 1,512
<CGS> 93
<TOTAL-COSTS> 93
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,542)
<INCOME-TAX> 11
<INCOME-CONTINUING> (3,553)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,553)
<EPS-PRIMARY> (.28)
<EPS-DILUTED> (.28)
</TABLE>
