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, 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 July 31, 1999
- ---------------------------- -----------------------------------
Common Stock, $.01 par value 12,944,121
<PAGE>
NETSPEAK CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
- ------------------------------
PAGE NO.
--------
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of December 31, 1998
and June 30, 1999 ......................................... 3
Condensed Consolidated Statements of Operations for the three
and six months ended June 30, 1998 and 1999 ............... 4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 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
- ---------------------------
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)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 34,117 $ 27,209
Short-term investments 10,805 10,926
Accounts receivable, net of allowances for doubtful
accounts of $709 and $1,249 at December 31, 1998 and
June 30, 1999, respectively 976 809
Inventory 798 319
Prepaid and other current assets 408 546
Deferred tax asset 14 6
-------- --------
Total current assets 47,118 39,815
Property and equipment, net 3,614 2,941
Other assets 993 813
-------- --------
$ 51,725 $ 43,569
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 706 $ 533
Accrued compensation 1,289 1,038
Other accrued expenses 436 440
Unearned revenue 1,610 282
-------- --------
Total current liabilities 4,041 2,293
-------- --------
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 12,934,270 issued
and outstanding at December 31, 1998 and
June 30, 1999, respectively 127 129
Additional paid-in capital 68,147 69,130
Accumulated other comprehensive income (loss) 61 (94)
Accumulated deficit (20,651) (27,889)
-------- --------
Total shareholders' equity 47,684 41,276
-------- --------
$ 51,725 $ 43,569
======== ========
</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,
---------------------- ----------------------
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues $ 2,930 $ 1,024 $ 5,343 $ 2,536
Operating expenses:
Cost of revenues 569 152 1,236 245
Research and development 2,423 1,921 4,256 4,321
Sales and marketing 2,012 2,352 3,548 4,649
General and administrative 752 750 1,468 1,548
-------- -------- -------- --------
Total operating expenses 5,756 5,175 10,508 10,763
Loss from operations (2,826) (4,151) (5,165) (8,227)
Interest and other income 729 482 1,231 1,016
Other charges -- -- (383) --
-------- -------- -------- --------
Loss before income taxes (2,097) (3,669) (4,317) (7,211)
Income taxes 12 16 27 27
-------- -------- -------- --------
Net loss $ (2,109) $ (3,685) $ (4,344) $ (7,238)
======== ======== ======== ========
Net loss per share (basic and diluted) $ (0.17) $ (0.29) $ (0.36) $ (0.57)
======== ======== ======== ========
Weighted-average shares outstanding 12,437 12,828 11,999 12,808
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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NETSPEAK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1998 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,344) $ (7,238)
Adjustments to reconcile net loss to net cash
used in operations:
Depreciation 611 927
Provision for bad debts 371 540
Deferred taxes 27 8
Changes in assets and liabilities:
Accounts receivable (2,194) (373)
Inventory (469) 479
Prepaid and other current assets (277) (138)
Other assets (152) 180
Accounts payable 623 (173)
Accrued compensation 278 (251)
Other accrued expenses 198 4
Unearned revenue (3) (1,328)
-------- --------
Net cash used in operating activities (5,331) (7,363)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,069) (254)
Purchase of shortterm investments (4,191) (8,847)
Maturities and sales of shortterm investments 8,064 8,571
-------- --------
Net cash provided by (used in) investing activities 1,804 (530)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 36,860 --
Proceeds from issuance of common stock under
employee stock purchase plan -- 90
Proceeds from exercises of employee stock options 1,096 895
-------- --------
Net cash provided by financing activities 37,956 985
-------- --------
Net increase (decrease) in cash and cash equivalents 34,429 (6,908)
Cash and cash equivalents, beginning of period 4,718 34,117
-------- --------
Cash and cash equivalents, end of period $ 39,147 $ 27,209
======== ========
</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 as of June 30, 1999
and for the three and six months ended June 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, of which $27.3 million
remains at June 30, 1999. Additionally, the acceptance of a specific technology
platform being developed by the Company ("Platform") 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 new call
management software technology. NetSpeak and Motorola are in discussions
regarding replacing the acceptance of the Platform with another milestone.
Although the Company believes that it will be successful in negotiating a new
milestone 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 June 30, 1999, Motorola owned
30.5% 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 2,559,045 and 3,297,999 common shares from the
weighted-average shares outstanding calculation for the three and six months
ended June 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 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,
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<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 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 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1998 1999 1998 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net loss $(2,109) $(3,685) $(4,344) $(7,238)
Adjustment to reconcile net loss to
total comprehensive loss:
Unrealized gain (loss) on investments 4 (76) 27 (155)
------- ------- ------- -------
Comprehensive loss $(2,105) $(3,761) $(4,317) $(7,393)
======= ======= ======= =======
</TABLE>
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
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 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, 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 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 the Company's transition, the Company
spent the majority of the first half of 1999 refining its products to offer
prepackaged solutions that meet end-users' requirements with minimal
customization. Previously, the
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Company's development 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 June 30, 1999, the Company had an
accumulated deficit of $27.9 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 SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Net revenues for the three months ended June 30, 1999 were $1.0 million as
compared to $2.9 million for the three months ended June 30, 1998. Net revenues
for the six months ended June 30, 1999 and 1998 were $2.5 million and $5.3
million, respectively.
The reduction in net revenues was due to a decrease in sales of integrated
gateway systems and call management applications during 1999. As discussed
above, the Company is in the process of transitioning from its previous
technology oriented strategy to a product and market focused strategy. As a
result of this transition, the Company spent the first six months of 1999
refining its product offerings to more effectively address the broader market.
During this period, the Company experienced a reduction in sales to its prior
OEM customers, which primarily accounted for the decline in net revenues during
1999.
Sales of gateway systems for the three months ended June 30, 1999 and 1998
represented 24% and 39% of net revenues, respectively, and 16% and 51% for the
six months ended June 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 reduction in
gateway sales as a percentage of total sales was primarily due to the Company's
strategic partners purchasing NetSpeak's call management applications for use
with their own gateway platforms.
Sales of call management software and related client applications for the
three months ended June 30, 1999 and 1998 accounted for 42% and 50% of net
revenues, respectively, and 64% and 34% of net revenues for the six months ended
June 30, 1999 and 1998, respectively.
Professional services revenues represented 20% and 8% of net revenues for
the three and six months ended June 30, 1999, respectively. The Company did not
have any professional services revenues for the comparable periods in 1998.
Net revenues from consumer sales of the Company's WebPhone client software
represented 3% and 4% of net revenues for the three months ended June 30, 1999
and 1998, respectively, and 3% and 6% of net revenues for the six months ended
June 30, 1999 and 1998, respectively. The Company anticipates
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that consumer sales of its WebPhone client software will remain consistent with
the current period, as the Company's sales and marketing activities are
concentrated on its call management and gateway products.
The majority of the Company's sales were domestic, although the Company's
strategic partners distribute its products internationally.
As of June 30, 1999, Motorola had a remaining multi-year purchase
commitment of $27.3 million, which is subject to certain conditions.
Additionally, the acceptance of a specific technology platform being developed
by NetSpeak ("Platform") 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 new call management
software technology. NetSpeak and Motorola are in discussions regarding
replacing the acceptance of the Platform with another milestone. Although the
Company believes that it will be successful in negotiating a new milestone 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 and six months ended June 30, 1999, Motorola accounted for
26% and 56% of the Company's net revenues. 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,
including Motorola. As a result, a substantial reduction in revenues from the
Company's strategic partners may result in a significant decline in net revenues
from the three months ended June 30, 1999.
As part of the Company's efforts to broaden its 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 has
credit risk exposure. Additionally, the Company's sales and receivables are also
currently concentrated into a small number of customers.
Cost of revenues for the three months ended June 30, 1999 was $152,000, or
15% of net revenues, as compared to $569,000, or 19% of net revenues, for the
three months ended June 30, 1998. Cost of revenues for the six months ended June
30, 1999 and 1998 were $245,000, or 10% of net revenues, and $1.2 million, or
23% of net revenues, respectively. The decrease in cost of revenues as a
percentage of net revenues was due to the decline of integrated gateway system
sales as a percentage of the Company's sales mix. Gateway systems represent
hardware-based products that contain significantly higher costs than the
Company's software-based products. In connection with its transition in strategy
the Company is placing increased emphasis on its call management applications,
although 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 turnkey 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
such, cost of revenues may fluctuate substantially as a percent of net revenues
in future periods.
Research and development expenses for the three months ended June 30, 1999
were $1.9 million as compared to $2.4 million for the three months ended June
30, 1998. Research and development expenses for the six months ended June 30,
1999 and 1998 were $4.3 million in each period. In accordance with the Company's
objective of transitioning NetSpeak to a product and market focus, the Company
concentrated its development efforts on its call management solutions.
Accordingly, certain of the Company's engineering programs were prioritized and
some projects were eliminated. This resulted in lower personnel costs due to a
reduction in the Company's engineering staff as well as lower costs of
development hardware and software. All research and development costs have been
expensed as incurred. The Company anticipates
12
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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 June 30, 1999 were
$2.4 million as compared to $2.0 million for the three months ended June 30,
1998. Sales and marketing expenses for the six months ended June 30, 1999 and
1998 were $4.6 million and $3.5 million, respectively. As part of the Company's
transition to a product and market focus, the Company expanded its sales and
marketing staff in 1999 in order to develop more diversified sales channels. The
Company anticipates that sales and marketing expenses will increase in future
periods as the Company intends to continue concentrating on the broadening of
its distribution channels and expanding its marketing activities.
General and administrative expenses for the three months ended June 30,
1999 were $750,000 as compared to $752,000 for the three months ended June 30,
1998. General and administrative expenses for the six months ended June 30, 1999
and 1998 were $1.5 million in each period. General and administrative expenses
have remained
consistent, 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 June 30, 1999 and 1998
was $482,000 and $729,000, respectively. Interest and other income for the six
months ended June 30, 1999 and 1998 was $1.0 million and $1.2 million,
respectively. The reduction in interest and other income for the three months
ended June 30, 1999 was due to lower average cash and short-term investment
balances during the second quarter of 1999.
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 June 30, 1999 and 1998 were $16,000
and $12,000, respectively. Income taxes for the six months ended June 30, 1999
and 1998 were $27,000 in each period. 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 June 30, 1999, the Company had
$38.1 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 six months ended June 30,
1999 and 1998 was $7.4 million and $5.3 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.
13
<PAGE>
Net cash used in investing activities during the six months ended June 30,
1999 was $530,000. Net cash used in investing activities reflects $276,000 in
net purchases of short-term investments and $254,000 related to purchases of
computer equipment. Net cash provided by investing activities during the six
months ended June 30, 1998 was $1.8 million and reflected $3.9 million in net
maturities and sales of short-term investments, which were reinvested in cash
equivalents, offset by $2.1 million in capital expenditures primarily due to
purchases of computer equipment.
Net cash provided by financing activities during the six months ended June
30, 1999 was $985,000. The proceeds during the quarter were due to the exercises
of employee stock options for 183,000 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 six months ended June 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 $1.1 million from exercises of employee stock options for 442,000
shares of common stock during the six months ended June 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
14
<PAGE>
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 software
applications utilized in its infrastructure and 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 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 4. Submission of Matters to a Vote of Shareholders
(a) The Annual Meeting of Company's shareholders was held on May 20, 1999
(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 9,890,578 88,556
Rober A. Kennedy 9,890,678 88,456
Michael R. Rich 9,890,578 88,556
John W. Staten 9,890,578 88,556
Stephen P. Earhart 9,890,678 88,456
Michael B. Goldberg 9,890,578 88,556
A. Jeffry Robinson 9,890,678 88,456
Martin Shum 9,890,578 88,556
(ii) 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, 1999.
With respect to the foregoing matter 9,939,753 shares voted in
favor, 22,271 shares voted against, 17,110 shares abstained and
there were no broker non-votes.
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 13, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 27,209
<SECURITIES> 10,926
<RECEIVABLES> 809
<ALLOWANCES> 0
<INVENTORY> 319
<CURRENT-ASSETS> 39,815
<PP&E> 2,941
<DEPRECIATION> 0
<TOTAL-ASSETS> 43,569
<CURRENT-LIABILITIES> 2,293
<BONDS> 0
0
0
<COMMON> 129
<OTHER-SE> 69,130
<TOTAL-LIABILITY-AND-EQUITY> 43,569
<SALES> 2,536
<TOTAL-REVENUES> 2,536
<CGS> 245
<TOTAL-COSTS> 245
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,211)
<INCOME-TAX> 27
<INCOME-CONTINUING> (7,238)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,238)
<EPS-BASIC> (0.57)
<EPS-DILUTED> (0.57)
</TABLE>
