<PAGE>
As filed with the Securities and Exchange Commission on June 18, 1999
Registration Statement No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------------
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. / /
---------------------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed
Title of Each Class of Maximum Amount of
Securities to be Aggregate Registration
Registered Offering Price(1) Fee
<S> <C> <C>
Common Stock, $.01 par value per share $50,000,000.00 $13,900.00
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933, as amended.
---------------------------------------------
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 June 18, 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>
Shares
INTERSPEED, INC. [LOGO]
Common Stock
$ per share
- ----------------------------------------------------------------------
- - Interspeed, Inc. is offering shares and Brooktrout, Inc., the
selling stockholder, is offering shares.
- - We anticipate that the initial public offering price will be between $ and
$ per share.
- - This is our initial public offering and no public market currently exists for
our shares.
- - 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 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
The date of this prospectus is June , 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Summary................................................................................ 1
Risk Factors........................................................................... 4
Forward Looking Statements............................................................. 14
Use of Proceeds........................................................................ 14
Dividend Policy........................................................................ 14
Capitalization......................................................................... 15
Dilution............................................................................... 16
Selected Financial Data................................................................ 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................... 18
Business............................................................................... 25
Management............................................................................. 34
Principal and Selling Stockholders..................................................... 43
Certain Transactions with Related Parties.............................................. 44
Description of Capital Stock........................................................... 46
Shares Eligible for Future Sale........................................................ 50
Underwriting........................................................................... 52
Legal Matters.......................................................................... 54
Experts................................................................................ 54
Where You Can Find More Information.................................................... 54
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, 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. UNLESS OTHERWISE INDICATED, ALL REFERENCES IN THIS PROSPECTUS TO
"INTERSPEED," "WE," "US," OR "OUR" ARE TO INTERSPEED, INC.
The Company
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, Internet service providers and owners of multi-tenant units, or MTUs,
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 DSL Access Router, or DSLAR, offers our
customers a highly scalable and flexible solution at a lower total cost of
ownership.
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 DSL-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 DSL technology simultaneously
satisfies the demand for high speed performance, cost effectiveness, broad
geographic coverage and reliable security.
Service providers increasingly demand cost effective DSL access solutions that
enable them to provide high speed data access to small and medium sized business
users, MTUs and other organizations at a low total cost of ownership. We
designed our System 1000 and System 500 DSLARs specifically to meet this demand.
The benefits of our products include:
- HIGH PERFORMANCE SOLUTION. Our DSLAR products provide reliable,
secure and symmetric DSL connections at speeds up to 2.3 Mbps.
- SINGLE INTEGRATED SYSTEM. Our DSLAR products integrate a signal
concentrator, router and switch into a single platform, in contrast
to other DSL equipment vendors whose access concentrator products
require the purchase of separate routers and/or switches.
- LOWER TOTAL COST OF OWNERSHIP. We believe our DSLAR products reduce
the overall cost of ownership in a DSL access solution because they
can be purchased at a lower initial price than individual
components, have a smaller footprint, use less power, offer ease of
installation and configuration, provide integrated system
management, and allow for simpler customer training.
- FLEXIBLE SYSTEM ARCHITECTURE. Our DSLAR products are designed with
a flexible system architecture that allows a variety of our
functional line modules to be easily installed into a standard
chassis and assures that performance will not degrade as
subscribers are added. This flexibility allows service providers to
purchase 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. Our
single system DSLAR products provide for scalability from 8 to 192
ports. Additionally, our customers can configure any combination of
transmission speeds and protocols on different ports, as well as
easily remove or replace modules without reconfiguring the system.
<PAGE>
- SUPPORT FOR VIRTUAL PRIVATE NETWORKS. Our DSLAR products allow our
customers to configure multiple virtual private networks, or VPNs,
within the same system. Our system provides for the security of
transmitted data within the VPNs.
- ADVANCED NETWORK MANAGEMENT. Our proprietary SpeedView network
management software permits the network administrator to review
network status and performance and reconfigure the DSLAR through an
easy to use graphical user interface. Secure access to the
SpeedView management system can be achieved remotely through the
use of any commercially available browser.
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, MTUs 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 DSLAR.
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. 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.............................. shares
By Brooktrout.............................. shares
Total.................................... shares
Common stock outstanding after the 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 $
Working capital......................................................... (97) (97)
Total assets............................................................ 1,779 1,779
Long term note payable--due Brooktrout.................................. 8,167 --
Total stockholders' equity (deficit).................................... (7,659) 508
</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 shares by
Interspeed in this offering, assuming an initial public offering price of
$ per share, resulting in net proceeds to Interspeed of approximately
$ .
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. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES
FACING OUR COMPANY. 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.
We have a limited operating history and are subject to risks frequently
encountered by early stage companies
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. Specific
risks include whether we are able:
- to compete successfully in the intensely competitive market for
data communications equipment, specifically in the emerging market
for DSL equipment;
- to expand our sales and marketing, customer support and
manufacturing organization;
- to continue to recruit and retain qualified engineering and sales
and marketing personnel;
- to introduce timely and effectively new products and product
enhancements; and
- to develop the capability to manage the administrative and support
functions currently being performed for us by Brooktrout.
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;
4
<PAGE>
- expenses associated with product development which are often
incurred before we earn the associated revenue;
- 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;
- our ability to attain and maintain production volumes and maintain
product quality;
- the mix of products that we sell and the mix of distribution
channels through which they are sold;
- our ability to manage possible product transitions;
- costs relating to possible acquisitions and integration of
technologies or businesses; and
- data communications and DSL market conditions and economic
conditions generally.
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.
The loss of any significant customer could have an adverse effect on our
business.
The loss of any of our significant customers may 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 have an adverse effect on
our business
We sell our products directly through our sales force and indirectly through
original equipment manufacturers or OEMs, value added resellers, or VARs, and
system integrators. Our failure to adequately develop these sales channels may
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 eight 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 OEMs, VARs 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 adversely affected
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
5
<PAGE>
and marketing. Because our products were recently introduced for sale, we have
limited experience in operating a customer support program.
Our success is dependent on our target customers accepting DSL technology
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.
We are 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;
- 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.
6
<PAGE>
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.
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 adversely affect our business
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. 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. In order to
successfully manage our growth we must identify, attract, motivate, train and
retain highly skilled managerial, financial, engineering, sales and marketing
and other personnel. Competition for this type of personnel is intense. If we
fail to manage our growth effectively, it could have a material adverse effect
on our business, financial condition and results.
7
<PAGE>
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 has agreed to be acquired by Lucent Technologies
Inc.), Copper Mountain Networks, Inc., Diamond Lane (which was 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.
We may be exposed to risks associated with international operations
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.
8
<PAGE>
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 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 adversely affect
our business
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 that the loss of all or a substantial portion of such
rights could have a material adverse effect on our results of operations. Any
infringement of our proprietary rights could result in significant litigation
costs, 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
9
<PAGE>
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. We do not yet have any issued patents and it is
unclear whether any patents will be issued in the future. There can be no
assurance that our intellectual property protection measures will be sufficient
to prevent misappropriation of our technology by third parties. 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. From time to
time, third parties may assert patent, copyright, trademark and other
intellectual property rights to technologies that are important to our business.
Any claims asserting that our products infringe or may infringe proprietary
rights of third parties, if determined adversely to us, could have a material
adverse effect on our business, financial condition or results of operations. In
our agreements, we agree to indemnify our customers for any expenses or
liabilities resulting from claimed infringements of patents, trademarks or
copyrights of third parties. 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. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to us, if at all. 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.
10
<PAGE>
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 % of the
outstanding shares of common stock, or % 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;
- changes in market valuations of other data communications service
providers' companies; and
- lack of market liquidity.
In addition, many of the risks described elsewhere in this section could
materially and adversely affect our stock price, as discussed in those risk
factors. The stock markets have recently experienced price and volume volatility
that has affected companies' stock prices. Stock prices for many companies in
the Internet and emerging data communications sectors have experienced wide
fluctuations that have often been unrelated to the operating performance of
these companies. Fluctuations such as these are likely to affect the market
price of our common stock.
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. If instituted against us, regardless of the outcome, 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 shares of
common stock outstanding, of which approximately
11
<PAGE>
shares or approximately 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, as that term is defined in Rule 144 under the
Securities Act. The remaining 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 Rule 144 or Rule 701 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. U.S. Bancorp Piper Jaffray may, however, in
its sole discretion, at any time without notice, release all or any portion of
the shares subject to lock-up agreements. Beginning 180 days after the offering,
under specified circumstances and subject to customary conditions, Brooktrout
will have rights with respect to 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.
Sales of common stock by existing future stockholders in the public market, or
the availability of such shares for sale, could adversely affect the market
price of the common stock.
In addition, as soon as possible after the date of this prospectus, we intend to
file a registration statement on Form S-8 with the Securities and Exchange
Commission covering up to 1,212,868 shares of common stock reserved for issuance
under our 1999 Stock Option and Grant Plan and 1999 Employee Stock Purchase
Plan. The Form S-8 will permit the resale of the registered shares on the public
market. On the date 180 days after the effective date of this offering, at least
shares will be subject to immediately exercisable options.
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.
These provisions discourage potential takeover attempts and could adversely
affect the market price of our common stock.
12
<PAGE>
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
You will experience an immediate and substantial dilution of $ 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 $
per share of common stock, our net tangible book value as of , after
giving effect to this offering, would be $ 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.
13
<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 $ per share, are estimated to be $
million, or $ million if the underwriters exercise their
over-allotment in full, after deducting underwriting discounts and commissions
and estimated offering expenses of $ .
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.
14
<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
shares by Interspeed in this offering, assuming an initial public offering
price of $ per share, resulting in net proceeds to Interspeed of
approximately $ . 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 $
--------- ----------- -----------
--------- ----------- -----------
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........................................................... $ 0 $ 0 $ 0
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, shares issued and outstanding on a
pro forma as adjusted basis.............................................. 80 80
Additional paid-in capital................................................. 2,512 10,679
Accumulated deficit........................................................ (8,782) (8,782) (8,782)
Deferred compensation...................................................... (1,469) (1,469) (1,469)
--------- ----------- -----------
Total stockholders' equity (deficit)......................................... (7,659) 508
--------- ----------- -----------
Total capitalization......................................................... $ 508 $ 508 $
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
15
<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
shares of common stock offered by us at an assumed initial public offering price
of $ 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 $ million or $ per share. This
represents an immediate increase in such net tangible book value of $ per
share to existing shareholders and an immediate and substantial dilution of
$ 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............................................... $
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.......................................................................
Pro forma net tangible book value after the offering................................
Dilution to new investors........................................................... $
---------
---------
</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% $ 9,168,000% $ 1.15
New investors...........................
---------- --------- ------------ --------- ------
Total............................... 100.0% $ 100.0%
---------- --------- ------------ --------- ------
---------- --------- ------------ --------- ------
</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.
16
<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.
17
<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 System 1000 and System
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
18
<PAGE>
have relied on Brooktrout to provide the majority of these services. Upon the
effective date of this 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 the Company'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
19
<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 1,274 1,139
Sales and marketing............................ 80 251 70 136 220
General and administrative..................... 175 212 202 238 395
Stock compensation -- 2 14 32 71
----------- --------- ------------- ------------- -----------
Total operating expenses................... 1,192 1,387 1,017 1,680 1,825
----------- --------- ------------- ------------- -----------
Loss before income taxes......................... (1,192) (1,387) (1,017) (1,652) (1,774)
Income tax expense............................... -- -- -- -- --
----------- --------- ------------- ------------- -----------
Net loss......................................... $ (1,192) $ (1,387) $ (1,017) $ (1,652) $ (1,774)
----------- --------- ------------- ------------- -----------
----------- --------- ------------- ------------- -----------
Net loss per share-basic and diluted............. $ (.15) $ (.17) $ (.13) $ (.21) $ (.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. Research and development expenses increased for each
of the five quarters ended March 31, 1999 except for the quarter ended September
30, 1998 during which expenses decreased significantly because of
reclassification of $308,000 of prototype material from research and development
to manufacturing inventory.
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
20
<PAGE>
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 front end loading of payroll taxes.
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.
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<PAGE>
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.
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
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<PAGE>
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.
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. Many older
systems use a two digit date format which may create ambiguities when passing
into a new century.
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.
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.
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. We believe that all material systems will be compliant
by the Year 2000.
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 OF REMEDIATION. We continue to evaluate the estimated costs associated
with achieving Year 2000 readiness but as of this date we do not expect these
costs to be material.
CONSEQUENCES OF YEAR 2000 PROBLEMS. 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
23
<PAGE>
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. 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.
24
<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.
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.
HIGH SPEED DATA ACCESS ALTERNATIVES
A number of options are used to provide last mile connectivity including
analog modems and ISDN, cable modems, T-1 and broadband wireless. However, each
of these alternatives suffer from significant drawbacks, particularly for small
to medium sized businesses and MTUs. Analog modems and ISDN, while generally
affordable, currently only offer transmission speeds of 56 kilobits per second,
or Kbps, and 128 Kbps, respectively, which are not sufficient for most business
users. Cable, while offering speeds in excess of 1 million bits per second, or
Mbps, is a shared medium, leading to security concerns and a reduction in
transmission speed as users are added. In addition, cable is not generally
available to most business users. T-1 provides data transmission speeds of up to
1.5 Mbps but requires expensive
25
<PAGE>
infrastructure modification and substantial financial investment. Broadband
wireless offers speeds comparable to cable modems but is considered by most
business users as a technically unproven solution to the last mile bottleneck.
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
- 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 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.
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. 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.
- 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.
26
<PAGE>
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. Our products, referred to as DSL
Access Routers or DSLARs, provide a reliable, highly scalable solution that
integrates 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;
27
<PAGE>
- 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. Our System 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.
- 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
28
<PAGE>
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 OEM and VAR 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 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
SYSTEM 1000 AND SYSTEM 500 DSL ACCESS ROUTER
Our DSLARs represent a new generation of carrier class remote access
equipment. The Interspeed System 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. Our System 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.
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<PAGE>
SCALABILITY AND DENSITY
The System 1000/500 incorporates a multi-gigabit backplane to provide a
scalable and flexible architecture. The System 1000 is a NEBS compliant, 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 System 500 is identical to the System 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 System 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.
DEVICE MANAGEMENT/SPEEDVIEW
The System 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.
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A complete DSLAR contains at a minimum one System 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 OEMs, VARs 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 OEMs, VARs 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 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 System 1000/500
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<PAGE>
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.
Our research and development efforts are focused primarily on adding to and
enhancing the functions and features of our DSLAR products as well as the design
and development of next generation products. In the future we intend to offer
our customers other switch router modules including ATM over OC3, ATM over DS3
and T1/E1. We are prepared to support market needs through technological
developments including but not limited to IDSL, ADSL, HDSL2 and VDSL. We plan to
incorporate into our products a number of additional industry standard protocols
including point to point protocol, Frame Relay and multi protocol over ATM.
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 has agreed to be acquired by
Lucent Technologies Inc.), Copper Mountain Networks, Inc., Diamond Lane (which
was 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.
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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 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. Accordingly, the values of the unexercised in-the-money options have been
calculated on the basis of an assumed initial public offering price of
$ per share, less the applicable exercise price.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at September 30, In-The-Money Options
1998 at September 30, 1998 ($)
-------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Name Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------------------------------- ----------- ------------- --------------- -----------------
Stephen A. Ide...................................... -- -- -- --
Rajeev Agarwal...................................... 120,667 299,332 -- --
Christopher P. Whalen............................... 5,333 34,667 -- --
</TABLE>
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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 the Company 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
40
<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 THE COMPANY. 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
the Company'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
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<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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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 named executive
officers;
- 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% -- --
Rajeev Agarwal(3)..................................... 205,333 2.50% 205,333
Stephen A. Ide(4)..................................... 120,000 1.47% 120,000
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%
</TABLE>
- ------------------------------------
* Less than 1%
(1) Assumes the underwriters do not elect to exercise the over-allotment option
to purchase an additional 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.
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<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
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<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.
45
<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 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.
Following the offering, all the outstanding shares of common stock will be
legally issued, fully paid and nonassessable.
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.
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<PAGE>
Options
As of June 15, 1999, the Company 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 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 may demand that
we file a registration statement for the registration of its shares under the
Securities Act. After the closing of the offering, Brooktrout also will be
entitled to piggyback registration rights in connection with any registration by
us of securities for our own account or the account of other stockholders. If we
propose to register any shares of common stock under the Securities Act, we are
required to give Brooktrout notice of the registration and to include its shares
in the registration statement. At any time after we become eligible to file a
registration statement on Form S-3, Brooktrout may require us to file an
unlimited number of registration statements on Form S-3 under the Securities Act
with respect to its shares of common stock.
We are generally required to bear all of the expenses of all demand and
piggyback registrations, except underwriting discounts and commissions. We also
have agreed to indemnify Brooktrout under the terms of the Stockholders 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.
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<PAGE>
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.
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
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<PAGE>
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 .
49
<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, shares of common stock will be outstanding. See
"Capitalization." Of these shares, the shares sold in this offering will
be freely tradeable without restriction under the Securities Act except for any
shares purchased by "affiliates" of the Company as defined in Rule 144 under the
Securities Act. The remaining 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 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, 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.
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<PAGE>
UNDERWRITING
The underwriters named below, for whom U.S. Bancorp Piper Jaffray, Warburg
Dillon Read LLC, a subsidiary of UBS AG, and Tucker Anthony Cleary Gull 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.........................................................
Total......................................................................
</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.
Of the ordinary shares offered by us, up to shares will
be reserved for sale to persons designated by us. 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 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.
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
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<PAGE>
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.
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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 have been so included in reliance upon said report 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.
54
<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 $464,000 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 six months ended March 31, 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
Revenue from product sales is recognized upon the shipment of product. Revenue
from maintenance and support contracts is deferred and recognized ratably over
the service period. The purchase price of products sold by the Company generally
includes one year of maintenance and support, the value of which is unbundled
and recognized ratably over the service period. The Company accrues the
estimated cost of providing warranty services at the time that the sale is
recognized.
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.
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)
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.
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-14
<PAGE>
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
June , 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........................................................... *
Accounting Fees and Expenses................................................................. *
Legal Fees and Expenses...................................................................... *
Printing Expenses............................................................................ *
Blue Sky Qualification Fees and Expenses..................................................... *
Transfer Agent's Fee......................................................................... *
Miscellaneous................................................................................ *
TOTAL.................................................................................... $ *
---------
---------
</TABLE>
The amounts set forth above, except for the Securities and Exchange Commission,
National Association of Securities Dealers, Inc. and Nasdaq National Market
fees, 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
II-2
<PAGE>
share 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
II-3
<PAGE>
share 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 June , 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 (included on page ).
27.1 Financial Data Schedule.
- ------------------------------------
* To be filed by amendment to this registration statement.
** Confidential treatment requested as to these exhibits.
</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 Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Town of North Andover,
Commonwealth of Massachusetts, on June 18, 1999.
INTERSPEED, INC.
BY: /S/ STEPHEN A. IDE
-----------------------------------------
Stephen A. Ide
President
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS that each individual whose signature appears
below constitutes and appoints each of Stephen A. Ide and William J. Burke such
person's true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution, for such person and in such person's name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement (or to any
other registration statement for the same offering that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act), and to file the same,
with all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto each said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that any said attorney-in-fact and agent, or any
substitute or substitutes of any of them, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this 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 June 18, 1999
Stephen A. Ide Officer)
Chief Technology Officer,
/s/ RAJEEV AGARWAL Senior Vice
- ------------------------------ President-Research and June 18, 1999
Rajeev Agarwal Development and Director
Chief Financial Officer,
Senior Vice
/s/ WILLIAM J. BURKE President-Finance, and
- ------------------------------ Treasurer (Principal June 18, 1999
William J. Burke Financial and Accounting
Officer)
/s/ ERIC R. GILER Director
- ------------------------------ June 18, 1999
Eric R. Giler
/s/ ROBERT G. BARRETT Director
- ------------------------------ June 18, 1999
Robert G. Barrett
/s/ PAUL J. SEVERINO Director
- ------------------------------ June 18, 1999
Paul J. Severino
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 June , 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 (included on page II-7).
27.1 Financial Data Schedule.
- ------------------------------------
* To be filed by amendment to this registration statement.
** Confidential treatment requested as to these exhibits.
</TABLE>
<PAGE>
THE BROOKTROUT INTERSPEED, INC.
1997 STOCK OPTION PLAN
AS ADOPTED BY THE BOARD OF DIRECTORS OF THE COMPANY ON APRIL 11, 1997
AS AMENDED BY THE BOARD OF DIRECTORS ON JUNE 17, 1999
The purpose of this Plan is to encourage and enable employees
Brooktrout Interspeed, Inc. (the "Company") and of any subsidiary corporation of
which 50% or more of the outstanding voting stock is owned by the Company (a
"Subsidiary") to acquire an interest in the Company through the granting of
stock options, as herein provided (the "Options"). By encouraging such
individuals to acquire or increase their ownership of its stock, the Company
seeks to attract and retain the services of persons of exceptional competence
and to furnish an added incentive for them to increase their efforts on behalf
of the Company. The Options that may be granted hereunder include both incentive
stock options ("Incentive Stock Options") as provided under the Internal Revenue
Code of 1986, as amended (the "Code"), and Options that are not qualified under
the Code ("Non-Qualified Options").
1. SHARES OF STOCK SUBJECT TO THE PLAN
The stock that may be issued and sold pursuant to Options granted
under the Plan shall not exceed, in the aggregate, four hundred ninety-seven
thousand (497,000) shares of the common stock, $.01 par value, of the Company
(the "Common Stock"), which may be (i) either authorized but unissued shares
or treasury shares or (ii) shares previously reserved for issue upon exercise
of Options under the Plan, which Options have expired or been terminated;
provided, however, that the number of shares subject to the Plan shall be
subject to adjustment as provided in Section 8.
2. ELIGIBILITY
Incentive Stock Options may be granted to persons who are employees of
the Company or a Subsidiary and eligible to receive an Incentive Stock Option
under the Code. In addition, Non-Qualified Options may be granted under the Plan
to non-employee directors of the Company, to consultants to the Company and to
such other persons as the Board may select from time to time.
3. ADMINISTRATION
The Board of Directors of the Company (the "Board") acting by a
majority of its members, shall determine the employees and other persons to be
granted Options ("Optionees") and, in each case, the number of Options, the
number of shares subject to each Option, the vesting schedule for each Option
and the form of each Option. The Board shall also determine, interpret and
construe any provision of the Plan and any Option and shall effect the grant of
Options under the Plan. The Board may appoint from its members a committee of
two or more persons who may exercise the powers of the Board in granting Options
and taking any other action under the Plan. Any of the foregoing actions taken
by the Board or the
1
<PAGE>
committee appointed by the Board shall be final and conclusive and shall be
binding on each Optionee.
4. PRICE
The purchase price of shares that may be purchased under each Incentive
Stock Option shall be at least equal to the fair market value (determined as of
the date of grant of the Option) per share or, in the case of a stockholder
owning more than ten percent of the total combined voting power of all classes
of stock of the Company, as determined under the Code (a "greater-than-ten
percent stockholder"), 110% of such fair market value.
5. NATURE OF OPTION AND CERTAIN LIMITATIONS ON AMOUNT OF GRANT
The aggregate fair market value (determined as of the date of grant of
the Option) of the shares of Common Stock as to which any Incentive Stock Option
granted under the Plan shall first become exercisable (I.E., shall "vest") in
any calendar year shall not exceed $100,000. To the extent that the shares of
Common Stock as to which any Option granted under the Plan shall vest in any
calendar year shall have a fair market value (determined as of the date of the
grant of the Option) in excess of $100,000, or to the extent that the Board
shall so specify upon the grant of any Option under the Plan, such Option shall
be a Non-Qualified Option with respect to such excess or specified shares of
Common Stock.
6. PERIOD OF OPTION AND CERTAIN LIMITATIONS ON RIGHT TO EXERCISE
Each Option shall be exercisable at such time or times as the Board
shall from time to time determine but, with respect to an Incentive Stock
Option, in no event after the expiration of ten years (five years in the case of
a greater-than-ten percent stockholder) from the date such Option is granted.
The delivery of certificates representing shares under any Option will be
contingent upon receipt by the Company from the Optionee (or a purchaser acting
in his stead in accordance with the provisions of the Option) of the full
purchase price for such shares and the fulfillment of any other requirements
contained in the Option or applicable provisions of law. No Optionee or person
entitled to exercise the Option shall be, or shall be deemed to be, a holder of
any shares subject to the Option for any purpose unless and until certificates
for such shares are issued to such Optionee under the terms of the Plan.
7. NON-TRANSFERABILITY OF OPTION
Options granted under the Plan shall not be transferable by the
Optionee, other than by will or the laws of descent and distribution, and are
exercisable during the Optionee's lifetime only by the Optionee.
2
<PAGE>
8. DILUTION OR OTHER ADJUSTMENTS
If the Company effects a subdivision or consolidation of shares or
other capital readjustment, the payment of a stock dividend, or other increase
or reduction of the number of shares of the Common Stock outstanding, without
receiving compensation therefor in money, services or property, then (i) the
number, class, and per share price of shares of stock subject to outstanding
Options hereunder shall be appropriately adjusted in such a manner as to entitle
an Optionee to receive upon exercise of an Option, for the same aggregate cash
consideration, the same total number and class of shares the optionee would have
received as a result of the event requiring the adjustment had the Optionee
exercised the Option in full immediately prior to such event; and (ii) the
number and class of shares then reserved for issuance under the Plan shall be
adjusted by substituting for the total number of shares of Common Stock then
reserved that number and class of shares of stock that would have been received
by the owner of an equal number of outstanding shares of Common Stock as the
result of the event requiring the adjustment.
9. TAX WITHHOLDING
Each Optionee shall, no later than the date as of which the value of an
Option or of any Common Stock or other amount received thereunder first becomes
includable in the gross income of the participant for Federal income tax
purposes, pay to the Company, or make arrangements satisfactory to the Board
regarding payment of, any Federal, State, or local taxes of any kind required by
law to be withheld with respect to such income. The Company shall, to the extent
permitted by law, have the right to deduct any such taxes from any payment of
any kind otherwise due to the Optionee. An Optionee may elect to have such tax
withholding obligation satisfied, in whole or in part, by (i) authorizing the
Company to withhold from shares of Common Stock to be issued pursuant to any
Option a number of shares with an aggregate fair market value that would satisfy
the withholding amount due, or (ii) transferring to the Company shares of Common
Stock owned by the Optionee with an aggregate fair market value that would
satisfy the withholding amount due.
10. WRITTEN AGREEMENT
Each Option granted hereunder shall be embodied in a written Option
agreement, which shall be subject to the terms and conditions prescribed above
and shall be signed by the President or any Vice President of the Company for
and in the name of and on behalf of the Company. Such an Option agreement may
contain such other provisions as the Board in its discretion shall deem
advisable.
11. AMENDMENT OF THE PLAN
The Board may modify, amend or revise this Plan at any time and from
time to time. Such action shall be binding on all Options theretofore granted
hereunder, except as otherwise provided in the written agreement with respect to
a particular Option.
3
<PAGE>
12. EXPIRATION AND TERMINATION OF THE PLAN
Options may be granted under the Plan at any time, or from time to
time, prior to the date ten years after the date of adoption of this Plan as set
forth above. The Plan may be abandoned or terminated at any time by the Board,
except with respect to any Options then outstanding under the Plan.
4
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED AS TO CERTAIN
INFORMATION CONTAINED IN THIS EXHIBIT
Exhibit 10.4
TRANSITION SERVICES AGREEMENT
BY AND BETWEEN
BROOKTROUT, INC.
AND
INTERSPEED, INC.
DATED AS OF
-----------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE 1. SERVICES TO BE PERFORMED; TERM; PERFORMANCE AND COOPERATION............................ 1
ARTICLE 2. PAYMENT ............................................................................... 3
ARTICLE 3. RELATIONSHIP OF PARTIES................................................................ 3
ARTICLE 4. CERTAIN PROVISIONS .................................................................... 3
ARTICLE 5. MISCELLANEOUS ......................................................................... 4
</TABLE>
Schedules
<TABLE>
<S> <C> <C>
Schedule A - Payroll Processing and Administration
Schedule B - Human Resources Information System
Schedule C - Benefits
Schedule D - Marketing
Schedule E - Information Technology and Telecommunications
Schedule F - Accounts Receivable
Schedule G - Accounting and Finance
Schedule H - Order Entry
Schedule I - Use of Interspeed Name on Forms
</TABLE>
Tables
<TABLE>
<S> <C>
Table 1 - Transition Services Fees
</TABLE>
(i)
<PAGE>
TRANSITION SERVICES AGREEMENT
THIS TRANSITION SERVICES AGREEMENT ("Agreement") is made as of _____,
1999, by and between Brooktrout, Inc., a Massachusetts corporation
("Brooktrout") and Interspeed, Inc., a Delaware corporation ("Interspeed").
RECITALS
WHEREAS, Interspeed plans to consummate its initial public offering
on _____________, 1999, as per the Form S-1 Registration Statement dated
______, 1999, for its business located principally at 39 High Street, North
Andover, MA 01845, the date and time at which the closing of the initial
public offering occurred being referred to herein as the "Closing Date";
WHEREAS, in further consideration of the initial public offering and
related transactions, Interspeed will require Brooktrout's assistance to manage
certain operations of the Business during periods specified herein following the
Closing Date; and
WHEREAS, in connection with and as a condition precedent to the closing
of the initial public offering, Brooktrout has agreed to provide certain
services to Interspeed following the Closing Date and Interspeed desires to
avail themselves of such services on the terms and conditions as hereinafter
provided.
NOW THEREFORE, in consideration of the mutual agreements and covenants
herein contained and intending to be legally bound hereby, the parties hereto
hereby agree as follows:
ARTICLE 1. SERVICES TO BE PERFORMED; TERM; PERFORMANCE AND COOPERATION.
(a) In accordance with the terms and provisions of this
Agreement, Brooktrout agrees to perform for Interspeed the services described
in Schedules A through K hereto (collectively, the "Services") in the amounts
and to the extent specified with respect to each such Service in the
applicable Schedule. Brooktrout shall have no obligation to provide any
Services requiring any change or addition to their hardware, software,
systems, training or personnel requirements other than those necessary prior
to the Closing Date, and as outlined in this agreement for the transition
period.
(b) This Agreement shall become effective as of the Closing
Date and shall terminate with respect to each Service on the date specified for
such Service or as determined in accordance with the applicable Schedule hereto.
(c) Notwithstanding anything to the contrary contained herein,
this Agreement may be terminated, in whole or in part, at any time:
(i) by the mutual consent of Interspeed and Brooktrout;
(ii) by Interspeed in the event of any material breach or
default by Brooktrout of any obligations under this
Agreement and the failure of Brooktrout, as
appropriate, to cure, or to take substantial steps
towards the curing of, such breach or default within
thirty days after receipt of
<PAGE>
written notice from Interspeed requesting such breach
or default to be cured; or
(iii) by Brooktrout in the event of any material breach or
default by Interspeed's obligations under this
Agreement and the failure of Interspeed to cure, or
to take substantial steps towards the curing of, such
breach or default within thirty days after receipt of
notice from Brooktrout requesting such breach or
default to be cured.
(d) "Commercially reasonable efforts" or similar variations
thereof when used in this Agreement, mean that the obligated party is required
to make a diligent, reasonable and good faith effort to accomplish the
applicable objective. Such obligation, however, does not require an expenditure
of funds or the incurrence of a liability on the part of the obligated party,
nor does it require that the obligated party act in a manner that would be
contrary to normal commercial practices in order to accomplish the objective.
The fact that the objective is not actually accomplished is no indication that
the obligated party did or did not in fact utilize its reasonable commercial
efforts in attempting to accomplish the objective.
(e) Brooktrout shall use commercially reasonable efforts, as
defined in section (d) above, in the timely provision of the Services and
Interspeed shall use such commercially reasonable efforts to cooperate with
Brooktrout in connection with the provision of the Services. Such cooperation
shall include exchanging information, providing electronic access to data
systems used in connection with Services, performing true-ups and adjustments,
and obtaining all consents, licenses, sublicenses or approvals necessary or
desirable to permit each party to perform its obligations hereunder. In the
event there are any costs associated with obtaining such consents, licenses,
sublicenses or approvals, and if an acceptable arrangement concerning the
payment of such amounts cannot be agreed to by Brooktrout and Interspeed, then
Brooktrout shall not be required to continue providing the Service with respect
to which such consent, license, sublicense or approval is being obtained, except
as provided in Article 1(g) hereof.
(f) Brooktrout shall provide Services consistent with such
entity's past practices and at substantially the same level and quality as
provided by such entity as of the Closing Date. Brooktrout shall provide
Services in a time frame consistent with such entity's past practice and such
that Services respond to new developments in a timely manner, consistent with
such entity's past practice. Notwithstanding the foregoing, Brooktrout makes no
warranties of any kind, express or implied, with respect to any Services
provided hereunder. As needed from time to time during the period during which
Services are provided, and upon termination of the provision of any Services,
Brooktrout will provide Interspeed with all records (in any format, electronic
or otherwise) related to the provision of Services under this Agreement,
including, but not limited to, billing and other Business related records.
(g) The parties will consult with each other in good faith, as
required, with respect to the furnishing of and payment for special or
additional services, extraordinary items and the like, and will establish
pre-approval routines to the extent reasonably feasible.
(h) If Brooktrout reasonably believes it is unable to provide
any Service or, in the case of data systems, to support the function which the
data system relates, notwithstanding the use by Brooktrout of commercially
reasonable efforts as defined in section (d) above, to provide such Service
2
<PAGE>
or to support such function, the parties shall cooperate to determine the best
alternative approach. Until such alternative approach is found or the problem is
otherwise resolved to the satisfaction of the parties, Brooktrout shall (i) use
commercially reasonable efforts to continue providing the Service or, (ii) in
the case of data systems, support the function to which the data system relates
or permit Interspeed to have access to the data system so Interspeed can support
the function itself. To the extent an agreed upon alternative approach requires
payment above and beyond that which is included in Brooktrout's charge for the
Service in question, Interspeed shall be responsible for such payment in an
amount of Brooktrout's direct costs.
ARTICLE 2. PAYMENT. In consideration for the Services to be provided by
Brooktrout hereunder, Interspeed shall pay to Brooktrout such fees and costs as
set forth in Schedules A through H, and Table 1, hereto. Brooktrout shall not be
entitled to any other payments in respect of the Services to be provided to
Interspeed hereunder.
The fees for the Services shall be payable monthly in arrears.
Brooktrout shall forward to Interspeed separate invoices for the Services,
listing the services provided hereunder and listing the fees for such Services.
Invoices shall be payable within 30 days after receipt by Interspeed.
Interspeed shall additionally be responsible for the payment of any
applicable sales taxes relating to the provision of goods or services received
with respect to Services provided by Brooktrout hereunder, but not any taxes
attributable to Brooktrout's income.
ARTICLE 3. RELATIONSHIP OF PARTIES.
(a) All employees and representatives of Brooktrout
providing Services hereunder to Interspeed under this Agreement shall be
deemed for purposes of all compensation and employee benefits to be employees
or representatives solely of Brooktrout, as appropriate, and not to be
employees or representatives of Interspeed. In performing their respective
duties hereunder, all such employees and representatives of Brooktrout shall
be under the direction, control and supervision of Brooktrout (and not of
Interspeed) and Brooktrout shall have the sole right to exercise all
authority with respect to the employment (including termination of
employment), assignment and compensation of such employees and
representatives.
(b) The parties hereto are independent contractors, and neither
party nor its employees or agents will be deemed to be employees or agents of
the other for any purpose or under any circumstances. No partnership, joint
venture, alliance, fiduciary or any relationship other than that of independent
contractors is created hereby, expressly or by implication.
ARTICLE 4. CERTAIN PROVISIONS.
(a) SPECIFIC PERFORMANCE. Upon a breach of this Agreement by
Brooktrout, Interspeed shall, in addition to all other remedies (other than
indirect or consequential damages, which shall not be available), whether at law
or in equity, be entitled to specific performance and any other available
equitable remedy.
(b) INDEMNITY.
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(i) Brooktrout shall be liable, responsible and
accountable for damages, losses, liabilities, claims,
costs or expenses (including reasonable attorneys'
fees) only for gross negligence, willful misconduct
or willful refusal to act in the provision of
Services to Interspeed. Brooktrout shall not be
liable, responsible or accountable for damages
losses, liabilities, claims, costs or expenses
(including reasonable attorneys' fees) under this
Agreement except as expressly set forth in the
immediately preceding sentence.
(ii) Interspeed shall indemnify, defend, and hold harmless
Brooktrout and its respective directors, officers,
shareholders, employees, agents and controlling
persons from and against any and all losses, claims,
damages, liabilities, costs and expenses (including
any investigatory, legal and other expenses incurred
in connection with, and any amounts paid in, any
settlement) resulting from a demand, claim, lawsuit,
action or proceeding relating to any such person's
conduct in connection with the provision of Services
to Interspeed under this Agreement, provided that
such conduct did not constitute gross negligence,
willful misconduct, willful refusal to act or breach
of this Agreement by Brooktrout.
(c) NO CONSEQUENTIAL DAMAGES. NOTWITHSTANDING ANYTHING
CONTAINED IN THIS AGREEMENT TO THE CONTRARY, IN NO EVENT SHALL EITHER PARTY BE
LIABLE FOR INCIDENTAL, SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES
(INCLUDING LOST PROFITS OR LOST REVENUES) OF THE OTHER PARTY, ITS SUCCESSORS,
ASSIGNS OR THEIR RESPECTIVE AFFILIATES, AS A RESULT OF OR ARISING FROM THIS
AGREEMENT, REGARDLESS OF WHETHER SUCH LIABILITY ARISES IN TORT, CONTRACT, BREACH
OF WARRANTY, INDEMNIFICATION OR OTHERWISE.
ARTICLE 5. MISCELLANEOUS.
(a) GOVERNING LAW. This Agreement shall be deemed a
contract made under the laws of the Commonwealth of Massachusetts and,
together with the rights and obligations of the parties hereunder, shall be
construed under and governed by the law of the Commonwealth of Massachusetts,
without regard to the conflicts of law provisions thereof.
(b) FORCE MAJEURE. Neither party will have any liability for
damages or delay due to fire, explosion, lightning, pest damage, power failure
or surges, strikes or labor disputes, water or flood, acts of God, the elements,
war, civil disturbances, acts of civil or military authorities or the public
enemy, acts or omissions of communications or other carriers, or any other cause
beyond a party's reasonable control, whether or not similar to the foregoing.
(c) SUBCONTRACTING AND ASSIGNMENT.
(i) Brooktrout may subcontract any or all of the
functions or Services to be performed by either
entity under this Agreement with the consent of
Interspeed, which consent shall not be unreasonably
withheld, but will retain responsibility for all
matters subcontracted.
4
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(ii) This Agreement and all the provisions hereof shall be
binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted
assigns, but neither this Agreement nor any of the
rights, interests or obligations hereunder shall be
assignable or transferable by either party without
the prior written consent of the other party hereto,
and any such unauthorized assignment or transfer will
be void. Notwithstanding the foregoing Interspeed may
assign this Agreement to any direct or indirect
affiliate of such entity.
(d) ENTIRE AGREEMENT; MODIFICATION. This Agreement and the
Schedules attached hereto constitute the entire agreement between the parties
with respect to the subject matter hereof and shall supersede all previous
negotiation, commitments and writings with respect to Services. This Agreement
and the Schedules attached hereto may not be altered, modified or amended except
by a written instrument signed by all affected parties.
(e) NO DUTY OF VERIFICATION. In the absence of actual knowledge
to the contrary, Brooktrout shall have no responsibility for verifying the
correctness of any information given to it by or on behalf of Interspeed for the
purpose of providing the Services.
(f) WAIVERS. The failure of any party to require the
performance or satisfaction of any term or obligation of this Agreement, or the
waiver by any party of any breach of this Agreement, shall not prevent
subsequent enforcement of such term or obligation or be deemed a waiver of any
subsequent breach.
(g) SEVERABILITY. In the event that any court having
jurisdiction shall determine that any restrictive covenant or other provision
contained in this Agreement shall be unreasonable or unenforceable in any
respect, then such covenant or other provision shall be deemed limited to the
extent that such court deems it reasonable and enforceable, and so limited shall
remain in full force and effect. In the event that such court shall deem any
such covenant or other provision wholly unenforceable, the remaining covenants
and other provisions of this Agreement shall nevertheless remain in full force
and effect.
(h) NOTICES. Any notice, request, demand or other communication
required or permitted hereunder shall be in writing and shall be deemed to have
been given if delivered or sent by facsimile transmission, upon receipt, or if
sent by registered or certified mail or by a nationally recognized commercial
carrier, upon the sooner of the date on which receipt is acknowledged or the
expiration of three days after deposit in United States post office facilities
properly addressed with postage prepaid. All notices to a party will be sent to
the addresses set forth below or to such other address or person as such party
may designate by notice to each other party hereunder:
TO BROOKTROUT: BROOKTROUT, INC.
410 First Avenue
Needham, MA 02494
ATTENTION: Eric R. Giler, President
Facsimile No.: (781) 449-2025
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<PAGE>
With a copy to Goodwin Procter & Hoar LLP
Exchange Place
Boston, MA 02109
Attn: H. David Henken, P.C.
Thomas P. Storer, P.C.
Facsimile No.: (617) 523-1231
TO INTERSPEED: INTERSPEED, INC.
39 High Street
North Andover, MA 01845
ATTENTION: Stephen A. Idle, President
Facsimile No.: (978) 668-4798
with a copy to: Goodwin Procter & Hoar LLP
Exchange Place
Boston, MA 02109
Attn: H. David Henken, P.C.
Thomas P. Storer, P.C.
Facsimile No.: (617) 523-1231
Any notice given hereunder may be given on behalf of any party by his
counsel or other authorized representatives.
(i) DISPUTES. Except with respect to matters as to which
injunctive relief is being sought, any dispute arising out of or relating to
this Agreement that has not been settled within thirty (30) days by good faith
negotiation between the parties to this Agreement shall be submitted to the
JAMS/Endispute, Inc. for final and binding arbitration pursuant to the
JAMS/Endispute, Inc.'s Arbitration Rules. Any such arbitration shall be
conducted in Boston, Massachusetts.
(j) SURVIVAL OF OBLIGATIONS. The obligations of the parties
under Articles 2, 4(b), 4(c), 5(a), 5(d), 5(g), 5(h), and 5(i) shall survive the
expiration of this Agreement.
(k) TITLE AND HEADINGS. Titles and headings to sections herein
are inserted for convenience of reference only and are not intended to be part
of or to affect the meaning or interpretation of this Agreement.
(l) EXECUTION IN COUNTERPARTS. This Agreement may be executed
in any number of counterparts, each of which shall be deemed an original, but
all of which together shall constitute one and the same instrument.
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IN WITNESS WHEREOF, both Brooktrout and Interspeed have caused this
Agreement to be duly executed on its behalf by its duly authorized officer as of
the date first written above.
BROOKTROUT, INC.
By:
----------------------------
Name:
-----------------------
Title:
----------------------
INTERSPEED, INC.
By:
----------------------------
Name:
-----------------------
Title:
----------------------
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<PAGE>
SCHEDULE A
PAYROLL PROCESSING AND ADMINISTRATION
Scope: Brooktrout will provide payroll processing and administration
services for Interspeed comparable to those provided prior to
the Closing Date. Such services include calculation of
payroll, disbursement of paychecks and making direct deposits,
and collecting and forwarding payroll taxes and other
deductions, all on behalf of and for the account of
Interspeed.
1) During the period beginning on , 1999 through the end of
the Term described below, Brooktrout will pay the employees of
Interspeed, net of any taxes or other deductions such as
employee contributions to Flexible Spending Reimbursement
Accounts described on Schedule C hereof. Brooktrout will
deduct the gross payroll cost directly from Interspeed's cash
account.
2) Brooktrout will not make deductions with respect to the Brooktrout
401(k) Plan on or after , 1999, however, deductions will be made and
credited to a new Interspeed 401(k) Plan immediately upon adoption of
such Plan by Interspeed.
3) Brooktrout will provide Interspeed with a schedule showing the exact
nature of payments and deductions made by Brooktrout on behalf of
Interspeed.
4) The fees for set up of Interspeed hourly payroll charged by an
outside payroll processor will be directly billed to Interspeed, in
addition to payroll processing fees charged by the provider for such
hourly payroll processing.
Term: Terminates after the October 31, 1999 payroll has been processed,
although Interspeed may request an earlier termination.
Fees: Reimbursement by Interspeed for payroll processing and
administration services is outlined in Table 1. Interspeed
will reimburse Brooktrout for any payroll paid on behalf of
Interspeed for any period following the Closing Date within
two days after receipt of information from Brooktrout.
i
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SCHEDULE B
HUMAN RESOURCES
Scope: INFORMATION SYSTEMS:
Brooktrout will maintain the Interspeed human resources
database, process changes to such database and provide
Interspeed with current access methods. Brooktrout will
provide the following employee information from the database
via an Excel format: social security number, first, middle and
last names, address, city, state, zip codes, position titles,
marital status, date of birth, date of hire, gender, race
codes, exempt/non-exempt status, hourly or annual salary rates
(dependent upon exemption status), next review dates, federal
marital status, tax code, federal and state exemption numbers.
PERSONNEL FILES:
Brooktrout will transfer the personnel files to Interspeed at
the end of the transition services period.
RECRUITING AND HIRING:
Brooktrout will provide a reasonable level (up to 15 hours per
week) of recruiting and hiring support as needed by
Interspeed. Should the recruiting needs increase, Brooktrout
will provide assistance in hiring a contract recruiter.
Term: Terminates on October 31, 1999, although Interspeed may
request an earlier termination.
Fees: Reimbursement by Interspeed for human resources services is
outlined in Table 1.
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SCHEDULE C
BENEFITS
Scope: Brooktrout will permit all active employees of Interspeed as of
the Closing Date and their dependents, if applicable, to remain
in all welfare benefit plans maintained by Brooktrout for the
employees of Interspeed as of the Closing Date, including, but
not limited to, the following welfare benefits:
INSURANCE PLANS:
medical insurance
dental insurance
short-term disability insurance, long-term disability insurance
accidental death and dismemberment insurance, travel insurance
life insurance
With respect to the foregoing benefits, Brooktrout will provide
coverage, process changes in participation (including new hires
and terminations), and process claims under all policies.
WORK AND FAMILY PROGRAM:
employee assistance program
FLEXIBLE SPENDING REIMBURSEMENT ACCOUNTS:
health care
dependent care
With respect to the foregoing benefits, Brooktrout will provide
deduction, disbursement and plan administration services; and
will work with the Flexible Spending Reimbursement Accounts
provider to transfer ending account balances to the new
employer's plan.
"COBRA" CONTINUATION HEALTH CARE COVERAGE:
Brooktrout will provide continuation health care coverage as
required under Section 4980B of the Code and Sections 601
through 607 of ERISA as of the Closing Date ("COBRA") to those
employees of Interspeed incurring COBRA qualifying events who
become eligible for COBRA continuation coverage on or after the
Closing Date but before November 1, 1999 (or such earlier date
specified by Interspeed).
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401(K) PLAN ADMINISTRATION As noted in Schedule A, Brooktrout
will not make deductions with respect to the Brooktrout 401(k)
on or after , 1999. The assets of the 401(k) participants will
be transferred into the new employer's plan.
Term: Insurance Plans, Work and Family Programs, Flexible Spending
Reimbursement Accounts, and COBRA Continuation Health Care
Coverage terminates on the date that payroll services terminate
pursuant to Schedule A.
Fees: Interspeed will reimburse Brooktrout for its cost of providing
such benefits at a per capita rate for the actual time coverage
is in effect at the actual provider rates. Reimbursement by
Interspeed for benefits services is outlined in Table 1.
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<PAGE>
SCHEDULE D
MARKETING
Scope: Brooktrout will provide a reasonable level of Corporate
Marketing and management support, consistent with the level of
support provided to Interspeed prior to the Closing Period.
Marketing support services include advertising, promotions, web
site maintenance, collateral, public relations, and trade shows.
Term: Terminates on December 31, 1999, although Interspeed may request
an earlier termination.
Fees: Spending commitments will be pre-approved by Interspeed and all
marketing program costs will be paid to Brooktrout by
Interspeed at actual amounts incurred. Reimbursement by
Interspeed for marketing services is outlined in Table 1.
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SCHEDULE E
INFORMATION TECHNOLOGY AND TELECOMMUNICATIONS
Scope: Brooktrout will continue to support Interspeed with information
technology and systems support to a reasonable level, similar to
that provided prior to the Closing Date. Support includes
general Oracle system support, WAN service support, voice system
support as needed, and support of software, hardware, systems
and maintenance related to the following:
SYSTEMS SUPPORTED:
*** Confidential Treatment Requested as to this Information***
HARDWARE AND MAINTENANCE:
*** Confidential Treatment Requested as to this Information***
In order to provide adequate support on a timely basis,
Interspeed must coordinate with Brooktrout all changes or
enhancements made to their network, so as to ensure that the
above listed systems remain operable. Additional support
required to remedy the above systems due to network changes will
be invoiced separately and are not quoted in this agreement.
At the termination of this Transition Services Agreement,
Brooktrout will provide all of the data requested by Interspeed
from the above referenced systems, in reasonable format such
that Interspeed can import such data into their systems at
termination of this agreement.
Term: Terminates on December 31, 1999, but Interspeed may request an
earlier termination.
Fees: Reimbursement by Interspeed for information technology and
telecommunications services is outlined in Table 1. The cost of
an outside consultant contracted with mutual agreement of both
parties to download data to files for import by Interspeed will
be paid by Interspeed at actual invoice cost.
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SCHEDULE F
ACCOUNTS RECEIVABLE
Scope: Brooktrout's accounts receivable department will accept,
deposit and apply all checks and wire transfers received on
behalf of Interspeed. Collections will be wired weekly to an
account designated by Interspeed, and all documentation will
be sent weekly via overnight mail to Interspeed.
Term: Terminates on December 31, 1999, but Interspeed may request an
earlier termination.
Fees: Reimbursement by Interspeed of out of pocket expenses as
incurred (e.g., bank fees and delivery charges). Reimbursement
by Interspeed for accounts receivable services is outlined in
Table 1.
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<PAGE>
SCHEDULE G
ACCOUNTING AND FINANCE
Scope: Brooktrout will continue to support Interspeed with Accounting
and Finance support to a reasonable level, similar to that
provided prior to the Closing Date.
ACCOUNTING AND FINANCE SERVICES PROVIDED:
Accounts payable vouchering
Cash disbursements
Customer credit analysis
Customer invoicing
General ledger
Cost accounting
Fixed Assets
Month end closings
Financial reporting
Tax
RECORDS
Brooktrout will transfer accounting and finance records to
Interspeed at the end of the transition services period. Records
include:
(a) Paid suppliers invoices
(b) Customer invoices and supporting documentation
(purchase orders, packing slips)
(c) Customer credit files
Term: Terminates on December 31, 1999, but Interspeed may request an earlier
termination.
Fees: Actual invoice amounts, where invoices are processed by Brooktrout on
behalf of Interspeed, will be paid by Interspeed. Reimbursement by
Interspeed for accounting and finance services is outlined in Table 1.
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SCHEDULE H
ORDER ENTRY
Scope: Brooktrout will continue to support Interspeed order entry services
similar to that provided prior to the Closing Date.
Term: Terminates on December 31, 1999, but Interspeed may request an earlier
termination.
Fees: Reimbursement by Interspeed for order entry services is outlined in
Table 1 .
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SCHEDULE I
USE OF INTERSPEED NAME ON FORMS
Scope: During the transition period, Brooktrout will continue to use
Interspeed forms in the support services provided on behalf of
Interspeed. At the end of the transition period, Brooktrout will
transfer remaining forms to Interspeed. Documents include the
following:
(a) Invoices
(b) Checks
(c) Letterhead
Term: Transfer of the remaining forms will be done as the respective
supporting services are terminated by Brooktrout as outlined in this
Agreement.
Fees: None for existing stock; additional stock, if needed, will be purchased
by Interspeed.
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***Confidential Treatment Requested as
to this Information***
TABLE 1: TRANSITION SERVICES FEES
***Confidential Treatment Requested as
to this Information***
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED AS TO CERTAIN
INFORMATION CONTAINED IN THIS EXHIBIT
EX 10.5
INTERSPEED, INC.
601 SOUTH UNION STREET
LAWRENCE, MA 01843
U.S.A.
AUTHORIZED RESELLER AGREEMENT
Reseller Name: Cabletron Systems, Inc.
----------------------------------------------------------------
Effective Date:
----------------------------------------------------------------
This Authorized Reseller Agreement ("Agreement") states the agreement between
Interspeed, Inc. and the Reseller named above, Cabletron Systems, Inc., a
Delaware corporation with principal offices at 35 Industrial Way, Rochester,
New Hampshire 03867, hereinafter "Cabletron" with respect to said CABLETRON's
purchase and resale of certain Products of Interspeed as described herein. In
Consideration of the mutual promises contained herein, the parties agree as
follows:
Section 1. DEFINITIONS
For the purposes of this Agreement, the terms defined below shall have the
meanings indicated:
1.1 Interspeed - Interspeed, Inc. a Massachusetts corporation and its
affiliates. A Brooktrout Company.
1.2 Interspeed Product - a product as to which Interspeed is the
manufacturer or supplier as indicated on Schedule A.
1.3 Discount Schedule - Interspeed's established Cabletron Discount Schedule
as set forth in Schedule C, as such Cabletron Discount Schedule may be
changed by Interspeed from time to time upon thirty (30) days prior
written notice to Cabletron.
1.4 Effective Date - the effective date of this Agreement as set forth above.
1.5 Embedded Software - computer software or firmware in object code form,
which is delivered with a Hardware Product as a component thereof.
1.6 End User - an individual, corporation, partnership or other legal entity
("person") who uses Products only for such Person's personal or internal
business use, and not for resale or other distribution.
1.7 End User License - a license granted by Interspeed or a Third Party
Supplier to an End User to use a Software Product or Embedded Software,
including any "shrink wrap" or similar license accompanying a Software
Product or a Hardware Product which includes Embedded Software.
1.8 Hardware Products - Products which are not Software Products, as
identified on Schedule A. Hardware Products may include components of
Embedded Software.
1.9 Licensed Marks - those specific trademarks, service marks, product names
and trade names of Interspeed which are identified in Schedule D, and any
other such proprietary marks which Interspeed may authorize Cabletron in
writing to use.
1.10 List Price - the list price of any Product as set forth in Schedule B,
as such list prices may be changed by Interspeed from time to time upon
thirty (30) days prior written notice to Cabletron.
1.11 Minimum Quantity - the minimum quantity of Products measured by the Net
Discounted Price (as defined in Section 4.1), to be purchased by
Cabletron for purposes of Section 4.2, as set forth in Schedule A.
1.12 Products - those hardware, software and related products identified on
Schedule A.
1.13 Cabletron - the Reseller named above, as further identified on
Schedule A.
1.14 Term - the period commencing on the Effective Date and ending on the
expiration or termination of this Agreement for any reason.
1.15 Term Year - the initial term or any renewal term of this Agreement as
provided in Section 2.3.
1.16 Territory - the geographical area described in Schedule A.
1.17 Third Party Product - a Product as to which a Person other than
Interspeed is the manufacturer, licensor or supplier, as indicated on
Schedule A.
1.18 Third Party Supplier - the manufacturer, licensor or supplier of a
Third Party Product.
1.19 Update - a modification to a Software Product, which may include
corrections to errors in the prior release and may include minor changes
to functionality or user interface, but does not include any new features
or substantial changes to functionality.
1.20 Upgrade - any modification to a Product, which is not an Update.
<PAGE>
Section 2. DISTRIBUTION RIGHTS
2.1 By this Agreement, Interspeed makes, and Cabletron accepts the
appointment of Cabletron as an authorized non-exclusive Reseller of
Product(s) solely in accordance with the terms and conditions of this
Agreement to third parties on a worldwide basis. Cabletron reserves the
right to market the Products to any customer in any location, directly
or indirectly, through other resellers, and other distribution channels,
including, without limitation, distributors and OEM's.
2.2 Territory--Cabletron is authorized to sell, lease or otherwise
distribute the Products only in the Territory. Without Interspeed's
prior written consent, Cabletron shall not solicit customers outside of
the Territory or sell the Products to any customer for use outside of
the Territory.
2.3 Term--The Term of this Agreement shall commence on the Effective Date
and shall extend initially until the end of the calendar quarter in
which the first anniversary of the Effective Date occurs. Thereafter,
the term of this Agreement shall be automatically extended for successive
renewal terms of one calendar year, unless terminated in accordance with
Section 11.
2.4 Treatment of Software Products--In the case of software Products and
Embedded Software, Cabletron's rights hereunder include and are limited
to the right to distribute copies of such Software Products in the form
distributed by Interspeed, including the accompanying End User Licenses
with respect to such Software Products as embodied in such copies. In
certain cases, Interspeed may specify other procedures, to protect its
rights in Software Products and Embedded Software distributed by
Cabletron. Cabletron shall comply with Interspeed's instructions with
respect to such procedures and shall not take or encourage any action,
which might tend to defeat their purpose. As applied to Software
Products and Embedded Software, "sell," "resell" and similar terms shall
be deemed to refer to the transfer for consideration of such copies and
End User Licenses, without any transfer of ownership rights in the
underlying Software Product or Embedded Software.
2.5 Product Changes and New Products--This Agreement applies to the Products
specifically identified in Schedule A as they may be modified by
Interspeed from time to time. Interspeed reserves the right to make
changes in the Interspeed Products and Third Party Products are
expressly agreed by Interspeed. Interspeed shall be under no obligation
to appoint Cabletron as a reseller of any new or additional products
which may be sold or introduced by Interspeed. Interspeed shall exercise
reasonable best efforts to provide Cabletron with any enhancements or
improvements to the Interspeed Product, as soon as is practicable when
they become commercially available.
Section 3. MARKETING
3.1 Sales Efforts--Cabletron agrees to use its commercially reasonable best
efforts to promote the Products in the Territory. To assist Cabletron in
this regard, Interspeed will make available to Cabletron a supply of
sales brochures and technical documentation for the marketing and
promotion of the Products, which may be ordered by Cabletron at the
prices then in effect. Interspeed further will make available to
Cabletron the opportunity for its personnel to participate in sales and
technical training relating to the Products as offered by Interspeed
from time to time at prices then in effect. Cabletron shall be
responsible for the travel and other expenses of its personnel
attending such training.
Notwithstanding the above, Interspeed shall provide to Cabletron one (1)
set of technical documentation and one (1) set of user manuals for each
Interspeed Product, and twenty-five (25) sets of marketing brochures.
Interspeed agrees to furnish and update Product descriptions at no
charge for the initial order under this Agreement. Interspeed also
agrees to furnish and update at no charge technical documentation to
support Cabletron's planning, installation, testing, maintenance, and
operation of the Products, for the initial order under this Agreement.
Cabletron may make copies of Interspeed's Product description required
in response to prospects/customers' requests for proposal. Prior to or
contemporaneous with the delivery of Products, Interspeed shall provide
Cabletron with respect to each individual Product one (1) set of
documentation that addresses installation and maintenance of the Product.
Initial technical and sales training and information with respect to
installation and service of the Product, including training on any
special tools or test equipment, will be provided to Cabletron at no
cost for up to ten (10) people during the first six (6) months of this
Agreement. The training shall take place at a mutually agreed upon time
and location.
3.2 Licensed Marks--Cabletron is authorized to use the Licensed Marks in
connection with Cabletron's marketing and distribution of Products in
the Territory, solely in accordance with the terms of this Agreement,
including without limitation Section 10.2 and such reasonable
instructions and guidelines as Interspeed may establish in writing from
time to time.
3.3 Sales Information--Cabletron agrees to provide to Interspeed from time
to time, information with regard to Cabletron's customers, prospects and
marketing programs and plans, all in accordance with Interspeed's
reasonable requests and guidelines issued from time to time. All
information provided by Cabletron shall be deemed confidential unless
otherwise specified.
Section 4. PRICING & PAYMENT
4.1 Price--The price for units of the Products sold to Cabletron hereunder
("Net Discounted Price") shall be the product of (x) the list price of
the Product as in effect from time to time and (y) the Cabletron
Discount Level set forth in Schedule A, subject to adjustment as set
forth in Section. The current list price for the Products is set forth
in Schedule B. Cabletron acknowledges that the initial Cabletron
Discount Level as set forth in Schedule A has been determined on the
basis of the Minimum Quantity set forth in Schedule A. Cabletron
represents to Interspeed that it is Cabletron's best estimate and
expectation that it will purchase a quantity of Products at least equal
to such Minimum Quantity during the first Term Year under this
Agreement. Interspeed represents that the price charged for the Products
purchased hereunder by Cabletron are, when viewed as a whole, comparable
to the lowest prices charged by Interspeed to buyers of a class similar
to Cabletron purchasing in comparable quantities and circumstances and
under similar terms and conditions.
<PAGE>
4.2 Minimum Commitments--The Cabletron Discount level for the Products is
contingent upon Cabletron purchasing Products having a total Net
Discounted Price at least equal to the Minimum Quantity during each Term
Year. If Cabletron's actual amount of purchases of Products (measured by
Net Discount Price) for any Term Year exceeds the Minimum Quantity
applicable to a higher Discount Level, the Cabletron Discount Level
shall be increased for the next Term Year to the rate determined in
accordance with the Discount Schedule. Conversely, if Cabletron fails to
achieve the Minimum Quantity for any Term Year, Interspeed shall have
the right to reduce the Cabletron Discount Level for the next Term Year
in accordance with the Discount Schedule. Notwithstanding the foregoing,
Interspeed reserves the right to review the rate of actual purchases of
Products during any Term Year and increase or decrease the Cabletron
Discount Level applicable to such Term Year if the rate of actual
purchases varies substantially from the anticipated rate of purchases
during such Term Year.
4.3 Price Changes--Interspeed reserves the right, in its sole discretion, to
change prices applicable to the Products by written notice to Cabletron
no less than thirty (30) days prior to the effective date of such
change. All purchase orders which have been received by Interspeed prior
to the expiration of said 30 days for Products which are to be shipped
within 30 days from order receipt date shall be at the prices which were
in effect prior to the price change notification.
4.4 Payment--Except as otherwise set forth herein, any sum due to Interspeed
pursuant to this Agreement shall be payable within thirty (30) days from
the date of invoice from Interspeed to Cabletron. A "correct" invoice
shall contain (i) Interspeed's name and invoice date, (ii) the specific
Purchase Order Number, (iii) description, price and quantity of the
Products or Services actually delivered, and (iv) complete mailing
address of where payment is to be sent. A correct invoice must be
submitted to the appropriate invoice address listed on the Purchase
Order. Failure by Cabletron to make payments when due may result in
delay of other scheduled shipments.
4.5 Taxes--Cabletron shall pay to Interspeed any tax on the Products or use
thereof, however designated, levied or based by any taxing authority,
except any tax based on or measured by the net income of Interspeed.
4.6 Currency--All monetary amounts in this Agreement are in U.S. dollars and
payments are to be made in U.S. dollars.
Section 5. ORDERS & SHIPMENT
5.1 Orders--Cabletron shall order units of the Products by submitting its
authorized written purchase order(s) containing such information as may
be required by Interspeed from time to time. All orders for units of the
Products placed by Cabletron shall be subject only to the terms and
conditions of this Agreement, and no contrary or additional terms stated
on Cabletron's purchase order or otherwise presented by Cabletron shall
have any effect. Orders shall become binding upon acceptance by
Interspeed provided that any order shall be deemed accepted unless
Interspeed provides notice of rejection to Cabletron within ten (10)
working days after receipt of such order.
5.2 Initial Order--Upon signing this Agreement, Cabletron shall place an
initial order with Interspeed for the number of units of Products set
forth in Schedule A.
5.3 Delivery--Units of the Products are delivered by Interspeed F.O.B.
Interspeed's point of shipment. Although Interspeed shall use reasonable
efforts to ship the units of Products ordered by Cabletron according to
the requested ship date on Cabletron's orders, delivery shall be subject
to availability of materials and other factors that may affect shipment,
and Interspeed shall not be liable for any delays in delivery for any
reason. Interspeed shall select the carrier. Cabletron assumes all risk
of loss upon delivery of units of the Products to the carrier by
Interspeed. Units of the Products shall be deemed accepted by Cabletron
upon delivery.
5.4 Delivery Charges--Unless otherwise directed by Cabletron, Interspeed
shall prepay the freight and invoice Cabletron for the transportation
charges. Insurance shall be provided by Interspeed at Cabletron's
expense, on units of the Products while in transit unless otherwise
instructed by Cabletron. Cabletron shall be responsible for all storage,
rigging and other charges at Cabletron's delivery site.
5.5 Cancellation and Rescheduling--The initial order for seventy-five (75)
Product (Systems) under this Agreement shall be firm and may not be
canceled or rescheduled and delivery shall be taken no later than
December 31, 1999. For additional Products, beyond the initial order of
seventy-five (75) described above, the following provisions shall apply:
Cabletron may cancel a purchase order or any portion thereof at any time
up to twenty (20) business days prior to the scheduled delivery date of
the Products specified in such purchase order. In the event Cabletron
cancels a purchase order or any portion thereof within twenty (20)
business days of the scheduled delivery date Cabletron agrees to pay to
Interspeed a restocking charge equal to fifteen percent (15%) of the
total amount of order canceled or rescheduled.
Section 6. PRODUCTS
6.1 Interspeed Hardware Product Warranty--Interspeed warrants to Cabletron
that all Hardware Products which are Interspeed Products and are sold in
accordance with this Agreement shall be free from defects in materials
and workmanship under normal and proper use for a period of one year
from date of delivery to Cabletron. This warranty does not include
expendable components. Interspeed further warrants that all Products
will comply with all applicable federal, state and other governmental
safety regulations in effect at the time of manufacture, and will be
listed with Underwriter's Laboratory (UL) if so required. Interspeed
further will exercise reasonable best efforts in conjunction with
Cabletron to have the Products comply with other certification
requirements on a country by country basis. Interspeed further warrants
that all Products will comply with current rules and regulations of the
Federal Communications Commission (FCC) concerning Electromagnetic
Interference, including, without limitation, equipment labeling and
instruction manual information requirements. Interspeed further warrants
that the Products have passed all applicable governmental or commercial
safety, quality, emission, and other appropriate U.S. product standards,
including UL, CSA and UDF. Interspeed further warrants and represents
that (i) Interspeed is the sole and exclusive owner of all
<PAGE>
right, title and interest in and to the Products, has the full power,
right and authority to enter into this Agreement, carry out its
obligations under this Agreement and grant the rights granted to
Cabletron hereunder.
6.2 Software Products and Embedded Software--Interspeed has the right, as
owner or licensee to distribute and license the use of the Software
Products and the Embedded Software. All rights and obligations with
respect to the Software Products shall be directly between Interspeed or
the applicable Third Party Supplier and End Users of the Software
Products, in accordance with the terms of the End User License agreement
included with the Software Products or otherwise. Except as authorized
in writing by Interspeed, Cabletron shall not modify, enhance, or
otherwise change or supplement the Software Products. Cabletron shall
have no right to distribute any Embedded Software except in connection
with the sale or lease of the Hardware Product of which it is a
component.
6.3 Interspeed Software Product Warranty--Interspeed warrants to Cabletron
that (a) the diskettes or other tangible media in which Interspeed
Software Products are embodied shall be free from defects in materials
and workmanship, and (b) the functionality of the Software Products
shall substantially conform to the published Product documentation
delivered therewith, each for a period of ninety (90) days from date of
delivery to Cabletron. Cabletron understands that Interspeed does not
provide any warranty with respect to the performance, suitability,
reliability or error free condition of any Interspeed Software Product,
and shall not make any contrary representation or warranty to any End
User.
6.4 Warranty Service Procedure--In the event of a warranty claim under
Section 6.1 or 6.3, Cabletron may return the defective Interspeed
Product pursuant to the Interspeed Return Material Authorization process
to Interspeed for repair or replacement, at Interspeed's option. For
warranty service, Cabletron shall pay all freight costs to Interspeed
and Interspeed shall pay all return freight costs to Cabletron. All
freight costs in connection with Products not covered under warranty
services are the responsibility of Cabletron.
6.5 Customer Support--Cabletron shall be primarily responsible for
providing sales and technical support to Cabletron's End Users. Except
in the case of Products governed by Section 6.6, Interspeed shall
provide without charge telephone inquiry support and such other support
as Interspeed deems appropriate to assist Cabletron personnel in
resolving End User problems regarding Interspeed Products which
Cabletron is not able to resolve through its own personnel, subject to
Interspeed's normal product support guidelines and procedure. Cabletron
agrees to become sufficiently knowledgeable about the Products and
related user manuals and marketing literature in order to be able to
respond to product inquiries made by End Users. Cabletron shall maintain
an adequately trained staff and telephone service to provide prompt
telephone support to End-Users. Interspeed will refer to Cabletron any
request for support or inquiries made directly by Cabletron's End Users,
and Cabletron shall not refer any such requests or inquiries to
Interspeed without Interspeed's prior approval.
6.6 Maintenance Services--Interspeed reserves the right to provide
maintenance services for certain Interspeed products under programs for
which a fee is charged, including without limitation those particular
maintenance programs identified in Schedule F. Schedule F sets forth the
terms and prices of maintenance programs currently applicable to the
Interspeed Products, which are subject to change from time to time by
written notice from Interspeed. Maintenance fees under any such
maintenance program shall be due and payable in advance with respect to
each Term Year.
6.7 Software Updates and Upgrades--From time to time Interspeed or a Third
Party Supplier may make available Updates of Software Products or
Embedded Software. Any such Updates with respect to Interspeed Products
shall be made available to Cabletron for distribution to its End Users
without charge. Cabletron shall resell only the most recent Update,
which has been made available to it for any Software Product. In the
case of Upgrades with respect to Interspeed Products, Interspeed may, in
its sole discretion, either make such Upgrades available to Cabletron's
End Users for no charge or at a special Upgrade price, or treat such
Upgrade as a new Product which will be made available only on normal sale
terms.
6.8 Millennium Requirements--Interspeed represents and warrants that the
Products supplied to Cabletron under the terms of this Agreement on or
after January 1, 2000 A.D. ("Millennial Dates") will not adversely
affect the licensed materials performance with respect to date and
date-dependent data, computations, output, or other functions, including
calculating, comparing and sequencing. Interspeed further represents and
warrants that the licensed materials will (i) create, store, process,
and output information related to or including Millennial Dates without
error or omission, and will (ii) accurately process date and
date-dependent data, including calculating, comparing and sequencing
from, into, and between the twentieth and twenty-first centuries,
including leap year calculations, when used in accordance with the
documentation accompanying the licensed materials. Interspeed will
provide written evidence sufficient to demonstrate adequate testing and
conversion of the Products to meet the foregoing requirements prior to
execution of this Agreement, upon the request of Cabletron. In the event
that a problem attributed to a failure to correctly process date data as
set forth above is discovered which severely impacts Cabletron's
business, this problem shall be treated as a Severity Level 1 problem.
This Severity Level 1 problem shall require that Interspeed diligently
work on such problem until the error is corrected. For purposes of this
Agreement, Severity Level 1 shall mean that Interspeed shall work on a
continuous twenty-four (24) hour basis to resolve such problem until
corrected, at no additional cost to Cabletron.
6.9 Disclaimer of Warranties--NEITHER INTERSPEED NOR ANY THIRD PARTY
SUPPLIER MAKES ANY REPRESENTATION OR WARRANTY, EITHER EXPRESS OR IMPLIED,
INCLUDING WITHOUT LIMITATION ANY REPRESENTATIONS OR WARRANTIES AS TO
MERCHANTIBILITY OR FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO
ANY PRODUCT OR SERVICE PROVIDED HEREUNDER OR ANY OTHER MATTER RELATED TO
THIS AGREEMENT.
<PAGE>
Section 7. INDEMNIFICATION
7.1 Infringement Indemnification--Interspeed shall defend or settle any
suit or proceeding brought against Cabletron based upon a claim that any
Interspeed Product constitutes an infringement of any existing United
States patent, copyright or trade secret rights provided that Interspeed
is notified promptly in writing and is given complete authority to
control the defense and is provided all information required for the
defense. Interspeed shall pay all damages and costs awarded against
Cabletron, but shall not be responsible for any cost, expense or
compromise incurred or made by Cabletron without Interspeed's prior
written consent or for any lost profits or other damage or loss suffered
by Cabletron. If any Interspeed Product is in the opinion of Interspeed
likely to or does become the subject of a claim for infringement,
Interspeed may, at its sole option, procure for Cabletron the right to
continue using such Interspeed Product or modify it to become
non-infringing. If Interspeed is not reasonably able to modify or
otherwise secure for Cabletron the right to continue using and reselling
such Interspeed Product, Interspeed may terminate this Agreement and,
upon return to it of any items of such Interspeed Product purchased,
unused, and unsold by Cabletron hereunder, refund to Cabletron the
amounts paid for such items. Notwithstanding anything herein to the
contrary, Interspeed shall have no liability for any claim of
infringement based upon (1) use of any version or release other then the
latest unmodified version or release of an Interspeed Product, (2) use or
combination of an Interspeed Product with any other products, (3) use of
an Interspeed Product in any manner other than its intended use as set
forth in its documentation, or (4) use of an Interspeed Product after
having been given notice, or having reason to believe, that such
Interspeed Product infringes a proprietary right of a third party.
Interspeed also agrees to indemnify Cabletron and hold it harmless,
against any loss or damage that may be suffered by Cabletron, and any
claims that may be related to personal injury or property damage as a
result of use of the Products supplied hereunder or any breach of
Interspeed's covenants and agreements herein, not to exceed the payments
previously made by Cabletron for the Product with respect to which such
damage arose.
7.2 Indemnification By Cabletron. Except with respect to matters for which
Interspeed is liable pursuant to Sections 6.1, 6.3 or 7.1 Cabletron
hereby agrees to indemnify Interspeed, and hold it harmless, against any
loss or damage that may be suffered by Interspeed and any claims that
may be made against Interspeed by any person directly related to
personal injury or property damage, as a direct or indirect result of
the sale by Cabletron of units of the Products or the use thereof by
Cabletron's direct or indirect customers, or any breach of Cabletron's
covenants and agreements herein not to exceed the payments previously
made by Cabletron for the Product with respect to which such claim arose.
7.3 Insurance--Interspeed shall maintain adequate Product liability and
general liability insurance as it deems necessary and shall provide
Cabletron with evidence of or a Certificate of Insurance upon the
written request of Cabletron.
Section 8. LIMITATION OF LIABILITY
8.1 Limitation of Liability--IN NO EVENT SHALL EITHER PARTY OR ANY THIRD
PARTY SUPPLIER BE LIABLE FOR ANY LOSS OF PROFITS OR DIRECT, INDIRECT,
SPECIAL, CONSEQUENTIAL, INCIDENTAL OR OTHER DAMAGES ARISING OUT OF ANY
BREACH OF THIS AGREEMENT OR THE OBLIGATIONS OF THIS AGREEMENT. EITHER
PARTY'S SOLE REMEDY AND EITHER PARTY'S TOTAL LIABILITY, IN CONTRACT,
TORT OR OTHERWISE, ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS
AGREEMENT OR ANY OF THE PRODUCTS, SHALL BE THE CORRECTION, REPAIR OR
REPLACEMENT OF ANY DEFECTIVE INTERSPEED PRODUCT OR, AT EITHER PARTY'S
OPTION, THE PAYMENT OF ACTUAL DIRECT DAMAGES NOT TO EXCEED THE PAYMENTS
PREVIOUSLY MADE BY CABLETRON FOR THE ITEM OF PRODUCT WITH RESPECT TO
WHICH SUCH DAMAGES AROSE.
8.2 Third Party Products--Interspeed makes no representation for warranty
with respect to any Third Party Products and shall have no liability
with respect thereto. Including without limitation any liability with
respect to any defects in such Third Party Products or any infringement
by such Third Party Products or any patent, copyright, trademark,
service mark, trade secret or other intellectual property right of any
Person. To the extent permitted by Interspeed's agreement with the
supplier or licensor of any such Third Party Product, Interspeed hereby
assigns to Cabletron and/or its End Users the benefit of any warranties
or indemnification rights provided by the supplier or licensor of such
Third Party Product. Cabletron and its end Users shall be responsible
for dealing directly with such suppliers and licensors with respect to
such warranties and indemnification rights, and Interspeed shall have no
obligation or liability with respect thereto.
Section 9. SECURITY INTEREST
Title to the Products shall vest in Cabletron upon the date of shipment
to Cabletron. Interspeed shall retain a security interest in the
Products until the entire balance of the price for such Products and all
other monies payable hereunder are paid in full. Cabletron shall
execute, upon request by Interspeed, financing statements deemed
necessary or desirable by Interspeed to protect its security interest in
the Product. Cabletron authorizes Interspeed to file a copy of this
Security Agreement or a financing statement with the appropriate state
authorities at any time thereafter as a financing statement in order to
perfect Interspeed's security interest.
Section 10. PROPRIETARY RIGHTS AND CONFIDENTIALITY
10.1 Proprietary Rights--The rights owned by Interspeed (including without
limitation, those rights licensed to Interspeed by Third Party
Suppliers) in the Products and Confidential Information (as defined in
Section 10.3), including, without any limitation, any and all patents,
copyrights, author's rights, trademarks, trade names, know-how and any
rights under the trade secret laws of any jurisdiction with respect
thereto, irrespective of whether such rights arise under U.S. or
international intellectual property, unfair competition or trade secret
laws ("Proprietary Rights") shall be and remain at all times the
property of Interspeed, and Cabletron and its End Users shall have no
right, title or interest therein
<PAGE>
except as expressly provided herein. Cabletron understands and
acknowledges that the Software Products and Embedded Software are subject
to protection as copyrighted works of authorship of Interspeed or the
applicable Third Party Supplier under the United States Copyright Act
and applicable foreign and international copyright laws and treaties.
Cabletron shall not in any way remove or alter any of Interspeed's or any
Third Party Supplier's notices or in connection with any Product
respecting copyright, trademark, or other proprietary rights.
10.2 Use of Licensed Marks--Cabletron shall use the Licensed Marks only in
connection with the Products, and not in connection with any other
product or services of any Person. Cabletron may not modify any of the
Licensed Marks or combine them with any other marks of any Person.
Cabletron shall not use or distribute any such marketing materials
without Interspeed's initial written approval and any such use shall be
only in accordance with the samples or designs provided to Interspeed
in connection with such approval. After such initial written approval,
Interspeed may, at its option, require prior written approval,
Interspeed may, at its option, require prior written approval of any
marketing materials as to substance, form and style used by Cabletron
in its advertising. Cabletron shall not file any application for
registration in any jurisdiction with respect to any Licensed Mark, or
any mark or name confusing similar thereto. Except to the extent
authorized in writing by Interspeed. Cabletron shall not modify,
enhance or otherwise change or supplement the packaging of the
Products, except to add labels to indicate that such Products have
been distributed by Cabletron, provided that such labels or affixation
thereof on such packaging shall not obscure, alter or hide the Licensed
Marks. Upon termination of this Agreement for any reason, Cabletron
shall immediately cease all use of the Licensed Marks and, at
Cabletron's election, destroy or deliver to Interspeed all such
materials in Cabletron's control or possession that bear any Licensed
Marks, including any and all sales literature.
10.3 Confidentiality--Both parties acknowledges that, in the course of
dealings between the parties, each party will acquire information about
the other, its business activities and operations, and its mechanical
information and trade secrets, of a highly confidential and proprietary
nature ("Confidential Information"). For purposes of this Agreement,
Confidential Information shall include all design information and
related technical information with respect to the Products, including
the design and programming methods and techniques, architectures,
algorithms and other technology embodied in the Embedded Software or
Software Products, and all information with respect to either party's
product development and marketing plans. Both parties shall keep
confidential, shall not incorporate in its products or otherwise use in
any manner other than in furtherance of the purposes of this Agreement,
and shall protect from unauthorized use or disclosure by its employees
and agents, the Confidential Information and all copies or physical
embodiments thereof in its possession, and shall limit access to the
Confidential Information to those of its personnel who require such
access in connection with either party's use thereof as permitted by
this Agreement. Both parties shall secure and protect the Confidential
Information and any and all copies and other physical embodiments
thereof in its possession in a manner consistent with the maintenance
of each party's rights and interest therein. Both parties shall take
appropriate action by instruction or agreement with its employees who
are permitted access to the Confidential Information or any copy or other
physical embodiment thereof to satisfy each party's obligations
hereunder. Upon termination of this agreement for any reason, each party
shall immediately return to the other party or, if authorized by the
other party destroy all documents, files, and other materials embodying
any of the Confidential Information and shall certify to the other
party that such return or destruction has taken place. Cabletron
shall not attempt to obtain the source code to any Software Products or
Embedded Software by decompilation, disassembly or other means, and
shall not make any copies of the Software Products except as
specifically authorized. The obligations of this Section 10.2 shall
survive any termination of this Agreement.
Section 11. TERMINATION
11.1 Termination--Either party may terminate this Agreement as of the end
of any Term Year upon sixty (60) days prior written notice to the other
party. Interspeed may terminate this Agreement in whole or in part by
written notice to Cabletron, in the event of the occurrence of any of
the following: (a) if Cabletron has not ordered, as of the end of any
term Year, the Minimum Quantity applicable to such Term Year as set
forth on Schedule A; (b) if Cabletron fails to pay any amount due
hereunder within ten (10) days after written demand by Interspeed for
payment thereof; (c) if either party fails to observe or perform any
term or condition of this Agreement and does not cure such failure
within ten (10) days after written demand by the other party; (d) if
either party makes a general assignment for the benefit of creditors or
files a voluntary petition in bankruptcy or for reorganization or
arrangement under the bankruptcy laws, or if a petition in bankruptcy is
file against either party and is not dismissed within thirty (30) days
after the filing, or if a receiver or trustee is appointed for all or
any part of the property or assets of either party, or (e) as provided
in Section 7.1.
11.2 Effect of Termination--Upon any termination of this Agreement, all
rights and obligations of the parties under this Agreement shall cease
except for: (i) the obligations of both parties with respect to orders
made by Cabletron prior to termination of this Agreement that
Interspeed does not elect to terminate; (ii) Cabletron's obligations to
make all payments with respect to deliveries made by Interspeed prior
to termination; and (iii) the rights and obligations of the parties
under Sections 7.8, 10 and this Section 11.
Section 12. GENERAL
12.1 Entire Agreement--Each party acknowledged that it has read this
Agreement, fully understands it, and agrees to be bound by its terms
and further agrees that it is the complete and exclusive statement of the
agreement between the parties, which supersedes and merges all prior
proposals, understandings and all other agreements, oral and written,
between the parties relating to the subject matter of this Agreement.
This Agreement cannot be modified or altered except by a written
instrument duly executed by both parties. No additional or conflicting
terms or conditions, whether contained in Cabletron's purchase order,
shipping release, or elsewhere, shall be binding upon Interspeed.
12.2 Relationship of Parties--The relationship of the parties hereto shall be
that of buyer and seller. Nothing herein shall be construed to create
any partnership, joint
<PAGE>
venture, agency or similar relationship or to subject the parties to any
implied duties or obligations respecting the conduct of their affairs, which
are not expressly stated herein. Neither party shall have any right or
authority to assume or create any obligation or responsibility, either
express or implied, on behalf of or in the name of the other party, or to
bind the other party in any matter or thing whatsoever.
12.3 Governing Law--This Agreement and performance hereunder shall be
governed by and construed in accordance with the laws of The
Commonwealth of Massachusetts without regard to conflict of laws and
without reference to the 1980 United Nations Convention on Contracts or
the Sale of Goods and any amendments thereto.
12.4 Severability--If any provision of this Agreement shall be held to be
invalid, illegal, or unenforceable, the validity, legality, and
enforceability of the remaining provisions shall in no way be affected
or impaired thereby. Further, the provision that is held to be invalid,
illegal or unenforceable shall remain in effect as far as possible in
accordance with the intention of the parties.
12.5 No Waiver--The failure of either party to exercise in any respect any
right provided for herein shall not be deemed a waiver of any right
hereunder.
12.6 Assignment--Cabletron may not assign this Agreement in whole or in part
without the prior written consent of Interspeed. Interspeed may assign
its rights and obligations under this agreement without the written
consent of Cabletron to a corporation succeeding to substantially all
the assets and business of Interspeed relating to the Products by merger
or purchase, which corporation shall expressly assume all of
Interspeed's obligations under this agreement by a writing delivered to
Cabletron, and may assign its rights to receive payments hereunder
without limitation. Notwithstanding the above, Cabletron may assign its
rights and obligations under this Agreement without the written consent
of Interspeed to a corporation succeeding to substantially all the
assets and business of Cabletron, which corporation shall expressly
assume all of Cabletron's obligations under this Agreement by a written
notice delivered to Interspeed.
12.7 Notices--Notices to either party under or relating to this Agreement
shall be in writing to the address indicated on Schedule A of this
Agreement or to such subsequent address as either party may specify by
notice to the other and shall be deemed effective when received if
delivered in hand or by telefax "with written confirmation of receipt,
or on the second day following the date of postmark if sent by prepaid
certified mail, return receipt requested.
12.8 Force Majeure--Neither party shall be responsible for delays or
failures in performance resulting from causes beyond the control of
such party. Such causes shall include, but not be limited to, inability
to obtain export licenses or import authorization, acts of God,
strikes, lockouts, riots, acts of war, epidemics, government
regulations imposed after the fact, fire, communications line failures,
equipment failures, power failures or earthquakes.
12.9 Export Control--To the extent that the Territory is within the United
States, Cabletron acknowledges that Interspeed shall deliver the
Products to Cabletron in the United States and Cabletron shall not
export the Products except as permitted by all applicable laws and
regulations, including the Export Administration Act and the
regulations issued thereunder by the United States Department of
Commerce, Offices of Export Administration.
12.10 Compliance with Laws--Cabletron shall be responsible for ensuring
compliance with all applicable laws and regulations in the Territory,
including but not limited to labeling and language requirements.
Cabletron shall not sell or lease any Products which are not in
compliance with such laws and regulations.
12.11 Conflict of Interest--During the term of this Agreement, Interspeed
shall not knowingly solicit from or propose new or repeat business,
including maintenance, to Cabletron's commercial customers for whom
Interspeed is providing Products, software and/or services pursuant to
this Agreement.
12.12 Packaging--Products shall be packaged and packed at no additional
charge for shipment in suitable boxes, reels, bundles, pieces or coils,
etc., which will provide protection against damage during domestic
shipment, handling, and storage in reasonably dry, unheated quarters.
Corrugated shipping containers shall comply with requirements of Rule
41 of the Uniform Freight Classification. Containers of any type that
are too heavy or too large to be palletized shall be skidded to
facilitate fork truck and/or mechanical handling.
12.13 Toxic Substances and Hazardous Products--Interspeed warrants to
Cabletron that, except as expressly stated elsewhere in this Agreement,
all Products furnished hereunder or in performance of purchase orders
placed hereunder, is safe for its normal use, is non-toxic.
12.14 Records and Audit--Interspeed shall maintain complete and accurate
records of all amounts billable to and payments made by Cabletron under
this Agreement in accordance with generally accepted accounting
practices. Interspeed shall retain such records for a period of three
(3) years from the date of final payment for Products. Within thirty
(30) days after Cabletron provides written notification to Interspeed
of an invoice dispute, Interspeed shall provide Cabletron documentation
evidencing the propriety of its position and the correctness of its
invoice charges.
12.15 Continuing Availability of Products and Replacement and Repaired
Parts--Interspeed agrees to offer for sale to Cabletron for a period of
four (4) years after the termination/expiration date of this Agreement,
maintenance and replacement of Products and parts for Products provided
under this Agreement.
<PAGE>
Executed as a document under seal as of the date first set forth above by the
duly authorized representative of the parties hereto.
INTERSPEED, INC. CABLETRON:
----------------------
By: /s/ Christopher Whalen By: /s/ David Kirkpatrick
------------------------------ ------------------------------
Name: Christopher Whalen Name: David Kirkpatrick
---------------------------- ----------------------------
Title: VP Sales and Marketing Title: VP of Finance and CFO
--------------------------- ---------------------------
<PAGE>
*** Confidential Treatment
Requested as to this
Information
Interspeed, Inc.
601 South Union Street
Lawrence, MA 01843
SCHEDULE A
1. Reseller Name: Cabletron Systems, Inc.
2. Reseller Address: 36 Industrial Way, Rochester, New Hampshire 03867
Country: USA
3: Territory: Locations which Cabletron currently sells and supports
products.
4. Products:
System 500 16 Port SDSL Platform
System 500 32 Port SDSL Platform
System 500 48 Port SDSL Platform
5. Reseller Discount Level: *** Confidential Treatment Requested as to this
Information ***
6. Minimum Quantity: *** Confidential Treatment Requested as to this
Information ***
Interspeed and Cabletron confirm that this is the Schedule A referred to in
the above-referenced Reseller Agreement.
Interspeed, Inc. Cabletron Systems, Inc.
By: /s/ Christopher Whalen By: /s/ David Kirkpatrick
-------------------- ---------------------
Name: Christopher Whalen Name: David Kirkpatrick
------------------ --------------------
Title: VP Sales and Marketing Title: VP of Finance and CFO
---------------------- ---------------------
Date: May 21, 1999 Date: May 20, 1999
------------ ------------
<PAGE>
*** Confidential Treatment
Requested as to this
Information
Interspeed, Inc.
601 South Union Street
Lawrence, MA 01843
Authorized Cabletron Agreement
Schedule B
----------
Price List
----------
*** Confidential Treatment Requested as to this Information ***
<PAGE>
Interspeed, Inc.
601 South Union Street
Lawrence, MA 01843
U.S.A.
Authorized Cabletron Agreement
SCHEDULE C
CABLETRON DISCOUNT SCHEDULE
<PAGE>
Interspeed, Inc.
601 South Union Street
Lawrence, MA 01843
Authorized Cabletron Agreement
SCHEDULE D
LICENSED MARKS
<PAGE>
Interspeed, Inc.
601 South Union Street
Lawrence, MA 01843
U.S.A.
Authorized Cabletron Agreement
SCHEDULE E
RUN-TIME LICENSE AGREEMENT
<PAGE>
Interspeed, Inc.
601 South Union Street
Lawrence, MA 01843
U.S.A.
Authorized Cabletron Agreement
SCHEDULE F
MAINTENANCE SUPPORT SERVICE-TERMS AND PRICES
<PAGE>
Exhibit 10.7
CAPITALIZATION AGREEMENT
This Recapitalization Agreement is entered into this 17th day of June,
1999 by and between BROOKTROUT, INC. ("Brooktrout"), a Massachusetts
corporation, and INTERSPEED, INC. ("Interspeed"), a Delaware corporation.
In consideration of the mutual covenants herein contained and for other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereby agree as follows:
1. BACKGROUND. Interspeed anticipates making a public offering of its
common stock (the "Public Offering"), in which Brooktrout will participate as a
selling stockholder, pursuant to a Registration Statement on Form S-1 of the
Securities and Exchange Commission (the "Registration Statement"). Brooktrout,
as the sole stockholder of Interspeed, has heretofore provided to Interspeed
advances, in the form of payment of expenses on behalf of Interspeed and
otherwise, in an amount which totaled approximately $8,167,000 as of March 31,
1999 and has increased and is expected to continue to increase up to the
consummation of the Public Offering (collectively, the "Brooktrout Advances").
This Agreement is being entered into to set forth the agreement of Brooktrout
and Interspeed with respect to the disposition of these advances in connection
with the Public Offering and otherwise.
2. CONTRIBUTION TO CAPITAL. Upon effectiveness of the Registration
Statement, Brooktrout shall contribute to the capital of Interspeed, and
Interspeed shall accept as a contribution to its capital, the full amount of the
Brooktrout Advances made up to the date of such effectiveness.
3. EXTENSION OF PAYMENT. In any event, Brooktrout agrees that it shall
not seek repayment of the Brooktrout Advances, in whole or in part, at any time
prior to October 1, 2000.
4. DISCLAIMER. It is hereby acknowledged and agreed that Brooktrout
shall make no further advances to Interspeed following effectiveness of the
Registration Statement, and that Brooktrout has committed to make further
advances as needed to Interspeed through the date of effectiveness of the
Registration Statement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed on their respective behalves by their officers thereunto duly
authorized, as of the date and year first set forth above.
BROOKTROUT, INC.
By: /s/ Robert C. Leahy
------------------------------------------
Robert C. Leahy
Vice President, Finance and Operations
INTERSPEED, INC.
By: /s/ Stephen A. Ide
------------------------------------------
Stephen A. Ide
President
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholders of
Interspeed, Inc.:
We consent to the use in this Registration Statement 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
June 18, 1999
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<PAGE>
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<INCOME-CONTINUING> (1,043) (4,313) (1,909) (3,426)
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