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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended September 30, 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 October 31, 2000
---------------------------- --------------------------------------
Common Stock, $.01 par value 14,207,949
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NETSPEAK CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
Page No.
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited)
as of December 31, 1999 and September 30, 2000 ......................... 3
Condensed Consolidated Statements of Operations
(unaudited) for the three and nine months ended
September 30, 1999 and 2000 ............................................ 4
Condensed Consolidated Statements of Cash Flows
(unaudited) for the nine months ended September 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
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
NETSPEAK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except per share and share amounts)
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 23,109 $ 29,443
Short-term investments 11,160 4,284
Accounts receivable, net 2,814 5,119
Prepaid and other current assets 541 1,026
-------- --------
Total current assets 37,624 39,872
Property and equipment, net 2,527 2,309
Other assets 795 996
-------- --------
$ 40,946 $ 43,177
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 637 $ 1,019
Accrued compensation 1,201 2,495
Other accrued expenses 952 931
Unearned revenue 361 1,109
-------- --------
Total current liabilities 3,151 5,554
-------- --------
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 14,207,949 issued and
outstanding at December 31, 1999 and September 30, 2000,
respectively 134 142
Additional paid-in capital 70,658 72,962
Accumulated deficit (32,863) (35,468)
Accumulated other comprehensive loss (134) (13)
-------- --------
Total shareholders' equity 37,795 37,623
-------- --------
$ 40,946 $ 43,177
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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NETSPEAK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues $ 2,016 $ 5,434 $ 4,552 $ 14,633
Operating expenses:
Cost of revenues 185 422 430 1,583
Research and development 1,878 2,718 6,200 6,945
Sales and marketing 2,103 2,388 6,751 6,859
General and administrative 783 1,030 2,331 3,288
-------- -------- -------- --------
Total operating expenses 4,949 6,558 15,712 18,675
Loss from operations (2,933) (1,124) (11,160) (4,042)
Interest and other income 422 519 1,438 1,483
-------- -------- -------- --------
Loss before income taxes (2,511) (605) (9,722) (2,559)
Income taxes 4 7 31 46
-------- -------- -------- --------
Net loss $ (2,515) $ (612) $ (9,753) $ (2,605)
======== ======== ======== ========
Net loss per share (basic and diluted) $ (0.19) $ (0.04) $ (0.76) $ (0.19)
======== ======== ======== ========
Weighted-average shares outstanding 12,947 14,190 12,866 13,906
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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NETSPEAK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------
1999 2000
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,753) $ (2,605)
Adjustments to reconcile net loss to net cash
used in operations:
Depreciation 1,401 1,322
Provision for bad debts 540 55
Changes in assets and liabilities:
Accounts receivable (2,025) (2,360)
Prepaid and other current assets 547 (485)
Other assets 93 (201)
Accounts payable (12) 382
Accrued compensation (140) 1,294
Other accrued expenses 195 (21)
Unearned revenue (1,155) 748
-------- --------
Net cash used in operating activities (10,309) (1,871)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (399) (1,104)
Purchase of short-term investments (10,768) (5,973)
Maturities and sales of short-term investments 10,497 12,970
-------- --------
Net cash (used in) provided by investing activities (670) 5,893
-------- --------
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 947 2,202
-------- --------
Net cash provided by financing activities 1,037 2,312
-------- --------
Net (decrease) increase in cash and cash equivalents (9,942) 6,334
Cash and cash equivalents, beginning of period 34,117 23,109
-------- --------
Cash and cash equivalents, end of period $ 24,175 $ 29,443
-------- --------
SUPPLEMENTAL INFORMATION:
Cash paid for income taxes $ 36 $ 31
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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NETSPEAK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The interim condensed consolidated financial statements of NetSpeak
Corporation (the "Company") as of September 30, 2000 and for the three and nine
months ended September 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. Certain
reclassifications to the prior years' consolidated financial statements have
been made to conform to the current year presentation.
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
3,707,000 and 3,802,000 common shares from the weighted-average shares
outstanding calculation for the three and nine months ended September 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
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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.
On October 23, 2000, the court granted preliminary approval to the settlement
and scheduled a final fairness hearing to be held on December 22, 2000. If the
settlement receives final approval at that time and that decision is not
appealed, the litigation will be dismissed with prejudice and the settlement
fund will be disbursed under court supervision. Although there can be no
assurance that the settlement will be approved by the court or that the approval
will not be appealed, 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 fourth 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 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, taxation, 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 Nine months ended
September 30, September 30,
------------------- -------------------
1999 2000 1999 2000
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net loss $(2,515) $ (612) $(9,753) $(2,605)
Adjustment to reconcile net loss to
total comprehensive loss:
Unrealized (loss) gain on investments (33) 56 (122) 121
------- ------- ------- -------
Comprehensive loss $(2,548) $ (556) $(9,875) $(2,484)
======= ======= ======= =======
</TABLE>
6. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative Financial
Instruments and for Hedging Activities" ("SFAS 133") which provides a
comprehensive standard for the recognition and measurement of derivatives and
hedging activities. SFAS 133 is effective for fiscal years beginning after June
15, 2000. The Company does not expect SFAS 133 to have an impact on the
Company's results of operations or
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financial condition when adopted as the Company holds no derivative financial
instruments and does not currently engage in hedging activities.
8
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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 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 acceptance of the Company's products in the
marketplace, dependence on strategic partners including their ability to
distribute the Company's products and meet their financial commitments, the
Company's need to develop additional distribution channels for its products and
technology, the Company's ability to address international markets, fluctuations
in customer sales cycles, the effectiveness of the Company's sales and marketing
activities, the timing and scope of deployments of the Company's products by
customers, customers ability to obtain additional funding, 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 Company's ability to
compete successfully again more established competitors with greater resources,
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.
The Company distributes its products through value-added resellers ("VARs"),
system integrators ("SIs"), original equipment manufacturers ("OEMs") and its
direct sales force. 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 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, developing indirect sales
channels, targeting VARs, SIs and OEMs that concentrate on the data networking
industry, and increasing its direct sales force. Since inception, the Company
has generated a significant percentage of its revenues through several of its
key strategic partners. For the three months ended September 30, 2000 and 1999,
Motorola Inc. ("Motorola") accounted for 26% and 64% 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.
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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.
The market for the Company's products and solutions is characterized by
rapid technological change, evolving industry standards, changes in end-user
requirements, intense competition by more established industry participants and
frequent new product introductions and enhancements. As is typical in the case
of new and rapidly emerging technologies, demand and market acceptance are
subject to a high level of uncertainty. Broad acceptance of the Company's
products by customers and end-users is critical to the Company's success and
ability to generate revenues. The Company has a limited operating history upon
which an evaluation of the Company and its prospects can be based. As of
September 30, 2000, the Company had an accumulated deficit of $35.5 million. Due
to the Company's limited operating history and the lack of maturity in the
industry, the Company's operating results are difficult to predict and may
fluctuate significantly in the future as a result of a variety of factors, many
of which are outside the Company's control. These factors include, but are not
limited to, those set forth above.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Net revenues for the three months ended September 30, 2000 were $5.4
million as compared to $2.0 million for the three months ended September 30,
1999. Net revenues for the nine months ended September 30, 2000 were $14.6
million as compared to $4.6 million for the nine months ended September 30,
1999.
Sales of call management products for the three months ended September
30, 2000 and 1999 accounted for 74% and 70% of net revenues, respectively, and
69% and 66% of net revenues for the nine months ended September 30, 2000 and
1999, respectively. The increase of call management product sales was due to the
Company obtaining new service provider customers as well as greater OEM sales,
which resulted from the February 2000 OEM agreement with Fujitsu Business
Communications Systems.
Professional services accounted for 20% and 15% of net revenues for the
three months ended September 30, 2000 and 1999, respectively, and 25% and 11% of
net revenues for the nine months ended September 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 second quarter of 2000.
Sales of gateway systems represented 9% and 13% of net revenues for the
three and nine months ended September 30, 1999, respectively. The Company did
not generate any gateway sales for the nine months ended September 30, 2000 as
it discontinued its gateway product line in the first quarter of 2000.
Cost of revenues for the three months ended September 30, 2000 was
$422,000, or 8% of net revenues, as compared to $185,000, or 9% of net revenues,
for the three months ended September 30, 1999. Cost of revenues for the nine
months ended September 30, 2000 and 1999 was $1.6 million, or 11% of net
revenues, and $430,000, or 9% of net revenues, respectively. The Company
anticipates that cost of revenues as a percentage of net revenues will continue
to remain relatively consistent with the current period as the Company
anticipates its sales mix will primarily consist of software-based products in
the future.
Research and development expenses for the three months ended September
30, 2000 were $2.7 million as compared to $1.9 million for the three months
ended September 30, 1999. Research and
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development expenses for the nine months ended September 30, 2000 and 1999 were
$6.9 million and $6.2 million, respectively. The increase in research and
development during 2000 was attributed to the addition of personnel in order to
perform new product development and product enhancements. The Company
anticipates that research and development expenses will increase in future
periods as it continues to expand its research development activities. All
research and development costs have been expensed as incurred.
Sales and marketing expenses for the three months ended September 30,
2000 were $2.4 million as compared to $2.1 million for the three months ended
September 30, 1999. Sales and marketing expenses were $6.9 million and $6.8
million for the nine months ended September 30, 2000 and 1999, respectively. The
increase in sales and marketing expenses during 2000 was primarily due to the
addition of sales personnel as the Company expanded its distribution channels.
The Company anticipates that sales and marketing expenses will increase in
future periods as it seeks to expand its distribution channels.
General and administrative expenses for the three months ended
September 30, 2000 were $1.0 million as compared to $783,000 for the three
months ended September 30, 1999. General and administrative expenses were $3.3
million and $2.3 million for the nine months ended September 30, 2000 and 1999,
respectively. The increase in general and administrative expenses was primarily
due to greater compensation costs. In addition, during the first quarter of 2000
the Company also incurred severance charges associated with the resignation of
its former Vice Chairman.
Interest and other income for the three months ended September 30, 2000
and 1999 was $519,000 and $422,000, respectively. Interest and other income was
$1.5 million and $1.4 million for the nine months ended September 30, 2000 and
1999, respectively.
Income taxes are primarily attributed to state income tax. Income taxes
for the three months ended September 30, 2000 and 1999 were $7,000 and $4,000,
respectively. For the nine months ended September 30, 2000 and 1999 income taxes
were $46,000 and $31,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations through sales of equity
securities since its inception. The Company has raised $65.1 million, net of
offering costs, including $47.2 million in sales of private securities and $17.9
million in the Company's initial public offering. As of September 30, 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 nine months ended
September 30, 2000 and 1999 was $1.9 million and $10.3 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 nine months ended
September 30, 2000 was $5.9 million. Net cash provided by investing activities
during the first nine months of 2000 primarily reflects $7.0 million in net
sales of short-term investments offset by $1.1 million in purchases of computer
equipment. Net cash used in investing activities during the nine months ended
September 30, 1999 was $670,000 and reflects $271,000 in net purchases of
short-term investments and $399,000 in purchases of computer equipment.
Net cash provided by financing activities during the nine months ended
September 30, 2000 and 1999 was $2.3 million and $1.0 million, respectively. Net
cash provided by financing activities represented proceeds from exercises of
employee stock options and the issuance of shares of common stock under the
Company's Employee Stock Purchase Plan. For the nine months ended September 30,
2000 and 1999
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exercises of employee stock options were 751,000 and 191,000 shares of common
stock, respectively. The Company also issued 13,200 and 9,900 shares of common
stock under its Employee Stock Purchase Plan for the nine months ended September
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.
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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.
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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: November 13, 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)
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
27 Financial Data Schedule.
