<PAGE>
As filed with the Securities and Exchange Commission on July 21, 1999
Registration Statement No. 333-81071
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------------
INTERSPEED, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
Delaware 3661 04-3333365
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
----------------------------------------
39 High Street
North Andover, Massachusetts 01845
(978) 688-6164
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive office)
---------------------------------------------
Stephen A. Ide
PRESIDENT
Interspeed, Inc.
39 High Street
North Andover, Massachusetts 01845
(978) 688-6164
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
---------------------------------------------
COPIES TO:
<TABLE>
<S> <C>
Thomas P. Storer, P.C. Mitchell S. Bloom, Esq.
Mark A. Weiss, Esq. Testa, Hurwitz & Thibeault, LLP
Goodwin, Procter & Hoar LLP 125 High Street
Exchange Place Boston, Massachusetts 02110
Boston, Massachusetts 02109-2881 (617) 248-7000
(617) 570-1000
</TABLE>
----------------------------------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
----------------------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
---------------------------------------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the SEC, acting pursuant to Section 8(a), may
determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Subject to completion, dated July 21, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE SECURITIES AND EXCHANGE COMMISSION DECLARES
OUR REGISTRATION STATEMENT EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
3,500,000 Shares
INTERSPEED, INC. [LOGO]
Common Stock
$ per share
- ----------------------------------------------------------------------
- - Interspeed, Inc. is offering 2,000,000 shares and Brooktrout, Inc., the
selling stockholder, is offering 1,500,000 shares.
- - We anticipate that the initial public offering price will be between $10 and
$12 per share.
- - We have reserved up to 150,000 shares to offer directly to persons having a
relationship with us and up to 200,000 shares to offer directly to
Brooktrout's stockholders.
- - Proposed trading symbol: Nasdaq National Market -- ISPD.
------------------------------------
This investment involves risk. You should carefully consider the "Risk Factors"
beginning on page 4.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Per Share Total
----------- --------------
<S> <C> <C>
Public Offering Price................................................................. $ $
Underwriting Discounts and Commissions................................................ $ $
Proceeds, before expenses, to Interspeed.............................................. $ $
Proceeds to Brooktrout................................................................ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE UNDERWRITERS HAVE A 30-DAY OPTION TO PURCHASE UP TO 525,000 ADDITIONAL
SHARES OF COMMON STOCK FROM BROOKTROUT TO COVER OVER-ALLOTMENTS, IF ANY.
Neither the Securities and Exchange Commission nor any state securities
commission has approved of anyone's investment in these securities or determined
if this prospectus is truthful or complete. Any representation to the contrary
is a criminal offense.
U.S. Bancorp Piper Jaffray
Warburg Dillon Read LLC
Tucker Anthony Cleary Gull
DLJDIRECT Inc.
The date of this prospectus is July , 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Summary................................................................................ 1
Risk Factors........................................................................... 4
Forward Looking Statements............................................................. 13
Use of Proceeds........................................................................ 13
Dividend Policy........................................................................ 13
Capitalization......................................................................... 14
Dilution............................................................................... 15
Selected Financial Data................................................................ 16
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................ 17
Business............................................................................... 24
Management............................................................................. 33
Principal and Selling Stockholders..................................................... 42
Certain Transactions with Related Parties.............................................. 43
Description of Capital Stock........................................................... 45
Shares Eligible for Future Sale........................................................ 48
Underwriting........................................................................... 50
Legal Matters.......................................................................... 52
Experts................................................................................ 52
Where You Can Find More Information.................................................... 52
Index to Financial Statements.......................................................... F-1
</TABLE>
------------------------------------
You should rely only on the information contained in this prospectus. We have
not, and the underwriters have not, authorized any other person to provide you
with different information. This prospectus is not an offer to sell, nor is it
seeking an offer to buy, these securities in any state where the offer or sale
is not permitted. The information in this prospectus is complete and accurate as
of the date on the front cover, but the information may have changed since that
date.
The name Interspeed, a registered trademark, SpeedView and our logo are names
and marks which belong to us. This prospectus also contains the trademarks and
trade names of other entities which are the property of their respective owners.
Unless otherwise stated in this prospectus, the information contained in this
prospectus assumes that the underwriters' over-allotment option is not
exercised.
<PAGE>
SUMMARY
THE ITEMS IN THE FOLLOWING SUMMARY ARE DESCRIBED IN MORE DETAIL LATER IN THIS
PROSPECTUS. THIS SUMMARY PROVIDES AN OVERVIEW OF SELECTED INFORMATION AND DOES
NOT CONTAIN ALL THE INFORMATION YOU SHOULD CONSIDER. THEREFORE, YOU SHOULD ALSO
READ THE MORE DETAILED INFORMATION SET OUT IN THIS PROSPECTUS AND THE FINANCIAL
STATEMENTS.
Interspeed
We were incorporated in Massachusetts in 1996 as a wholly owned subsidiary of
Brooktrout, Inc. and commenced operation in March 1997. We reincorporated as a
Delaware corporation in June 1999. Since our inception, we have yet to incur a
profit.
Interspeed designs, develops and markets advanced high speed data communication
equipment based on digital subscriber line technology. Our products enable data
communication service providers, such as competitive local exchange carriers,
Internet service providers and owners of multi-tenant units to utilize the
existing copper wire infrastructure to deliver high speed data access to their
customers. We believe we offer the only single platform system that integrates
the principal components required to offer digital subscriber line service,
including signal concentration, routing, switching and network management.
Unlike traditional digital subscriber line products, our products offer our
customers a highly scalable and flexible solution at a lower total cost of
ownership than our competitors' products.
The proliferation of Internet usage, electronic commerce and business use of
electronic communication has resulted in a large increase in data transmission
by electronic means. We have designed our digital subscriber line based products
to alleviate the bottleneck that has occurred due to increased communications
traffic over the existing copper wire infrastructure. While there are a number
of alternatives that provide connectivity from the service provider central
office to the end user, often called the last mile, we believe only digital
subscriber line technology simultaneously satisfies the demand for high speed
performance, cost effectiveness, broad geographic coverage and reliable
security.
Service providers increasingly demand cost effective digital subscriber line
access solutions that enable them to provide high speed data access to small and
medium sized business users, multi-tenant units and other organizations at a low
total cost of ownership. We designed the Interspeed 1000 and 500 digital
subscriber line access routers specifically to meet this demand. The benefits of
our products include:
- a high performance solution;
- a single integrated system;
- a lower total cost of ownership than competitors' products; and
- a flexible system architecture.
Our objective is to be the leading provider of high speed data access solutions
to service providers who focus on small to medium sized businesses, multi-tenant
units and other organizations. In order to achieve this objective, we intend to
leverage our technological leadership by expanding the functionality and
increasing the performance of our integrated platform. We emphasize the
provision of a high level of continuing service and support which is critical in
developing and maintaining long term customer relationships. We sell our
products through a direct sales force and have formed strategic customer
relationships with Cabletron and Log On America. We intend to continue to
develop market channels through strategic relationships with other original
equipment manufacturers, value added resellers and system integrators. To take
advantage of the significant international market opportunity, we designed our
products in compliance with international as well as U.S. regulatory standards,
thereby allowing worldwide marketing of our digital subscriber line access
router.
<PAGE>
Our principal executive offices are located at 39 High Street, North Andover,
Massachusetts 01845. Our telephone number is (978) 688-6164.
The Offering
<TABLE>
<S> <C>
Common stock offered:
By Interspeed.............................. 2,000,000 shares
By Brooktrout.............................. 1,500,000 shares
Total.................................... 3,500,000 shares
Common stock outstanding after the 10,018,132 shares(1)
offering...................................
Use of proceeds.............................. General corporate purposes, including working
capital, research and development and
expansion of sales and marketing activities.
Proposed Nasdaq National Market Symbol....... ISPD
</TABLE>
- ------------------------------------
(1) Based on the number of shares outstanding as of June 15, 1999. Excludes
1,961,000 shares issuable upon exercise of stock options outstanding as of
June 15, 1999 at a weighted average exercise price of $.29 per share.
2
<PAGE>
Summary Financial Data
(in thousands, except per share data)
The following tables set forth our summary financial data. The information set
forth for the six months ended March 31, 1999 have been derived from unaudited
financial statements. You should read the following information together with
our Financial Statements and the Notes thereto beginning on page F-1 of this
prospectus, the information under "Selected Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." See
Note 1 of the Notes to our Financial Statements for an explanation of the shares
used in computing net loss per share--basic and diluted.
<TABLE>
<CAPTION>
Period from Six Months Ended
October 23, 1996 March 31,
(inception) to Year Ended --------------------
September 30, 1997 September 30, 1998 1998 1999
------------------ ------------------ --------- ---------
<S> <C> <C> <C> <C>
(unaudited)
Statements of Operations Data:
Revenue............................................. $ -- $ -- $ -- $ 391
Gross profit........................................ -- -- -- 79
Loss before income taxes............................ (1,043) (4,313) (1,909) (3,426)
Net loss............................................ (1,043) (4,313) (1,909) (3,426)
Net loss per share.................................. (0.24) (0.54) (0.24) (0.43)
Shares used to compute net loss per share-- basic
and diluted....................................... 4,364 8,000 8,000 8,000
</TABLE>
<TABLE>
<CAPTION>
March 31, 1999
----------------------------------------
<S> <C> <C> <C>
(unaudited)
<CAPTION>
Pro forma
as
Actual Pro forma(1) adjusted(2)
----------- ------------ -------------
(unaudited)
<S> <C> <C> <C>
Balance Sheet:
Cash.................................................................... $ 61 $ 61 $ 19,550
Working capital......................................................... (97) (97) 19,392
Total assets............................................................ 1,779 1,779 21,268
Long term note payable--due Brooktrout.................................. 8,167 -- --
Total stockholders' equity (deficit).................................... (7,659) 508 19,997
</TABLE>
- ------------------------------------
(1) Pro forma to reflect the contribution by Brooktrout of the long term note
payable to capital of Interspeed upon the effective date of this offering.
(2) Pro forma as adjusted to give effect to the sale of 2,000,000 shares by
Interspeed in this offering, assuming an initial public offering price of
$11.00 per share, resulting in net proceeds to Interspeed of approximately
$19.5 million.
3
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS BEFORE YOU DECIDE TO
BUY OUR COMMON STOCK. YOU SHOULD ALSO CONSIDER THE OTHER INFORMATION IN THIS
PROSPECTUS. OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS COULD BE
HARMED BY ANY OF THE FOLLOWING RISKS. THE TRADING PRICE OF OUR COMMON STOCK
COULD DECLINE DUE TO ANY OF THE FOLLOWING RISKS, AND YOU MIGHT LOSE ALL OR PART
OF YOUR INVESTMENT.
We have a history of losses and anticipate future losses
We have accumulated losses of approximately $8.8 million since inception in
October 1996 through March 31, 1999 and expect to incur net losses in the
future. Losses were approximately $1.0 million for the period through September
30, 1997, approximately $4.3 million for the fiscal year ended September 30,
1998 and approximately $3.4 million for the six months ended March 31, 1999. We
anticipate continuing to incur significant sales and marketing, research and
development and general and administrative expenses and, as a result, we will
need to generate higher revenues to achieve and sustain profitability. We cannot
be certain we will realize sufficient revenues to achieve profitability.
Because of our limited operating history it is difficult for us to predict
future results of operations
We commenced operations in March 1997 and our first product became generally
available in February 1999. Due to our limited operating history, it is
difficult for us to predict future results of operations. You should consider
our business and prospects in light of the risks typically encountered by
companies in their early stages of development, particularly those in rapidly
evolving markets such as the data communications equipment market. We cannot be
certain that we will successfully address these risks.
Our operating results are likely to fluctuate significantly and cause our stock
price to be volatile
Our quarterly or annual operating results are likely to fluctuate significantly
in the future due to a variety of factors, many of which are outside of our
control. If our operating results do not meet the expectations of securities
analysts and investors, the trading price of our common stock could
significantly decline. Some of the factors that could affect our quarterly or
annual operating results include:
- our ability to develop, manufacture, market and support our
products and product enhancements;
- the timing and amount of, or cancellation or rescheduling of,
orders for our products, particularly large orders from key
customers;
- our ability to retain key management, sales and marketing and
engineering personnel;
- announcements, new product introductions and price reductions in
products offered by our competitors;
- our ability to obtain sufficient supplies of sole or limited source
components for our products;
- a decrease in the average selling prices of our products;
- changes in costs of components which we include in our products;
and
- the mix of products that we sell and the mix of distribution
channels through which they are sold.
Due to these and other factors, quarterly or annual revenues, expenses and
results of operations could vary significantly in the future, and
period-to-period comparisons should not be relied upon as indications of future
performance.
4
<PAGE>
The loss of any significant customer could prevent us from achieving our sales
goals
The loss of any of our significant customers may prevent us from achieving our
sales goals and thus have a material adverse effect on our business, financial
condition and results of operations. Our products became generally available in
February 1999 and to date we have only sold products to a limited number of
customers. Unless and until we diversify and expand our customer base, our
future success will significantly depend upon a limited number of customers.
Failure to adequately develop our sales channels could prevent us from achieving
our sales goals
We sell our products directly through our sales force and indirectly through
original equipment manufacturers, value added resellers and system integrators.
Our failure to adequately develop these sales channels may prevent us from
achieving our sales goals and thus have a material adverse effect on our
business, financial condition and results of operations. We are currently in the
early stages of developing these sales channels and expect to expend significant
resources in this area. As of June 1, 1999 we had a total of employees in
direct sales, marketing and sales engineering in the United States. In addition,
we have only recently entered into our first reseller agreements. To the extent
we are able to enter into agreements with additional original equipment
manufacturers, value added resellers or systems integrators, the amount and
timing of resources which they devote to the sale of our products may not be
within our control, and they may not perform their obligations as expected.
If we are unable to develop and operate an effective customer support
organization, sales of our products may be reduced
Purchasers of data communications equipment assign significant weight in their
purchasing decisions to a vendor's capabilities and reputation in supporting its
products. We will be required to expend significant resources and management
attention on developing and operating a customer support organization. If our
level of customer support does not satisfy customer expectations, our reputation
and future sales could be adversely affected. Accordingly, we have emphasized
customer support in our business strategy and marketing. Because our products
were recently introduced for sale, we have limited experience in operating a
customer support program.
If our target customers do not accept DSL technology, we may be unable to
sustain or grow our business
Our future success is substantially dependent upon whether DSL technology gains
widespread market acceptance by data communications service providers and the
small to medium sized business users to whom they market their services. In the
event that our customers or potential customers adopt technologies other than
DSL, we may be unable to sustain or grow our business. Our business strategy and
current products are focused on DSL technology. Various alternative
technologies, including T-1, cable and broadband wireless, are currently
available to deliver high speed data communications, and each of the
alternatives has comparative advantages and disadvantages. Data communications
service providers continually evaluate alternative high speed data access
technologies and may at any time adopt technologies other than DSL.
Our success is dependent on market acceptance of our products
We have recently introduced our products to the market. Market acceptance of our
products is critical to our future success. Factors that may affect the market
acceptance of our products include:
- market acceptance of DSL technology;
- the features, performance, price and total cost of ownership of our
products;
- the availability of competing products and technologies;
5
<PAGE>
- the success and development of our direct sales force and
distribution channels;
- the quality of our customer service and support of our products;
and
- the breadth and depth of our product offerings.
Failure of our existing or future products to achieve and maintain meaningful
levels of market acceptance would materially adversely affect our business,
financial condition and results of operations.
Our operating results will be dependent on a single family of products
We expect to derive substantially all of our revenues from our DSLAR product
family and related modules for the foreseeable future. The market may not
continue to demand our current products, and we may not be successful in
marketing any new or enhanced products. Any reduction in the demand for our
current products or our failure to successfully develop or market and introduce
new or enhanced products could materially adversely affect our business,
financial condition and results of operations.
Unless we are able to keep pace with the evolution of the data communications
equipment market we will not be able to grow or sustain our business
The data communications equipment market is characterized by:
- rapid technological advances;
- evolving industry standards;
- changes in end-user requirements;
- frequent new product introductions; and
- evolving offerings by data communications service providers.
We believe our future success will depend, in part, on our ability to anticipate
or adapt to such changes and to offer, on a timely basis, products that meet
customer demands. We intend to continue to invest significantly in product and
technology development. The development of new or enhanced products is a complex
and uncertain process requiring the anticipation of technological and market
trends. We may experience design, manufacturing, marketing and other
difficulties that could delay or prevent our development, introduction or
marketing of new products and enhancements and result in unexpected expenses.
The introduction of new or enhanced products also requires that we manage the
transition from older products in order to minimize disruption in customer
ordering patterns and ensure that adequate supplies of new products can be
delivered to meet anticipated customer demand. Our inability to develop on a
timely basis new products or enhancements to existing products, or the failure
of such new products or enhancements to achieve market acceptance, could
materially adversely affect our business, financial condition and results of
operations.
If we lose key personnel, we may be unable to successfully operate our business
Our success depends to a significant degree upon the continued contributions of
our principal management, engineering and sales personnel, many of whom perform
important management functions and would be difficult to replace. Specifically,
we believe that our future success is highly dependent on our President, Stephen
A. Ide; our Senior Vice President-Research and Development, Rajeev Agarwal; our
Chief Financial Officer and Senior Vice President-Finance, William J. Burke; and
our Vice President-Sales and Marketing, Christopher P. Whalen. We do not have
employment contracts with our key personnel. The loss of the services of any key
personnel could materially adversely affect our business, financial condition
and results of operations.
6
<PAGE>
If we are unable to attract and retain additional qualified personnel, we may be
unable to achieve our objectives
Our business strategy will require us to attract and retain additional
engineering, sales, customer support and administrative personnel. We have at
times experienced, and continue to experience, difficulty in recruiting
qualified personnel. Recruiting qualified personnel is an intensely competitive
and time consuming process. We may not be able to attract and retain the
necessary personnel to accomplish our business objectives, and we may experience
constraints that will adversely affect our ability to satisfy customer demand in
a timely fashion or to support our customers and operations. In addition,
companies in the data communications industry whose employees accept positions
with competitors frequently claim that such competitors have engaged in unfair
hiring practices. We could incur substantial costs in defending ourselves
against any such litigation, regardless of the merits or outcome of such
litigation.
Failure to manage our growth may prevent us from achieving our business plan
We have expanded and plan to continue to expand our operations, including our
sales and marketing activities, our accounting, billing and human resource
departments and the establishment of additional sales offices. This expansion
may place significant strains on our ability to manage our growth, including our
ability to monitor operations, bill customers, control costs and maintain
effective quality controls. Since we commenced operations, we have relied upon
Brooktrout, our parent company, to provide us with administrative and support
services, including accounting, human resources and computer systems. While we
will enter into the transition services agreement with Brooktrout to continue to
provide these services during a transition period ending December 31, 1999, at
the end of this period we will need to have implemented systems that provide the
functions and services currently provided by Brooktrout. If we fail to manage
our growth effectively, it could have a material adverse effect on our business,
financial condition and results.
Intense competition in the market for high speed data access equipment could
prevent us from achieving or sustaining profitability
The market for data communications equipment is highly competitive, particularly
in the emerging DSL equipment market. If we are unable to compete effectively in
the market for high speed data access equipment, our results of operations could
be materially adversely affected. We compete directly with Ascend
Communications, Inc., which was recently acquired by Lucent Technologies Inc.;
Copper Mountain Networks, Inc.; Diamond Lane, which was recently acquired by
Nokia, Inc.; Paradyne Networks, Inc. and Tut Systems, Inc. Many of our current
and potential competitors have significantly greater selling and marketing,
technical, manufacturing, financial, and other resources. Moreover, our
competitors may foresee the course of market developments more accurately than
we do and could in the future develop new technologies that compete with our
products. The strength and capabilities of our competitors may be increased as a
result of the trend toward consolidation in the data communications market.
Capitalizing on and maintaining our technological advantage will require a
continued high level of investment in research and development, marketing and
customer service and support. Due to the rapidly evolving markets in which we
compete, additional competitors with significant market presence and financial
resources may enter those markets, thereby further intensifying competition. We
may not have sufficient resources to continue to make the investments or achieve
the technological advances necessary to compete successfully with existing
competitors or new competitors.
7
<PAGE>
If we are unable to develop international markets for our products, we may be
unable to grow as planned
Our strategy emphasizes the development of international markets for our
products. We may be unsuccessful in marketing, selling and distributing our
products in foreign markets. Conducting business outside of the United States is
subject to risks, including:
- longer accounts receivable collection cycles;
- possible foreign currency exchange and conversion issues;
- difficulties in managing operations across disparate geographic
areas;
- difficulties associated with enforcing agreements and collecting
receivables through foreign legal systems;
- changes in a specific country's or region's political or economic
conditions;
- trade protection measures;
- import or export licensing requirements;
- potential adverse tax consequences;
- unexpected changes in regulatory requirements; and
- reduced or limited protection of our intellectual property rights
in some countries.
We cannot be certain that one or more of such factors will not have a material
adverse effect on our future international operations, and consequently, our
business, financial condition and results of operations.
Our dependence on sole and single source suppliers and independent manufacturers
exposes us to supply interruptions that could result in product delivery delays
Although we generally use standard parts and components for our products, some
key components are purchased from sole or single source vendors for which
alternative sources are not currently available. Our inability to obtain
sufficient quantities of these components may result in future delays or
reductions in product shipments which could materially adversely affect our
business, financial condition and results of operations. We currently purchase
proprietary components from Conexant and Motorola for which there are no direct
substitutes. These components could be replaced with alternatives from other
suppliers, but that would involve redesign of our products. Such redesign would
involve considerable time and expense. We currently enter into purchase orders
with our suppliers for materials based on forecasts, but have no guaranteed
supply arrangements with these suppliers.
In addition, we currently use a small number of independent manufacturers to
manufacture printed circuit boards, chassis and subassemblies to our design. Our
reliance on independent manufacturers involves a number of risks, including the
potential for inadequate capacity, unavailability of, or interruptions in access
to, process technologies, and reduced control over delivery schedules,
manufacturing yields and costs. If our manufacturers are unable or unwilling to
continue manufacturing our components in required volumes, we will have to
transfer manufacturing to acceptable alternative manufacturers whom we have
identified, which could result in significant interruption of supply. Moreover,
the manufacture of these components is extremely complex, and our reliance on
the suppliers of these components exposes us to potential production
difficulties and quality variations, which could negatively impact cost and
timely delivery of our products. We currently enter into purchase orders with
independent
8
<PAGE>
manufacturers of materials based on forecasts, but have no guaranteed
arrangements with these manufacturers. Any significant interruption in the
supply, or degradation in the quality, of any component would have a material
adverse effect on our business, financial condition and results of operations.
If our products contain defects, we may lose sales, incur significant expenses
and be subject to significant liability claims
Our products may contain undetected or unresolved errors. If this happens, we
may experience significant difficulties including:
- delay in or loss of market acceptance and sales;
- product returns;
- diversion of development resources;
- injury to our reputation; and
- increased warranty and service costs.
Any of these difficulties could have a material adverse effect on our business,
financial condition and results of operations. Moreover, because our products
are designed to provide critical communications services, we may be subject to
significant liability claims. Although we maintain product liability insurance
covering certain damages arising from implementation and use of our products,
our insurance may not cover any claims sought against us. Liability claims could
require us to spend significant time and money in litigation or to pay
significant damages. As a result, any such claims, whether or not successful,
could seriously damage our reputation and our business.
Our limited ability to protect our intellectual property may prevent us from
retaining our competitive advantage
Our success and our ability to compete are dependent in part upon our
proprietary technology. Taken as a whole, we believe our intellectual property
rights are significant and any failure to adequately protect our proprietary
rights could result in our competitors offering similar products, potentially
resulting in loss of a competitive advantage and decreased revenues. We rely on
a combination of copyright, trademark and trade secret laws; other intellectual
property laws; nondisclosure agreements with our employees and third parties and
other protective measures to establish and protect our proprietary rights. We
have filed a patent application covering certain aspects of the design of our
single platform DSL hardware solution. In addition, the laws of many foreign
countries do not protect our intellectual property to the same extent as the
laws of the United States. Also, despite the steps taken by us to protect our
proprietary rights, it may be possible for unauthorized third parties to copy or
reverse engineer aspects of our products, develop similar technology
independently or otherwise obtain and use information that we regard as
proprietary. Furthermore, policing the unauthorized use of our products is
difficult. Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets or patents that we may obtain, or
to determine the validity and scope of the proprietary rights of others. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on our future operating results.
Intellectual property claims against us can be costly and restrict our business
The data communications industry is characterized by the existence of a large
number of patents and frequent litigation based on allegations of patent
infringement. As the number of entrants in our market increases and the
functionality of our products is enhanced and overlaps with the products of
other companies, we may become subject to claims of infringement or
misappropriation of the intellectual property rights of others. Any claims
asserting that our products infringe or may infringe proprietary
9
<PAGE>
rights of third parties, if determined adversely to us, could have a material
adverse effect on our business, financial condition or results of operations.
Any claims, with or without merit, could be time-consuming, result in costly
litigation, divert the efforts of our technical and management personnel, cause
product shipment delays or require us to enter into royalty or licensing
agreements, any of which could have a material adverse effect upon our operating
results. Legal action claiming patent infringement may be commenced against us.
We cannot assure you that we would prevail in such litigation given the complex
technical issues and inherent uncertainties in patent litigation. In the event a
claim against us was successful, and we could not obtain a license to the
relevant technology on acceptable terms or license a substitute technology or
redesign to avoid infringement, could have a material adverse effect on our
business, financial condition and results of operations.
Changes to regulations affecting the telecommunications industry could reduce
demand for our products
Any changes to legal requirements relating to the telecommunications industry,
including the adoption of new regulations by federal or state regulatory
authorities under current laws or any legal challenges to existing laws or
regulations relating to the telecommunications industry, could have a material
adverse effect upon the market for our products. Moreover, our distributors or
customers may require, or we may otherwise deem it necessary or advisable, that
we modify our products to address actual or anticipated changes in the
regulatory environment. Our inability to modify our products or address any
regulatory changes could have a material adverse effect on our business,
financial condition or results of operations.
Year 2000 problems could disrupt our business
During the next year, many software programs may not recognize calendar dates
beginning in the Year 2000. This problem could cause computers or machines which
utilize date dependent software to either shut down or provide incorrect
information. If we, or any of our key suppliers, customers or service providers,
fail to mitigate internal and external Year 2000 risks, we may temporarily be
unable to provide products or engage in other business activities, including
billing, which could have a material adverse effect on our business.
Control by Brooktrout may limit your ability to influence the outcome of matters
requiring stockholder approval
Upon completion of this offering, Brooktrout will own approximately 65% of the
outstanding shares of common stock, or 60% if the underwriters' over-allotment
option is exercised in full. Accordingly, Brooktrout will be able to control or
significantly influence matters requiring approval by our stockholders,
including the election of directors and the approval of mergers or other
business combination transactions. This concentration of ownership could have
the effect of delaying or preventing a change in our control or otherwise
discouraging a potential acquiror from attempting to obtain control of us, which
in turn could have a material adverse effect on the market price of the common
stock or prevent our stockholders from realizing a premium over the market
prices for their shares of common stock.
We expect that the market price for our common stock may be volatile, which
could cause the value of your investment in our company to decline
The value of your investment could decline due to the impact of any of the
following factors upon the market price of our common stock:
- changes in our earnings estimates by financial analysts;
- our failure to meet financial analysts' performance expectations;
10
<PAGE>
- changes in market valuations of other data communications service
providers' companies;
- Investor perception of the Internet and emerging data
communications sectors generally, independent of the operating
performance of such companies; and
- lack of market liquidity.
In the past, securities class action litigation has often been instituted
against companies following periods of volatility in the market price of such
companies' securities. Such litigation could result in substantial costs and
diversion of our management's attention and resources and have a material
adverse effect on our business, financial condition and results of operations.
We could be required to pay substantial damages, including punitive damages, if
we were to lose such a lawsuit.
Substantial future sales of our common stock in the public market could cause
our stock price to fall
Sales of a large number of shares of our common stock in the public market after
this offering could adversely affect the market price of our common stock. Upon
completion of this offering, we will have approximately 10,018,132 shares of
common stock outstanding, of which approximately 3,500,000 shares, or
approximately 4,025,000 shares if the underwriters' over-allotment option is
exercised in full, will be freely transferable without restriction or
registration under the Securities Act of 1933, unless such shares are held by
our affiliates. The remaining 6,518,132 shares of common stock held by existing
stockholders and 572,863 shares subject to outstanding options vested on June
15, 1999 will be restricted securities and may only be sold in the public market
if registered or if they qualify for an exemption from registration under the
Securities Act. All of our officers and directors and Brooktrout have agreed
with U.S. Bancorp Piper Jaffray not to sell or otherwise dispose of any of their
shares for 180 days after the date of this prospectus. Beginning 180 days after
the offering, under specified circumstances and subject to customary conditions,
Brooktrout will have rights with respect to 6,500,000 shares of common stock, to
require us to register their shares of common stock under the Securities Act,
and Brooktrout will have rights to participate in any future registrations of
securities by us.
Provisions in our corporate charter and bylaws may discourage takeover attempts
and thus depress the market price of our common stock
Provisions in our amended and restated Certificate of Incorporation, may have
the effect of delaying or preventing a change of control or changes in our
management. These provisions include:
- the right of the Board of Directors, without stockholder approval,
to issue shares of preferred stock and to establish the voting
rights, preferences, and other terms thereof;
- the right of the Board of Directors to elect a director to fill a
vacancy created by the expansion of the Board of Directors;
- the ability of the Board of Directors to alter our bylaws without
prior stockholder approval;
- the election of three classes of directors to each serve three year
staggered terms;
- the elimination of stockholder voting by consent;
- the removal of directors only for cause;
- the vesting of exclusive authority in the Board of Directors
(except as otherwise required by law) to call special meetings of
stockholders; and
- certain advance notice requirements for stockholder proposals and
nominations for election to the Board of Directors.
11
<PAGE>
These provisions discourage potential takeover attempts and could adversely
affect the market price of our common stock.
We have no specific plan for any significant portion of the net proceeds of this
offering
Although we expect to use the net proceeds of this offering for general
corporate purposes such as working capital, product development and sales and
marketing, we currently have no specific plan for any significant portion of the
net proceeds of this offering. As a consequence, our management will have the
discretion to allocate the net proceeds of this offering to uses the
stockholders may not deem desirable. We may not be able to invest these net
proceeds to yield a significant return. Substantially all of the net proceeds of
this offering will be invested in short-term, interest-bearing, investment grade
securities or guaranteed obligations of the U.S. government for an indefinite
period of time.
This offering will cause immediate and substantial dilution in the value of your
investment
You will experience an immediate and substantial dilution of $9.00 per share in
the net tangible book value per share of common stock from the initial public
offering price. Assuming an initial public offering price of $11.00 per share of
common stock, our pro forma net tangible book value as of March 31, 1999, after
giving effect to this offering, would be $2.00 per share.
We do not intend to pay dividends
To date, we have never declared nor paid any cash dividends on shares of our
common stock. We currently intend to retain our earnings for future growth and
development of our business and, therefore, do not anticipate declaring or
paying any dividends in the foreseeable future.
12
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain statements under the captions "Summary," "Risk Factors," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business," and elsewhere in this prospectus are
"forward-looking statements." These forward-looking statements include, but are
not limited to, statements about our plans, objectives, expectations and
intentions and other statements contained in the prospectus that are not
historical facts. When used in this prospectus, the words "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar
expressions are generally intended to identify forward-looking statements.
Because these forward-looking statements involve risk and uncertainties, there
are important factors, including the factors discussed under "Risk Factors,"
that could cause actual results to differ materially from those expressed or
implied by these forward-looking statements.
USE OF PROCEEDS
The net proceeds to Interspeed from the sale of common stock in this offering,
assuming a public offering price of $11.00 per share, are estimated to be $ 19.5
million, after deducting underwriting discounts and commissions and estimated
offering expenses of $2.5 million.
We expect to use substantially all of the net proceeds for general corporate
purposes, including working capital, research and development and expansion of
sales and marketing activities. The amounts we actually expend for such working
capital and other purposes may vary significantly and will depend on a number of
factors, including the amount of our future revenues and other factors described
under "Risk Factors." Accordingly, our management will retain broad discretion
in the allocation of the net proceeds of this offering. A portion of the net
proceeds may also be used to acquire or invest in complementary businesses,
technologies, product lines or products. We have no current plans, agreements or
commitments with respect to any such transaction, and we are not currently
engaged in any negotiations with respect to any such transaction. Pending such
uses, the net proceeds of this offering will be invested in short-term,
interest-bearing, investment grade securities or guaranteed obligations of the
U.S. government.
DIVIDEND POLICY
We have never declared nor paid any cash dividends on our capital stock. We
currently intend to retain any future earnings to finance the growth and
development of our business and, therefore, do not anticipate declaring or
paying any cash dividends in the foreseeable future. Any future determination to
pay cash dividends will be at the discretion of the Board of Directors and will
be dependent upon our financial condition, results of operations, capital
requirements, general business condition and such other factors as the Board of
Directors may deem relevant.
13
<PAGE>
CAPITALIZATION
The following table sets forth our cash and capitalization as of March 31, 1999
(a) on an actual basis, (b) pro forma to reflect the contribution by Brooktrout
of the long term note payable to capital of Interspeed upon the effective date
of this offering and (c) pro forma as adjusted to give effect to the sale of
2,000,000 shares by Interspeed in this offering, assuming an initial public
offering price of $11.00 per share, resulting in net proceeds to Interspeed of
approximately $19.5 million, after deducting underwriting discounts and
commissions and estimated offering expenses of $2.5 million. This table should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our financial statements of the Company
and the notes to those statements included elsewhere in this prospectus.
The table below excludes:
- 1,420,132 shares of common stock issuable upon exercise of
outstanding stock options at a weighted average exercise price of
$0.13 per share as of March 31, 1999;
- 18,132 shares of common stock that were issued subsequent to March
31, 1999 upon exercise of previously granted options; and
- 567,000 options that were granted subsequent to March 31, 1999 with
an exercise price less than the estimated fair value of our common
stock at the date of grant.
<TABLE>
<CAPTION>
March 31, 1999
-----------------------------------
<S> <C> <C> <C>
(unaudited)
<CAPTION>
Pro forma
Actual Pro forma As Adjusted
--------- ----------- -----------
(in thousands, except per share
data)
<S> <C> <C> <C>
Cash......................................................................... $ 61 $ 61 $ 19,550
--------- ----------- -----------
--------- ----------- -----------
Long-term note payable--due Brooktrout....................................... $ 8,167 $ -- $ --
Stockholders' equity:
Preferred Stock, $0.01 par value per share; 1,000,000 shares authorized, no
shares issued or outstanding on an actual, pro forma and pro forma as
adjusted basis........................................................... $ -- $ -- $ --
Common stock, $0.01 par value per share; 30,000,000 shares authorized,
8,000,000 shares issued and outstanding on an actual and pro forma basis;
30,000,000 shares authorized, 10,000,000 shares issued and outstanding on
a pro forma as adjusted basis............................................ 80 80 100
Additional paid-in capital................................................. 2,512 10,679 30,148
Accumulated deficit........................................................ (8,782) (8,782) (8,782)
Deferred compensation...................................................... (1,469) (1,469) (1,469)
--------- ----------- -----------
Total stockholders' equity (deficit)......................................... (7,659) 508 19,997
--------- ----------- -----------
Total capitalization......................................................... $ 508 $ 508 $ 19,997
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
14
<PAGE>
DILUTION
Purchasers of the common stock in this offering will experience immediate and
substantial dilution in the net tangible book value of the common stock from the
initial public offering price.
Net tangible book value per share represents the amount of our total tangible
assets less total liabilities, divided by the number of shares of common stock
outstanding. At March 31, 1999, we had a pro forma net tangible book value of
$508,000 or $0.06 per share of common stock after giving effect to contribution
to capital of the long term note payable-due Brooktrout. After giving effect to
the sale of 2,000,000 shares of common stock offered by us at an assumed initial
public offering price of $11.00 per share and after the deduction of
underwriting discounts and commissions and estimated offering expenses payable
by us, our pro forma net tangible book value would have been approximately $20.0
million or $2.00 per share. This represents an immediate increase in such net
tangible book value of $1.94 per share to existing shareholders and an immediate
and substantial dilution of $9.00 per share to new investors purchasing common
stock in this offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C>
Assumed initial public offering price............................................... $ 11.00
Pro forma net tangible book value before the offering............................. 0.06
Increase in pro forma net tangible book value per share attributable to new
investors....................................................................... 1.94
Pro forma net tangible book value after the offering................................ 2.00
Dilution to new investors........................................................... $ 9.00
---------
---------
</TABLE>
The following table summarizes, as of March 31, 1999, the difference between
existing stockholders and the new investors with respect to the number of shares
of common stock purchased, the total consideration paid and the average price
per share paid (before the deduction of underwriting discounts and commissions
and estimated offering expenses payable by Interspeed, and after giving effect
to Brooktrout's contribution of the long term note payable to the capital of
Interspeed):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
--------------------- ------------------------ Average Price
Number Percent Amount Percent Per Share
---------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................. 8,000,000 80% $ 9,168,000 29% $ 1.15
New investors.......................... 2,000,000 20% 22,000,000 71% 11.00
---------- --------- ------------- --------- ------
Total.............................. 10,000,000 100.0% $ 31,168,000 100.0% 3.12
---------- --------- ------------- --------- ------
---------- --------- ------------- --------- ------
</TABLE>
The foregoing table excludes:
- 1,420,132 shares of common stock subject to outstanding options at
March 31, 1999 at a weighted average exercise price of $0.13 per
share;
- an aggregate of 1,012,868 shares available for future grant under
our 1999 Stock Option and Grant Plan.
To the extent these options are exercised and the underlying shares are granted,
there will be further dilution to new investors.
15
<PAGE>
SELECTED FINANCIAL DATA
(in thousands, except per share data and selected operating data)
The selected financial data as of September 30, 1997 and 1998 and for the period
October 23, 1996 (inception) to September 30, 1997, for the year ended September
30, 1998 has been derived from the audited financial statements and the notes to
those statements included elsewhere in this prospectus. The selected financial
data for the six month periods ended March 31, 1999 and 1998 has been derived
from the unaudited financial information included elsewhere in this prospectus,
which in our opinion include all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of the results for such
periods. The selected financial data should be read in conjunction with, and is
qualified in its entirety by "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Financial Statements of Interspeed and
the Notes to those statements and the other financial data included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
For the period
October 23, 1996 For the year For the six months
(inception) to ended ended March 31,
September 30, September 30, --------------------
1997 1998 1998 1999
---------------- ----------------- --------- ---------
<S> <C> <C> <C> <C>
Statements of Operations Data:
Revenue................................................ $ -- $ -- $ -- $ 391
Cost of revenue........................................ -- -- -- 312
------- ------- --------- ---------
Gross profit........................................... -- -- -- 79
Operating expenses
Research and development............................. 878 3,204 1,550 2,413
Sales and marketing.................................. -- 401 80 356
General and administrative........................... 165 689 279 633
Stock compensation................................... -- 19 -- 103
------- ------- --------- ---------
Total operating expenses............................... 1,043 4,313 1,909 3,505
------- ------- --------- ---------
Loss before income taxes............................... (1,043) (4,313) (1,909) (3,426)
Income tax expense..................................... -- -- -- --
------- ------- --------- ---------
Net loss............................................... $ (1,043) $ (4,313) $ (1,909) $ (3,426)
------- ------- --------- ---------
------- ------- --------- ---------
Net loss per share--basic and diluted.................. $ (0.24) $ (0.54) $ (0.24) $ (0.43)
------- ------- --------- ---------
------- ------- --------- ---------
Shares used to compute net loss per share--basic and
diluted.............................................. 4,364 8,000 8,000 8,000
</TABLE>
<TABLE>
<CAPTION>
September 30, September 30, March 31, March 31,
1997 1998 1999 1999
--------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C>
(pro forma)(1)
Balance Sheet:
Cash.................................................... $ 21 $ 132 $ 61 $ 61
Working capital......................................... (155) 213 (97) (97)
Total assets............................................ 348 1,227 1,779 1,779
Long term note payable--due Brooktrout.................. 206 5,038 8,167 --
Total stockholders' equity (deficit).................... (42) (4,336) (7,659) 508
</TABLE>
- ------------------------------------
(1) The unaudited pro forma selected balance sheet data as of March 31, 1999
reflects the contribution by Brooktrout of the long term note payable to the
capital of Interspeed upon the effective date of this offering.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND THE
NOTES TO THOSE STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE CONTAINED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE, BUT
ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS.
Overview
We design, develop, and market advanced high-speed data communication solutions
based on digital subscriber line, or DSL, technology. Our products enable data
communication service providers such as competitive local exchange carriers,
Internet service providers, and owners of multi-tenant units, to utilize the
existing copper wire infrastructure to deliver high speed data access to their
customers. We believe we offer the only single platform system that integrates
the principal components required to offer DSL service, including signal
concentration, routing, switching and network management. Unlike traditional DSL
products, our DSLAR offers a highly scalable and flexible solution to our
customers, at a lower total cost of ownership.
Since we commenced operations in March 1997, we have focused our efforts and
resources on research and development and the formation of a corporate
infrastructure. We announced general availability of our Interspeed 1000 and
Interspeed 500 DSL Access Routers in February 1999.
REVENUE. Our revenue is generated primarily from sales of our products and
related maintenance services to data communications service providers and their
customers. Revenue from product sales is recognized upon shipment of the
product. Revenue from maintenance and support contracts is deferred and
recognized ratably over the service period. The purchase price of products sold
by us generally includes one year of maintenance and support, the value of which
is unbundled and recognized ratably over the service period and an accrual is
recorded for the estimated cost of providing warranty services at that time.
COST OF REVENUE. Cost of revenue consists of direct product costs such as
standard parts and components for our products, salaries and employee benefits
for manufacturing personnel and overhead such as equipment and facility costs.
GROSS PROFIT. We expect our gross profit to be effected by many factors
including pricing, product mix, cost factors such as component prices, internal
and external manufacturing costs as well as manufacturing efficiencies due to
higher volume of product shipments which we believe will result in the
improvement of overhead absorption.
RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily
of salaries and employee benefits for engineering personnel and costs relating
to prototypes including components, non-recurring engineering charges and tools.
Product enhancements and new features are key objectives. We expect research and
development expenses to increase in absolute dollars in the future.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, employee benefits, trade shows, public relations, marketing materials,
travel and other marketing expenses. Future sales and marketing activities will
involve additional costs related to the expansion of the sales and sales
engineering organization, product branding, advertising and public relations
costs. We expect sales and marketing expenses to increase in absolute dollars in
the future.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of
personnel costs for executive officers, administrative and support activities
including payroll administration, worker's compensation and general liability
insurance, accounting and finance, legal, tax and human resources. To date, we
have relied on Brooktrout to provide the majority of these services. Upon the
effective date of this
17
<PAGE>
offering, we will enter into a transition services agreement with Brooktrout,
pursuant to which Brooktrout will continue to provide us with certain services
during a transitional period. The agreement calls for fees to be paid in
connection with the continuation of current administrative and support services,
with such services being phased out over a period beginning October 1999 to
December 1999. As we phase out these services from Brooktrout in the October
1999 to December 1999 time period, we expect to recruit and staff for finance,
human resources, administrative and information services employees. We will
incur other corporate expenses such as legal, audit, and insurance expenses.
The cost for the services provided by Brooktrout, included in General and
Administrative Expenses, amounted to $165,000 for the period October 23, 1996
(inception) to September 30, 1997, $668,000 for the year ended September 30,
1998, $269,000 for the six month period ended March 31, 1998, and $464,000 for
the six month period ended March 31, 1999. These costs have been allocated to us
using methodologies primarily based on headcount and specific services rendered.
Although we believe the allocations are reasonable, the costs we incurred for
these services may not be indicative of the costs that would have been incurred
if we had been a stand-alone entity.
STOCK COMPENSATION. Stock options have been granted with exercise prices which
were less than the estimated fair value of Interspeed's common stock.
Compensation cost associated with these options, determined as the difference
between the fair value of the stock and the exercise price, totalled
approximately $1.5 million at March 31, 1999. This cost was recorded as deferred
compensation and is being amortized to expense over the period in which the
employee is expected to render services. Compensation cost amortization was
$19,000 and $103,000 for the year ended September 30, 1998 and the six months
ended March 31, 1999.
Subsequent to March 31, 1999, 567,000 options were granted with exercise prices
which were less than the estimated fair value of our common stock. The
compensation cost associated with these options totalled $4.9 million. In
connection with these grants, we expect to record a charge of approxmiately $1.9
million in the three months ended June 30, 1999 and approximately $405,000 in
the quarter ended September 30, 1999. In addition, similar charges are expected
for future periods.
INCOME TAX EXPENSE. Through March 31, 1999, we have incurred net losses
totalling approximately $8.8 million. To date, we have been included in
Brooktrout's consolidated income tax filings and these losses have been used to
reduce the group's taxes payable. Brooktrout has not and does not intend to
reimburse us for the value of the net losses used to reduce Brooktrout's
consolidated taxable income. Accordingly, we have not recorded any benefit
related to these losses. Following the effective date of the Offering, we will
no longer be included in Brooktrout's consolidated income tax filings; we do not
anticipate recognizing any benefits from losses generated in the short term due
to our limited operating history. We expect to continually evaluate the
recoverability of net loss carryforwards.
Quarterly Operating Results
The following table sets forth unaudited quarterly operating results for each of
our last five quarters. This information has been prepared by us on a basis
consistent with our audited financial statements and includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the data. These quarterly results are not necessarily indicative
of results of operations for any future period. We have experienced in the past
and expect to experience in the future, fluctuations in
18
<PAGE>
quarterly operating results. Factors that may cause such fluctuations include,
but are not limited to, those discussed in "Risk Factors" and elsewhere in this
prospectus.
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
March 31, June 30, September 30, December 31, March 31,
1998 1998 1998 1998 1999
----------- --------- ------------- ------------- -----------
<CAPTION>
(in thousands, unaudited)
<S> <C> <C> <C> <C> <C>
Revenue.......................................... $ -- $ -- $ -- $ 64 $ 327
Cost of revenue.................................. -- -- -- 36 276
Gross profit..................................... -- -- -- 28 51
Operating expenses:..............................
Research and development....................... 937 922 731 1,273 1,139
Sales and marketing............................ 80 251 70 136 220
General and administrative..................... 175 212 202 210 356
Stock compensation -- 2 14 32 62
----------- --------- ------------- ------------- -----------
Total operating expenses................... 1,192 1,387 1,017 1,651 1,777
----------- --------- ------------- ------------- -----------
Loss before income taxes......................... (1,192) (1,387) (1,017) (1,623) (1,726)
Income tax expense............................... -- -- -- -- --
----------- --------- ------------- ------------- -----------
Net loss......................................... $ (1,192) $ (1,387) $ (1,017) $ (1,623) $ (1,726)
----------- --------- ------------- ------------- -----------
----------- --------- ------------- ------------- -----------
Net loss per share-basic and diluted............. $ (.15) $ (.17) $ (.13) $ (.20) $ (.22)
Shares used to compute net loss per share-basic
and diluted.................................... 8,000 8,000 8,000 8,000 8,000
</TABLE>
Five Quarters Ended March 31, 1999
REVENUE. Our revenue in the quarter ended December 31, 1998 was $64,000 and
represented the first sale of our product under the beta test program. Our first
product became generally available in February 1999. Revenue in the quarter
ended March 31, 1999 was $327,000 and represented an increase of $263,000 or
411% for the quarter ended December 31, 1998.
COST OF REVENUE. Cost of revenue for the quarter ended December 31, 1998 was
$36,000 and was $276,000 for the quarter ended March 31, 1999, an increase of
$240,000 or 667%. The increase in costs is primarily due to payroll costs
related to the dedication of personnel to manufacturing coinciding with the
general availability of our first product.
GROSS PROFIT. Gross profit as a percentage of revenue was 44% for the quarter
ended December 31, 1998 and was 16% for the quarter ended March 31, 1999. Gross
profit as a percentage of revenue declined as a result of increased costs
associated with expansion of manufacturing operations. We expect our gross
profit to be effected by many factors including product mix, cost factors such
as component prices, internal and external manufacturing costs as well as
manufacturing efficiencies due to higher product shipment volume.
RESEARCH AND DEVELOPMENT. Since its inception, Interspeed has allocated
substantial funding to its research and development efforts. The decrease in
research and development expense in the quarter ended September 30, 1998 was due
to the decreased usage of prototype materials in research and development
projects.
SALES AND MARKETING. Sales and marketing expenses fluctuated from quarter to
quarter as a result of expenses related primarily to one major trade show in the
quarter ended June 30, 1998. During the quarter ended June 30, 1998
approximately $156,000 of the $251,000 was related to a trade show, public
relations, and marketing materials. The decrease of $10,000 from the quarter
ended March 31, 1998 to the quarter ended September 30, 1998 was primarily due
to a decrease in payroll taxes resulting from various employees exceeding FICA
tax limits.
19
<PAGE>
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased
$10,000 from the quarter ended June 30, 1998 to the quarter ended September 30,
1998. This decrease was directly related to the decrease in salary and benefit
costs associated with the loss of personnel. General and administrative expenses
increased from $238,000 for the quarter ended December 31, 1998 to $395,000 for
the quarter ended March 31, 1999, an increase of 66%. General and administrative
expenses increased as a result of allocations made to Interspeed based on
headcount. Headcount for the period increased from 28 to 36.
Results of Operations
The following table sets forth certain statements of operations for the years
ended September 30, 1997 and 1998 and the six months ended March 31, 1998 and
1999. This information should be read with our financial statements and notes
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Period from
October 23,
1996
(inception) Year Ended
to September September Six Months
30, 30, Ended March 31,
------------- ----------- --------------------
(In thousands except per share data) 1997 1998 1998 1999
- ----------------------------------------------- ------------- ----------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Revenue........................................ $ -- $ -- $ -- $ 391
Cost of revenue................................ -- -- -- 312
------------- ----------- --------- ---------
Gross profit................................... -- -- -- 79
------------- ----------- --------- ---------
Operating expenses:............................
Research and development..................... 878 3,204 1,550 2,413
Sales and marketing.......................... -- 401 80 356
General and administrative................... 165 689 279 633
Stock compensation........................... -- 19 -- 103
------------- ----------- --------- ---------
Total operating expenses................. 1,043 4,313 1,909 3,505
------------- ----------- --------- ---------
Loss before income taxes....................... (1,043) (4,313) (1,909) (3,426)
Income tax expense............................. -- -- -- --
------------- ----------- --------- ---------
Net loss....................................... $ (1,043) $ (4,313) $ (1,909) $ (3,426)
------------- ----------- --------- ---------
------------- ----------- --------- ---------
Net loss per share-basic and diluted........... $ (0.24) $ (0.54) $ (0.24) $ (0.43)
------------- ----------- --------- ---------
------------- ----------- --------- ---------
Shares used to compute net loss per share-basic
and diluted.................................. 4,364 8,000 8,000 8,000
</TABLE>
Six Months Ended March 31, 1999 and 1998
REVENUE. During the six months ended March 31, 1999, total revenues from
product sales totalled $391,000 with the majority of these revenues concentrated
in the months of February and March 1999 pursuant to the general availability of
our product in February 1999.
COST OF REVENUE. During the six months ended March 31, 1999, cost of revenue
totalled $312,000, the majority of which is related to revenue recognized in
February and March of 1999.
GROSS PROFIT. During the six months ended March 31, 1999, gross profit as a
percentage of revenue was 20%, due primarily to the early stages of our
production build-up. As we achieve higher selling volumes, gross profit as a
percentage of revenue is expected to improve as manufacturing efficiencies are
achieved and fixed manufacturing costs are spread among higher product shipment
volume.
RESEARCH AND DEVELOPMENT. In the first six months ended March 31, 1999,
research and development expenses increased by 56% to $2.4 million from $1.6
million during the first six months of 1998, directly associated with the
increase in salary and benefit costs related to the hiring of 13 additional
development professionals and costs incurred in building the first prototypes of
our product for testing. We expect that research and development expenses in
future periods will continue to increase in absolute dollar terms.
20
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SALES AND MARKETING. In the first six months ended March 31, 1999, sales and
marketing expenses increased by 345% to $356,000 from $80,000 in the first six
months of 1998, mostly related to the increase in salary and benefit costs
associated with additional staffing of 3 sales and marketing professionals which
occurred late in 1998, and increased activity due to the release of our product
to the market and the consummation of sales to customers. We expect that sales
and marketing expenses in future periods will continue to increase in absolute
dollar terms.
GENERAL AND ADMINISTRATIVE. In the first six months ended March 31, 1999,
general and administrative expenses increased by 127% to $633,000 compared to
$279,000 in six months ended March 31, 1998. The cost for the services provided
by Brooktrout, included in General and Administrative Expenses, amounted
$269,000 for the six month period ended March 31, 1998, and $464,000 for the six
month period ended March 31, 1999. Because of the allocation method used, these
costs increased as our total headcount increased by 17 people from October 1,
1997 to March 31, 1999.
STOCK COMPENSATION. In the six months ended March 31, 1999, compensation cost
amortization was $103,000.
Years Ended September 30, 1998 and 1997
In the quarter ended December 31, 1999, we completed initial product development
and released our first product for beta test. General release of our product for
sale occurred in February 1999.
REVENUE, COST OF REVENUE AND GROSS PROFIT. During the years ended September 30,
1997 and 1998, we were still in the development stage and no products were
available for shipment to customers.
RESEARCH AND DEVELOPMENT. Research and development expense increased
approximately 265% in 1998 to $3.2 million for the period ended September 30,
1998 compared to $878,000 in the same period for the prior year. This increase
is directly related to the addition of seven development professionals and costs
incurred in building the first prototypes of our product for testing.
SALES AND MARKETING. In the years ended September 30, 1997 and 1998, expenses
increased from $0 to $401,000. This increase was primarily due to personnel
dedicated to our marketing effort and activities related to tradeshows and other
marketing processes.
GENERAL AND ADMINISTRATIVE. In the years ended September 30, 1997 and 1998,
general and administrative expenses increased by 318% to $689,000 in 1998
compared to $165,000 in 1997. Because of the allocation method used, these costs
increased as our total headcount increased by 13 people during the period.
STOCK COMPENSATION. In the year ended September 30, 1998, compensation cost
amortization was $19,000.
Liquidity and Capital Resources
Since inception, our operations have been funded through contributions of
capital and loans from Brooktrout of approximately $1.2 million, $4.8 million
and $3.1 million for the period October 23, 1996 (inception) to September 30,
1997, the year ended September 30, 1998 and the six months ended March 31, 1999,
respectively. At March 31, 1999, we had long term notes payable to Brooktrout in
the amount of $8.2 million. The notes are non-interest bearing. In connection
with this offering, Brooktrout has agreed to contribute the outstanding note
balance on the effective date of the offering to the capital of Interspeed.
Until the consummation of the offering, Brooktrout has agreed to continue to
fund our operations.
For the period October 23, 1996 (inception) to September 30, 1997, the year
ended September 30, 1998 and the six months ended March 31, 1998 and 1999, we
purchased approximately $371,000, $369,000, $206,000 and $419,000, respectively,
of equipment. We currently have no material commitments for additional capital
expenditures.
21
<PAGE>
We believe that the net proceeds from this offering will be sufficient to meet
our anticipated cash needs for working capital and capital expenditures for at
least 12 months following this offering. Thereafter, if cash generated from
operations is insufficient to satisfy our liquidity requirements, we might need
to raise additional funds through public or private financing, strategic
relationships or other arrangements. There can be no assurance that such
additional funding, if needed, will be available on terms which we believe are
attractive, or at all. If we fail to raise capital when needed, it could harm
our business, operating results and financial condition. If we raise additional
funds through the issuance of equity securities, the percentage ownership of our
stockholders would be reduced.
We do not believe that inflation has had a significant effect on its operations
to date.
Year 2000 Readiness Disclosure
The Year 2000 issue relates to potential problems arising from the way in which
computer software processes functions that are date dependent. These problems
arise from hardware and software unable to distinguish dates in the "2000s" from
dates in the "1900s" and from other sources such as the use of special codes and
conventions in software that use a date field. These problems could result in a
system failure with miscalculations causing disruptions of operations, including
among other things, a temporary inability to process transactions, send invoices
or engage in other normal business activities. The Year 2000 issue may pose
additional problems due to the fact the Year 2000 is a leap year and some
computers and programs may fail to recognize the extra day.
GENERAL READINESS ASSESSMENT. As a wholly owned subsidiary of Brooktrout, we
have relied on Brooktrout's Year 2000 Plan except with respect to our products
and suppliers where we have instituted our independent compliance program. By
December 31, 1999, we plan to no longer rely on any Brooktrout systems. We have
begun a formal systems selection process and have retained a systems consultant
to assist us in determining our systems requirements and assist us in purchasing
Year 2000 compliant business systems to satisfy our present and future needs as
a rapidly expanding and changing business. However, no assurance can be given
that we or third parties with whom we have a business relationship will
successfully address our or their Year 2000 issues. To date, we have not
experienced any problems with Year 2000 issues with either third party or our
internal systems. Our Year 2000 readiness program is supervised by our Year 2000
compliance committee which is headed by Rajeev Agarwal, and we review our Year
2000 program on a monthly basis.
Our overall non-Brooktrout related Year 2000 readiness program has consisted of
the following steps:
- purchasing internal systems that are Year 2000 compliant;
- developing a complete inventory of our products' hardware and
software and assessing whether each specific piece of equipment or
software is Year 2000 compliant;
- contacting most of our major equipment vendors to ensure that the
equipment or software purchased has been tested and verified as
Year 2000 compliant; and
- developing contingency plans to address potential Year 2000
problems which are not directly in our control.
Specific areas in our Year 2000 program which have been completed:
- ensuring our products' hardware and software are Year 2000
compliant;
- contacting most of our major equipment providers and receiving
disclosure statements that all of the equipment or software
purchased from these vendors is Year 2000 compliant; and
- implementing contingency plans ensuring that we have alternative
suppliers for our products' components.
22
<PAGE>
ASSESSMENT OF INTERNAL INFRASTRUCTURE. With respect to our internal systems, we
have relied on Brooktrout's Year 2000 Plan which consists of three
phases--assessment, testing and implementation. Brooktrout is currently in the
implementation phase and anticipates completing this phase during the third
calendar quarter of 1999. By December 31, 1999, with the assistance of our
systems consultant, we plan to have our own internal systems in place. All of
the systems we purchase will be Year 2000 compliant.
ASSESSMENT OF INTERSPEED'S SOFTWARE AND PRODUCTS. We have gathered, tested and
produced information about our products impacted by the Year 2000 transition. We
believe that all of our products are in or will be in Year 2000 compliance.
SUPPLIERS All organizations dealing with the Year 2000 must address the effect
this issue will have on their significant business relationships with key third
parties. Our significant business relationships which may be adversely impacted
by the Year 2000 issue include certain contractual relationships with key
suppliers of components for our products and service providers for our internal
systems. We continue to work with third parties to understand their ability to
continue to provide services and products. If any significant Year 2000 problems
are identified with third parties, contingency plans will be developed.
COSTS TO ADDRESS YEAR 2000 ISSUES. To date, the primary costs of achieving Year
2000 compliance have been incorporated into the fees Brooktrout has charged
Interspeed for managing Interspeed's system requirements. The historical costs
to assess our Year 2000 readiness have been negligible. The primary future costs
will be our consultant's fee and the Year 2000 compliant systems we purchase. We
are not currently able to estimate the final aggregate cost of addressing the
Year 2000 issue because funds may be required as a result of future findings. We
do not expect these costs to be material nor to have an adverse effect on our
business and financial results.
CONSEQUENCES OF YEAR 2000 PROBLEMS. We are still in the process of evaluating
potential disruptions or complications that might result from Year 2000 related
problems. Presently, however, we believe that the most likely worst case
scenario related to the Year 2000 issue is associated with third party vendors.
A significant Year 2000 related disruption of the services provided to us by
third party vendors could prevent us from timely delivering our products to
customers, which in turn could materially and adversely affect our results of
operations, liquidity and financial condition. We are not presently aware of any
vendor related Year 2000 issue that is likely to result in such a disruption.
We anticipate that litigation may be brought against vendors of all component
products of systems that are unable to properly manage data related to the Year
2000. We have not received any threats of such litigation. Although we believe
our products are Year 2000 compliant, no assurance can be given that such
litigation may not be threatened or brought in the future. Our failure or
failure of our key suppliers and/or customers to be Year 2000 compliant may also
result in litigation being brought against us in addition to making it more
difficult and/or costly for us to manufacture and sell our products. Any such
claims, with or without merit, or our failure or the failure of our suppliers or
customers to be Year 2000 compliant could result in a material adverse affect on
our business, financial condition and results of operations, including increased
warranty costs, customer satisfaction issues and potential lawsuits.
Although there is inherent uncertainty in the Year 2000 issue, we expect that as
we progress with our Year 2000 readiness plan, the level of uncertainty about
the impact of the Year 2000 issue on us will be reduced and we should be better
positioned to identify the nature and extent of any material risk to us as a
result of any Year 2000 disruptions. This section contains certain statements
that are forward-looking statements. Our Year 2000 compliance, and the eventual
affects of the Year 2000 on us may be materially different than currently
projected. This may be due to, among other things, delays in the implementation
of our Year 2000 Plan and the failure of key third parties with whom we have a
significant business relationship to achieve Year 2000 compliance.
23
<PAGE>
BUSINESS
Overview
Interspeed designs, develops and markets advanced high-speed data communication
solutions based on digital subscriber line, or DSL, technology. Our products
enable data communication service providers such as competitive local exchange
carriers, or CLECs, Internet service providers, or ISPs, and owners of
multi-tenant units, or MTUs, to utilize existing copper wire infrastructure to
deliver high speed data access to their customers. We believe we offer the only
single platform system that integrates the principal components required to
offer DSL service, including signal concentration, routing, switching and
network management. Unlike traditional DSL products, our DSL Access Router, or
DSLAR, offers our customers a highly scalable and flexible solution at a lower
total cost of ownership.
Interspeed incorporated in Massachusetts in 1996 as a wholly owned subsidiary of
Brooktrout, Inc. and commenced operations in March 1997. We reincorporated as a
Delaware corporation in June 1999. Our parent company, Brooktrout, is a
worldwide supplier of electronic communications products whose mission is to
provide high performance quality products that enable businesses and consumers
to exchange information electronically. Brooktrout has decided that it is in its
stockholders best interest to sell approximately 20-25% of its original
ownership of Interspeed to the public and have Interspeed operate as an
independent public company so that Brooktrout can realize some immediate return
on its investment in Interspeed and provide Brooktrout's stockholders with
greater potential long term value recognition on Brooktrout's investment in
Interspeed.
Industry Overview
The data traffic generated by computer users accessing the Internet and business
networks has increased significantly over the last few years and is expected to
increase in the years to come. Several key factors driving this growth include
electronic commerce, business usage of the Internet, remote access for
teleworkers and distributed computing applications such as e-mail. According to
International Data Corporation, or IDC, the number of Internet users worldwide
reached approximately 150 million in March 1999 and is forecasted to grow to
approximately 500 million by 2003. Forrester Research, Inc. predicts that
business to business electronic commerce will grow from $43 billion in 1998 to
$1.3 trillion in 2003. In addition, the number of small to medium sized
businesses using computers is growing. According to Access Partners, an industry
research consultant, there are 9.2 million small to medium sized businesses in
the United States of which approximately 67% are using personal computers.
To address this growth and to take advantage of the new competitive
opportunities created by passage of the Telecom Act, service providers such as
ISPs, CLECs, incumbent local exchange carriers, or ILECs, and the regional bell
operating companies, or RBOCs are looking for carrier class solutions which
allow them to utilize the installed base of copper wire to offer increased data
transmission speeds to their customers.
CURRENT DATA COMMUNICATIONS INFRASTRUCTURE--THE LAST MILE BOTTLENECK
End users are increasingly demanding high data speeds to meet their evolving
needs. While network backbones can support data speeds up to 10 gigabits,
communication speeds over the last mile connection between the service
providers' central office and the end user are often limited because data must
travel over existing copper wire infrastructure equipment which was built to
handle analog voice rather than bandwidth intensive data. This last mile
connection often results in significant bottlenecks that limit high speed data
transmission. Over 140 million copper lines are installed in businesses and
homes in the United States and over 700 million copper lines are installed
worldwide. Service providers are looking for ways to leverage this significant
investment and offer increased transmission speeds over the last mile.
24
<PAGE>
HIGH SPEED DATA ACCESS ALTERNATIVES
A number of options are used to provide last mile connectivity including
analog modems and ISDN, cable modems and T-1. However, each of these
alternatives suffer from significant drawbacks, particularly for small to medium
sized businesses and MTUs. Analog modems and ISDN operate at speeds of 56Kbps
and 128Kbps, respectively, which are inadequate for most business users. Cable,
operating at an average speed of 1Mbps, offers sufficient speed but is not
generally available to business users. In addition, cable is inherently
susceptible to security breaches. T-1 service, operating at 1.5Mbps, offers
adequate speed and security but requires expensive infrastructure modification
resulting in high monthly charges.
DSL TECHNOLOGY AS THE LAST MILE SOLUTION
DSL technology, which was specifically developed to take advantage of
existing copper infrastructure, offers an effective solution to the last mile
bottleneck by providing dedicated high speed data access up to 2.3 Mbps at a
competitive cost to end users. IDC estimates that worldwide DSL lines will grow
from 58,000 in 1998 to 8.4 million in 2002, an annual growth rate of 247%.
Additionally, IDC estimates that worldwide DSL network equipment revenue will
grow from $16 million in 1998 to $612 million in 2002. The two dominant forms of
DSL technology are asymmetric DSL, or ADSL, and symmetric DSL, or SDSL. ADSL
transmits data at high speeds only downstream to the subscriber and is best
suited for the residential market where consumers typically download large
quantities of data but send limited data upstream. In contrast, SDSL supports
the two way exchange of data at high speeds, satisfying the requirements of
businesses.
DSL TECHNOLOGY--IMPORTANT BENEFITS AND LIMITATIONS
- HIGH SPEED. DSL technology offers high speed data access at speeds
ranging from 150 Kbps to several million bits per second at
distances up to 23,000 feet, or approximately 4.3 miles, dependent
upon several line characteristics.
- LOW COST. Because DSL takes advantage of the widely available
existing copper wire infrastructure, it is relatively inexpensive
to deploy.
- SECURE DEDICATED CONNECTIONS. Since DSL connections are dedicated
to each individual user, service providers can maintain high levels
of performance and security even as new subscribers are added to
the system.
While DSL technology has numerous benefits, there are limitations to the
technology. DSL technology can only be used to provide service to users within
approximately a 4 mile radius of the service provider's facility such as a
telephone company central office or within a campus environment. In addition,
the realized operational speed of DSL is dependent on the relative distance of
end users to the service providers. Subscribers that are further from the
facility may realize performance degradation.
DSL TECHNOLOGY--IMPLEMENTATION
Implementation of DSL involves the installation of specialized equipment at
the point where the copper wire interfaces with the data communications
backbone. This point may be at the service provider central office or another
communications hub such as the equipment room of a building or a campus. This
specialized equipment performs several important functions, including:
- SIGNAL CONCENTRATION. The concentrator receives the data signals
from many DSL lines and consolidates them into a single higher
bandwidth signal for uplink over high speed transmission lines.
25
<PAGE>
- ROUTING. Routers are required to process the data signals from the
concentrator and direct them to their appropriate destinations.
Routers or other equipment may also support additional functions
such as authentication, encryption and firewall.
- SYSTEM MANAGEMENT. Typically, each piece of equipment contains a
software controlled management system enabling the user to manage
system functionality and coordinate with other network equipment.
Historically, this has been accomplished by purchasing, installing and managing
individual equipment components, including concentrators, routers and switches.
This configuration can have some significant drawbacks, including additional
capital and operating costs, space requirements and interoperability issues.
A typical configuration for a DSL system is illustrated below:
[Diagram depicting CPE, concentrator, router, switch, backbone router and
Internet]
Currently data communications service providers are seeking solutions which
reduce the total cost of ownership of operating their networks. To achieve these
objectives, the service providers demand a solution that effectively utilizes
existing copper infrastructure to provide high speed data access to their
customers. In addition, this solution must provide:
- high density to optimize limited central office space;
- scalability and modularity to extend product life; and
- ease of installation to eliminate deployment delays.
In a typical configuration based on current technology, DSL central office
products are essentially DSL concentrators combined with a separate but
compatible router and/or switch to provide security and authentication
functions, and to process the data and forward it to its destination. This
multiple product configuration is not only expensive to install, but also must
undergo complicated interoperability testing to ensure that all combinations and
configurations work. The necessary maintenance and training associated with this
multiple product configuration can be costly and time consuming, thus increasing
the service providers' total cost of ownership.
The Interspeed Solution
We offer a single platform carrier class DSL solution that enables data
communications service providers to utilize existing copper infrastructure to
deliver cost effective, high speed data access to small and medium sized
businesses, MTUs and other organizations. 'Carrier class' refers to equipment
that conforms to rigorous standards of reliability, performance and safety that
are required by 'carriers' or telephone companies for equipment that is
qualified for deployment in a central ofice. Our products, referred to as DSL
Access Routers or DSLARs, provide a reliable, highly scalable solution that
integrates
26
<PAGE>
several important functions into one product. We believe this product represents
a new category of DSL access equipment. Our DSLARs offer the following key
benefits:
- HIGH PERFORMANCE SOLUTION. Our DSLARs provide reliable DSL
connections at speeds up to 2.3 Mbps.
- SINGLE SYSTEM. Our DSLARs combine a concentrator and switch/router
in a single product, in contrast to other DSL equipment vendors
whose products require separate concentrators, routers and/or
switches. We believe our products reduce the customer's total cost
of ownership because they:
- are available at a lower initial cost than that associated
with purchasing individual components;
- have a smaller footprint and use less power;
- offer ease of installation and configuration;
- provide integrated system management; and
- allow simpler training of customer personnel.
Our single system architecture enables a simpler configuration of DSL equipment
in the central office, as illustrated below:
[Diagram depicting the DSLAR replacing signal concentrator, router and switch
connecting
to a backbone router on the Internet]
- FLEXIBLE SYSTEM ARCHITECTURE. Our DSLARs are designed with a
flexible system architecture that allows a variety of our
functional modules to be easily installed into the standard
chassis. In addition, the product has been designed so that
performance will not degrade as subscribers are added. This offers
several significant advantages:
- SCALABILITY AND DENSITY. Service providers can purchase our
DSLARs with only the minimum number and type of modules that
they initially require, yet have the ability to add modules
as necessary to accommodate system expansion and changing
functional needs. The Interspeed 1000 product, for example,
currently offers scalability from 16 ports to 192 ports
within a single chassis.
- FLEXIBILITY. Our product architecture permits different
modules to be combined in a single system. This allows
customers to define a configuration with, for example,
different transmission speeds or different communication
protocols, on different ports.
27
<PAGE>
- EASE OF UPGRADE. Our products are designed with a clear
upgrade path. Hardware upgrades are achieved simply by
removing and replacing the modules, without reconfiguring
the system. In-service software upgrades can be implemented
either on site or remotely, through an Internet connection
and a commercially available web browser.
- SUPPORT FOR VIRTUAL PRIVATE NETWORKS. Our DSLAR products enable a
service provider to configure multiple virtual private networks, or
VPNs, within the same DSLAR system. A VPN may consist of any group
of ports where the data received on one port will only be delivered
to other ports within the same VPN, providing security of
transmitted data.
- ADVANCED NETWORK MANAGEMENT. Our DSLARs include our proprietary
SpeedView network management software which permits the network
administrator to review network status and performance and
reconfigure the DSLAR through an easy to use graphical user
interface. Network managers can securely access the SpeedView
management system from a remote location using a commercially
available web browser. In addition, our DSLARs support standardized
Simple Network Management Protocol, or SNMP, as well as command
line interface for network management.
Strategy
Our mission is to become the leading provider of high speed data communications
solutions to service providers who utilize the existing copper wire
infrastructure to deliver high speed data access to small to medium sized
businesses, MTUs and other organizations. The principal elements of our strategy
are to:
- PROVIDE AN INTEGRATED SOLUTION. In contrast to our competitors'
products which require purchasing multiple discrete components, our
DSLAR products provide an integrated system which reduces the total
cost of ownership.
- ACHIEVE BROAD MARKET PENETRATION. We intend to increase our market
penetration through expanding our direct sales channel and
establishing indirect sales channels to market our products. We
intend to develop strategic relationships with OEMs and VARs to
expand our ability to further penetrate our selected target
markets.
- DEVELOP LONG TERM CUSTOMER RELATIONSHIPS. Our sales and support
strategy is to partner with our customers to meet their long-term
needs. To achieve this, our teams of experienced sales
professionals, sales engineers and technical support staff will
work closely with our customers to provide pre- and post-sale
service, including joint sales presentations and cooperative trade
show activities. In addition, we intend to implement formal
training programs for our sales and technical support staff to
ensure a high level of customer satisfaction.
- ESTABLISH AN INTERNATIONAL PRESENCE. The international markets,
particularly Europe and the Pacific Rim, offer a significant
opportunity for our products. We intend to take a number of steps
to expand internationally. We have and will continue to design our
products to comply with regulatory standards of international
markets. Additionally, we are currently exploring international
partnerships in Europe and the Pacific Rim to establish direct
sales and original equipment manufacturer and value added reseller
relationships.
- MAINTAIN TECHNOLOGICAL AND PRODUCT LEADERSHIP. Our products enable
service providers to offer high speed data access to their
customers, especially small and medium sized businesses, MTUs and
other organizations. We expect these markets to grow rapidly and
their specific requirements to evolve over time. We believe our
single, integrated DSLAR products provides us with a significant
technological leadership position in the high
28
<PAGE>
speed data access market. We intend to maintain and leverage this
technological leadership by continuing to add functionality to and
increase the performance of our products. In addition, we intend to
monitor the evolving requirements of service providers and their
customers to incorporate their needs into our product development
process.
Products
INTERSPEED 1000 AND INTERSPEED 500 DSL ACCESS ROUTER
Our DSLARs represent a new generation of carrier class remote access
equipment. The Interspeed 1000/500 DSLARs combine all the functionality required
to provide high speed data access service on a single platform. Our DSLARs
include the line interfaces or modems, data aggregation and statistical
multiplexing and Layer 2 and 3 switching and routing, as well as a packet- or
cell-based backbone interface. The Interspeed 1000/500 DSLARs can operate as a
fully functional router supporting industry standard protocols. The entire
system is enhanced by our full featured administration and management software,
SpeedView, that incorporates a web server to provide a browser based interface.
SCALABILITY AND DENSITY
The Interspeed 1000/500 provides a scalable and flexible architecture that
incorporates a backplane capable of handling several billion bits per second.
The Interspeed 1000 is NEBS compliant. NEBS, or Network Equipment Building
Specifications, is a set of standards to which all equipment to be deployed in
telephone company central offices must conform. The Interspeed 1000 is a 14 slot
chassis housing 12 line modules capable of supporting a total of 192 DSL ports.
Each DSL port supports symmetrical data rates of up to 2.32 Mbps using a single
copper wire pair. The chassis accepts two switch modules to provide a fully
redundant switching and routing system. Each switch module provides five
Ethernet ports. The Interspeed 500 is identical to the Interspeed 1000 except it
offers a four slot chassis that accepts three line modules and one switch module
to support a total of 48 DSL ports.
CURRENTLY AVAILABLE HARDWARE MODULES
- LM02. This is our second generation line module that replaces the
first generation LM01 module. This module supports a total of 16
ports of SDSL. Each port can be individually configured to operate
at one of several speeds ranging from 192 Kbps to 2.3 Mbps.
- SM01. This is our Ethernet based switch/router module. The SM01 has
five Ethernet ports. This module operates as a full featured IP
router and supports industry standard protocols including RIP/RIP2
and OSPF. Alternatively, it can be configured to operate as a Layer
2 switch.
- SM02. This module is identical to SM01 except it has one fiber
optic Ethernet port.
- MM. The Media Module provides enhanced serviceability by allowing
customers to replace line modules without disturbing the DSL
wiring.
VIRTUAL PRIVATE NETWORKS
The Interspeed 1000/500 DSLARs are designed to support VPNs. This allows the
service provider to configure multiple secure networks within the same chassis.
Each system supports up to 32 VPNs where a VPN may consist of any group of
physical ports or logical ports such as a virtual channel on an ATM port. The
data received on one port will only be delivered to other ports within the same
VPN. Each of the VPNs may implement a different routing or switching mode.
Administrative security can be applied such that a user looking for network
information can only view information pertinent to the VPN of which the user is
a part.
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DEVICE MANAGEMENT/SPEEDVIEW
The Interspeed 1000/500 provides a powerful set of administration and
management functions. Three different methods are available to manage the
system. Interspeed conforms to the SNMP to support dedicated network management
software platforms. SpeedView is a management interface using a web server,
which enables complete system management and configuration from a commercially
available browser.
A complete DSLAR contains at a minimum one Interspeed 1000 or 500 chassis, one
SM01 or SM02 switch/router module, one LM02 line module and one Media Module. An
example of our DSLAR is set forth below.
[Diagram indicating internal layout of our DSLAR architecture.]
Interspeed DSLAR Architecture
Customers
Our customers consist of original equipment manufacturers and value added
resellers and system integrators. Aggregate sales to our two largest customers
accounted for approximately 92% of our total revenues for the six months ended
March 31, 1999. Of these, Cabletron Systems, Inc. accounted for approximately
79% of total sales and Nissho Iwai accounted for approximately 13% of our total
sales.
Sales and Marketing
We have a direct sales force headquartered in North Andover, Massachusetts, with
senior regional sales managers covering the West, Midwest, South and East
regions of the United States. Each sales region is supported by sales engineers
that provide technical support to our sales force and customers. As of June 1,
1999, we had a total of eight employees in direct sales, marketing and sales
engineering in the United States, and are in the process of recruiting
additional sales personnel. The direct sales force is responsible for
establishing relationships with key accounts within each territory. Key accounts
are generally classified as data service providers, such as the RBOCs/ILECs,
CLECs, ISPs, or as original equipment manufacturers, value added resellers and
system integrators.
We have also initiated marketing activities in Europe and the Pacific Rim. These
efforts include the signing of Nexcomm as our Korean distributor, commissioning
market studies in Europe and in Japan in order to generate leads and contacts,
and actively recruiting regional sales managers to cover international markets.
In addition to our customer specific efforts, our marketing activities include
attendance at industry trade shows and conferences, advertising of our products
in industry trade journals, operating a web site, and ongoing communications
with potential customers, industry analysts and the trade press.
Customer Service and Support
We employ teams of experienced sales professionals, sales engineers and
technical support staff that provide pre- and post-sales support including
installation and technical assistance. Our sales and support staff also
participate in and provide support for joint sales presentations and cooperative
trade show activities with our customers. Our support services are available to
our customers both on site and by telephone and remote access seven days a week
on a 24-hour a day basis. In order to achieve current and long term customer
satisfaction, our sales and support staff provide customer feedback to our
product design engineers to ensure that we satisfy our customers' evolving
requirements.
Warranties on our products extend for 12 months. We have a variety of hardware
maintenance and support programs tailored to our customers' specific
requirements which are available for products no
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<PAGE>
longer under warranty. These programs vary from agreements to provide service on
a time and materials basis to annual service contracts based on a percentage of
the cost of the product. To date, revenues attributable to customer service and
support services have been immaterial.
Research and Development
As of June 1, 1999 our research and development team included 28 qualified
engineers with data communication industry experience. Our research and
development team transitioned the Interspeed 1000/500 products from the product
definition stage to final beta testing in only 18 months and continues to
develop enhancements to, and extensions of, that product family. During the
fiscal years ended September 30, 1997 and 1998 and the six months ended March
31, 1999, we spent approximately $878,000, $3.2 million, and $2.4 million
respectively, on research and development.
Competition
The DSL equipment market is in its early stage of development and no market
participant has yet achieved a competitively significant installed base or
market following.
Our competitors are generally divided into two segments. One segment focuses on
selling equipment to data communication service providers that target the
business user end market. The other segment focuses on selling equipment to data
communication service providers that target the MTU market. Generally, customers
must purchase and interconnect individual equipment components from numerous
suppliers to achieve the functionality of our DSLAR products. We compete
directly with Ascend Communications, Inc., which was recently acquired by Lucent
Technologies Inc., Copper Mountain Networks, Inc.; Diamond Lane, which was
recently acquired by Nokia, Inc.; Paradyne Networks, Inc. and Tut Systems, Inc.
The principal competitive factors in our market include:
- system reliability, performance and features;
- technical support and customer service;
- ease of installation and use;
- total cost of ownership;
- size and stability of operations; and
- brand recognition.
Manufacturing
We currently outsource the majority of our manufacturing to contract
manufacturers. We currently perform final test, assembly and packaging of our
products at our facility in North Andover, Massachusetts. We use a small number
of independent manufacturers to manufacture printed circuit boards, chassis and
subassemblies for our products. In addition, we use a combination of standard
parts and components in our products, which are generally available from more
than one vendor. Some components are obtained from a sole or single source and,
should supply of these components cease, would require redesign of our products.
While we work closely with some well established vendors, we have no supply
commitments from our vendors and we generally purchase components on a purchase
order basis, rather than entering into long term agreements with our vendors. To
date, we have generally been able to obtain adequate supplies in a timely manner
from our current suppliers. We have identified alternate vendors should current
vendors be unable to fulfill our needs. However, a reduction or interruption in
supply or a significant increase in the price of components would materially and
adversely affect our business, financial condition and results of operations.
Our manufacturing floor follows industry standard electro-static discharge
procedures and we use a materials resource system to control product flow. Our
product is built to meet or exceed current
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<PAGE>
Institute for Interconnecting and Packaging Electronic Circuits, or IPC,
standards. We have designed our manufacturing processes and business practices
to conform to ISO 9000 standards and we intend to apply for ISO 9000
certification.
Quality control and quality assurance are carefully monitored. Key metrics which
we measure include supplier on-time delivery, inventory level, order to delivery
time and customer installation failure rate. All metrics are measured, tracked
and improved through root cause failure analysis, containment and corrective
action implementation.
Intellectual Property
We rely on a combination of copyright, trademark, trade secret and other
intellectual property laws, nondisclosure agreements with our employees and
third parties and other protective measures to protect our proprietary rights.
We have filed a patent application covering aspects of the design of our single
platform DSL hardware solution. We do not yet have any issued patents, and it is
unclear whether any patents will be issued in the future. Although we employ a
variety of intellectual property assets in the development and manufacturing of
our products, we believe that none of such intellectual property is individually
critical to our current operations. Although we are not aware that our products
infringe on the proprietary rights of third parties, there can be no assurance
that others will not assert claims of infringement in the future or that, if
made, such claims will not be successful. Litigation to determine the validity
of any claims, whether or not such litigation is determined in favor of us,
could result in significant expense and divert our efforts from daily
operations. In the event of any adverse ruling, we may be required to pay
substantial damages, discontinue the sale of infringing products, expend
significant resources to develop non-infringing technology or obtain licenses to
use infringing or substituted technology. From time to time, we may desire or be
required to renew or to obtain licenses from others in order to further develop
and market our products effectively. There can be no assurance that any
necessary licenses will be available on commercially reasonable terms.
Employees
As of June 1, 1999, we had 45 full time employees. We are not a party to any
collective bargaining agreements covering any of our employees, have never
experienced any material labor disruption and are unaware of any current efforts
or plans to organize our employees. We consider our relationships with our
employees to be good.
Facilities
We are headquartered in a facility consisting of approximately 36,000 square
feet in North Andover, Massachusetts, under a lease expiring in 2004. We have an
engineering office in Richardson, Texas, where we lease 3,208 square feet under
a lease expiring in January 2001. We anticipate opening additional regional
sales offices in the future as we increase the size of our sales force and
expand our sales and marketing initiatives.
Legal Proceedings
We are not currently involved in any pending legal proceedings that are expected
to have a material adverse effect on our business.
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<PAGE>
MANAGEMENT
Executive Officers, Key Employees and Directors
Our executive officers, key employees and directors, their ages and their
positions as of June 17, 1999, are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ----------------------------------------- --- ------------------------------------------------------
<S> <C> <C>
Stephen A. Ide........................... 55 President and Director
William J. Burke......................... 54 Chief Financial Officer, Senior Vice President-Finance
and Treasurer
Rajeev Agarwal........................... 39 Chief Technology Officer and Senior Vice
President-Research and Development and Director
Christopher P. Whalen.................... 37 Vice President--Sales and Marketing
Eric R. Giler (1)(2)..................... 43 Director
Robert G. Barrett (1)(2)................. 54 Director
Paul J. Severino (1)(2).................. 52 Director
</TABLE>
- ------------------------------------
(1) Member of the compensation committee.
(2) Member of the audit committee.
STEPHEN A. IDE has served as our President since January 1997. Mr. Ide has
served as a director since October 1996. Mr. Ide currently serves as Senior Vice
President of Brooktrout, Inc., our parent corporation. From January 1993 to
December 1996, Mr. Ide was Senior Vice President of Sales and Marketing for
Brooktrout and was Vice President of Sales and Marketing from 1987 to December
1992. Prior to joining Brooktrout, Mr. Ide was co-founder and President of
Computer Telephone Corp., currently CTC Communications, Inc., a publicly traded
CLEC. Mr. Ide also served as Vice President of Operations for Rolm of New
England Corporation.
WILLIAM J. BURKE has served as our Chief Financial Officer, Senior Vice
President-Finance and Treasurer since May 1999. Prior to joining Interspeed from
August 1998 to May 1999, Mr. Burke was the Vice President of Finance and
Administration and Chief Financial Officer of Teloquent Communications
Corporation, a privately held company and provider of software, hardware and
services for network-independent virtual call centers. From 1996 to 1998, Mr.
Burke was the Director of Telecommunications Banking at Tucker Anthony Cleary
Gull. From 1988 to 1996, Mr. Burke was at Boston Technology, a worldwide
provider of voice messaging and telecommunications equipment for enhanced
service and network based providers. He was Boston Technology's first Vice
President of Finance and Chief Financial Officer and helped manage its global
expansion and 1990 public offering. Mr. Burke is a member of the Board of
Directors and the Executive Committee of the Massachusetts Telecommunications
Council.
RAJEEV AGARWAL has served as our Chief Technology Officer and Senior Vice
President--Research and Development since 1997. Mr. Agarwal has served as a
director since March 1997. Prior to co-founding Interspeed, Mr. Agarwal worked
at Cabletron Systems from July 1987 to March 1997 where he established several
research and development programs to deliver new products including cable modems
and products incorporating 10BaseT, FDDI and ATM technologies.
CHRISTOPHER P. WHALEN has served as our Vice President--Sales and Marketing
since January 1999. He had previously been National Sales Manager since January
1998. Prior to joining Interspeed, Mr. Whalen worked in numerous sales and sales
management positions at Brooktrout from 1990 to 1998, including Western Regional
Sales Manager from 1995 to 1997 and Major Account Sales Manager from 1992 to
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<PAGE>
1995. Mr. Whalen worked for Dictaphone Corporation from 1986 to 1990 as Sales
Manager and in other sales capacities.
ERIC R. GILER has served as a director since October 1996. Mr. Giler co-founded
Brooktrout in 1984 and has served as President and a director of Brooktrout
since Brooktrout's inception. Mr. Giler is Chairman of the Massachusetts
Telecommunications Council. Mr. Giler also serves as a director of Netegrity,
Inc. and of various privately-held technology companies.
ROBERT G. BARRETT has served as a director since June 1999. Mr. Barrett has been
a general partner of Battery Ventures, L.P. since 1984. Mr. Barrett currently
serves as a director of Brooktrout and Peerless Systems Corp. Mr. Barrett also
serves as a director of various privately held technology companies.
PAUL J. SEVERINO has served as a director since June 1999. Mr. Severino has been
Chairman of the Board of NetCentric Corp. since 1998. From 1994 to 1998, Mr.
Severino was Chairman of the Board of Bay Networks. From 1986 to 1994, Mr.
Severino was President and Chief Executive Officer of Wellfleet Communications.
Mr. Severino also serves as a director of Media 100, Inc. and SilverStream, Inc.
Each officer serves at the discretion of the board of directors and holds office
until his or her successor is elected and qualified or until his or her earlier
resignation or removal. There are no family relationships among any of our
directors or executive officers.
Staggered Board
The number of directors is currently fixed at five. The board of directors is
divided into three classes, each of whose members will serve for a staggered
three-year term. The board of directors consists of two Class I directors, Eric
R. Giler and Rajeev Agarwal, whose term will expire at the annual meeting held
in 2000, two Class II directors, Robert G. Barrett and Stephen A. Ide, whose
terms will expire at the annual meeting held in 2001, and one Class III
director, Paul J. Severino, whose term will expire at the annual meeting held in
2002.
Committees of the Board of Directors
AUDIT COMMITTEE. The audit committee is responsible for recommending to the
board of directors the engagement of our outside auditors and reviewing our
accounting controls and the results and scope of audits and other services
provided by our auditors. The members of the audit committee are Robert G.
Barrett, Eric R. Giler and Paul J. Severino.
COMPENSATION COMMITTEE. The compensation committee is responsible for reviewing
and approving the amount and type of consideration to be paid to senior
management. The members of the compensation committee are Robert G. Barrett,
Eric R. Giler and Paul J. Severino. The compensation committee also serves as
the option committee under the 1999 Stock Option and Grant Plan.
OTHER COMMITTEES. The board of directors may establish, from time to time,
other committees to facilitate the management of our business.
Director Compensation
On the fifth day following their election to the board, Robert G. Barrett
received a non-qualified option under the 1999 Stock Option and Grant Plan for
30,000 shares, of which 22,500 vested upon grant and 7,500 will vest quarterly
over the final two quarters of his two year term, and Paul J. Severino received
a non-qualified option under the 1999 Stock Option and Grant Plan for 45,000
shares, of which 22,500 shares vested upon grant and 22,500 will vest quarterly
over the final six quarters of his three year term. In the future, each
director, who is neither an employee of Interspeed nor Brooktrout, will receive,
upon
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<PAGE>
election to the board, an option under the 1999 Stock Option and Grant Plan for
45,000 shares that will vest quarterly during each director's three year term.
Compensation Committee Interlocks and Insider Participation
Before June 1999, we did not have a compensation committee or similar committee
of the board of directors, and the then directors Messrs. Giler, Ide and Agarwal
each participated in deliberation of our board of directors concerning executive
officer compensation. In June 1999, the compensation committee of the board of
directors consisting of Robert G. Barrett, Eric R. Giler and Paul J. Severino,
was established. The Compensation Committee reviews and makes recommendations to
the board of directors regarding the compensation for senior management and key
employees of Interspeed.
Executive Compensation
The following table sets forth in summary form the compensation that was paid to
our President and the other most highly compensated executive officers whose
aggregate compensation exceeded $100,000 in the fiscal year ended September 30,
1998.
Summary Compensation Table
<TABLE>
<CAPTION>
1998
Fiscal Year Long-Term
Compensation Compensation
---------------------- -------------
<S> <C> <C> <C> <C>
Securities
Underlying All
Options/ Other
Salary Bonus SARs Compensation
---------- ---------- ------------- ---------------
Stephen A. Ide............................................ $ 167,500 $ 112,979 -- $ 2,323(1)
President
Rajeev Agarwal............................................ $ 110,000 $ 32,500 20,000 $ 2,400(1)
Chief Technology Officer and Senior Vice
President-Research and Development
Christopher P. Whalen..................................... $ 112,500 -- 40,000 $ 2,400(1)
Vice President-Sales and Marketing
</TABLE>
- ------------------------------------
(1) Includes a matching contribution under our 401(k) plan.
Option Grants in Last Fiscal Year.
The following table sets forth information regarding stock options granted
during fiscal year 1998 to our President and the other most highly compensated
executive officers. The exercise price per share of each option is equal to the
fair market value of the common stock as of the grant date.
The amounts shown as potential realizable value illustrate what might be
realized upon exercise immediately prior to expiration of the option term using
the 5% and 10% appreciation rates, compounded annually, as mandated by the SEC.
The potential realizable value is not intended to predict future appreciation of
the price of our common stock. The values shown do not consider
nontransferability, vesting or termination of the options upon termination of an
employee's employment relationship with us.
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<PAGE>
Option Grants In Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable
Value
at Assumed
Annual
Rates of
Individual Grants Stock
------------------------------------------------------- Price
Number of Percent of Total Appreciation
Securities Options Exercise for Option
Underlying Granted to or Base Term
Options Employees in Price Expiration -------------
Name Granted(#) Fiscal Year(1) ($/Sh) Date 5%($)
- ------------------------------------------------- ----------- ----------------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Stephen A. Ide................................... -- -- -- -- --
Rajeev Agarwal................................... 20,000 5.2% $ .13 07/01/08 --
Christopher P. Whalen............................ 40,000 10.5% $ .13 02/19/08 --
<CAPTION>
Name 10%($)
- ------------------------------------------------- -------------
<S> <C>
Stephen A. Ide................................... --
Rajeev Agarwal................................... --
Christopher P. Whalen............................ --
</TABLE>
- ------------------------------------
(1) Based on total of 381,600 options granted in fiscal 1998.
Option Exercises and Fiscal Year-End Option Holdings and Values.
The following table sets forth information concerning the number and value of
unexercised options to purchase common stock held by our President and the other
most highly compensated executive officers. The President and the named
executive officers did not exercise any stock options during fiscal year 1998.
There was no public trading market for our common stock as of September 30,
1998.
Aggregate Option Exercises and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options
Options at September 30, at September 30, 1998 ($)
1998 (1)
-------------------------- ---------------------------
<S> <C> <C> <C> <C>
Name Exercisable Unexercisable Exercisable Unexercisable
- --------------------------------------------------- ----------- ------------- ------------ -------------
Stephen A. Ide(2).................................. -- -- -- --
Rajeev Agarwal(3).................................. 120,667 299,332 $ 1,327,337 $ 3,292,652
Christopher P. Whalen(4)........................... 5,333 34,667 $ 58,663 $ 381,337
</TABLE>
- ------------------------------------
(1) The value of the unexercised in-the-money options was calculated using the
$11 midpoint of the range for the initial public offering price.
(2) Mr. Ide was granted 300,000 options on May 15, 1999 at an exercise price of
$.13 per share. As of June 30, 1999, using the $11 midpoint of the range for
the initial public offering price, the value of Mr. Ide's 120,000
exercisable shares was $1,320,000 and the value of his 180,000 unexercisable
shares was $1,980,000.
(3) Mr. Agarwal was granted 20,000 options on October 1, 1998 and on December
30, 1998, with all 40,000 options at an exercise price of $.13 per share,
and 20,000 options on March 31, 1999 at an exercise price of $.67 per share.
As of June 30, 1999, using the $11 midpoint of the range for the initial
public offering price, the value of Mr. Agarwal's 6,000 exercisable options
was $66,000 and the value of his 54,000 unexercisable options was $594,000.
(4) Mr. Whalen was granted 40,000 options on December 30, 1998 at an exercise
price of $.13 per share. As of June 30, 1999, using the $11 midpoint of the
range for the initial public offering price, the value of Mr. Whalen's 4,000
exercisable options was $44,000 and the value of his 36,000 unexercisable
options was $396,000.
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<PAGE>
Stock Plans
1999 STOCK OPTION AND GRANT PLAN
Our 1999 Stock Option and Grant Plan (the "1999 Stock Plan") was initially
adopted by our board of directors and approved by our stockholders in May 1999.
The 1999 Stock Plan permits us to make grants of:
- incentive stock options;
- non-qualified stock options;
- stock appreciation rights;
- restricted stock;
- deferred stock awards;
- unrestricted stock;
- performance share awards; and
- dividend equivalent rights.
The 1999 Stock Plan provides for the issuance of up to 1,012,868 shares of
common stock, of which 937,868 shares of common stock are available for future
grants.
To ensure that certain awards granted to the top five named executive officers
under the 1999 Stock Plan qualify as "performance-based compensation" under
Section 162(m) of the Internal Revenue Code of 1986, or the Code, the 1999 Stock
Plan provides that a committee of not less than two independent directors may
require that the vesting of such awards be conditioned on the satisfaction of
performance criteria which may include any or all of the following: (i) our
return on equity, assets, capital or investment; (ii) pre-tax or after-tax
profit levels of us or any subsidiary, division, operating unit or business
segment thereof, or any combination of the foregoing; (iii) cash flow, funds
from operations or similar measures; (iv) total stockholder return; (v) changes
in the market price of our common stock; (vi) sales or market share; or (vii)
earnings per share. The committee will select the particular performance
criteria within 90 days following the commencement of a performance cycle. To
satisfy the requirements of Section 162(m) of the Code, stock options and stock
appreciation rights with respect to no more than 250,000 shares of common stock
(subject to adjustment for stock splits and similar events) may be granted to
any one individual during any one calendar year period. In addition, the maximum
award of restricted stock, performance shares or deferred stock (or combination
thereof) for any one individual that is intended to qualify as
"performance-based compensation" under Section 162(m) of the Code will not
exceed 250,000 shares of common stock (subject to adjustment for stock splits
and similar events) for any performance cycle.
1999 STOCK PLAN ADMINISTRATION. The 1999 Stock Plan provides for administration
by a committee of not fewer than two non-employee directors, as appointed by the
board of directors from time to time (the "Option Committee"). Our compensation
committee serves as our Option Committee.
The Option Committee has full power to select, from among the employees eligible
for awards, the individuals to whom awards will be granted, to make any
combination of awards to participants, and to determine the specific terms and
conditions of each award, subject to the provisions of the 1999 Stock Plan. The
Option Committee may not reprice outstanding options, other than to
appropriately reflect changes in our capital structure. The Option Committee may
permit common stock, and other amounts payable pursuant to an award, to be
deferred. In such instances, the Option Committee may permit interest, dividend
or deemed dividends to be credited to the amount of deferrals.
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<PAGE>
ELIGIBILITY AND LIMITATIONS ON GRANTS. All officers, employees, directors and
key persons (including consultants and prospective employees) of Interspeed are
eligible to participate in the 1999 Stock Plan, subject to the discretion of the
Option Committee. In no event may any one participant receive options to
purchase more than 250,000 shares of common stock (subject to adjustment for
stock splits and similar events) during any one calendar year period, as stated
above. In addition, as stated above, the maximum award for any one individual
that is intended to qualify as "performance-based compensation" under Section
162(m) of the Code will not exceed 250,000 shares of common stock (subject to
adjustment for stock splits and similar events) for any performance cycle.
STOCK OPTIONS. Options granted under the 1999 Stock Plan may be either
Incentive Stock Options ("Incentive Options") within the definition of Section
422 of the Code or Non-Qualified Stock Options ("Non-Qualified Options").
Options granted under the 1999 Stock Plan will be Non-Qualified Options if they
(i) fail to meet the definition of Incentive Options, (ii) are granted to a
person not eligible to receive Incentive Options under the Code, or (iii)
otherwise so provide. Incentive Options may be granted only to officers or other
employees of the Company. Non-Qualified Options may be granted to persons
eligible to receive Incentive Options and to non-employee directors and other
key persons.
OTHER OPTION TERMS. The Option Committee has authority to determine the terms
of options granted under the 1999 Stock Plan. Generally, Incentive Options and
Non-Qualified Options are granted with an exercise price that is not less than
the fair market value of the shares of common stock on the date of the option
grant. However, Non-Qualified Options which are granted in lieu of a
participant's cash bonus, at the participant's election with the consent of the
Committee, will have an exercise price that is not less than 85 percent of the
fair market value of the shares of common stock on the date of the option grant.
The exercise price of an option may not be reduced after the date of the option
grant, other than to appropriately reflect changes in our capital structure.
The term of each option will be fixed by the Option Committee and may not exceed
ten years from date of grant. The Option Committee will determine at what time
or times each option may be exercised and, subject to the provisions of the 1999
Stock Plan, the period of time, if any, after retirement, death, disability or
termination of employment during which options may be exercised. Options may be
made exercisable in installments, and the exercisability of options may be
accelerated by the Option Committee. In general, unless otherwise permitted by
the Option Committee, no option granted under the 1999 Stock Plan is
transferable by the optionee other than by will or by the laws of descent and
distribution, and options may be exercised during the optionee's lifetime only
by the optionee, or by the optionee's legal representative or guardian in the
case of the optionee's incapacity.
Options granted under the 1999 Stock Plan may be exercised for cash or, if
permitted by the Option Committee, by transfer to us, of shares of common stock
which are not then subject to restrictions under any of our stock plans, which
have been held by the optionee for at least six months or were purchased on the
open market, and which have a fair market value equivalent to the option
exercise price of the shares being purchased, or by compliance with certain
provisions pursuant to which a securities broker delivers the purchase price for
the shares to us.
At the discretion of the Option Committee, stock options granted under the 1999
Stock Plan may include a "re-load" feature pursuant to which an optionee
exercising an option by the delivery of shares of common stock would
automatically be granted an additional stock option (with an exercise price
equal to the fair market value of the common stock on the date the additional
stock option is granted) to purchase that number of shares of common stock equal
to the number delivered to exercise the original stock option. The purpose of
this feature is to enable participants to maintain their equity interest without
dilution.
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<PAGE>
To qualify as Incentive Options, options must meet additional Federal tax
requirements, including a $100,000 limit on the value of shares subject to
Incentive Options which first become exercisable in any one calendar year, and a
shorter term and higher minimum exercise price in the case of large
stockholders.
TAX WITHHOLDING. Participants under the 1999 Stock Plan are responsible for the
payment of any federal, state or local taxes which we are required by law to
withhold upon any option exercise or vesting of other awards. Participants may
elect to have such tax withholding obligations satisfied either by authorizing
us to withhold shares of common stock to be issued pursuant to an option
exercise or other award, or by transferring to us shares of common stock having
a value equal to the amount of such taxes.
STOCK APPRECIATION RIGHTS. The Option Committee may award a stock appreciation
right ("SAR") either as a freestanding award or in tandem with a stock option.
Upon exercise of the SAR, the holder will be entitled to receive an amount equal
to the excess of the fair market value on the date of exercise of one share of
common stock over the exercise price per share specified in the related stock
option or, in the case of a freestanding SAR, the price per share specified in
such right, which price may not be less than the fair market value of the common
stock on the date of grant, multiplied by the number of shares of common stock
with respect to which the SAR is exercised. If the SAR is granted in tandem with
a stock option, exercise of the SAR cancels the related option to the extent of
such exercise.
RESTRICTED STOCK AWARDS. The Option Committee may grant shares, at par value or
for a higher purchase price determined by the Committee, of common stock to any
participant subject to such conditions and restrictions as the Option Committee
may determine. These conditions and restrictions may include the achievement of
pre-established performance goals and/or continued employment with us through a
specified vesting period. The vesting period shall be determined by the Option
Committee. The purchase price, if any, of shares of restricted stock will be
determined by the Option Committee. If the applicable performance goals and
other restrictions are not attained, the participant will forfeit his or her
award of restricted stock.
DEFERRED STOCK AWARDS. The Option Committee may also award phantom stock units
as deferred stock awards to participants. The deferred stock awards are
ultimately payable in the form of shares of common stock and may be subject to
such conditions and restrictions as the Option Committee may determine. These
conditions and restrictions may include the achievement of certain performance
goals and/or continued employment with us through a specified vesting period.
During the deferral period, subject to the terms and conditions imposed by the
Option Committee, the deferred stock awards may be credited with dividend
equivalent rights. Subject to the consent of the Option Committee, a participant
may make an advance election to receive a portion of his or her compensation or
restricted stock award otherwise due in the form of a deferred stock award.
UNRESTRICTED STOCK AWARDS. The Option Committee may also grant shares, at par
value or for a higher purchase price determined by the Option Committee, of
common stock which are free from any restrictions under the 1999 Stock Plan.
Unrestricted stock may be granted to any participant in recognition of past
services or other valid consideration, and may be issued in lieu of cash
compensation due to such participant.
DIVIDEND EQUIVALENT RIGHTS. The Committee may grant dividend equivalent rights
which entitle the recipient to receive credits for dividends that would be paid
if the recipient had held specified shares of common stock. Dividend equivalent
rights may be granted as a component of another award or as a freestanding
award. Dividend equivalent rights credited under the 1999 Stock Plan may be paid
currently or be deemed to be reinvested in additional shares of common stock,
which may thereafter accrue additional dividend equivalent rights at fair market
value at the time of deemed reinvestment or on the terms then governing the
reinvestment of dividends under a dividend reinvestment plan, if any. Dividend
equivalent rights may be settled in cash, shares of common stock or a
combination thereof, in a single
39
<PAGE>
installment or installments, as specified in the award. Awards under the 1999
Stock Plan that are payable in cash on a deferred basis may provide for
crediting and payment of interest equivalents.
PERFORMANCE SHARE AWARDS. The Option Committee may grant performance share
awards to any participant which entitle the recipient to receive shares of
common stock upon the achievement of individual or company performance goals and
such other conditions as the Option Committee shall determine.
ADJUSTMENTS FOR STOCK DIVIDENDS, MERGERS, ETC. The 1999 Stock Plan authorizes
the Option Committee to make appropriate adjustments to the number of shares of
common stock that are subject to the 1999 Stock Plan and to any outstanding
stock options to reflect stock dividends, stock splits and similar events. In
the event of certain transactions, such as a merger, consolidation, dissolution
or liquidation, the Option Committee in its discretion may provide for
appropriate substitutions or adjustments of outstanding stock options or SARs;
alternatively, outstanding stock options and SARs will terminate and the holder
will receive a cash payment equal to the excess of the fair market value per
share over the applicable exercise price, multiplied by the number of shares of
common stock covered by the stock option or SAR.
ACCELERATION UPON A MERGER, SALE OR CHANGE OF CONTROL OF INTERSPEED. Upon a
merger, sale or change of control of the Company, all outstanding awards to
executive officers and directors will immediately become exercisable.
AMENDMENTS AND TERMINATION. The board of directors may at any time amend or
discontinue the 1999 Stock Plan and the Option Committee may at any time amend
or cancel any outstanding award for the purpose of satisfying changes in law or
for any other lawful purpose, but no such action shall adversely affect the
rights under any outstanding awards without the holder's consent. To the extent
required by the Code to ensure that options granted under the 1999 Stock Plan
qualify as Incentive Options, 1999 Stock Plan amendments shall be subject to
approval by our stockholders.
1999 EMPLOYEE STOCK PURCHASE PLAN
Our 1999 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by our
board of directors in May 1999 and was subsequently approved by our
stockholders. Up to 200,000 shares of common stock may be issued under the
Purchase Plan. The Purchase Plan is administered by the compensation committee
of the board of directors.
The first offering under the Purchase Plan will begin on the effective date of
Interspeed's first underwritten public offering and end on March 31, 2000.
Subsequent offerings will commence on each October 1 and April 1 thereafter and
will have a duration of six months. Generally, all employees who are customarily
employed for more than 20 hours per week as of the first day of the applicable
offering period will be eligible to participate in the Purchase Plan. An
employee who owns or is deemed to own shares of stock representing in excess of
5% of the combined voting power of all classes of our stock will not be able to
participate in the Purchase Plan.
During each offering, an employee may purchase shares under the Purchase Plan by
authorizing payroll deductions of up to 10% of his or her cash compensation
during the offering period. The maximum number of shares which may be purchased
by any participating employee during any offering period is limited to the
number of whole shares which is less than or equal to $12,500 divided by the
closing price (offering price to the public with respect to the initial offering
period) per share on the first day of the applicable offering period. Unless the
employee has previously withdrawn from the offering, his or her accumulated
payroll deductions will be used to purchase common stock on the last business
day of the period at a price equal to 85% of the fair market value of the common
stock on the first or last day of the offering period, whichever is lower. For
purposes of the initial offering period, the fair market value of common stock
on the first day of the offering period shall be the offering price to the
public. Under
40
<PAGE>
applicable tax rules, an employee may purchase no more than $25,000 worth of
common stock in any calendar year. No common stock has been issued to date under
the Purchase Plan.
Limitations on Directors' and Executive Officers' Liability and Indemnification
Our Certificate of Incorporation provides for the indemnification of directors
to the maximum extent permitted by Delaware law. Section 145 of the Delaware
General Corporation Law permits a corporation to include in its charter
documents, and in agreements between the corporation and its directors and
officers, provisions expanding the scope of indemnification beyond that
specifically provided by the current law.
Our bylaws provide that we shall indemnify our directors, officers, employees
and other agents to the fullest extent permitted by law. We believe that
indemnification under our bylaws covers at least negligence and gross negligence
on the part of the indemnified parties. Our bylaws also permit us to secure
insurance on behalf of any officer, director, employee or other agent for any
liability arising out of his or her actions in such capacity, regardless of
whether the bylaws permit such indemnification.
At present, we have no pending litigation or proceeding involving a director or
officer of Interspeed in which indemnification is required or permitted, and we
are not aware of any threatened litigation or proceeding that may result in a
claim for such indemnification.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial ownership of
common stock as of June 15, 1999 and as adjusted to reflect the sale of the
common stock offered hereby of:
- the President and each of our directors and most highly compensated
executive officers who were serving as executive officers at the
end of the last completed fiscal year;
- all directors and executive officers as a group; and
- each person who is known by us to own beneficially more than 5% or
more of the outstanding shares of the common stock, including
Brooktrout, Inc., the selling stockholder.
Unless otherwise indicated, each of the stockholders has sole voting and
investment power with respect to the shares of common stock beneficially owned
by such stockholder. The address of Brooktrout, Inc. is 410 First Avenue,
Needham, MA 02494.
The number of shares beneficially owned by each stockholder is determined under
rules issued by the Securities and Exchange Commission. The information is not
necessarily indicative of beneficial ownership for any other purpose. Under
these rules, beneficial ownership includes any shares as to which the individual
or entity has sole or shared voting power or investment power and any shares as
to which the individual or entity has the right to acquire beneficial ownership
within 60 days after June 15, 1999 through the exercise of any stock option or
other right. The inclusion in this prospectus of such shares, however, does not
constitute an admission that the named stockholder is a direct or indirect
beneficial owner of such shares.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Owned
Prior to the Offering After the Offering(1)
----------------------- Shares ---------------------
Name Number Percent(2) Offered Number Percent
- ------------------------------------------------------ ---------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Brooktrout, Inc....................................... 8,000,000 99.77% 1,500,000 6,500,000 65.00%
Rajeev Agarwal(3)..................................... 205,333 2.50% 205,333 2.01%
Stephen A. Ide(4)..................................... 120,000 1.47% 120,000 1.18%
Paul J. Severino(5)................................... 60,000 * 60,000 *
Robert G. Barrett(6).................................. 20,000 * 20,000 *
Christopher P. Whalen(7).............................. 18,000 * 18,000 *
Eric R. Giler......................................... -- --
All directors and executive officers as a group
(7 persons)......................................... 423,333 5.01% 423,333 4.05%
</TABLE>
- ------------------------------------
* Less than 1%
(1) Assumes the underwriters do not elect to exercise the over-allotment option
to purchase an additional 525,000 shares of common stock.
(2) Percentage ownership is based upon 8,018,132 shares of common stock issued
and outstanding as of June 15, 1999.
(3) Represents 205,333 shares of common stock which may be acquired upon the
exercise of options that are currently exercisable.
(4) Represents 120,000 shares of common stock which may be acquired upon the
exercise of options that are currently exercisable.
(5) Represents 60,000 shares of common stock which may be acquired upon the
exercise of options that are currently exercisable.
(6) Represents 20,000 shares of common stock which may be acquired upon the
exercise of options that are currently exercisable.
(7) Represents 18,000 shares of common stock which may be acquired upon the
exercise of options that are currently exercisable.
42
<PAGE>
CERTAIN TRANSACTIONS WITH RELATED PARTIES
Transition Services Agreement
Brooktrout has provided various services to us, including, but not limited to,
payroll, data processing, information technology and telecommunications, tax,
legal, treasury, human resources, accounts receivable management, order entry,
employee benefits administration, marketing, financial accounting, executive
services and insurance administration. Amounts reflected in our financial
statements as fees charged by Brooktrout reflect the cost of these services as
well as payments made by Brooktrout on our behalf for costs of providing
insurance and employee benefits, rent and occupancy costs, and other
out-of-pocket costs.
In connection with this offering, we have entered into a transition services
agreement with Brooktrout for the purposes of defining our ongoing relationship.
Under the transition services agreement, upon consummation of this offering
Brooktrout will make available to us generally until December 31, 1999 many of
the same services currently provided to us, and we will pay Brooktrout a
variable fee for such services based on the amount and type of services used.
This fee, generally payable monthly in arrears, has been determined by
Brooktrout and us to be consistent with the historical costs of providing these
services and adjusted to recognize certain additional services to be provided by
Brooktrout to us after the offering and certain other services historically
provided by Brooktrout which will be our responsibility to provide. In general,
payments to third parties for insurance, employee benefits and similar
out-of-pocket costs will be paid directly by us, and are not included within the
fee payable to Brooktrout. We believe that the fees charged by Brooktrout are
substantially equivalent to those that will be charged by third parties or the
cost of providing the services internally. We cannot provide any assurance,
however, that one or more third parties could not provide similar services for
fees aggregating less than the fee payable to Brooktrout, or that we may not
face increased costs after the expiration of the transitional services
agreement.
Affiliated Transactions
We have adopted a policy providing that all material transactions between us and
our officers, directors and other affiliates must (i) be approved by a majority
of the members of our board of directors and by a majority of the disinterested
members of our board of directors and (ii) be on terms no less favorable to us
than can be obtained from unaffiliated third parties. In addition, this policy
requires any loans by us to our officers, directors or other affiliates be for
bona fide business purposes only.
Brooktrout has heretofore funded our operations primarily through open advances.
On the closing of this offering, Brooktrout will cancel our outstanding
indebtedness in the amount of approximately $ as a contribution to
our capital, and without other consideration. Brooktrout will not provide any
further financing for us after the closing of this offering.
Stockholder Rights Agreement
Pursuant to a Stockholder Rights Agreement to be entered into in connection with
the transition services agreement, we agreed to provide Brooktrout with the
following registration rights for its shares of common stock:
- the right to demand on an unlimited number of occasions that we
register its shares of common stock under the Securities Act for
resale to the public;
- the right to piggyback on any registration by us of securities for
our account or the account of other stockholders and to include its
shares in the registration statement filed by us; and
43
<PAGE>
- the right, after we become eligible to use Form S-3, to require us
to register its shares on a Form S-3.
Brooktrout has agreed pursuant to a lock-up agreement not to sell or offer to
sell or otherwise dispose of any of its shares of common stock for a period of
180 days after the date of this prospectus without the prior written consent of
U.S. Bancorp Piper Jaffray.
Brooktrout is permitted to transfer its registration rights to transferees who
agree to be subject to the terms and conditions of the Stockholder Rights
Agreement.
The Stockholder Rights Agreement also provides for us to indemnify Brooktrout
against claims and liabilities, including claims and liabilities arising under
the securities laws.
The transactions identified above may not have been conducted on terms no less
favorable to us than could have been obtained from unaffiliated third parties.
We have adopted a conflict of interest policy in connection with the offering.
In the future, all transactions between any of our officers, directors and
Brooktrout and us will require the approval of the disinterested members of our
board of directors and will be on terms no less favorable to us than could be
obtained from unaffiliated third parties.
Part-Time Employment Agreement
Brooktrout and Stephen A. Ide entered into a letter agreement under which Mr.
Ide will be retained by Brooktrout as a part-time employee of Brooktrout. In
exchange for providing up to two hours of service per week advising Brooktrout's
chief executive officer upon his request with respect to strategic and
operational matters, Mr. Ide will receive $5,000 per year.
44
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Following the offering, our authorized capital stock will consist of 30,000,000
shares of common stock, $.01 par value per share, of which 10,018,132 will be
issued and outstanding; and 1,000,000 shares of undesignated preferred stock
issuable in one or more series designated by the board of directors, of which no
shares will be issued and outstanding.
Common Stock
VOTING RIGHTS
The holders of common stock have one vote per share. Holders of common stock are
not entitled to vote cumulatively for the election of directors. Generally, all
matters to be voted on by stockholders must be approved by a majority, or, in
the case of election of directors, by a plurality, of the votes entitled to be
cast at a meeting at which a quorum is present by all shares of common stock
present in person or represented by proxy, voting together as a single class,
subject to any voting rights granted to holders of any then outstanding
preferred stock. Except as otherwise provided by law, amendments to our
certificate of incorporation must be approved by a majority of the voting power
of the common stock.
DIVIDENDS
Holders of common stock will share ratably in any dividends declared by the
board of directors, subject to the preferential rights of any preferred stock
then outstanding. Dividends consisting of shares of common stock may be paid to
holders of shares of common stock.
OTHER RIGHTS
In the event of any merger or consolidation of Interspeed with or into another
company as a result of which shares of common stock are converted into or
exchangeable for shares of stock, other securities or property, including cash,
all holders of common stock will be entitled to receive the same kind and
amount, on a per share of common stock basis, of such shares of stock and other
securities and property, including cash. On liquidation, dissolution or winding
up of Interspeed, all holders of common stock are entitled to share ratably in
any assets available for distribution to holders of shares of common stock. No
shares of common stock are subject to redemption or have preemptive rights to
purchase additional shares of common stock.
Preferred Stock
Our board of directors is authorized to issue shares of preferred stock in one
or more series, to establish the number of shares in each series and to fix the
designation, powers, preferences and rights of each such series and the
qualifications, limitations or restrictions thereof, in each case, if any, as
are permitted by Delaware law and as the board of directors may determine by
adoption of an amendment of our charter, without any further vote or action by
our stockholders. Because our board of directors has the power to establish the
preferences and rights of each class or series of preferred stock, it may afford
the stockholders of any series or class of preferred stock preferences, powers
and rights, voting or otherwise, senior to the rights of holders of shares of
our common stock. The issuance of shares of preferred stock could have the
effect of delaying, deferring or preventing a change in control of Interspeed.
Options
As of June 15, 1999, Interspeed had outstanding options to purchase a total of
1,961,000 shares of common stock pursuant to the 1997 Stock Plan at a weighted
average exercise price of $.29 per share
45
<PAGE>
and had issued no options pursuant to the 1999 Stock Plan. Recommendations for
option grants under the 1997 Stock Plan and the 1999 Stock Plan are made by the
compensation committee. The compensation committee may issue options with
varying vesting schedules, but all options granted pursuant to the stock plans
must be exercised within ten years from the date of grant.
Registration Rights
Under the terms of the Stockholders Rights Agreement, Brooktrout has
registration rights for its shares of common stock. See "Certain Transactions
With Related Partners--Stockholder Rights Agreement."
Indemnification Matters
Our certificate of incorporation contains a provision permitted by Delaware law
that generally eliminates the personal liability of directors for monetary
damages for breaches of their fiduciary duty, including breaches involving
negligence or gross negligence in business combinations, unless the director has
breached his or her duty of loyalty, failed to act in good faith, engaged in
intentional misconduct or a knowing violation of law, paid a dividend or
approved a stock repurchase in violation of the Delaware General Corporation Law
or obtained an improper personal benefit. This provision does not alter a
director's liability under the federal securities laws and does not affect the
availability of equitable remedies, such as an injunction or rescission, for
breach of fiduciary duty. Our bylaws provide that directors and officers shall
be, and in the discretion of the board of directors, non-officer employees may
be, indemnified by us to the fullest extent authorized by Delaware law, as it
now exists or may in the future be amended, against all expenses and liabilities
reasonably incurred in connection with service for or on behalf of Interspeed.
The bylaws also provide that the right of directors and officers to
indemnification shall be a contract right and shall not be exclusive of any
other right now possessed or hereafter acquired under any bylaw, agreement, vote
of stockholders or otherwise. In addition, Interspeed's directors and officers
are entitled to indemnification under Brooktout's bylaws. We also have
directors' and officers' insurance against certain liabilities.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers or persons controlling Interspeed as
described above, we have been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable. At present, there is no pending material litigation
or proceeding involving any director, officer, employee or agent of Interspeed
in which indemnification will be required or permitted.
Amendment of the Certificate of Incorporation
Any amendment to our certificate of incorporation must first be approved by a
majority of the board of directors and thereafter approved by a majority of the
total votes eligible to be cast by holders of voting stock with respect to such
amendment.
Bylaw Provisions
Our bylaws provide that a special meeting of stockholders may be called only by
the board of directors unless otherwise required by law. Our bylaws provide that
only those matters included in the notice of the special meeting may be
considered or acted upon at that special meeting unless otherwise provided by
law. In addition, our bylaws include advance notice and informational
requirements and time limitations on any director nomination or any new proposal
which a stockholder wishes to make at an annual meeting of stockholders.
46
<PAGE>
Ability to Adopt Stockholder Rights Plan
The board of directors may in the future resolve to issue shares of preferred
stock or rights to acquire such shares to implement a stockholder rights plan. A
stockholder rights plan typically creates voting or other impediments to
discourage persons seeking to gain control of a company by means of a merger,
tender offer, proxy contest or otherwise if the board of directors determines
that such change in control is not in the best interests of the company and its
stockholders. The board of directors has no present intention of adopting a
stockholder rights plan and is not aware of any attempt to obtain control of
Interspeed.
Statutory Business Combination Provision
Following the offering, we will be subject to Section 203 of the Delaware
General Corporation Law, which prohibits a publicly held Delaware corporation
from consummating a "business combination," except under certain circumstances,
with an "interested stockholder" for a period of three years after the date such
person became an "interested stockholder" unless:
- before such person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved
the business combination;
- upon the closing of the transaction that resulted in the interested
stockholder's becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding shares held by directors who are also officers of the
corporation and shares held by employee stock plans; or
- following the transaction in which such person became an interested
stockholder, the business combination is approved by the board of
directors of the corporation and authorized at a meeting of
stockholders by the affirmative vote of the holders of 66 2/3% of
the outstanding voting stock of the corporation not owned by the
interested stockholder.
The term "interested stockholder" generally is defined as a person who, together
with affiliates and associates, owns, or, within the prior three years, owned,
15% or more of a corporation's outstanding voting stock. The term "business
combination" includes mergers, asset sales and other similar transactions
resulting in a financial benefit to an interested stockholder. Section 203 makes
it more difficult for an "interested stockholder" to effect various business
combinations with a corporation for a three year period. A Delaware corporation
may "opt out" of Section 203 with an express provision in its original
certificate of incorporation or an express provision in its certificate of
incorporation or bylaws resulting from an amendment approved by holders of at
least a majority of the outstanding voting stock. Neither our certificate of
incorporation nor our bylaws contains any such exclusion.
Trading on the Nasdaq National Market System
We have applied to have the common stock approved for quotation on the Nasdaq
National Market under the symbol "ISPD."
Transfer Agent and Registrar
The transfer agent and registrar for our common stock will be .
47
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common stock. No
prediction can be made as to the effect, if any, that sales of common stock or
the availability of common stock for sale will have on the market price of our
common stock. The market price of our common stock could drop due to sale of a
large number of shares of our common stock or the perception that such sales
could occur. These factors could also make it more difficult to raise funds
through future offerings of common stock.
After this offering, 10,018,132 shares of common stock will be outstanding. See
"Capitalization." Of these shares, the 3,500,000 shares sold in this offering
will be freely tradeable without restriction under the Securities Act except for
any shares purchased by "affiliates" of Interspeed as defined in Rule 144 under
the Securities Act. The remaining 6,518,132 shares of common stock are
"restricted securities" within the meaning of Rule 144 under the Securities Act.
The restricted securities generally may not be sold unless they are registered
under the Securities Act or are sold pursuant to an exemption from registration,
such as the exemption provided by Rule 144 under the Securities Act.
In connection with this offering, our existing officers, directors and
Brooktrout, who will own a total of 6,500,000 shares of common stock after the
offering, have entered into lock-up agreements pursuant to which they have
agreed not to offer or sell any shares of common stock for a period of 180 days
after the date of this prospectus without the prior written consent of U.S.
Bancorp Piper Jaffray, on behalf of the underwriters. See "Underwriting." U.S.
Bancorp Piper Jaffray may, however, in its sole discretion, at any time and
without notice, waive any of the terms of these lock-up agreements specified in
the underwriting agreement. Following the lock-up period, these shares will not
be eligible for sale in the public market without registration under the
Securities Act unless such sale meet the conditions and restrictions of Rule 144
as described below.
Beginning 180 days after the date of this prospectus or earlier with the prior
written consent of U.S. Bancorp Piper Jaffray, 6,500,000 shares and
shares issuable upon exercise of outstanding vested options will be
eligible for sale in the public market subject to Rule 144 and Rule 701 of the
Securities Act.
In general, under Rule 144 as currently in effect, any person or persons whose
shares are aggregated, including an affiliate of ours, who has beneficially
owned shares for a period of at least one year is entitled to sell, within any
three-month period, commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of:
- 1% of the then outstanding shares of common stock, which is
expected to be approximately shares upon the completion of
this offering, or
- the average weekly trading volume in the common stock during the
four calendar weeks immediately preceding the date on which the
notice of such sale on Form 144 is filed with the SEC.
Sales under Rule 144 are also subject to certain provisions relating to notice
and manner of sale and the availability of current public information about
Interspeed during the 90 days immediately preceding a sale. In addition, a
person who is not an affiliate of ours during the 90 days preceding a sale and
who has beneficially owned the shares proposed to be sold for at least two years
would be entitled to sell such shares under Rule 144(k) without regard to the
volume limitation and other conditions described above. The foregoing summary of
Rule 144 is not intended to be a complete description.
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<PAGE>
In general, in reliance upon Rule 144 but without compliance with certain
restrictions, including the holding period requirements, contained in Rule 144,
Rule 701 permits resales of shares issued pursuant to certain compensatory
benefit plans and contracts commencing 90 days after we become subject to the
reporting requirements of the Exchange Act. Prior to the expiration of the
lock-up agreement, Interspeed intends to register on a registration statement on
Form S-8:
- a total of up to 1,012,868 shares of common stock reserved for
future issuance pursuant to the 1999 Stock Plan; and
- a total of 200,000 shares of common stock reserved for future
issuance pursuant to the 1999 Purchase Plan.
The Form S-8 will permit the resale in the public market of shares so registered
by non-affiliates without restriction under the Securities Act.
We have agreed not to sell or otherwise dispose of any shares of common stock
during the 180 day period following the date of this prospectus, except we may
issue, and grant options to purchase, shares of common stock under the 1999
Stock Plan and 1999 Purchase Plan.
Following the offering, under specified circumstances and subject to customary
conditions, Brooktrout will have rights with respect to all of its shares of
common stock, subject to the 180 day lock-up arrangement, to require us to
register their shares of common stock under the Securities Act, and they will
have rights to participate in any future registrations of securities by us.
49
<PAGE>
UNDERWRITING
The underwriters named below, for whom U.S. Bancorp Piper Jaffray, Warburg
Dillon Read LLC, a subsidiary of UBS AG, Tucker Anthony Cleary Gull and
DLJdirect Inc. are acting as representatives, have agreed to buy, subject to the
terms of the underwriting agreement, the number of shares listed opposite their
names below. The underwriters are committed to purchase and pay for all of the
shares if any are purchased, other than those shares covered by the
over-allotment option described below.
<TABLE>
<CAPTION>
Number
Underwriters of Shares
- --------------------------------------------------------------------------------- ----------
<S> <C>
U.S. Bancorp Piper Jaffray Inc...................................................
Warburg Dillon Read LLC, a subsidiary of UBS AG..................................
Tucker Anthony Cleary Gull.......................................................
DLJdirect Inc....................................................................
----------
Total.................................................................... 3,500,000
----------
----------
</TABLE>
The underwriters have advised us that they propose to offer the shares to the
public at $ per share. The underwriters propose to offer the shares to
certain dealers at the same price less a concession of not more than $ per
share. The underwriters may allow and the dealers may reallow a concession of
not more than $ per share on sales to certain other brokers and dealers.
After the offering, these figures may be changed by the representatives.
The underwriters have reserved for sale at the initial offering price (i) up to
150,000 shares of common stock to persons associated with Interspeed and (ii) up
to 200,000 shares of common stock to Brooktrout's stockholders. Shares not sold
to these persons will be reoffered immediately by the underwriters to the public
at the initial public offering price. The underwriters do not intend to confirm
sales to any accounts over which they exercise discretionary authority.
Brooktrout has granted to the underwriters an option to purchase up to an
additional 525,000 ordinary shares at the same price to the public, and with the
same underwriting discount, as set forth above. The underwriters may exercise
this option at any time during the 30-day period after the date of this
prospectus, but only to cover over-allotments, if any. To the extent the
underwriters exercise the option, each underwriter will become obligated,
subject to certain conditions, to purchase approximately the same percentage of
the additional shares as it was obligated to purchase under the underwriting
agreement.
The following table shows the underwriting fees to be paid to the underwriters
and the expenses to be paid by us in connection with this offering. These
amounts are shown assuming both no exercise and full exercise of the
over-allotment option.
<TABLE>
<CAPTION>
Total
-------------------------
<S> <C> <C> <C>
Full
Per Share No Exercise Exercise
----------- ----------- ------------
Underwriting discounts and commissions................. $ $ $
Expenses............................................... $ $ $
</TABLE>
We have agreed to indemnify the underwriters against certain liabilities,
including civil liabilities under the Securities Act, or to contribute to
payments that the underwriters may be required to make in respect of those
liabilities.
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<PAGE>
We and each of our directors, executive officers and Brooktrout have agreed to
certain restrictions on our ability to sell additional ordinary shares for a
period of 180 days after the date of this prospectus. We have agreed not to
directly or indirectly offer, pledge, sell, offer to sell, contract to sell,
sell any option or contract to purchase, purchase any option to sell, or
otherwise transfer or dispose of, directly or indirectly, any ordinary shares,
or any securities convertible into, or exercisable or exchangeable for, ordinary
shares, without the prior written consent of U.S. Bancorp Piper Jaffray. The
agreements provide exceptions for our sales in connection with the exercise of
options granted and the granting of options to purchase shares under our
existing stock option plans and certain other exceptions. However, U.S. Bancorp
Piper Jaffray may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to the lock-up agreements.
As of the date of this prospectus, there are no agreements between the
representatives and any of our shareholders providing consent by the
representatives to the sales of ordinary shares prior to the expiration of the
lock-up period.
Prior to the offering, there has been no established trading market for the
ordinary shares. The initial public offering price for the ordinary shares
offered by this prospectus was negotiated by us and the underwriters. The
factors considered in determining the initial public offering price include the
history of and the prospects for the industry in which we compete, our past and
present operations, our historical results of operation, our prospects for
future earnings, the recent market prices of securities of generally comparable
companies and the general condition of the securities markets at the time of the
offering and other relevant factors. There can be no assurance that the initial
public offering price of the ordinary shares will correspond to the price at
which the ordinary shares will trade in the public market subsequent to this
offering or that an active public market for the ordinary shares will develop
and continue after this offering.
To facilitate the offering, the underwriters may engage in transactions that
stabilize, maintain or otherwise affect the price of the ordinary shares during
and after the offering. Specifically, the underwriters may over-allot or
otherwise create a short position in the ordinary shares for their own account
by selling more ordinary shares than have been sold to them by us. The
underwriters may elect to cover any such short position by purchasing ordinary
shares in the open market or by exercising the over-allotment option granted to
the underwriters. In addition, the underwriters may stabilize or maintain the
price of the ordinary shares by bidding for or purchasing shares of ordinary
shares in the open market and may impose penalty bids. If penalty bids are
imposed, selling concessions allowed to syndicate members or other
broker-dealers participating in the offering are reclaimed if ordinary shares
previously distributed in the offering are repurchased, whether in connection
with stabilization transactions or otherwise. The effect of these transactions
may be to stabilize or maintain the market price of the ordinary shares at a
level above that which might otherwise prevail in the open market. The
imposition of a penalty bid may also effect the price of the ordinary shares to
the extent that it discourages resales of the ordinary shares. The magnitude or
effect of any stabilization or other transactions is uncertain. These
transactions may be effected on the Nasdaq National Market or otherwise and, if
commenced, may be discontinued at any time.
51
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed upon
for Interspeed by Goodwin, Procter & Hoar LLP, Boston, Massachusetts. Certain
legal matters in connection with this offering will be passed upon for the
underwriters by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
EXPERTS
The financial statements as of September 30, 1997 and 1998, and for the period
October 23, 1996 (inception) to September 30, 1997 and the year ended September
30, 1998, included in this prospectus have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report appearing in this
prospectus, and are included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the SEC for the stock we
are offering by this prospectus. This prospectus does not include all of the
information contained in the registration statement. You should refer to the
registration statement and its exhibits for additional information. Whenever we
make reference in this prospectus to any of our contracts, agreements or other
documents, the references are not necessarily complete and you should refer to
the exhibits attached to the registration statement for copies of the actual
contract, agreement or other document. When we complete this offering, we will
also be required to file annual, quarterly and special reports, proxy statements
and other information with the SEC. We intend to furnish to our stockholders
annual reports containing audited financial statements for each fiscal year.
You can read our SEC filings, including the registration statement, over the
Internet at the SEC's web site at http://www.sec.gov. You may also read and copy
any document we file with the SEC at its public reference facilities at 450
Fifth Street, NW, Washington, DC 20549, 7 World Trade Center, Suite 1300, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. You may also obtain copies of the documents at
prescribed rates by writing to the Public Reference Section of the SEC at 450
Fifth Street, NW, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330
for further information on the operation of the public reference facilities. Our
SEC filings are also available at the office of the Nasdaq National Market. For
further information on obtaining copies of our public filings at the Nasdaq
National Market you should call (212) 656-5060.
52
<PAGE>
INTERSPEED, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Balance Sheets............................................................ F-3
Statement of Operations................................................... F-4
Statements of Stockholder's Equity (Deficit).............................. F-5
Statements of Cash Flows.................................................. F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Interspeed, Inc.
North Andover, MA
We have audited the accompanying balance sheets of Interspeed, Inc. as of
September 30, 1997 and 1998, and the related statements of operations,
stockholder's equity (deficit), and cash flows for the period from October 23,
1996 (inception) to September 30, 1997 and for the year ended 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at September 30, 1997 and 1998,
and the results of its operations and its cash flows for the period from October
23, 1996 (inception) to September 30, 1997 and for the year ended September 30,
1998.
Deloitte & Touche LLP
Boston, Massachusetts
May 14, 1999 (except for Note 10
as to which the date is June 18, 1999)
F-2
<PAGE>
Interspeed, Inc.
Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, Pro forma
-------------------- March 31, March 31,
1997 1998 1999 1999
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
(unaudited) (unaudited)
Assets
Current assets:
Cash............................................................ $ 21 $ 132 $ 61
Accounts receivable............................................. -- -- 347
Inventory....................................................... -- 587 436
Prepaid expenses and other...................................... 8 19 315
--------- --------- -----------
Total current assets........................................ 29 738 1,159
Property and equipment, net..................................... 319 489 615
Other assets.................................................... -- -- 5
--------- --------- -----------
Total assets................................................ $ 348 $ 1,227 $ 1,779
--------- --------- -----------
--------- --------- -----------
Liabilities and Stockholder's Equity (Deficit)
Current liabilities:
Accounts payable................................................ $ 118 $ 350 $ 622
Accrued expenses................................................ 66 175 604
Deferred revenue................................................ -- -- 30
--------- --------- -----------
Total current liabilities................................... 184 525 1,256
Long term note payable--due Brooktrout.......................... 206 5,038 8,167 $ --
Deferred rent................................................... -- -- 15 15
Commitments and contingencies (Notes 1 and 5)
Stockholder's equity (deficit):
Preferred Stock, $0.01 par value per share; 1,000,000 shares
authorized, no shares issued or outstanding................... -- -- -- --
Common stock, $.01 par value, 30,000,000 shares authorized
8,000,000 shares issued and outstanding....................... 80 80 80 80
Additional paid-in capital...................................... 921 1,391 2,512 10,679
Accumulated deficit............................................. (1,043) (5,356) (8,782) (8,782)
Deferred compensation........................................... -- (451) (1,469) (1,469)
--------- --------- ----------- -----------
Total stockholder's equity (deficit)........................ (42) (4,336) (7,659) $ 508
--------- --------- ----------- -----------
-----------
Total....................................................... $ 348 $ 1,227 $ 1,779
--------- --------- -----------
--------- --------- -----------
</TABLE>
See notes to financial statements.
F-3
<PAGE>
Interspeed, Inc.
Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
Period from Six months
October 23, 1996 ended March 31,
(inception) Year ended --------------------
to September 30, 1997 September 30, 1998 1998 1999
-------------------------- ------------------ --------- ---------
<S> <C> <C> <C> <C>
(unaudited)
Revenue........................................... $ -- $ -- $ -- $ 391
Cost of revenue................................... -- -- -- 312
------- ------- --------- ---------
Gross profit...................................... -- -- -- 79
------- ------- --------- ---------
Operating expenses:
Research and development........................ 878 3,204 1,550 2,413
Sales and marketing............................. -- 401 80 356
General and administrative...................... 165 689 279 633
Stock compensation.............................. -- 19 -- 103
------- ------- --------- ---------
Total operating expenses...................... 1,043 4,313 1,909 3,505
------- ------- --------- ---------
Loss before income taxes.......................... (1,043) (4,313) (1,909) (3,426)
Income tax expense................................ -- -- -- --
------- ------- --------- ---------
Net loss.......................................... $ (1,043) $ (4,313) $ (1,909) $ (3,426)
------- ------- --------- ---------
------- ------- --------- ---------
Net loss per share-
basic and diluted............................... $ (0.24) $ (0.54) $ (0.24) $ (0.43)
------- ------- --------- ---------
------- ------- --------- ---------
Shares used to compute net loss
per share- basic and diluted.................... 4,364 8,000 8,000 8,000
</TABLE>
See notes to financial statements.
F-4
<PAGE>
Interspeed, Inc.
Statements of Stockholder's Equity (Deficit)
(in thousands)
<TABLE>
<CAPTION>
Common Stock Additional
------------------------ Paid-in Accumulated Deferred
Shares Amount Capital Deficit Compensation Total
----------- ----------- ----------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 23, 1996 (inception)............. -- $ -- $ -- $ -- $ -- $ --
Common stock issued for cash to Parent............ 8,000 80 921 -- -- 1,001
Net loss.......................................... -- -- -- (1,043) -- (1,043)
----- --- ----------- ------------ ------------- ---------
Balance, September 30, 1997....................... 8,000 80 921 (1,043) -- (42)
Unearned compensation related to stock options.... -- -- 470 -- (470) --
Amortization of unearned compensation............. -- -- -- -- 19 19
Net loss.......................................... -- -- -- (4,313) -- (4,313)
----- --- ----------- ------------ ------------- ---------
Balance, September 30, 1998....................... 8,000 80 1,391 (5,356) (451) (4,336)
Unaudited:
Unearned compensation related to stock
options....................................... -- -- 1,121 -- (1,121) --
Amortization of unearned compensation........... -- -- -- -- 103 103
Net loss........................................ -- -- -- (3,426) -- (3,426)
----- --- ----------- ------------ ------------- ---------
Balance, March 31, 1999 (unaudited)............... 8,000 $ 80 $ 2,512 $ (8,782) $ (1,469) $ (7,659)
----- --- ----------- ------------ ------------- ---------
----- --- ----------- ------------ ------------- ---------
</TABLE>
See notes to financial statements.
F-5
<PAGE>
Interspeed, Inc.
Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Period from Six months ended
October 23, 1996 Year ended March 31,
(inception) to September 30, ------------------------
September 30, 1997 1998 1998 1999
------------------ ------------- ----------- -----------
<S> <C> <C> <C> <C>
(unaudited)
Cash flows from operating activities:
Net loss............................................ $ (1,043) $ (4,313) $ (1,909) $ (3,426)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation...................................... 52 199 95 293
Stock compensation................................ -- 19 -- 103
Increase (decrease) in cash from:
Accounts receivable............................. -- -- -- (347)
Inventory....................................... -- (587) (12) 151
Prepaid expenses and other...................... (8) (11) (43) (301)
Accounts payable................................ 118 232 178 272
Accrued expenses................................ 66 109 44 429
Deferred revenue................................ -- -- -- 30
Deferred rent................................... -- -- -- 15
------- ------------- ----------- -----------
Net cash used for operating activities.............. (815) (4,352) (1,647) (2,781)
------- ------------- ----------- -----------
Cash flows used for investing activities-
Purchases of property and equipment............... (371) (369) (206) (419)
------- ------------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuances of common stock, net........ 1,001 -- -- --
Proceeds from long term debt-due Brooktrout......... 206 4,832 1,845 3,129
------- ------------- ----------- -----------
Net cash provided by financing activities........... 1,207 4,832 1,845 3,129
------- ------------- ----------- -----------
Net increase (decrease) in cash..................... 21 111 (8) (71)
------- ------------- ----------- -----------
Cash, beginning of period........................... -- 21 21 132
------- ------------- ----------- -----------
Cash, end of period................................. $ 21 $ 132 $ 13 $ 61
------- ------------- ----------- -----------
------- ------------- ----------- -----------
</TABLE>
See notes to financial statements.
F-6
<PAGE>
Interspeed, Inc.
Notes to the Financial Statements
(Information for the Six Months Ended March 31, 1998
and 1999 is Unaudited)
1. Nature of the Business, Basis of Presentation and Summary of Significant
Accounting Policies:
NATURE OF THE BUSINESS
Interspeed, Inc. (the "Company" or "Interspeed"), a wholly owned subsidiary of
Brooktrout, Inc. ("Brooktrout"), was founded in October 1996 and began
operations in March 1997. The Company designs, develops, and markets advanced
high-speed data communications solutions based on digital subscriber line, or
DSL, technology. The Company's products enable data communication service
providers such as competitive local exchange carries, Internet service
providers, and owners of multi-tenant units to deliver high speed data access
solutions to their customers utilizing existing copper wire infrastructure.
BASIS OF PRESENTATION
The accompanying financial statements represent the accounts of Interspeed, a
wholly-owned subsidiary of Brooktrout. Operating expenses include allocations of
general corporate overhead expenses related to Brooktrout's corporate
headquarters and common support activities, including payroll administration,
worker's compensation and general liability insurance, accounting and finance,
legal, tax and human resources. These costs amounted to $165,000, $668,000,
$269,000 and $398,000 for the period October 23, 1996 (inception) to September
30, 1997, the year ended September 30, 1998 and the six month period ended March
31, 1998 and 1999, respectively, and have been allocated to Interspeed using
methodologies primarily based on headcount and usage. Although Interspeed
believes the allocations are reasonable, the costs of these services to
Interspeed may not be indicative of the costs that would have been incurred if
Interspeed had been a stand-alone entity. Interspeed has entered into a
Transition Services Agreement with Brooktrout, pursuant to which Brooktrout will
continue to provide certain services to Interspeed during a transition period.
In addition, Brooktrout has agreed to continue to fund the operations of the
Company until consummation of the offering. See Note 9.
Since inception and through the completion of this offering, Interspeed has been
or will be included in the consolidated tax returns of Brooktrout and Brooktrout
has realized or will realize the tax benefits associated with Interspeed's
operating losses through that date. Accordingly, despite its operating losses
since inception, Interspeed does not have available any net operating loss
carryforwards nor has it recognized any tax benefits afforded Brooktrout by
these net operating losses. Upon the completion of this offering, Interspeed
will no longer be included in the consolidated return of Brooktrout and income
or losses will be included in a separate return of Interspeed. Any taxes due
will be the responsibility of Interspeed and any benefits associated with losses
will inure to Interspeed.
UNAUDITED INTERIM FINANCIAL INFORMATION
The balance sheet as of March 31, 1999 and the related statements of operations,
stockholder's equity and cash flows for the months ended 1998 and 1999 are
unaudited.
In the opinion of management, all adjustments, consisting of only normal
recurring items, which are necessary for a fair presentation, have been included
in such unaudited interim financial information. The results for interim periods
are not necessarily indicative of results which may be expected for any other
interim period or for the full year and may not necessarily reflect the results
of operations, financial
F-7
<PAGE>
Interspeed, Inc.
Notes to the Financial Statements (Continued)
(Information for the Six Months Ended March 31, 1998
and 1999 is Unaudited)
1. Nature of the Business, Basis of Presentation and Summary of Significant
Accounting Policies: (continued)
position, changes in equity and cash flows of Interspeed in the future or what
they would have been had Interspeed been a separate, stand- alone entity during
the periods presented.
UNAUDITED PRO FORMA PRESENTATION
The unaudited pro forma balance sheet reflects the contribution to capital, as
of March 31, 1999, by Brooktrout of amounts due from the Company. Such
contribution is expected to occur upon the effectiveness of this Offering.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements, in conformity with generally accepted
accounting principles, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue
The Company generally recognizes revenues from equipment sales upon shipment. No
revenue is recognized on products shipped on a trial basis. The Company's
products generally carry a one year warranty from the date of purchase.
Estimated sales returns and warranty costs are recorded at the time the product
revenue is recognized. Customers may contract for support services over and
above that provided by the company's warranty policy. Revenue from such
contracts and from extended warranty contracts is recognized ratably over the
service period. The Company does not recognize revenue on beta units until beta
testing on such units is completed.
Inventory
Inventory is stated at the lower of cost (first-in, first-out basis) or market.
Advertising Expenses
The Company expenses advertising costs in the period in which they are incurred.
Advertising cost for the period October 23, 1996 (inception) to September 30,
1997, the year ended September 30, 1998 and the six months ended March 31, 1998
and 1999 was $0 , $2,000, $1,000 and $28,000, respectively.
Property and Equipment
Purchased property and equipment is carried at cost and depreciation is provided
over the estimated useful lives of the related assets on the straight-line
basis. Leasehold improvements are depreciated over the lesser of the lease term
or the estimated useful life of the improvement.
F-8
<PAGE>
Interspeed, Inc.
Notes to the Financial Statements (Continued)
(Information for the Six Months Ended March 31, 1998
and 1999 is Unaudited)
1. Nature of the Business, Basis of Presentation and Summary of Significant
Accounting Policies: (continued)
Research and Development
Research and development costs, other than software development costs, are
expensed as incurred. Software development costs would be capitalized following
attainment of technological feasibility, however, no development costs which
qualify for capitalization were incurred during any of the periods presented.
Net Loss Per Share
Basic net loss per share is computed using the weighted average number of common
shares outstanding during each period. Outstanding stock options have been
excluded from the computation of diluted per share amounts since the effect
would be antidilutive. Had the impact of stock options, using the treasury stock
method, been included in the computation, weighted average shares would have
increased by 1,126,385 and 1,320,558 for the year ended September 30, 1998 and
the six months ended March 31, 1999.
Stock-Based Compensation
Compensation expense associated with awards of stock options to employees is
measured using the intrinsic value method described in Accounting Principles
Board Opinion No. 25.
Cash Flows
There were no cash payments of interest or taxes for any of the periods
presented.
Comprehensive Income
There was no difference between the Company's net loss and its total
comprehensive loss for any of the periods presented.
Segment Information
The Company currently operates in one business segment, designing, developing
and marketing advanced communications products which enable service providers to
deliver high speed data access to small and medium sized businesses, MTUs, and
other organizations.
Concentration of Risk
To date, the Company's activities have been conducted primarily in the United
States. The Company performs ongoing credit evaluations of its customers and
generally requires no collateral. On March 31, 1999, accounts receivable
consisted primarily of amounts due from one customer.
The Company relies on contract manufacturers and some single source suppliers of
materials for certain product components. As a result, should the Company's
current manufacturers or suppliers not produce
F-9
<PAGE>
Interspeed, Inc.
Notes to the Financial Statements (Continued)
(Information for the Six Months Ended March 31, 1998
and 1999 is Unaudited)
1. Nature of the Business, Basis of Presentation and Summary of Significant
Accounting Policies: (continued)
and deliver inventory for the Company to sell on a timely basis, operating
results could be adversely impacted.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," effective for
fiscal years beginning after June 15, 2000. The new standard requires that all
companies record derviatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for based on the use of the derivative and
whether it qualifies for hedge accounting. Management is currently assessing the
impact of SFAS No. 133 on the financial statements of the Company. The Company
will adopt this accounting standard on October 1, 2000 as required.
2. Inventory
Inventory consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, March 31,
1997 1998 1999
--------- --------- -----------
<S> <C> <C> <C>
Raw material....................................................... $ -- $ 587 $ 298
Work in process.................................................... -- -- 91
Finished goods..................................................... -- -- 47
--------- --------- -----
Total.............................................................. $ -- $ 587 $ 436
--------- --------- -----
--------- --------- -----
</TABLE>
3. Property and Equipment
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
Estimated -------------------- March 31,
Useful Life 1997 1998 1999
--------------- --------- --------- -----------
<S> <C> <C> <C> <C>
Office equipment................................. 5 years $ 14 $ 77 $ 99
Computers and software........................... 3 years 282 497 742
Test equipment................................... 5 years 21 82 207
Leasehold improvements........................... up to 5 years 54 84 89
Construction-in-progress -- -- 22
--------- --------- -----------
Total............................................ 371 740 1,159
Less accumulated depreciation.................... 52 251 544
--------- --------- -----------
Total............................................ $ 319 $ 489 $ 615
--------- --------- -----------
--------- --------- -----------
</TABLE>
F-10
<PAGE>
Interspeed, Inc.
Notes to the Financial Statements (Continued)
(Information for the Six Months Ended March 31, 1998
and 1999 is Unaudited)
4. Accrued Expenses
Accrued expenses consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
---------------------- March 31,
1997 1998 1999
----- --------- -----------
<S> <C> <C> <C>
Compensation...................................................... $ 55 $ 145 $ 500
Accrued employee benefits......................................... 8 12 28
Other............................................................. 3 18 76
--- --------- -----
Total............................................................. $ 66 $ 175 $ 604
--- --------- -----
--- --------- -----
</TABLE>
5. Lease Obligations
In March 1997, the Company leased office, manufacturing and warehouse space
under a non-cancelable operating lease that expired in February 1999. The
Company subsequently moved operations to a new location and entered into a
non-cancelable operating lease for office, manufacturing and warehouse space in
March 1999, which expires in March 2004.
Minimum future lease payments under all operating leases at September 30, 1998
are as follows (in thousands):
<TABLE>
<S> <C>
1999................................................................ $ 201
2000................................................................ 370
2001................................................................ 462
2002................................................................ 485
2003................................................................ 509
Thereafter.......................................................... 216
---------
$ 2,243
---------
---------
</TABLE>
Rent expense for the period October 23, 1996 (inception) to September 30, 1997,
the year ended September 30, 1998, and the six months ended March 31, 1998 and
1999 was $38,000, $80,000, $40,000 and $50,000, respectively.
6. Stock Option Plan
In April 1997, the Company's Board of Directors adopted and the stockholder
approved the 1997 Stock Option Plan (the Plan), under which the Company may
grant both incentive stock options and non-qualified options to employees. The
Plan allows for the granting of options to purchase up to 1,988,000 shares of
common stock. The stock options are generally granted with vesting periods of
five years and have an expiration date of ten years from the date of grant.
Certain options have been granted with exercise prices which were less than the
estimated fair value of the Company's common stock at the date of grant.
Compensation cost associated with these options, determined as the difference
between the fair value of the stock and the exercise price, totalled $1.5
F-11
<PAGE>
Interspeed, Inc.
Notes to the Financial Statements (Continued)
(Information for the Six Months Ended March 31, 1998
and 1999 is Unaudited)
6. Stock Option Plan (continued)
million as of March 31, 1999. This cost was recorded as deferred compensation
and is being amortized to expense over the period in which the employee is
expected to render services. Compensation cost amortization was $19,000 and
$103,000 for the year ended September 30, 1998 and the six months ended March
31, 1999.
Subsequent to March 31, 1999, 567,000 options were granted with an exercise
price which was less than the estimated fair value of the Company's common stock
at the date of grant. The compensation cost associated with these options
totalled $4.9 million.
Activity under the Plan is summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
---------- -----------
<S> <C> <C>
Granted................................................................................... 962,400 $ .13
Exercised................................................................................. -- --
Forfeited................................................................................. -- --
----------
Outstanding at September 30, 1997......................................................... 962,400 $ .13
Granted................................................................................... 381,600 $ .13
Exercised................................................................................. -- --
Forfeited................................................................................. 52,000 $ .13
----------
Outstanding at September 30, 1998......................................................... 1,292,000 $ .13
Granted................................................................................... 170,000 $ .13
Exercised................................................................................. -- --
Forfeited................................................................................. 41,868 $ .13
----------
Outstanding at March 31, 1999............................................................. 1,420,132 $ .13
----------
----------
</TABLE>
The following table sets forth information regarding stock options outstanding
at September 30, 1998:
<TABLE>
<CAPTION>
Weighted Average
Range of Remaining
Exercise Number Life Number
Prices Of Shares (years) Exercisable
- ----------- ---------- ------------------- -----------
<S> <C> <C> <C>
0$.13...... 1,292,000 4.02 295,280
</TABLE>
The following information concerning the Company's stock option plan is provided
in accordance with SFAS 123.
The fair value of each option grant has been estimated on the date of grant
using the minimum value method. Weighted average assumptions used in determining
the fair value of grants for the period October 23, 1996 (inception) to
September 30, 1997 and the year ended September 30, 1998 include
F-12
<PAGE>
Interspeed, Inc.
Notes to the Financial Statements (Continued)
(Information for the Six Months Ended March 31, 1998
and 1999 is Unaudited)
6. Stock Option Plan (continued)
risk-free interest rates of 5.5% and 4.75%, respectively, and an expected life
of 5 years. Volatility and dividend yields are not considered in the minimum
value calculation.
The weighted average fair value of options granted for the period October 23,
1996 (inception) to September 30, 1997 and the year ended September 30, 1998 was
$1.26, and $6.69 per share, respectively.
Had compensation expense for stock options been determined based on fair value
at the grant date in accordance with the provisions of SFAS 123, pro forma net
loss and pro forma net loss per share would have been as follows (in thousands
except per share data):
<TABLE>
<CAPTION>
For the period
October 23, 1997 For the year
(inception) ended
to September 30, September 30,
1997 1998
-------------------------- -----------------
<S> <C> <C>
Pro forma net loss............................ $ (1,045) $ (4,340)
Pro forma net loss per share-basic and
diluted..................................... $ (0.24) $ (0.54)
</TABLE>
7. Retirement Plan
The Company has a 401(k) retirement plan available to qualified employees.
Employees are allowed to contribute up to 18% of their salary to the plan. The
Company matches contributions equal to $.25 per dollar contributed up to a
maximum of 6% of a participant's salary. The Company contributed $2,000,
$18,000, $4,000 and $19,000 to the plan for the period October 23, 1996
(inception) to September 30, 1997, the year ended September 30, 1998 and the six
months ended March 31, 1998 and 1999, respectively.
8. Significant Customer and Geographic Information:
The Company currently targets its sales efforts to data communications service
providers, multi tenant units, and other service organizations to both public
and private network providers and users across four related market segments. For
the six months ended March 31, 1999, sales to United States customers amounted
to $332,000 and export sales amounted to $59,000. Two customers accounted for
79% and 13%, respectively, of revenue for the six months ended March 31, 1999.
9. Related Party Transactions
Since inception, the Company's operations have been funded through contributions
of capital and loans from Brooktrout of $1.2 million, $4.8 million and $3.1
million for the period October 23, 1996 (inception) to September 30, 1997, the
year ended September 30, 1998 and the six months ended March 31, 1999,
respectively. At March 31, 1999, Interspeed had long term notes-due to
Brooktrout in the amount of $8.2 million. The notes are non-interest bearing and
are due on demand. Brooktrout has agreed that the Company will not be required
to repay these notes until after March 31, 2000. The average balance due to
Brooktrout for the period October 23, 1996 (inception) to September 30, 1997,
the year ended
F-13
<PAGE>
Interspeed, Inc.
Notes to the Financial Statements (Continued)
(Information for the Six Months Ended March 31, 1998
and 1999 is Unaudited)
9. Related Party Transactions (continued)
September 30, 1998 and the six months ended March 31, 1998 and 1999 was $19,000,
$34,000, $305,654, and $527,318, respectively.
The following is an analysis of the intercompany accounts:
<TABLE>
<CAPTION>
Period October 23,1996
(inception) to Year ended Six months ended Six months ended
September 30, 1997 September 30, 1998 March 31, 1998 March 31, 1999
---------------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Beginning Balance................. $ 0 $ (206) $ (206) $ (5,038)
Expenses allocated from Parent.... $ (165) $ (668) $ (269) $ (398)
Cash Transfers.................... $ (693) $ (3,775) $ (1,375) $ (2,500)
Expenses paid by Parent on behalf
of the Company................... 652 (389) (211) (231)
-------- -------- -------- --------
Ending Balance.................... (206) (5,038) (2,061) (8,167)
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The Company and Brooktrout have entered into a Transition Services Agreement
(the "Agreement") which outlines certain services that will continue to be
performed on behalf of the Company by Brooktrout for a specified period of time.
The Agreement calls for these services to be phased out over a period beginning
October 1999 to December 1999. The services called for in the Agreement include
payroll processing and administration, human resources, benefits, marketing,
information technology and telecommunications, accounts receivable, accounting
and finance and order entry.
10. Subsequent Events
REINCORPORATION IN DELAWARE AND RELATED INCREASE IN AUTHORIZED SHARES AND STOCK
SPLIT
In connection with a reincorporation of the Company in Delaware, on June 17,
1999 the Board of Directors approved, and on June 18, 1999 effected, an increase
in the number of common shares authorized to 30,000,000 shares and a four for
one stock split of the common stock. The stock split has been given retroactive
recognition in all periods presented in the accompanying financial statements.
In addition, the Board of Directors authorized the creation of an unspecified
class of preferred stock, par value $0.01, with a total authorized amount of
1,000,000 shares. No shares of preferred stock have been issued.
STOCK OPTION AND GRANT PLAN
In June 1999, the Company adopted, and the stockholders approved, the Interspeed
1999 Stock Option and Grant Plan (the "1999 Stock Plan"), under which the
Company may grant both incentive stock options and nonstatutory stock options to
employees, consultants and directors. Options issued under the 1999 Stock Plan
can have an exercise price of no less than 85% of the fair market value, as
defined under the 1999 Stock Plan, of the stock at the date of grant. The 1999
Stock Plan provides for the issuance of up to 1,012,868 shares of the Company's
common stock.
F-14
<PAGE>
Interspeed, Inc.
Notes to the Financial Statements (Continued)
(Information for the Six Months Ended March 31, 1998
and 1999 is Unaudited)
10. Subsequent Events (continued)
LONG TERM DEBT
In connection with this offering, Brooktrout has agreed to contribute the
outstanding note balance to the capital of Interspeed on the effective date of
the Offering.
F-15
<PAGE>
3,500,000 Shares
INTERSPEED, INC.
Common Stock
[LOGO]
--------------
PROSPECTUS
--------------
Until , all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
U.S. Bancorp Piper Jaffray
Warburg Dillon Read LLC
Tucker Anthony Cleary Gull
July , 1999
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the expenses payable by us in connection with the
offering (excluding underwriting discounts and commissions):
<TABLE>
<CAPTION>
Nature of Expense Amount
- -------------------------------------------------------------------------------------------- ----------
<S> <C>
SEC Registration Fee........................................................................ $ 13,900
NASD Filing Fee............................................................................. 5,500
Nasdaq National Market Listing Fee.......................................................... 50,000
Accounting Fees and Expenses................................................................ 325,000
Legal Fees and Expenses..................................................................... 350,000
Printing Expenses........................................................................... 125,000
Blue Sky Qualification Fees and Expenses.................................................... 15,000
Transfer Agent's Fee........................................................................ 12,000
Miscellaneous............................................................................... 75,000
TOTAL................................................................................... $ 971,400
----------
----------
</TABLE>
The amounts set forth above, except for the Securities and Exchange Commission
and National Association of Securities Dealers, Inc. are in each case estimated.
- ------------------------------------
* To be completed by amendment.
Item 14. Indemnification of Directors and Officers
In accordance with Section 145 of the Delaware General Corporation Law, Article
of our amended and restated certificate of incorporation provides
that no director of Interspeed be personally liable to Interspeed or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (1) for any breach of the director's duty of loyalty to
Interspeed or its stockholders, (2) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (3) in
respect of unlawful dividend payments or stock redemptions or repurchases, or
(4) for any transaction from which the director derived an improper personal
benefit. In addition, our first amended and restated certificate of
incorporation provides that if the Delaware General Corporation Law is amended
to authorize the further elimination or limitation of the liability of
directors, then the liability of a director of the corporation shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law, as so amended.
Article of our amended and restated by-laws provides for indemnification
by Interspeed of its officers and certain non-officer employees under certain
circumstances against expenses, including attorneys fees, judgments, fines and
amounts paid in settlement, reasonably incurred in connection with the defense
or settlement of any threatened, pending or completed legal proceeding in which
any such person is involved by reason of the fact that such person is or was an
officer or employee of the registrant if such person acted in good faith and in
a manner he or she reasonably believed to be in or not opposed to the best
interests of Interspeed, and, with respect to criminal actions or proceedings,
if such person had no reasonable cause to believe his or her conduct was
unlawful. We have also obtained directors' and officers' insurance against
certain liabilities.
II-1
<PAGE>
The Stockholder Rights Agreement, filed as Exhibit 10.6 hereto, provides for
Interspeed to indemnify Brooktrout against claims and liabilities, including
claims and liabilities arising under the securities laws.
Under Section of the Purchase Agreement filed as Exhibit 1.1 hereto, the
underwriters have agreed to indemnify, under certain conditions, Interspeed, its
directors, certain officers and persons who control Interspeed within the
meaning of the Securities Act against certain liabilities.
Item 15. Recent Sales of Unregistered Securities
Set forth in chronological order below is information regarding the number of
shares of capital stock issued by Interspeed during the past three years.
Further included is the consideration, if any, received by Interspeed for such
shares. We believe that the transactions described below with respect to option
grants to our employees were exempt from the registration requirements of the
Securities Act by reason of Rule 701 promulgated thereunder.
(1) In October, 1996, we sold 400 shares to Brooktrout, Inc. for an aggregate
purchase price of $1,000.00 in reliance upon the exemption from registration
under section 4(2) of the Securities Act.
(2) In April, 1997, we sold 7,999,600 shares to Brooktrout, Inc. for an
aggregate purchase price of $999,950.00 in the form of a promisory note in
the amount of $712,387.21 and by cancellation of our obligations with
respect to advances previously given in the aggregate amount of $287,562.79
in reliance upon the exemption from registration under section 4(2) of the
Securities Act.
(3) In April, 1997, pursuant to an incentive stock option agreement, we granted
options to purchase up to an aggregate of 400,000 shares of common stock to
an employee at an exercise price of $.13 per share in reliance upon the
exemption from registration under Rule 701 promulgated under the Securities
Act.
(4) In May, 1997, pursuant to incentive stock option agreements, we granted
options to purchase up to an aggregate of 180,000 shares of common stock to
employees at an exercise price of $.13 per share in reliance upon the
exemption from registration under Rule 701 promulgated under the Securities
Act.
(5) In June, 1997, pursuant to incentive stock option agreements, we granted
options to purchase up to an aggregate of 120,000 shares of common stock to
employees at an exercise price of $.13 per share in reliance upon the
exemption from registration under Rule 701 promulgated under the Securities
Act.
(6) In July, 1997, pursuant to incentive stock option agreements, we granted
options to purchase up to an aggregate of 262,400 shares of common stock to
employees at an exercise price of $.13 per share in reliance upon the
exemption from registration under Rule 701 promulgated under the Securities
Act.
(7) In December, 1997, pursuant to incentive stock option agreements, we granted
options to purchase up to an aggregate of 60,000 shares of common stock to
employees at an exercise price of $.13 per share in reliance upon the
exemption from registration under Rule 701 promulgated under the Securities
Act.
(8) In February, 1998, pursuant to incentive stock option agreements, we granted
options to purchase up to an aggregate of 122,000 shares of common stock to
employees at an exercise price of $.13 per share in reliance upon the
exemption from registration under Rule 701 promulgated under the Securities
Act.
(9) In April, 1998, pursuant to incentive stock option agreements, we granted
options to purchase up to an aggregate of 24,000 shares of common stock to
employees at an exercise price of $.13 per share
II-2
<PAGE>
in reliance upon the exemption from registration under Rule 701 promulgated
under the Securities Act.
(10) In May, 1998, pursuant to incentive stock option agreements, we granted
options to purchase up to an aggregate of 13,600 shares of common stock to
employees at an exercise price of $.13 per share in reliance upon the
exemption from registration under Rule 701 promulgated under the Securities
Act.
(11) In June, 1998, pursuant to incentive stock option agreements, we granted
options to purchase up to an aggregate of 52,000 shares of common stock to
employees at an exercise price of $.13 per share in reliance upon the
exemption from registration under Rule 701 promulgated under the Securities
Act.
(12) In July, 1998, pursuant to incentive stock option agreements, we granted
options to purchase up to an aggregate of 44,000 shares of common stock to
employees at an exercise price of $.13 per share in reliance upon the
exemption from registration under Rule 701 promulgated under the Securities
Act.
(13) In August, 1998, pursuant to incentive stock option agreements, we granted
options to purchase up to an aggregate of 54,000 shares of common stock to
employees at an exercise price of $.13 per share in reliance upon the
exemption from registration under Rule 701 promulgated under the Securities
Act.
(14) In September, 1998, pursuant to incentive stock option agreements, we
granted options to purchase up to an aggregate of 12,000 shares of common
stock to employees at an exercise price of $.13 per share in reliance upon
the exemption from registration under Rule 701 promulgated under the
Securities Act.
(15) In October, 1998, pursuant to incentive stock option agreements, we granted
options to purchase up to an aggregate of 36,000 shares of common stock to
employees at an exercise price of $.13 per share in reliance upon the
exemption from registration under Rule 701 promulgated under the Securities
Act.
(16) In December, 1998, pursuant to incentive stock option agreements, we
granted options to purchase up to an aggregate of 68,000 shares of common
stock to employees at an exercise price of $.13 per share in reliance upon
the exemption from registration under Rule 701 promulgated under the
Securities Act.
(17) In January, 1999, pursuant to incentive stock option agreements, we granted
options to purchase up to an aggregate of 20,000 shares of common stock to
employees at an exercise price of $.13 per share in reliance upon the
exemption from registration under Rule 701 promulgated under the Securities
Act.
(18) In February, 1999, pursuant to incentive stock option agreements, we
granted options to purchase up to an aggregate of 26,000 shares of common
stock to employees at an exercise price of $.13 per share in reliance upon
the exemption from registration under Rule 701 promulgated under the
Securities Act.
(19) In March, 1999, pursuant to an incentive stock option agreement, we granted
options to purchase up to an aggregate of 20,000 shares of common stock to
employees at an exercise price of $.67 per share in reliance upon the
exemption from registration under Rule 701 promulgated under the Securities
Act.
(20) In April, 1999, pursuant to incentive stock option agreements, we granted
options to purchase up to an aggregate of 20,000 shares of common stock to
employees at an exercise price of $.80 per share
II-3
<PAGE>
in reliance upon the exemption from registration under Rule 701 promulgated
under the Securities Act.
(21) In May, 1999, pursuant to incentive stock option agreements, we granted
options to purchase up to an aggregate of 147,000 shares of common stock to
employees at an exercise price of $.80 per share and 300,000 shares to
employees at an exercise price of $.13 per share in reliance upon the
exemption from registration under Rule 701 promulgated under the Securities
Act.
(22) In June, 1999, pursuant to incentive stock option agreements, we granted
options to purchase up to an aggregate of 20,000 shares of common stock at
an exercise price of $.80 per share and 80,000 shares to employees at an
exercise price of $2.50 per share in reliance upon the exemption from
registration under Rule 701 promulgated under the Securities Act.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<C> <S>
*1.1 Form of Underwriting Agreement.
*3.1 Certificate of Incorporation.
*3.2 Amended and Restated Certificate of Incorporation.
*3.3 By-laws.
*3.4 Amended and Restated By-laws.
*4.1 Specimen certificate for shares of common stock, $.01 par value per share.
*5.1 Opinion of Goodwin, Procter & Hoar LLP as to the legality of the securities being
offered.
+10.1 1997 Stock Option Plan
*10.2 1999 Stock Option and Grant Plan.
*10.3 Employee Stock Purchase Plan.
**10.4 Transition Services Agreement, dated as of , 1999, by and between
Interspeed and Brooktrout, Inc.
**10.5 Authorized Reseller Agreement, dated as of May , 1999, by and between Interspeed
and Cabletron Systems, Inc.
*10.6 Stockholder Rights Agreement, dated as of July , 1999, by and between Interspeed
and Brooktrout, Inc.
+10.7 Capitalization Agreement, dated June 17, 1999, by and between Interspeed and
Brooktrout, Inc.
*11.1 Statement regarding computation of income per common share.
*23.1 Consent of Goodwin, Procter & Hoar LLP (included in Exhibit 5.1 hereto).
23.2 Consent of Deloitte & Touche LLP.
+24.1 Powers of Attorney.
+27.1 Financial Data Schedule.
- ------------------------------------
* To be filed by amendment to this registration statement.
** Confidential treatment requested as to these exhibits.
+ Previously filed.
</TABLE>
(b) Financial Statement Schedules
All schedules have been omitted because they are not required or because the
required information is given in the Financial Statements or Notes to those
statements.
II-4
<PAGE>
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the underwriters at
the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial BONA FIDE offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Amendment No. 1 to Registration Statement File No. 333-81071 to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
Town of North Andover, Commonwealth of Massachusetts, on July 21, 1999.
INTERSPEED, INC.
BY: /S/ STEPHEN A. IDE
-----------------------------------------
Stephen A. Ide
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1
to the Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
Signature Title Date
- ------------------------------ --------------------------- -------------------
/s/ STEPHEN A. IDE President and Director
- ------------------------------ (Principal Executive July 21, 1999
Stephen A. Ide Officer)
Chief Technology Officer,
* Senior Vice
- ------------------------------ President-Research and July 21, 1999
Rajeev Agarwal Development and Director
Chief Financial Officer,
Senior Vice
* President-Finance, and
- ------------------------------ Treasurer (Principal July 21, 1999
William J. Burke Financial and Accounting
Officer)
* Director
- ------------------------------ July 21, 1999
Eric R. Giler
* Director
- ------------------------------ July 21, 1999
Robert G. Barrett
* Director
- ------------------------------ July 21, 1999
Paul J. Severino
*By: /s/ STEPHEN A. IDE
----------------------------------
Attorney-in-Fact
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
*1.1 Form of Underwriting Agreement.
*3.1 Certificate of Incorporation.
*3.2 Amended and Restated Certificate of Incorporation.
*3.3 By-laws.
*3.4 Amended and Restated By-laws.
*4.1 Specimen certificate for shares of common stock, $.01 par value per share.
*5.1 Opinion of Goodwin, Procter & Hoar LLP as to the legality of the securities being
offered.
+10.1 1997 Stock Option Plan
*10.2 1999 Stock Option and Grant Plan.
*10.3 Employee Stock Purchase Plan.
**10.4 Transition Services Agreement, dated as of , 1999, by and between
Interspeed and Brooktrout, Inc.
**10.5 Authorized Reseller Agreement, dated as of May , 1999, by and between Interspeed
and Cabletron Systems, Inc.
*10.6 Stockholder Rights Agreement, dated as of July , 1999, by and between Interspeed
and Brooktrout, Inc.
+10.7 Capitalization Agreement, dated June 17, 1999, by and between Interspeed and
Brooktrout, Inc.
*11.1 Statement regarding computation of income per common share.
*23.1 Consent of Goodwin, Procter & Hoar LLP (included in Exhibit 5.1 hereto).
23.2 Consent of Deloitte & Touche LLP.
+24.1 Powers of Attorney.
+27.1 Financial Data Schedule.
- ------------------------------------
* To be filed by amendment to this registration statement.
** Confidential treatment requested as to these exhibits.
+ Previously filed.
</TABLE>
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholders of
Interspeed, Inc.:
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-81071 of Interspeed, Inc. on Form S-1 of our report dated May 14, 1999
(except for Note 10 as to which the date is June 18, 1999) appearing in the
prospectus, which is a part of this Registration Statement, and to the reference
to us under the heading "Experts" in such prospectus.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Boston, Massachusetts
July 20, 1999
