================================================================================
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, 2000
[ ] 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, 2000
---------------------------- -----------------------------------
Common Stock, $.01 par value 14,184,382
================================================================================
<PAGE>
NETSPEAK CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
------------------------------
Page No.
--------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) as of
December 31, 1999 and June 30, 2000........................................ 3
Condensed Consolidated Statements of Operations (unaudited) for the
three and six months ended June 30, 1999 and 2000.......................... 4
Condensed Consolidated Statements of Cash Flows (unaudited) for the
three and six months ended June 30, 1999 and 2000.......................... 5
Notes to Condensed Consolidated Financial Statements (unaudited).............. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 8
PART II - OTHER INFORMATION
---------------------------
Other Information.............................................................12
Signatures....................................................................13
2
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. FINANCIAL STATEMENTS
NETSPEAK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share amounts)
December 31, June 30,
1999 2000
-------- --------
ASSETS
Cash and cash equivalents $ 23,109 $ 26,834
Short-term investments 11,160 6,836
Accounts receivable, net 2,814 4,949
Prepaid and other current assets 541 519
-------- --------
Total current assets 37,624 39,138
Property and equipment, net 2,527 2,125
Other assets 795 566
-------- --------
$ 40,946 $ 41,829
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 637 $ 456
Accrued compensation 1,073 1,172
Other accrued expenses 1,080 1,311
Unearned revenue 361 835
-------- --------
Total current liabilities 3,151 3,774
-------- --------
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; 13,375,716 and 14,184,382 issued and
outstanding at December 31, 1999 and June 30, 2000,
respectively 134 142
Additional paid-in capital 70,658 72,838
Accumulated deficit (32,863) (34,856)
Accumulated other comprehensive loss (134) (69)
-------- --------
Total shareholders' equity 37,795 38,055
-------- --------
$ 40,946 $ 41,829
======== ========
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
NETSPEAK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues $ 1,024 $ 4,819 $ 2,536 $ 9,199
Operating expenses:
Cost of revenues 152 658 245 1,161
Research and development 1,921 2,295 4,321 4,227
Sales and marketing 2,352 2,081 4,649 4,471
General and administrative 750 1,039 1,548 2,258
-------- -------- -------- --------
Total operating expenses 5,175 6,073 10,763 12,117
Loss from operations (4,151) (1,254) (8,227) (2,918)
Interest and other income 482 512 1,016 964
-------- -------- -------- --------
Loss before income taxes (3,669) (742) (7,211) (1,954)
Income taxes 16 -- 27 39
-------- -------- -------- --------
Net loss $ (3,685) $ (742) $ (7,238) $ (1,993)
======== ======== ======== ========
Net loss per share (basic and diluted) $ (0.29) $ (0.05) $ (0.57) $ (0.14)
======== ======== ======== ========
Weighted-average shares outstanding 12,828 13,898 12,808 13,762
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
NETSPEAK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------------
1999 2000
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,238) $ (1,993)
Adjustments to reconcile net loss to net cash
used in operations:
Depreciation 927 876
Provision for bad debts 540 11
Changes in assets and liabilities:
Accounts receivable (373) (2,146)
Prepaid and other current assets 349 22
Other assets 180 229
Accounts payable (173) (181)
Accrued compensation (251) 99
Other accrued expenses 4 231
Unearned revenue (1,328) 474
-------- --------
Net cash used in operating activities (7,363) (2,378)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (254) (474)
Purchase of short-term investments (8,847) (2,062)
Maturities and sales of short-term investments 8,571 6,451
-------- --------
Net cash (used in) provided by investing activities (530) 3,915
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock under
employee stock purchase plan 90 110
Proceeds from exercises of employee stock options 895 2,078
-------- --------
Net cash provided by financing activities 985 2,188
-------- --------
Net (decrease) increase in cash and cash equivalents (6,908) 3,725
Cash and cash equivalents, beginning of period 34,117 23,109
-------- --------
Cash and cash equivalents, end of period $ 27,209 $ 26,834
======== ========
SUPPLEMENTAL INFORMATION:
Cash paid for income taxes $ 36 $ 39
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
NETSPEAK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The interim condensed consolidated financial statements of NetSpeak
Corporation (the "Company") as of June 30, 2000 and for the three and six months
ended June 30, 1999 and 2000 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 1999 Form 10-K.
2. REVENUE RECOGNITION
The Company recognizes revenue in accordance with the American
Institute of Certified Public Accountants ("AICPA") Statement of Position
("SOP") 97-2, "Software Revenue Recognition", and SOP 98-9, "Modification of SOP
97-2, With Respect to Certain Transactions". The Company generates revenues from
product licenses and fees for services. Product license revenues are generally
recognized upon product shipment provided that no significant post-delivery
obligations exist and payment is due within one year. Service revenues include
fees for customer support, product maintenance and professional engineering
services. Service revenues for customer support and product maintenance are
recognized ratably over the term of the maintenance period, which is typically
twelve months. Service revenues for professional engineering services are
generally recognized when the services are performed. Product license and
service revenues are recognized upon customer acceptance, if required. Advance
payments of product licenses and services are reported as unearned revenue until
all conditions for revenue recognition are met.
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 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
3,298,000 and 3,242,000 common shares from the weighted-average shares
outstanding calculation for the three and six months ended June 30, 1999 and
2000, respectively, as their effect was anti-dilutive.
4. COMMITMENTS AND CONTINGENCIES
LITIGATION - 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
6
<PAGE>
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. In December 1999, the parties reached an agreement in
principle to settle this litigation for $7.0 million, of which the Company has
agreed to pay $500,000 (which amount was accrued in the December 31, 1999
financial statements) toward the settlement with the balance to be funded by the
Company's insurance carriers and the individual defendants in the action. This
settlement is subject to various contingencies, including obtaining court
approval. Although there can be no assurance that all of these contingencies
will be satisfied, the Company and its counsel believe that the settlement will
be resolved in accordance with the agreement in principle and will be
consummated by the end of the first quarter of 2001.
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, results of operations or
cash flows.
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, results of operations or cash flows.
5. TOTAL COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1999 2000 1999 2000
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net loss $(3,685) $ (742) $(7,238) $(1,993)
Adjustment to reconcile net loss to
total comprehensive loss:
Unrealized (loss) gain on investments
(76) 23 (155) 65
------- ------- ------- -------
Comprehensive loss $(3,761) $ (719) $(7,393) $(1,928)
======= ======= ======= =======
</TABLE>
7
<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 Form 10-Q 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 other negative 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 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 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 of the Company's products and solutions are
service providers, including traditional and new telecommunications carriers,
Internet service providers and cable companies. The Company distributes its
products through its direct sales force, value-added resellers ("VARs"), system
integrators ("SIs") and original equipment manufacturers ("OEMs"). Product
license revenues are generally recognized upon product shipment provided that no
significant post-delivery obligations exist and payment is due within one year.
Service revenues include fees for customer support, product maintenance and
professional engineering services. Service revenues for customer maintenance and
support are recognized ratably over the term of the maintenance period, which is
typically 12 months. Professional engineering service revenues are generally
recognized when the services are performed. Product license and service revenues
are recognized upon customer acceptance, if required. 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.
During 1999, the Company transitioned its strategy from technology
oriented to product and market-focused. As part of its transition, the Company
also began expanding its distribution channels, increasing its direct sales
force and developing indirect sales channels, targeting VARs, SIs and OEMs that
concentrate on the data networking industry. Since inception, the Company has
generated a significant percentage of its revenues through several of its key
strategic partners. For the three months ended June 30, 2000 and 1999, Motorola
Inc. ("Motorola") accounted for 20% and 26% of the Company's net revenues,
respectively. As the Company is still in the process of expanding and
diversifying its sales channels, its revenues are still heavily dependent on its
primary strategic partners. Significant variations in revenues from any or a
combination of the Company's key strategic partners may result in fluctuations
of the Company's revenues.
8
<PAGE>
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, 2000, the Company had an
accumulated deficit of $34.9 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, 2000 AND 1999
Net revenues for the three months ended June 30, 2000 were $4.8 million
as compared to $1.0 million for the three months ended June 30, 1999. Net
revenues for the six months ended June 30, 2000 were $9.2 million as compared to
$2.5 million for the six months ended June 30, 1999.
Sales of call management products for the three months ended June 30,
2000 and 1999 accounted for 64% and 42% of net revenues, respectively, and 67%
and 64% of net revenues for the six months ended June 30, 2000 and 1999,
respectively. The increase in call management product sales was due to the
Company obtaining new service provider customers as well as greater OEM sales as
a result of the February 2000 OEM agreement with Fujitsu Business Communications
Systems.
Professional services accounted for 36% and 31% of net revenues for the
three months ended June 30, 2000 and 1999, respectively, and 33% and 17% of net
revenues for the six months ended June 30, 2000 and 1999, respectively. The
increase in professional service revenue was primarily due to professional
engineering service engagements performed for the Company's strategic partners.
The Company anticipates that professional services revenues will decline in
future periods as a significant professional service engagement ended during the
quarter.
Sales of gateway systems represented 24% and 16% of net revenues for
the three and six months ended June 30, 1999, respectively. The Company did not
generate any gateway sales for the six months ended June 30, 2000 as it
discontinued its gateway product line in the first quarter of 2000.
Cost of revenues for the three months ended June 30, 2000 was $658,000,
or 14% of net revenues, as compared to $152,000, or 15% of net revenues, for the
three months ended June 30, 1999. Cost of revenues for the six months ended June
30, 2000 and 1999 was $1.2 million, or 13% of net revenues, and $245,000, or 10%
of net revenues, respectively. The increase in cost of revenues as a percentage
of net revenues for the six months ended June 30, 2000 was primarily due to a
shift in the Company's sales mix towards professional services. The Company
anticipates that cost of revenues as a percentage of net revenues will decline
from the current period as it anticipates its sales mix to primarily consist of
software-based products in the future.
Research and development expenses for the three months ended June 30,
2000 were $2.3 million as compared to $1.9 million for the three months ended
June 30, 1999. Research and development expenses for the six months ended June
30, 2000 and 1999 were $4.2 million and $4.3 million, respectively. The
9
<PAGE>
increase in research and development for the three months ended June 30, 2000
was primarily attributed to the addition of personnel. The Company anticipates
that research and development expenses will increase in future periods as it
expands its existing research and development programs in order to perform
product enhancements and new product development. All research and development
costs have been expensed as incurred.
Sales and marketing expenses for the three months ended June 30, 2000
were $2.1 million as compared to $2.4 million for the three months ended June
30, 1999. Sales and marketing expenses were $4.5 million and $4.6 million for
the six months ended June 30, 2000 and 1999, respectively. The reduction in
sales and marketing expenses for the second quarter of 2000 was primarily due to
a decrease in the provision for uncollectible accounts. The Company anticipates
that sales and marketing expenses will increase in future periods as it expands
its distribution channels and product marketing activities.
General and administrative expenses for the three months ended June 30,
2000 were $1.0 million as compared to $750,000 for the three months ended June
30, 1999. General and administrative expenses were $2.3 million and $1.5 million
for the six months ended June 30, 2000 and 1999, respectively. The increase in
general and administrative expenses was primarily due to greater personnel
costs. In addition, during the first quarter of 2000 the Company also incurred
severance charges associated with the resignations of its former Vice Chairman.
Interest and other income for the three months ended June 30, 2000 and
1999 was $512,000 and $482,000, respectively. Interest and other income was
$964,000 and $1.0 million for the six months ended June 30, 2000 and 1999,
respectively. The reduction in interest and other income for the six months
ended June 30, 2000 was due to a decrease in the Company's cash and short-term
investment balances.
Income taxes are primarily attributed to state income tax. For the six
months ended June 30, 2000 and 1999 income taxes were $39,000 and $27,000,
respectively. Income taxes for the three months ended June 30, 1999 were
$16,000. The Company did not incur income taxes in the current period.
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, 2000, the
Company had $33.7 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, 2000 and 1999 was $2.4 million and $7.4 million, respectively. Net cash used
in operating activities related to funding of the Company's research and
development, sales, marketing and administrative activities.
Net cash provided by investing activities during the six months ended
June 30, 2000 was $3.9 million. Net cash provided by investing activities during
the first six months of 2000 primarily reflects $4.4 million in net sales of
short-term investments offset by $474,000 in purchases of computer equipment.
Net cash used in investing activities during the six months ended June 30, 1999
was $530,000 and reflects $276,000 in net purchases of short-term investments
and $254,000 in purchases of computer equipment.
Net cash provided by financing activities during the six months ended
June 30, 2000 and 1999 was $2.2 million and $985,000, respectively. Net cash
provided by financing activities represented proceeds from exercises of employee
stock options for 727,500 and 183,000 shares of common stock and the
10
<PAGE>
issuance of 13,200 and 9,900 shares of common stock under the Company Employee
Stock Purchase Plan during the six months ended June 30, 2000 and 1999,
respectively.
The Company has no material commitments other than those under office
and equipment operating leases. As a result of the expansion of the Company's
research and development and sales and marketing activities, capital
expenditures may increase in future periods primarily due to 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,
results of operations and cash flows.
11
<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 June
15, 2000 (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
---- --- ------------------
Michael R. Rich 11,304,709 489,769
John W. Staten 11,424,259 370,219
Stephen P. Earhart 11,424,159 370,319
Robert F. Jones 11,424,159 370,319
Scott Poteracki 11,424,159 370,319
A. Jeffry Robinson 11,424,259 370,219
Martin Shum 11,424,259 370,219
(ii) Ratification and approval of amendment to the
Company's 1995 Stock Option Plan to increase the
number of shares of the Company's common stock
reserved for issuance thereunder from an aggregate
5,500,000 shares to an aggregate of 7,000,000 shares.
With respect to the foregoing matter 5,187,521 shares
voted in favor, 982,496 shares voted against, 58,576
shares abstained and there were no broker non-votes.
(iii) 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, 2000.
With respect to the foregoing matter 11,316,336
shares voted in favor, 414,338 shares voted against,
63,804 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.
12
<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 11, 2000 By: /s/ MICHAEL R. RICH
------------------------------------------------
Michael R. Rich
Chairman of the Board and Chief Executive
Officer and President
By: /s/ JOHN W. STATEN
------------------------------------------------
John W. Staten
Chief Financial Officer (Principal Financial and
Accounting Officer)
13
<PAGE>
Exhibit Index
Exhibit No. Exhibit Description
----------- -------------------
27 Financial data schedule
