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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended March 31, 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 April 28, 2000
- ------------------------------------- ------------------------------------
Common Stock, $.01 par value 13,821,210
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<PAGE>
NETSPEAK CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
- ------------------------------
Page No.
--------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1999
and March 31, 2000..................................................... 3
Condensed Consolidated Statements of Operations for the three
months ended March 31, 1999 and 2000................................... 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 and 2000................................... 5
Notes to Condensed Consolidated Financial Statements...................... 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
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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)
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ ---------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 23,109 $ 27,234
Short-term investments 11,160 6,749
Accounts receivable, net 2,814 3,940
Prepaid and other current assets 541 310
-------- --------
Total current assets 37,624 38,233
Property and equipment, net 2,527 2,260
Other assets 795 660
-------- --------
$ 40,946 $ 41,153
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 637 $ 550
Accrued compensation 1,073 1,115
Other accrued expenses 1,080 1,195
Unearned revenue 361 505
-------- --------
Total current liabilities 3,151 3,365
-------- --------
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 13,821,210 issued and
outstanding at December 31, 1999 and March 31, 2000,
respectively 134 138
Additional paid-in capital 70,658 71,856
Accumulated deficit (32,863) (34,114)
Accumulated other comprehensive loss (134) (92)
-------- --------
Total shareholders' equity 37,795 37,788
-------- --------
$ 40,946 $ 41,153
======== ========
</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)
Three months ended
March 31,
-----------------------
1999 2000
-------- --------
Net revenues $ 1,512 $ 4,380
Operating expenses:
Cost of revenues 93 503
Research and development 2,400 1,932
Sales and marketing 2,297 2,390
General and administrative 798 1,219
-------- --------
Total operating expenses 5,588 6,044
Loss from operations (4,076) (1,664)
Interest and other income 534 452
-------- --------
Loss before income taxes (3,542) (1,212)
Income taxes 11 39
-------- --------
Net loss $ (3,553) $ (1,251)
======== ========
Net loss per share (basic and diluted) $ (0.28) $ (0.09)
======== ========
Weighted-average shares outstanding 12,770 13,626
======== ========
See accompanying notes to condensed consolidated financial statements.
4
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NETSPEAK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------
1999 2000
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,553) $ (1,251)
Adjustments to reconcile net loss to net cash
used in operations:
Depreciation 464 439
Provision for bad debts 262 --
Changes in assets and liabilities:
Accounts receivable 97 (1,126)
Prepaid and other current assets 396 231
Other assets 107 135
Accounts payable (249) (87)
Accrued compensation (86) 42
Other accrued expenses 12 115
Unearned revenue (1,246) 144
-------- --------
Net cash used in operating activities (3,796) (1,358)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (182) (172)
Purchase of short-term investments (7,166) (1,998)
Maturities and sales of short-term investments 7,052 6,451
-------- --------
Net cash (used in) provided by investing activities (296) 4,281
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercises of employee stock options 112 1,202
-------- --------
Net cash provided by financing activities 112 1,202
-------- --------
Net (decrease) increase in cash and cash equivalents (3,980) 4,125
Cash and cash equivalents, beginning of period 34,117 23,109
-------- --------
Cash and cash equivalents, end of period $ 30,137 $ 27,234
======== ========
SUPPLEMENTAL INFORMATION:
Cash paid for income taxes $ -- $ 28
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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NETSPEAK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The interim condensed consolidated financial statements of NetSpeak
Corporation (the "Company") as of March 31, 2000 and for the three months ended
March 31, 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. 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
3,900,000 and 2,981,000 common shares from the weighted-average shares
outstanding calculation for the three months ended March 31, 1999 and 2000,
respectively, as their effect was anti-dilutive.
3. 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
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 third quarter of 2000.
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
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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.
4. TOTAL COMPREHENSIVE LOSS
Three months ended
March 31,
-----------------------
1999 2000
-------- --------
Net loss $ (3,553) $ (1,251)
Adjustment to reconcile net loss to
total comprehensive loss:
Unrealized (loss) gain on investments (79) 42
-------- --------
Comprehensive loss $ (3,632) $ (1,209)
======== ========
7
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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 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 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 March 31, 2000 and March 31,
1999, Motorola accounted for 33%, and 76% 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
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
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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, 2000, the Company had an
accumulated deficit of $34.1 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, 2000 AND 1999
Net revenues for the three months ended March 31, 2000 were $4.4 million
as compared to $1.5 million for the three months ended March 31, 1999.
Sales of call management products for the three months ended March 31,
2000 and 1999 accounted for 69% and 79% of net revenues, 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 31% and 6% of net revenues for the
three months ended March 31, 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 remain relatively
consistent with the current period in the future.
Sales of gateway systems for the three months ended March 31, 1999
represented 12% of net revenues. During the first quarter of 2000, the Company
elected to discontinue its gateway product line in order to concentrate on its
call management solutions. Accordingly, the Company did not generate any gateway
sales for the three months ended March 31, 2000.
Cost of revenues for the three months ended March 31, 2000 was $503,000,
or 11% of net revenues, as compared to $93,000, or 6% of net revenues, for the
three months ended March 31, 1999. The increase in cost of revenues as a
percentage of net revenues in 2000 was due to a shift in the Company's sales mix
towards professional services and integrated systems. The Company anticipates
that cost of revenues as a percentage of net revenues may continue to increase
as the Company believes that revenues from professional services may become a
greater percentage of the Company's sales mix in future periods.
Research and development expenses for the three months ended March 31,
2000 were $1.9 million as compared to $2.4 million for the three months ended
March 31, 1999. The reduction in research and development expenses for the three
months ended March 31, 2000 was primarily attributed to a decrease in personnel
costs and hardware and software used in product development as a result of the
elimination of certain of the Company's research and development programs. All
research and development costs have been expensed as incurred. 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
9
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perform product enhancements and new product development.
Sales and marketing expenses for the three months ended March 31, 2000 were
$2.4 million as compared to $2.3 million for the three months ended March 31,
1999. Although sales and marketing expenses were relatively consistent for the
three months ended March 31, 2000 and 1999, 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 March 31,
2000 were $1.2 million as compared to $798,000 for the three months ended March
31, 1999. The increase in general and administrative expenses was primarily due
to severance related expenses.
Interest and other income for the three months ended March 31, 2000 and
1999 was $452,000 and $534,000, respectively. The reduction in interest and
other income in 2000 was due to a decrease in the Company's cash and short-term
investment balances.
Income taxes for the three months ended March 31, 2000 and 1999 were
$39,000 and $11,000, respectively. Such taxes were primarily attributed to state
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 March 31, 2000, the Company had
$34.0 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, 2000 and 1999 was $1.4 million and $3.8 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 three months ended
March 31, 2000 was $4.3 million. Net cash provided by investing activities
during the first quarter of 2000 primarily reflects $4.5 million in net sales of
short-term investments offset by $172,000 in purchases of computer equipment.
Net cash used in investing activities during the three months ended March 31,
1999 was $296,000 and reflects $114,000 in net purchases of short-term
investments and $182,000 primarily related to purchases of computer equipment.
Net cash provided by financing activities during the three months ended
March 31, 2000 and 1999 was $1.2 million and $112,000, respectively. Net cash
provided by financing activities represented proceeds received from exercises of
employee stock options for 445,492 and 48,502 shares of common stock for the
three months ended March 31, 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
10
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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
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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.
12
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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 12, 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
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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-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 27,234
<SECURITIES> 6,749
<RECEIVABLES> 3,940
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 38,233
<PP&E> 2,260
<DEPRECIATION> 0
<TOTAL-ASSETS> 41,153
<CURRENT-LIABILITIES> 3,365
<BONDS> 0
0
0
<COMMON> 138
<OTHER-SE> 71,856
<TOTAL-LIABILITY-AND-EQUITY> 41,153
<SALES> 4,380
<TOTAL-REVENUES> 4,380
<CGS> 503
<TOTAL-COSTS> 503
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,212)
<INCOME-TAX> 39
<INCOME-CONTINUING> (1,251)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,251)
<EPS-BASIC> (.09)
<EPS-DILUTED> (.09)
</TABLE>
